First, is your organisation ready for two new accounting standards? To align with IFRS global standards, public benefit entities (PBEs) will need to report revenue differently. Standards PBE IPSAS 9 and 23 have been replaced by standard PBE IPSAS 47, which relates to binding arrangements, while the new standard - PBE IPSAS 48 fills an accounting gap by spelling out what’s required for transfer expenses.
The second big question is whether you have a clear, well-communicated strategy when it comes to your reserves, or are you just accumulating funds with no clear goal? Ideally, you will be measuring reserves accurately and telling your organisation’s story effectively.
Is your organisation ready for two new accounting standards?
Accounting for revenue: Is an arrangement binding?
Currently there are two PBE IPSAS revenue standards: one for exchange revenue (9) and one for non-exchange revenue (23). To simplify the difference, ‘exchange revenue’ comes from a transaction where one party receives something of approximately equal value to the consideration transferred, while ‘non-exchange revenue’ is typically from donations, grants or similar transactions where there is not an approximately equal exchange in value. Distinguishing between the two can be tricky; recording transaction revenues is quite complex, and it hasn’t always been clear which standard a PBE should use.
Under PBE IPSAS 47, all revenue goes into a single standard, which is a positive change because it removes some of this subjectivity and complexity. It establishes whether there is a ‘binding arrangement’. Is there some kind of contractual obligation associated with revenue for your PBE? For example, has the organisation received a grant that has both rights and obligations requiring you to deliver a certain number of hours of training? Conversely, a donation, with no strings attached on how it is spent, is a ‘non-binding arrangement’.
Binding and non-binding arrangements will be accounted for slightly differently, but both will still sit within PBE IPSAS 47. For non-binding revenue, you’ll need to consider whether the arrangement creates an asset or a liability on the balance sheet. That determines whether the revenue can be recognised immediately or must be deferred. For binding arrangements, revenue recognition will be based on the timing of the rights and promises contained in that arrangement.
A corresponding standard for transferring grants
PBE IPSAS 48 is brand new and will close the current gap in how to account for transfer funding. While PBE IPSAS tells you how to account for funds coming into a PBE from a grant, there’s no accounting standard for the paying entity (the granter). This means there is no current standard on how a government agency, for instance, can account for transferring funds to a charity. And unlike PBE IPSAS 47, there’s no IFRS equivalent because nothing in the for-profit world parallels this type of fund transfer.
Standard 48 mirrors standard 47, so it also requires you to identify whether the transfer is a binding arrangement or not.
These new standards come into effect from the start of 2029. You need to use 2028 as a comparative year, so PBEs have time to think about what changes they need to make. By planning ahead this year and next, you can make the transition to the new standards as smooth as possible.
Do you have a clear, well-communicated strategy when it comes to your reserves?
Why your NFP needs a reserves strategy
Not for Profit entities already need to report on the amount of money they have in reserve, with specifics which are provided in accounting standards. And since 1 April 2024, there has been an additional question for charities to answer in their annual return: How does the NFP plan to use accumulated funds in the future?
In the past, a significant number of NFPs have taken a ‘just in case’ approach to reserves. They build up a substantial balance in the kitty, waiting for a theoretical rainy day that is never clearly defined. This can feel like a safe approach, but it might mean the funds aren’t being used effectively to help the NFP deliver on its purpose.
Large reserves can also create question marks for funders. On occasion, we’ve heard potential funders have seen the balance sheets of an NFP and done a double take: ‘Why are you asking us for money if you have $X million on your balance sheet?’ NFPs may need to be more effective at pre-empting this question in their financial reporting.
How much do you need, and what is it for?
NFPs should carefully consider reserve targets as a tool to manage risk and capitalise on opportunities. We often see the addition of a reserves target set at six months’ worth of expenses, or as a percentage of their annual budgeted expenses.
Six months in expenses might be the right reserves target for your NFP, but is there any real logic behind that? Your targets should be based on the organisation’s strategic plan, the big-ticket opportunities in the pipeline, and any high-cost risks that might be on the horizon in the next three years. What if your organisation needed to wind up – what would an orderly process actually cost?
Think about which taps could be turned off immediately, and which would require a slower cost reduction.
How much resilience buffer do you need? That might vary; if your organisation has stable, periodic cash flows from varied sources, the buffer may be lower than an organisation that is heavily reliant on one funder with less frequent payments.
Timing is also important to consider - if you are in year one of a five-year funding contract, you may have to build reserves now if your costs are currently lower (but will be higher in year four) yet your revenue is stable through the contract.
Your reserves are not static. You may have accumulated a significant reserve to spend on a large project; once this is over, the reserve strategy will likely need a refresh.
For NFPs that already have significant cash reserves, it’s time to carefully consider whether some of that money could be spent on furthering the organisation’s purpose.
Telling the story of your reserves
We often see confusion when reserves are viewed only as a single total number, without enough context about what the funds are for, how they are held and how they will be used. It can create an impression that NFPs are “sitting on pots of money”, when those funds are often deliberately allocated to meet specific future needs and not always in liquid forms ready to spend.
Clear reserves reporting helps organisations explain not just how much they hold, but why they hold it, how reserve targets have been determined, and how those reserves are expected to be used over time. This reporting can be incorporated into your financial statements (but it must be audited) or as supplementary information in your annual report (not audited but must be consistent with the financial statements).
NFPs can consider taking this reporting to the next level, demonstrating the type of investment held that aligns with the purpose of each reserve. Some reserves - like those used to manage short-term cashflow pressures or to respond to unexpected events - may need to be readily available and therefore held in cash or near cash. Other reserves - like long-term obligations, orderly wind down or future transitions - may be appropriate to hold in less liquid assets, such as property or long-term investments.
By putting in the effort on your reserves to link their purpose, timing and underlying investments, your NFP can stand out from the crowd and attract funding, while managing and reporting on your finances responsibly.
This level of transparency strengthens confidence among funders, regulators and other stakeholders, demonstrating that reserves are being managed intentionally to support the organisation’s purpose and not simply accumulated without a plan.
