Notional Expenses

Meaning of Notional Expense

Notional expenses for NGOs are expenses that are estimated or calculated based on reasonable assumptions and approximations rather than actual expenses incurred. These are amounts that are reported as expenditure, but not actually spent. In effect, there is no cash movement, it is simply a journal entry.

Examples of notional expenses for NGOs may include:

1. Office expenses: Where an NGO is using its owned premises for operations, it may use notional expenses to estimate the costs associated with renting office space, utilities, and other office-related expenses.
2. Travel expenses: Where the field staff is using private vehicles to access remote locations, notional expenses may be used to estimate the costs associated with travel, lodging and meals.
3. Program expenses: NGOs may use notional expenses to estimate the costs associated with running a particular program, including materials, equipment, and supplies.

Accounting for Notional Expense

Notional expenses should be accounted for in the same way as actual expenses to represent the costs associated with a particular program or project as a way of providing a more accurate representation of the true cost of the program or project.

Below are some general guidelines to be considered while accounting for notional expenses:

1. Appropriate disclosure and explanation of how the notional expenses were calculated.
2. Clearly defining and documenting the assumptions and approximations made, as well as the data sources used to support the calculations.
3. Disclosing the impact of the notional expenses on the NGO’s financial position and performance.

Challenges

Dealing with the ethical part of notional expenses is the biggest challenge. Do you disclose the expense in the financials? How much do you disclose? What constitutes a reasonable basis of charging the expense? Are the assumptions accurate?

Notional expenses also face an issue of transparency – whether the donor is aware or not that this amount has been charged. Notional expenses for meeting administrative or overhead costs should be charged only if the donor policy allows the same.

Best Practices

Accounting for expenses based on notionality is a prevalent practice in the NGO sector today. Charging in a camouflaged manner for a particular amount indicates a lack of transparency.

Below are some of the best practices to follow to ensure greater transparency in relation to notional expenses:

1. Charge notional expenses based on the donor policy.
2. Use reasonable assumptions and document the methodology used to arrive at the notional expenses
3. As a good practice, it is important not to make money out of a project.
4. Use notional expenses only when actual expenses cannot be reasonably determined or verified.

NGOs should always strive to track and document actual expenses as accurately as possible, and use notional expenses only as a last resort.