Hi Abraham, thanks for sharing your thoughts! I really appreciate you taking the time to read through the implementation guidance.
I’m especially curious about your point on the modified cash basis. I’m not familiar with this approach, and I can see the appeal of simplicity of this basis compared to the full accrual basis. My concern is whether this would create comparability problems:
Lack of standardisation: I don’t know if there is a uniform way to implement modified cash basis—each organisation could choose which items to treat as cash vs. accrual, making cross-organisation comparisons difficult.
Timing artifacts: Organisations with different payment cycles could show different expense patterns even with identical underlying activities. For example, an org that pays invoices immediately vs. one that batches payments quarterly could look artificially different.
Missing obligations: Without capturing accrued expenses or other provisions, we wouldn’t be able to see the org’s outstanding commitments, which seems important for understanding the true financial position.
You mentioned you’d be excited to see a standard that supports modified cash for audit purposes—which I think would be really interesting! Creating such a standard would presumably need to address these comparability challenges by defining exactly which modifications are acceptable and how to apply them consistently.
Yeah, I agree with the standardization issue and all the downsides you outline, which for me would be the main appeal of someone creating a standard, and might resolve most the concerns (since then there would be consistent practices on when organizations do cash vs accruals). I think that generally, organizations who do modified cash accrue things on a timed basis (e.g. liabilities that will exist for longer than a month will be accrued) and a size basis (e.g. major multi-year grants might be accrued), and just using that as a standard would help.
I think the primary advantage is cash accounting has way less room for error. It’s half the general ledger lines, so I guess half as many places to make mistakes. And, since a journal entry of only P&L and liability/receivable accounts isn’t reconcilable, in practice, it seems like transactions that only touch them generate more errors than ones touching cash accounts.
And, I think I regularly encounter organizations doing accrual whose liability accounts are just really messed up (e.g. I’m pretty sure every organization on earth accruing payroll taxes has some payroll tax account with a messed up value they have to correct).
I do think for EA organizations, INPAS seems like a big improvement on GAAP. One issue in adoption in the US—since statements need to be prepared according to GAAP for charitable solicitation registration audits for most states, there would need to be some state level policy change, since organizations might be hesitant to pay for two audits.
Hi Abraham, thanks for sharing your thoughts! I really appreciate you taking the time to read through the implementation guidance.
I’m especially curious about your point on the modified cash basis. I’m not familiar with this approach, and I can see the appeal of simplicity of this basis compared to the full accrual basis. My concern is whether this would create comparability problems:
Lack of standardisation: I don’t know if there is a uniform way to implement modified cash basis—each organisation could choose which items to treat as cash vs. accrual, making cross-organisation comparisons difficult.
Timing artifacts: Organisations with different payment cycles could show different expense patterns even with identical underlying activities. For example, an org that pays invoices immediately vs. one that batches payments quarterly could look artificially different.
Missing obligations: Without capturing accrued expenses or other provisions, we wouldn’t be able to see the org’s outstanding commitments, which seems important for understanding the true financial position.
You mentioned you’d be excited to see a standard that supports modified cash for audit purposes—which I think would be really interesting! Creating such a standard would presumably need to address these comparability challenges by defining exactly which modifications are acceptable and how to apply them consistently.
Yeah, I agree with the standardization issue and all the downsides you outline, which for me would be the main appeal of someone creating a standard, and might resolve most the concerns (since then there would be consistent practices on when organizations do cash vs accruals). I think that generally, organizations who do modified cash accrue things on a timed basis (e.g. liabilities that will exist for longer than a month will be accrued) and a size basis (e.g. major multi-year grants might be accrued), and just using that as a standard would help.
I think the primary advantage is cash accounting has way less room for error. It’s half the general ledger lines, so I guess half as many places to make mistakes. And, since a journal entry of only P&L and liability/receivable accounts isn’t reconcilable, in practice, it seems like transactions that only touch them generate more errors than ones touching cash accounts.
And, I think I regularly encounter organizations doing accrual whose liability accounts are just really messed up (e.g. I’m pretty sure every organization on earth accruing payroll taxes has some payroll tax account with a messed up value they have to correct).
I do think for EA organizations, INPAS seems like a big improvement on GAAP. One issue in adoption in the US—since statements need to be prepared according to GAAP for charitable solicitation registration audits for most states, there would need to be some state level policy change, since organizations might be hesitant to pay for two audits.