FYI Article – The Evolution of Accounting Standards for Private Sector Not-for-Profit Organizations Continues
How Did We Get Here?
The accounting standards for not-for-profit organizations in Part III of the CPA Canada Handbook – Accounting were originally adopted in 1996. Those standards were meant to address the unique transactions and circumstances of not-for-profit organizations (NFPOs). The standards accommodated a number of industry practices that were common in this sector at the time and provided optional approaches to accounting for identical transactions and/or circumstances. Many of those accommodations are not consistent with either the concepts in Part III of the Handbook or the standards in other parts of the Handbook.
Accordingly, the Accounting Standards Board (AcSB) had a process under way in the early 2000’s to propose amendments to the NFPO standards. The first series of these amendments were adopted in 2008. At the same time, a second series of possible amendments to the remaining NFPO standards were being considered.
In March 2010, both the AcSB and the Public Sector Accounting Board (PSAB) issued documents for comment outlining their respective strategies to be applied by NFPOs effective January 1, 2012. The proposals indicated that both Boards intended to work together once those strategies had been implemented to review and possibly amend the NFPO standards. The AcSB/PSAB joint Statement of Principles, “Improvements to Not-for-Profit Standards,” issued in April 2013, was the first step of that process. It solicited input on the need for improvements to the NFPO standards and how those improvements might be addressed. The comment period ended in December 2013.
Since then, the AcSB has considered staff’s analysis of stakeholder input, which has provided a wealth of knowledge on the proposed principles. The AcSB has also reaffirmed its commitment to continue:
- to maintain a separate set of standards for private sector not-for-profit organizations that addresses transactions and circumstances unique to such organizations;
- with the improvements process to review the standards in Part III of the Handbook and update the standards as necessary; and
- to work with PSAB, with the objective of achieving consistency between private and public sector standards for not-for-profit organizations when appropriate.
What’s Happening Now?
At its May 25-26 meeting, the AcSB approved the creation of a standing not-for-profit advisory committee to assist the Board with its standards improvements initiatives, as well as provide input on other standard-setting matters of interest to private sector not-for-profit organizations. An invitation soliciting individuals interested in participating in this Committee is posted online.
At its May 2015 meeting, the AcSB also approved the following projects to address all of the principles relating to private sector standards that were proposed in the joint AcSB/PSAB Statement of Principles.
Accounting Standards Improvements – Phase 1
This phase of the project addresses the proposals that an NFPO:
- applies the referenced accounting standards for private enterprises in Part II of the Handbook to report the capitalization, amortization and disposal of tangible capital assets and recognize write-downs to reflect a partial loss of service potential of a tangible asset still in use (Principle 5);
- continues to apply the existing Part III standards for intangible assets and add a requirement to Part III to recognize write-downs to reflect a partial loss of service potential of an intangible asset still in use (Principle 6);
- continues to apply the existing Part III standards for collections and add a requirement to Part III to recognize collections at either cost or nominal value (Principle 8); and
- maintains the existing standards in Part III for:
- works of art, historical treasures and similar items that are not part of a collection (Principle 9);
- related party transactions (Principle 12); and
- allocated expenses (related to fundraising and general support costs) (Principle 15).
Accounting Standards Improvements – Phase 2
This phase of the project relates to whether, and how, to amend Section 4450, Reporting Controlled and Related Entities by Not-for-Profit Organizations, and addresses the proposals that:
- require consolidation of controlled NFPOs, subject to an exclusion from consolidation of a large number of individually immaterial organizations (Principle 10);
- require the application of the equity method to account for controlled profit-oriented enterprises although an organization would not be required to conform the accounting principles of the subsidiary with those of the parent (Principle 10);
- maintain the existing standards for definition and disclosure of economic interests (Principle 11); and
- present expenses by function in the financial statements, disclose expenses by object in the notes, and present total fundraising and support expenses in either the financial statements or discloses them in the notes (Principle 14).
Contributions – Revenue Recognition and Related Matters
This project will include:
- researching the recognition of revenue from contributions, as part of addressing the proposals that state:
- pledges should meet the definition of an asset in order to be recorded (Principle 1);
- a contribution stipulation should meet the definition of a liability in order to not be recognized as a revenue when received or receivable (Principle 2);
- when a stipulation gives rise to a liability, revenue would be recognized as the liability recorded pursuant to Principle 2 is settled (Principle 3); and
- contributions of materials and services may be recognized when a fair value can reasonably be recognized (Principle 4).
- addressing the implications of:
- eliminating the $500,000 size exemption in Part III that permits non-recognition of tangible and intangible capital assets (Principle 7); and
- applying the referenced standards in Part II to the presentation of financial statements subject to retaining guidance material in Part III that addresses unique financial statement presentation issues faced by not-for-profit organizations. (Principle 13).
The new Committee’s membership will be established in the coming weeks. It will meet in the fall of 2015 to commence its work beginning with the Accounting Standards Improvements – Phase 1 project. The AcSB plans to issue an Exposure Draft for the Phase 1 project in 2016.
Grace Lang, CPA, CA, CPA (Illinois)
Principal, Accounting Standards Board
Phone: +1 (416) 204-3478
Brian Barrington, CPA, CA
Consultant, Accounting Standards Board
Phone: +1 (416) 204-3436