Assistant professor Davor Vašiček, Ph.D.

Assistant Davor Mance, M.A.

Questioning Financial Indicators of Civil SocietyDevelopment

SUMMARY

Until the introduction of the full accrual accounting concept in 2008, the system ofgovernmental and private non-profit organizations in Croatia was very inconsistent,but nevertheless, withstood for a long number of years. Most of the changes werebrought in for the purpose of adjusting our legislative regulations to the AcquisCommunitaire. The Croatian accession to the European Union was used toimplement reforms in various sectors, and also in the accounting for non-profitorganizations. On January 1ST, 2008, a new accounting system was introduced, basedon the application of the full accrual concept of revenues and expenses. As a result,the divergence of accounting systems for governmental and private non-profitorganizations was significantly reduced. The reform results suggest that it is justifiedand reasonable, for all non-profit organization groups, to apply the sameinternationally comparable and acceptable rules of measurement and evaluation,recognition, and economic classification of revenues and expenses.

CONTENTS

1. Introduction..............................................22. Definiton of Non-profit Organizations in Croatia..........23. The Development of the Financial Reporting System.........44. The Reformed Accounting and Financial Reporting System....54.1. Recognition of Revenues................................74.2. Recognition of Expenses................................74.3. Classifications and Charter of Accounts................84.4. Financial Reporting....................................9

5. Control of Non-profit Organisation Performance............95.1. External Control......................................10

5.2. Internal Control......................................126. Conclusion...............................................13References..................................................14

1. INTRODUCTION

From the beginning of 1994 until the end of 2007, non-profitorganizations in the Republic of Croatia had been applying theaccounting system governed by the Regulation on Accountancy ofNon-profit Organizations (Official Gazette 112/93). In spite ofnumerous essential and formal drawbacks, this system withstoodthe various criticisms within the professional society for along number of years. In practice, different professional, butunofficial accounting and reporting solutions were used assubstitutes for the inconsistent legislative provisions inregards to the charts of accounts, recognition of financialreporting elements and the content of financial statementsalike. Such solutions were also accepted by outside data users,including the supervisory and statistics state bodies. In themeanwhile, budget and company accounting systems have beenupdated on several occasions. Most of the changes were broughtin for the purpose of adjusting our legislative regulations tothe Acquis Communitaire. This context represented an adequatemoment for the systematic and professional standardization ofthe accounting system in non-profit organizations. The reformin the accounting for non-profit organizations was radicallyimplemented. On January 1ST, 2008, a new accounting system wasintroduced and it was based on the application of the fullaccrual concept and the relevant economic classification ofrevenues and expenses. As a result, the divergence ofaccounting systems for governmental and private non-profitorganizations was significantly reduced.

2. DEFINITON OF NON-PROFIT ORGANIZATIONS IN CROATIA

There are different definitions of a non-profit organizationdepending on the different aspects such as the legal, financialand especially the economic aspect. The term non-profit organizationis not explicitly legally defined within the existing legal

texts of the Republic of Croatia. The Constitution of theRepublic of Croatia proclaims the freedom of association as oneof the fundamental political rights (Article 43.): “Everyoneshall be guaranteed the right to the freedom of association forthe purposes of protection of their interests or promotion oftheir social, economic, political, national, cultural and otherconvictions and objectives. For this purpose, everyone mayfreely form trade unions and other associations, join them orleave them, in conformity with law. The exercise of this rightshall be restricted by the prohibition of any violent threat tothe democratic constitutional order and independence, unity andterritorial integrity of the Republic of Croatia.”

Even though, there is no legal definition of a non-profitorganization, it is possible to single out certain legalcharacteristics of non-profit organizations. The firstcharacteristic is that this type of legal entity exists andoperates for some other reason than generating profit. Theemphasis here is not on avoiding generating profit, in thesense of accumulating net income surplus, but on the presenceof a prevailing public benefit. The second characteristic of anon-profit organization is that it is prohibited fromdistributing the realized profits to third parties that could,due to their position, influence the work of the organizationin order to acquire personal gains. The third assumptionindicates that the characteristics of a non-profit organizationdo not necessarily depend on its legal form, i.e. theactivities and the purposes of the organization are vitalrather than the character of its legal identity (Vrhovski,2005).

The most common definition of a non-profit organizationincludes those in relation to the founder. A non-profit organizationis an organization whose objective is different from theprofit-objective of its owner. Its purpose usually includesproviding services (Anthony/Young, 1988, p. 49). Thisdefinition stresses the basic difference between profit andnon-profit organizations.

The goals of non-profit organizations are, above all, orientedtowards achieving better conditions for providing servicesbased on available resources. The relations with the serviceusers are achieved without direct market links. Non-profitorganizations are not financed through the sales of goods orservices on the market but are, as a rule, financed from othersources (various subsidy means, grants, alms, contributions,membership fees etc). Due to the nature of the activities ofnon-profit organizations, the measuring of expenses andbenefits, and especially expressing provided benefits in termsof values is quite difficult.

In accordance with the manner of financing, and thus financialreporting, non-profit organizations in Croatia are also dividedinto two main categories:

a) Governmental non-profit organizations or public non-profitorganizations, and

b) Non-governmental or private non-profit organizations.

If the activity of a non-profit organization is initiated andsupported by the state, then it is performed in compliance withthe state policy and is financed, directly or indirectly, outof the fiscal and quasi-fiscal state revenues. Such non-profitorganizations are included in the national public sector, i.e.the general state sector. Namely, the public sector isdetermined according to the methodology of the InternationalMonetary Fund, the United Nations System of National Accountsand the European System of National Accounts.1

The organization of non-governmental non-profit organizationsis mostly founded on voluntary basis (they are made up of agroup of citizens that have voluntarily joined in order tocarry out certain activities). They are mostly financed throughdonations, grants, membership contributions and other similarspecific forms of financing that are, as a rule, based onvoluntary and humane grounds. In order for the non-profitorganizations to achieve an optimal level in performing set

1 European System of Accounts - ESA

goals and tasks, it is necessary to establish an adequateaccounting information system as a support for managing non-profit organizations.

3. THE DEVELOPMENT OF THE FINANCIAL REPORTING SYSTEM

A separate accounting system for non-profit organizations inthe Republic of Croatia was established at the end of 1993 andwas to be applied starting from January 1, 1994. In the firstyear of its implementation, this system encompassed all non-profit organizations, therefore also the governmental non-profit organizations (budget users) and other (private) non-profit subjects regardless of the difference among them interms of the process of their establishment or financingsources.

One year later, budgetary accounting was singled out as anindividual system from the universal accounting system for non-profit organizations. All budgetary organizations that arefinanced out of the state budget or the budget of local andself-government authorities are obliged to implement thebudgetary accounting system. The other non-profit organizationsi.e. those that are financed mainly through other means (meansprovided by the founders, membership contributions, non-budgetfunds, donations, grants, sponsorships and the like) areobliged to conduct their accounting in line with the accountingsystem for non-profit organizations. After the budgetaryorganizations were excluded from the accounting of non-profitorganizations, the necessary adjustments, due to newcircumstance were not made within the accounting of non-profitorganizations.

The identifiable feature of accounting for non-profitorganization was fund accounting and the modified accrual as anaccounting concept that determines the criteria for accountingrecognition of economic events regardless of when cashtransactions occur.

In process of choosing the accounting model, and by followingsome, superficial and inconsistent global experiences, themodel of fund accounting was set up, that based on thedifferent types and number of funds, had to be modified to suitour specific features. This model of fund accounting isespecially developed in the United States of America for theneeds of reporting of supported units, above all on statelevel. The implementation of such a system in Croatia, withoutsignificant adjustments, was unsuitable in its mere beginning.

Inconsistency in the accounting for non-profit organizationsand the needs of non-profit organizations for certain type ofinformation were especially evident in the inconsistency ofapplying the economic classification of revenues and expenses(structure of the chart of accounts) and subsequently thecontent of certain positions of financial statements.

Moreover, the analysis of financial statement content showedinconsistency of their elements with the content of books keptaccording to prescribed valuation methods.

The prescribed valuation method – the modified accrualaccounting concept was actually the cash basis concept.Recognition of revenues was conditioned by the collection ofrevenues within the period or 20 days after the end of theaccounting period.

Accordingly, expenses did not include the recognition of coststhat were not paid within the period of 20 days after theaccounting period. In the case of non-liquidity, as well as inother possible situations, significant unpaid amounts were notrecognized or stated as expenses within the period in whichthey occurred.2

This accounting system was abandoned by the end of 2007. Withinthe context of the accounting reform, the following changeswere taken into account:

2 More on the assessment of the accounting system for non-profitorganizations 2004-2007 see Vašiček V and D. (2007), Stanje i potrebarazvoja računovodstva neprofitnih organizacija, Riznica (8/9)

a) Restructuring of fund accounting,b) Changes in the choice of accounting concepts,c) Changes in the form and content of financial statements,d) Harmonization of registering data in main and secondary

books of accounts ande) Changes within the chart of accounts.

4. THE REFORMED ACCOUNTING AND FINANCIAL REPORTINGSYSTEM

The formal legal framework leading to the changes within theexisting system of accounting and financial reporting for non-profit organizations was the new Accounting Act. Pursuant tothe provisions of this Act, 3 the accounting of religiouscommunities, political parties, trade unions and other non-profit organizations shall be prescribed by the Government ofthe Republic of Croatia. This was further enforced by theRegulation on Accountancy of Non-profit Organizations4 thatdefines bookkeeping documents, business books, organization ofbookkeeping, listing of assets and liabilities, principles forpresenting assets, liabilities, own resources, revenues andexpenses, content and implementation of the accounting plan,financial reporting and other areas related to the accountingof non-profit organizations.

The entities that are obliged to employ the new Regulation onAccountancy of Non-profit Organizations are mostly non-governmental non-profit organizations i.e. associations andalliances, funds, foundations, institutions, political parties,chambers, unions, religious and other communities, and allother legal entities whose basic goal is not generating profitand that are classified as non-profit organizations underspecific regulations

In defining the entities obliged to implement this Regulation,it should be pointed out that that it does not apply and never3 Official Gazette No. 109/2007, Article 2, Paragraph 54 Official Gazette No. 10/2008

did to the State Budget, the budgets of local and regionalself-government units, budget and extra-budgetary users definedby the Budget Act and identified within the Register of StateBudget Users.

Namely, due to the similarities in the nature of their activityand the manner in which they were founded, it is often quitehard to determine whether they are governmental (budget) ornongovernmental (extra-budgetary) non-profit organizations. Asalready emphasized, in order to achieve a clear distinction,the Budget Act, the Regulation on defining budget users andkeeping the Register of state budget users set forth thecriteria for the recognition of budget users emphasizing thefounding and/or ownership rights and the percentage of state orlocal budgets financing of overall expenses (50% and above).5

Governmental non-profit organizations (budget and extra-budgetary users) published in the Register of state budgetusers are obliged to implement budget accounting. Therefore,all other non-profit organizations (non-governmental) areobliged to employ the non-profit accounting system.

Exempted from full implementation of accounting principles andfinancial reporting under this Regulation still remain the smallnon-profit organizations. Pursuant to Article 71 of theRegulation, a non-profit organization with an asset value andannual revenue, according to the data for three previousbusiness years, under HRK 100,000 (ca. EUR 13,000) is notobliged to complete and turn in financial statements andimplement the double-entry bookkeeping and the account planaccording to the stipulations prescribed by the Regulation. TheRegulation on Accountancy of Non-profit Organizations does notstipulate the obligation to apply fund accounting. It stillenables non-profit organizations to decide upon setting up asystem of fund accounting and its adjustment to internal needs.

5 Official Gazette (2003) Zakon o proračunu, Zagreb Narodne novine d.d.(96)Official Gazette (2004) Pravilnik o utvđivanju korisnika proračuna i

vođenju Registra korisnika proračuna, Zagreb Narodne novine d.d.(80)

Starting from January 1, 2008, the full accrual concept wasprescribed for the recognition of business transactions, i.e.the recognition of revenues and expenses.

The data obtained from the financial statements completed onaccrual basis are more complete and thorough or in other wordsthey have a greater span and scope in relation to the datapresented in financial statements completed on the modifiedcash basis. The application of accrual basis ensures recordingdata on business transactions that will be extended throughfollowing accounting periods. These data can be found useful tofinancial statement users in assessing future trends towardsincreasing or decreasing of resources that are at the non-profit organization’s disposal and the assessment of theability of the organization to fulfil the tasks for which itwas established as well as management’s performance and theirresponsibility for entrusted resources.

The most significant features of today’s system of accountingconcepts are related to the following:

1. Capitalization of costs of acquisition and calculation ofdepreciation of a non-financial long-term asset.

2. Recognition of assets is primarily based on the historicalcost (value) of the asset or the estimated value. Hence,assets are capitalized and initially valued according to theamounts spent on their acquisition unless the cost ofacquisition cannot be established and then the estimatedvalue is used. This means that the system introduces thecalculation of depreciation as proportional costs of its useover time and abandons the former system of presenting totalexpense at the moment of its acquisition.

The Regulation also prescribes the compulsory revalorization(in conditions of inflation when the increase rate, measured bythe coefficient of the price quoted by industrial productmanufacturers for three previous years, is above 30%) in whichthe effects of valorization are assigned to own resources(capital).

4.1. Recognition of Revenues

In recognizing revenues the categories of reciprocal and non-reciprocal incomes are introduced and defined. This assumes adifference among two groups of revenues:

1. Reciprocal income i.e. counter-service income fromdelivering goods, service or the like that assumesinvoicing, and

2. Non-reciprocal incomes as specific sources of non-profitorganization’s financing such as membership fees, donationsand other similar incomes.

Reciprocal incomes, as incomes based on the delivery of goodsor services, are recognized in the relevant accounting periodunder the condition that they can be measured regardless themoment of their collection. In this case, the recognition ofincomes is assumed at the moment of its occurrence in relationto the moment of delivery under the general conditions ofmeasurement and reliability of collection.

Non-reciprocal incomes, as incomes that are not realized fromdirect delivery of goods or services (donations, membershipfees, contributions and the like) are recognized in therelevant reporting period under the condition that they areavailable i.e. that they will be collected before the financialstatements for the relevant period are presented.

4.2. Recognition of Expenses

Unlike the previous system that recognized expenses incorrelation with the moment of payment, the new system iscompletely based on accrual basis, i.e. the expenses arerecognized regardless of the moment of payment. In this sense,the Regulation stipulates the following:

Expenses are recognized in the corresponding reportingperiod regardless the moment of payment

Expenses for acquisition costs of short-term non-financialassets are recognized in the moment of the occurrence ofthe actual expense i.e. moment of sale

Acquisition costs of long-term assets are capitalized,whereas expenditures are recognized during their usefullife

Acquisition costs of long-term non-financial tangibleassets at historical cost per unit under HRK 3,500 (ca.EUR 500) can be written off on a one-time basis

4.3. Classifications and Charter of Accounts

The Regulation also covers the new approach to classificationsand introduces a new, more comprehensive and systematic chartof accounts. The new accounting plan for non-profitorganizations defines numerical labels and descriptions forindividual accounts that are to be used by non-profitorganizations in their bookkeeping records of assets,liabilities and own resources as well as revenues and expenses.

The new classification system provides for the comparability ofdata of non-profit organizations and those of governmental non-profit organizations (budget users) as it is based on theapplication of the international economic classification ofassets, liabilities, revenues and expenses as defined by GFS20016.

Accounts are classified as: classes, groups, subgroups andsections. Hence, the new system of four-digit compulsoryaccounts (chart of accounts) has been introduced.

Sections, as the fourth account level within the accountingplan can be further subdivided into analytical and sub-analytical accounts according to needs. The classification ofsections within the accounting plan is still carried outaccording to the decimal system.

Revenues are classified according to the following groups ofaccounts:31 – Income from the sales of good and services,32 – Income from membership fees and contributions,33 – Income under special regulations,34 – Income from assets,

6 IMF, A Manual of Governmental Finance Statistic, 2001

35 – Incomes from donations and36 – Other incomes.Expenses are classified according to the following groups ofaccounts:41 – Compensation of employees,42 – Material expenses,43 – Depreciation expenses,44 – Financial expenses,45 – Donations and46 – Other expenses.

4.4. Financial Reporting

The system of financial reporting is based on standardizedforms and in scopes of financial statements. Basic financialstatements include: the balance sheet, profit and loss accountand notes accompanying the financial statements. All financialstatements are completed for a business year which is inalignment with the calendar year whereas only the profit andloss accounts are prepared for accounting period during theyear and this is on six-month basis from January 1 to June 30.All financial statements give a clear picture of the financialposition and the performance of the non-profit legal entity. Asstated, only those non-profit organizations whose value ofassets and revenues in the former three years were above HRK100,000 (ca EUR 13,000) are obliged to submit their financialstatements to the Ministry of Finance and the State AuditOffice. At the moment, this applies to only 8.340 entities or20% of the total number of registered non-profitorganizations.7 According to the gathered data, an aggregatedbut not consolidated statement of financial position and anincome statement are shown in the next two tables.

7 According to the research of economic and financial position of non-profit organizations for 2008 and 2009, 8,340 entities submitted theirfinancial statements. For more, see D.Vašiček/D.Kovačić: Prikaz i analizarezultata poslovanja neprofitnih organizacija u Republici Hrvatskoj, Riznica br.10, HZRIF,2010, p.15

Table 1: Aggregated non-consolidated statement of financialposition as of 31st December 2009

Financial position in 000 kn 1.1.2009 31.12.2009

INDEXI ASSETS (1+2) 49.011.987 48.681.533 99,3 1. Nonfinancial assets 16.453.060 18.037.522 109,6 2. Financial assets 32.558.927 30.644.012 94,1 II LIABILITIES AND EQUITY 49.011.416 48.681.533 99,3 3. Liabilities 9.572.300 11.158.387 116,6 4. Equity (own resources) 39.717.669 37.904.109 95,4 - Revenue surpluses 5.176.251 7.262.729 140,3 - Revenue deficits 450.839 526.645 116,8 Source: Ministry of Finance

Table 2: Aggregated non-consolidated income statement as of 31stDecember 2009

Financial results in 000 kn 2008 2009 INDEXI TOTAL REVENUES 14.073.62

0 13.304.80

0 94,5

II TOTAL EXPENSES 11.864.871

11.296.288

95,2

1. Employee expenses 1.930.865 2.063.336 106,9 - of which payrolls 1.559.923 1.685.568 108,1 2. Suppliers 6.416.508 6.041.102 94,1 3. Depretiation 432.016 424.331 98,2 4. Financial expenses 314.045 279.823 89,1 5. Grants 2.011.139 1.647.458 81,9 6. Other expenses 761.345 839.477 110,3 III REVENUE SURPLUS 2.535.104 2.429.553 95,8 IV REVENUE DEFICIT 326.356 421.040 129,0 Additional data 2008 2009 INDEXNumber of non-profitorganisations

  8.340  

Number of employees at FY end 17.005 18.228 107,2 Number of employees based onwork hours

18.387 19.661 106,9

Average payroll based in kn 7.070 7.144 101,1 Source: Ministry of Finance

The tables are based exclusively on the data gathered from the8.340 entities that submitted their financial statements. Thevast majority of non-profit organisations have assets and

revenues under 100.000 kn and do not have to submit any kind offinancial statements.

5. CONTROL OF NON-PROFIT ORGANISATION PERFORMANCE

5.1. External Control

The Amendments and Supplements to the Regulation on Accountancyof Non-profit Organizations in January 2009 stipulated theobligation of registering the organization within the Registryof Non-profit Organizations. The Registry is organized and leadby the Ministry of Finance. The Registry was established toenable a more quality monitoring financial data of non-profitorganizations at the level of the entire sector. Non-profitorganizations are entered according to special provisions intorelevant registries that are not related and that do notcontain data relevant to financial statement databases. Due tothe above mentioned and with the aim of regulating andincreasing business transparency as well as introducingfinancial discipline within the non-profit organization sector,the Ministry of Finance sets up a special Registry that enablesthe interconnection of individual (local) registries. Registryof Non-profit Organizations contains the following data on non-profit organizations:

General data: name of the non-profit organization,registration number, individual identification number,registration number in the local registry, accountnumber, address, city/municipality and county statisticallabel, business activity code, contact person,telephone/fax number, e-mail, web page;

Data on authorized person/s, and

Data relevant for financial statement databases.

The data in the Registry of Non-profit Organizations are publicand available pursuant to the provisions under the Act on theRight of Access to Information. Non-profit organizations areentered into the Registry of Non-profit Organizations after

filling in the Registry of Non-profit Organizations Form (Form:RNO) and submitting it to the Ministry of Finance no later than30 days upon their registration within the local registries.The non-profit organization shall inform the Ministry ofFinance on any changes of data entered into the Registry ofNon-profit Organizations within two working days upon thechange by means of Form on Changes within the Registry of Non-profit Organizations (Form: RNO-P)

The external control over non-profit organization’s performanceis directed towards the following:

a) Respecting economic principles, rationality and achievementof performance success measured by financial indicators andwith the aim of protecting the interests of founders andwider social community – the country;

b) Performing registered activities in compliance with theprovisions, regulations and founding acts.

Depending on the source of their financing, the interests offounders and the tasks to be met by the non-profit entitiesthrough their activities, the external control isinstitutionalized according to special legal regulations thatgovern the area of business operations of a non-profit segment.In Croatia, external control is mostly conducted by the StateAudit. The State Audit as an autonomous body performs itsactivities in line with the State Audit Act that regulates thearea of its activity and its jurisdiction.

The area and jurisdiction of the State Audit are adjusted inorder to protect the state interests. As a result, itsactivities within the non-profit sector are oriented towardsthose entities that are founded by state means and/or financedfrom budget and extra-budgetary funds.8 The audit of thementioned non-profit entities includes auditing of document,statements, systems of internal control and internal audit,accounting and financial procedures as well as other records inorder to verify the accuracy of financial reports on the

8 See State Audit Act, Article 1, Official Gazette No. 70/93, 48/95

business performance and financial position of the engagedstate assets

External control over financial performance, with the aim tomeet state interests in accruing fiscal and parafiscalrevenues, is present in all non-profit organizations.Conforming to special regulations, the same is carried out bystate bodies responsible for generating state revenue. Thenormative base for implementing specific forms of externalcontrol of individual non-profit entity performance is definedby fundamental regulations that govern the conditions and waysof setting up an organization and the area of its activities.

Thus, for instance, the external control of the activities of acitizen association is defined by the Associations' Act(Official Gazette Nos. 88/2001 and 11/2002). The Act definesthe administrative and inspection control. The administrativecontrol refers to the enforcement of the Act and relatedprovisions, while the inspection control covers control overthe legality of an association’s financial operations andactivities.

Inspection control is carried out by government bodiesresponsible for the registry of associations’ activities andcontrol of public revenues. The external control over theactivities of institutions is regulated by the Institutions Act(Official Gazette Nos. 76/93, 29/9., 47/99). The financialactivities of an institution are supervised by the relevantpublic administration body while the supervision overprofessional activities is conducted by a professional bodydetermined by special regulations. Similar form of normativeinauguration of external control can be found in other specialregulations that regulate in more detail the activity ofindividual non-profit organizations.

Certain interest groups – founders of non-profit organizationsin line with the founding acts and with the aim to control theachievement of their interests may also use other forms ofcontrol such as external audit.

5.2. Internal Control

The development of an internal control in non-profitorganizations largely depends on its size, organizational chartand complexity of business activities. Certain segments ofinternal controls or individual internal control mechanisms canbe recognized to a greater or lesser extent in allorganizations, while a comprehensive system of internalcontrols and internal audit is only present in a few complexnon-profit systems. The reasons for this are closely connectedwith the characteristics of the functioning of most non-profitentities. Our practice confirms the conclusions presented byEmerson O. Henke analyzing the reasons for the lack of adeveloped system of internal control in non-profitorganizations.

The key reasons usually include the following (Emerson/Henke,1992):

1. Governing bodies (boards of managers, management committeesand similar groups) are often large and consist ofvolunteers who are relatively inactive in operationalactivities. None of them has an ownership interest withinthe organization he or she would be interested inprotecting.

2. Resources that should be invested in the development of theinternal controls are limited.

3. The accounting function is inadequately treated, oftendivided and understaffed.

4. Organizations employ a small number of employees and it isnot possible to achieve the desired level of separation ofduties and responsibilities.

5. Due to the non-market nature of activities, there is a lackof market valuation and control of the quantity and qualityof provided services and goods.

Current regulations governing the accounting and financialreporting system for non-profit organization indicate that

there should be certain internal control mechanisms in thefield of financial and accounting controls and the preservationof material resources. These cases closely meet the needs forcontrol of the business of undeveloped (according to the volumeand complexity of activities) non-profit entities, especiallyin the bureaucratic model of organizational functioning ofthose with a strong line management system. More complex non-profit entities should necessarily take more intensive approachto setting up (or upgrading) the system of internal controlsthat, along with the control, includes internal audit. In non-profit organizations, internal audits are often faced with thesame basic features as well as profit oriented units, but dueto the significantly different operational objectives, relatedratios for analysis and definition of activity andeffectiveness of operations are often different. Thespecificity of certain analytical procedures in the internalaudit of non-profit organizations and their use for evaluatingthe success often stems from the limitations that are given bya non-market orientation. Decisions of interest groups andother founders of the non-profit entities can significantlyinfluence the direction and scope of activities. The reductionof funding in certain time intervals may significantly affectthe efficacy and effectiveness. Lack of market valuation ofoutput and value for money achieved, prevents reliableassessment of whether the conversion of resources into theservices has been carried out effectively i.e. whether thelevel of services rendered is consistent to invested efforts.

6. CONCLUSION

The success of non-profit organizations - a component of civilsociety in carrying out the objectives and tasks, is directlylinked to good governance. To secure the information basenecessary to support the management, it is necessary toestablish the appropriate accounting and information system andmanagement control. The reform of accounting and reporting

systems is directed towards replacing the fund accounting withthe full accrual accounting basis. This has resulted in thechange in form and content of financial statements and theapplication of systematic classification that requires changeswithin the contents of the chart of accounts and records ofcompliance with primary and subsidiary ledgers. The reformdirection that has been selected in terms of applying accrualaccounting has enabled the establishment of consistent andmodern accounting systems in the non-profit sector. Moreover,this is further regulated by the requirements demanding for theapplication of relevant classification systems of internationalfinancial and statistical reporting. At the same time, theoptimal degree of harmonization of reporting systems of"private" and "state" non-profit organizations has beenachieved. This suggests that it is justified and reasonable,for all non-profit organization groups, to apply the same rulesof measurement and evaluation, recognition of revenues andexpenses and the internationally comparable and acceptableeconomic classification of revenues and expenses. The nature ofactivities and different sources of financing generally requirethat non-profit organizations accurately account for not onlythe overall financial performance but also its businesssegments that are financed from various, often severelyrestricted resources. Therefore, accounting for non-profitorganizations is facing a growing demand for the development ofinternal accounting and monitoring of operations by segmentsand sources of financing. In the management processes supportedby the accounting information, the importance of developing andfunctioning of the internal financial monitoring and control isincreasingly emphasized. In the non-profit sector in transitioncountries, the situation in this regard is stillunsatisfactory. The development of internal control in non-profit organizations largely depends on its size, complexity ofthe organizational chart and business activities.

By following the international trend of affirmation andimplementation of the accrual accounting concept, the reformdirection of change of external financial reporting of non-

profit organizations in the observed transition was determinedto a complete or slightly adapted accrual accounting concept,i.e. direct or indirect application of IAS. In close connectionto this, there is the necessity of implementing relevant andinternationally comparable classification for the presentationof the elements of financial statements of non-profitorganizations.

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