Not-for-Profit Advisory Committee
November 17, 2016
The Not-for-Profit Advisory Committee’s purpose is to assist the Accounting Standards Board (AcSB) on maintaining and improving the accounting standards for not-for-profit organizations (NFPOs) in Part III of the CPA Canada Handbook – Accounting and in identifying the need for non-authoritative guidance about the standards. The Committee makes recommendations to the AcSB but is not authorized to interpret or provide authoritative guidance on accounting standards for NFPOs.
This document has been prepared by the staff of the AcSB and is based on discussions during the Committee’s meeting. The meeting notes do not necessarily represent the views of the AcSB and nothing in them constitutes authoritative guidance on acceptable or unacceptable application of accounting standards for NFPOs. Only the AcSB can make such a determination.
Accounting Standards Improvements for NFPOs
Upcoming Exposure Draft
Committee members discussed the following changes the AcSB made to the exposure draft as a result of the fatal flaw review process:
- Additional wording was added to the exposure draft and basis for conclusions to explain that componentization is already a requirement in accounting standards for private enterprises in Part II and was carried forward from the pre-changeover standards in Part V.
- A reference to Section 3051, Investments, was added to proposed Section 4441, Collections, to provide guidance that may be applicable to works of art, historical treasures and similar items that are not part of a collection. These items are to be accounted for according to their intended use (i.e., as capital assets, investments or inventory items).
- The proposed requirement relating to recognition of the gain or loss on the proceeds from disposing of collection items with external restrictions has been amended to require application of Section 4410, Contributions — Revenue Recognition.
- The term “market value” has been replaced by “fair value” in the proposed transitional provisions since fair value is defined in Part III.
Effective Date of the Proposals
Committee members discussed whether an effective date of January 1, 2019 or April 1, 2019 for the exposure draft proposals would be most appropriate. AcSB staff noted that a question relating to this will be included in the exposure draft. Committee members noted that since year ends for NFPOs vary across the sector, it is difficult to determine the best effective date for all NFPOs. Some Committee members also observed that regardless of the effective date, earlier application of the proposals is an option.
Obtaining Feedback on the Proposals
Committee members discussed ways to consult the not-for-profit sector on the upcoming exposure draft, including who to contact, to both raise awareness of the proposals as well as obtain feedback. Committee members suggested contacting specialty industry groups to obtain feedback on the proposals, as well as using social media.
Part II Proposals
As part of the Committee’s mandate to monitor changes in Part II that may affect NFPOs, Committee members were provided with a summary of current projects. Committee members discussed proposed changes relating to the following:
- redeemable preferred shares issued in a tax planning arrangement;
- 2017 annual improvements;
- subsidiaries and investments relating to the application of the cost method; and
- narrow-scope amendments to Section 1591, Subsidiaries, and Section 3056, Interests in Joint Arrangements.
Committee members also discussed issues for consideration in the 2018 annual improvement process for Part II. One Committee member noted an issue with Section 3856, Financial Instruments, relating to situations when the fair value in an endowment fund is less than historical cost. It is often unclear whether an NFPO would have to contribute funds to the endowment fund to make up the difference between historical cost and fair value.
Contributions – Revenue Recognition and Related Matters
The Committee divided into break-out groups and discussed the following related to accounting for contributions in Canada:
Reasons for Two Methods of Accounting
Committee members noted that having two methods to recognize revenue from contributions allows an NFPO to choose whichever method is most appropriate based on its needs and the needs of its users. Committee members emphasized the importance of identifying who uses NFPO financial statements and the needs of those users. Committee members observed that in many cases some types of organizations will choose one method over the other because the method better reflects the operational performance of the organization, while other NFPOs will choose the method that better illustrates stewardship over its funds. Other Committee members noted that in many cases the choice of method depends on the organization’s size and the complexity of its activities, or the method they have applied historically.
How Two Methods Serve Conceptual Principles and the Effect on Donors
Committee members observed that in many cases donors are unaffected by an NFPO’s choice to use the deferral method versus the restricted fund method and do not use the financial statements to assess the financial health of the NFPO when making its donation decisions. Instead, donors want to know if their investment will be protected. Committee members noted that donors do not compare NFPOs based on which method has been used. Instead, there are other indicators that are more important, such as the purpose of the organization and whether they have achieved their social mission.
One member cited the importance of comparability of some types of NFPOs, such as universities, and noted that a lack of comparability is currently a concern given the use of both the deferral and restricted fund methods. As well, some NFPOs use the CPA Canada Public Sector Accounting Handbook either with or without the PS 4200 series of Sections. This member also noted that comparability will become increasingly important in the future as competition for funding among NFPOs increases. Other Committee members discussed how the choice of method can affect NFPOs’ funding and noted that some types of funders prefer one method over another.
Deferral Method – Pros and Cons
Committee members discussed the pros and cons of the deferral method for recognizing revenue from contributions.
Some Committee members noted that the deferral method results in less volatility on the statement of operations and does not overstate the bottom line because contributions are not recognized immediately as revenue when received. Other members noted that using the deferral method provides a clear picture of whether the organization had sufficient funding to cover its operational activities in a fiscal year because only the unrestricted revenue is recorded in net assets (i.e., it tells a better story). As a result, the deferral method can be easier for funders to understand.
Alternatively, Committee members noted that when the deferral method is used, total contributions are not always recognized as revenue in the same fiscal year they are received, which can be confusing to users. Committee members also observed that using the deferral method is complicated and more resource intensive to apply when accounting for some items such as income distribution policies on endowments.
Restricted Fund Method – Pros and Cons
Committee members discussed the pros and cons of the restricted fund method for recognizing revenue from contributions.
Committee members observed that the restricted fund method is easier to apply because it does not require matching revenues with expenses since all revenue is recognized when received. Committee members noted that using the restricted fund method is an effective way to illustrate to users the money that is available for operations. Committee members also noted that for larger, more complicated or longer-term projects, it may reflect the flow of funds better as the different key operating activities of the NFPO can be reported by fund.
Conversely, Committee members observed that using the restricted fund method creates presentation and governance challenges, including defining what is a fund, which can be overly complex. Committee members also observed that since all revenue is recognized immediately into their respective funds, there is no tracking of commitments, which can result in additional record keeping that is costly. Other members cited the additional complexity that arises when funding is received and the NFPO has no corresponding fund, in which case the deferral method is applied.
One Committee member noted that the restricted fund method occasionally results in the need to reverse revenue that was previously recorded in a fund when the NFPO did not meet the requirements for keeping the funds.
Other Areas for Improvement
Committee members discussed common issues and areas in the accounting for contributions that need improving. Committee members cited accounting for endowments as a common issue, particularly the inconsistent treatment of accounting for the income subsequently earned on the endowments.
Committee members also noted the complexity of endowments to users of NFPO financial statements (for example, accounting for internally restricted funds versus endowments).
Committee members discussed other matters relating to the accounting for contributions such as how donor agreements are structured.
The U.S. Financial Accounting Standards Board’s (FASB) Assistant Director for Nonpublic Entities presented an update on developments with regard to not-for-profit standards in the United States, with particular emphasis on accounting for contributions.
This update highlighted the FASB’s recent amendments to simplify and improve how an NFPO classifies its net assets, as well as the information it presents in financial statements and notes about its liquidity, financial performance and cash flows. Issued in August 2016, the amendments are effective for fiscal years beginning after December 15, 2018.
An overview of the FASB’s current project to improve and clarify existing guidance related to the recognition of revenue from grants and contracts by NFPOs was provided. The FASB plans to issue an exposure draft in the first half of 2017 on that agenda item.
The AcSB will continue to monitor and liaise with the FASB as well as standard setters in other jurisdictions to share best practices.
Committee members emphasized the need for guidance on how to account for combinations between NFPOs, and noted that these transactions are more frequent today — a trend that is likely to continue in the future.
Committee members also discussed how uncommon it is for NFPOs to prepare interim financial statements.
Terms of Reference and Statement of Operating Procedures
Committee members discussed changes the AcSB made to the Committee’s Terms of Reference and Statement of Operating Procedures. The amendments were made as part of the AcSB’s triennial review of its advisory groups to ensure that the documents for all of its committees are consistent and are fit for purpose.
The Committee agreed to request that the AcSB approve its amended Terms of Reference and ratify its amended Statement of Operating Procedures.