NGO accounting policy: what it should contain

What an NGO accounting policy is

The accounting policy of a public association or charitable foundation is an internal document that sets out how the organisation keeps its books: which standards it reports under, when grants and donations are recognised as income, how shared costs are split between projects and which exchange rate is used for foreign currency. The head of the organisation approves it by order, and it stays in force until changed in the same way. Donors and auditors ask for it first, because without it they cannot check whether the books are kept consistently and whether the figures in a donor report come from the accounting records rather than from a separate spreadsheet.

The right to set an accounting policy comes from the Law of Ukraine on Accounting and Financial Reporting, and the Ministry of Finance has issued recommendations on its content. Those recommendations were written for companies, so an NGO has to add sections that a business does not need: restricted (target) funding, analytics by project and donor, and allocation of shared costs.

General provisions and reporting

Standards. Public associations and charitable foundations keep their books under the Ukrainian national accounting standards. The policy should state which form of financial statements the organisation prepares: full or simplified, if by its size it qualifies as a micro or small entity.
Working chart of accounts. The accounts and sub-accounts the organisation uses, with separate sub-accounts for target funding.
Who keeps the books. An in-house accountant, a chief accountant or an outside firm under contract. If NGO accounting is outsourced, the policy says so.
Link to tax reporting. The report on the use of income of a non-profit organisation is prepared from the same accounting data, so the classification of income and expenses in the policy should allow it to be filled in without recalculation.

Income: what to recognise and when

Membership fees. The method and moment of recognition: in the period the fee relates to, or when it is received. Membership fees with a designated purpose are accounted for as restricted receipts.
Charitable donations. Cash and in-kind donations separately. For in-kind donations the policy states how their value is determined and who signs the acceptance record.
Grants and target funding. A grant receipt is first recorded as target funding (a liability) and becomes income in the periods when the expenses it was meant for are incurred. The part of a grant spent on fixed assets is recognised as income gradually, in proportion to the depreciation charged.
Passive income. Interest on the account balance, exchange differences. The policy should say whether they belong to the organisation or to the project, where the donor agreement requires interest to be reported or returned.

Project analytics and allocation of shared costs

Every transaction carries a project, donor and funding source code from the moment it is recorded. We describe how to set this up in a separate article on grant accounting by project. For costs that serve several projects at once, the policy contains a written allocation method:

Rent and utilities. By the floor area a project uses, or by the number of workstations.
Administrative costs. By the number of project staff, or in proportion to direct costs.
Salaries of shared staff. By monthly timesheets in which the total across all projects does not exceed full-time employment.

The allocation base does not change during the year without an order. Without such a method the organisation cannot explain why a cost was charged to a particular project, and this is exactly where the risk of double funding arises.

Foreign currency and exchange rates

In the accounting records, foreign currency transactions are translated at the official National Bank of Ukraine rate on the transaction date, and exchange differences follow the national standard. A donor report often requires a different approach: the actual rate at which currency was sold, a weighted average rate, or the rate of each tranche. The policy should describe both: how amounts are calculated in the books and how they are converted for the donor report, so that any difference between them can be explained. See our article on exchange differences in a grant project.

Fixed assets and property received free of charge

Valuation. Fixed assets received free of charge are measured at fair value on the date of receipt. The policy names who determines it and on what basis.
Depreciation. The method (most often straight-line) and useful lives by asset group.
Low-value non-current assets. The organisation sets the value threshold itself. It also chooses how they are depreciated: 100 percent in the first month of use, or 50 percent at commissioning and 50 percent at disposal.
Property bought with grant money. How it is marked as belonging to the project and what happens to it after the grant ends under the agreement.

Stocktaking, document flow, storage

Stocktaking schedule. Mandatory before the annual financial statements, and also when the person with material responsibility changes and at project close, if the donor requires it.
Document flow. Who prepares, who checks and who signs primary documents, bank payments, acts and timesheets. Who holds first and second signature rights.
Storage. Retention periods for primary documents and reports. Donor agreements often require documents to be kept longer than the legal minimum, so the policy sets the longer period.

Common mistakes

A template copied from a commercial company. It covers cost of sales and corporate income tax, but has nothing on target funding or project analytics.
The policy contradicts donor rules. For example, the low-value asset threshold or the exchange rate method does not match the agreement, and the donor report does not reconcile with the books.
No allocation method. Shared costs are split differently each time.
Nobody has updated the policy for years. It describes an organisation with one project, while it now runs five.

How often and how to change it

An accounting policy is changed only for valid reasons: the law or the accounting regulator has changed its requirements, or a new method gives a more reliable picture of transactions. It is most convenient to make changes from the start of the year, by a new order that states the effective date. A new type of receipt or a new donor with specific requirements usually calls for an addendum rather than a full new version. Changes are disclosed in the notes to the financial statements.

What an auditor checks

Whether there is an order, who signed it and from what date the policy applies.
Whether the books in the audited period are actually kept as written.
Whether the cost allocation method matches the timesheets and the actual entries.
Whether the policy contradicts the donor agreement on exchange rates, property and document retention.
Whether grant income is recognised as expenses are incurred rather than when cash arrives.

We describe how to keep books that let an organisation go through any review calmly in our article on keeping NGO books so that an audit passes.

Accounting in an NGO: what to read

Is an accounting policy mandatory for a public association

Yes. The accounting law applies to all legal entities, including non-profits. An organisation must set its accounting policy by an administrative document, usually an order of the head.

Can we use another organisation’s accounting policy

As a starting point, yes, but the document has to describe your projects, your donors and your cost allocation method. The auditor checks that the policy matches the actual books, and a borrowed template shows immediately.

Do we need a separate accounting policy for each grant

No. There is one policy per organisation. A specific donor’s requirements are set out in an annex or a separate project order, as long as they do not contradict the general rules.

When does a grant become income of the organisation

In the periods when the expenses it was intended for are incurred. Funds received but not yet spent remain target funding. The part of a grant spent on fixed assets becomes income in proportion to depreciation.

Who should sign the accounting policy order

The head of the organisation who holds the relevant powers under the charter. If the charter requires approval by the board, that should be obtained before the order is signed.

If you need help

Since 2000 we have kept the books of and audited public associations and charitable foundations. We can review your current accounting policy against your donor agreements or prepare a new one for your projects. We send a proposal once we have seen the task.