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Accounting Standards for Not-for-Profit Organisations

Not-for-Profit (NFPs) organisations are entities normally without transferable ownership interests. They are organised and operated exclusively for social, educational, professional, religious, charitable or any other not-for-profit purposes. In a bid to ensure a stronger accountability of this sector, the Financial Reporting Council (FRC) released a Statement of Accounting Standards (SAS) 32 in 2011, an accounting system for churches, mosques and other not-for-profit organisations that will compel them, to report their financial transactions periodically from January 2013.

The SAS 32 establishes a uniform basis of accounting and amongst others stipulates that financial statements for NFPs shall include the Statement of Accounting Policies, Statement of Financial Position, Statement of Activities (income and expenditure), Statement of Changes in Net Assets, Statement of Cash flows, Notes on Accounts and Five-year Financial Summary. As of now, the financial statements presented by the NFPs in the country are not uniform and comparable, thereby making comparison impossible. The intent of the new standard, however, is to unify such financial statements, make NFPs to be more accountable.

Separation of charity and commercial activities

It has been noted that a number of commercial entities that are being operated as “subsidiaries” or “divisions” under the charities and other NFPs, are claiming exemption on their income, on the ground that the totality of the “group” outfits are charity activities. This is based on the argument that they are engaged in the “advancement of an object of general public utility” and classified as a company limited by guarantee as provided for in Section 26 of the Companies and Allied Matter Act (CAMA). It is however, believed that the income of these business subsidiaries is subject to income tax and should be rightly so reported, accounted and disclosed as it is practiced in the United Kingdom, Singapore and other developed economies. This will, however, require NFPs to separate the accounts of their business subsidiaries, where applicable, to satisfy the requirements of different regulatory authorities.

Though it is a fact that NFPs may have assets and even be profitable, the accruing funds are expected to be used to further pursue its goals and not to create wealth for the owners. With loose or no regulations on financial accountability, many of these centres are being seen as money-spinning business empires for their founders. In some economies where record keeping is entrenched, donations to NFPs are well documented not only for record purposes, but also to ensure that the sources of those funds are known and to prevent such organisations from becoming a warehouse of laundered or stolen funds.

NFP Structure and Non-distribution of “profits”

CAMA provides that where one or more trustees are appointed by a community of other people, bound together by a common custom, religion, kinship or nationality, for the promotion of specific religious, educational, literary, scientific, social development, cultural, sporting or other charitable purpose, such trustees are required, with due authorisation of its members, to apply to the Corporate Affairs Commission for registration as a body corporate. An unregistered body or association is not recognised under Nigerian law. In Nigeria, NFPs are registered as either a “Company limited by Guarantee” or as “Incorporated Trustees”.

A company limited by Guarantee is one that is incorporated primarily to promote the objects of such a company with its shareholders barred from distributing its profits among its members, as dividend or otherwise. Also, the liability of the shareholders of a company limited by guarantee is restricted to the amount that they have subscribed to pay in the event that the company limited by guarantee is wound up or dissolved.

A company limited by guarantee is not registered with a share capital and requires the prior approval of the Attorney General of the Federation before it can be incorporated. The members of such a company are aware that the income and other assets of the company must be applied solely towards the promotion of the objects of the company and no portion of its profits can inure to the private benefit of the members or shareholders of the company. The exception to the above rule is that “… payments, in good faith, of reasonable and proper remuneration to an officer or servant of the body in return for any service actually rendered to the body or association…” is exempted from the rule against the distribution of trust income. Also exempted from the rule against the distribution of trust income are the reimbursements of out-of–pocket expenses or reasonable and proper rent or reasonable fees for services rendered by members of the association to the association. The penalty for breach of the restrictive provisions on the non distribution of trust income is captured in Section 603(3) of CAMA which provides that “if any person knowingly acts or joins in acting in contravention of this Section, he shall be liable to refund such income or property so misapplied to the association”.

In the event of the dissolution or winding up of a company limited by guarantee, its assets, after the liquidation of its liabilities, cannot also be distributed to its shareholders; in its stead, such profits must be transferred to another similar charitable organisation.

Taxation and other regulatory requirements

All companies in Nigeria are liable to pay Companies Income Tax on their global profits accruing in, brought into, derived from or received in Nigeria. However, the profits of any statutory, charitable, ecclesiastical, educational or other similar associations are exempted from Companies’ Income Tax obligations provided such profits are not derived from any trade or business carried on by such an organisation or association, and distributed among the members, trustees or shareholders of such a company, association or organisation.

The tax exemption provision in Section 13 of the Third Schedule of the Personal Income Tax Act (as amended) only exempts the income of the associations themselves and not the income of the individual trustees, their employees, etc from the payment of tax.

The Customs, Exercise Tariff, etc (Consolidation) Act 2004, Section 8, Second Schedule, exempts from the payment of import duty, certain goods meant for charitable or humanitarian purposes. The exemption from the payment of this duty is granted by the Minister of Finance.

In addition, CAMA requires every company in Nigeria, including companies limited by guarantee and incorporated trustees, to keep proper accounting records that sufficiently show and explain the financial affairs and position of the company. At the end of every financial year, each company must submit its annual returns to the Corporate Affairs Commission (CAC) along with a copy of its financial statements. Failure to discharge this duty is an offence.

Final word

We also endorse the efforts of the Financial Reporting Council to make non-profit organisations financially accountable and we encourage NFPs to embrace this new accounting standard as a way of increasing their corporate governance and accountability processes.

How we can help: WFO provides audit and accounting services across a multitude of sectors including the not-for-profits’ sector and are ideally placed to offer audit and accounting services that add value to your organization. By applying risk based audit methodology that is in compliance with the International Standards on Auditing (ISA) and the International Financial Reporting Standards (IFRS) as adopted by the Financial Reporting Council of Nigeria, the firm offers a tailored audit approach with an emphasis on early planning and understanding how your organisation operates. This enables us to explore key audit risks and tailor our audit response to the unique aspects, size and nature of your organisation. Our accounting services includes business process documentation and review, secondment of professional accounting staff, part-time CFO services and specialized accounting trainings. Our accounting services professionals usually customize the services to meet the exact needs of each of our clients. We invite you to contact us at practice@wfointernational.com to discuss your specific needs.

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.

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