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.
Contributions – Revenue Recognition and Related Matters
Using Consistent Concepts to Recognize Revenue
The Committee discussed the benefits of having a consistent conceptual basis for recognizing revenue derived from contributions and revenue derived from sales of goods and services. The Committee observed that many NFPO preparers use Section 3400, Revenue in Part II to account for revenue from the sale of goods and services, which for some types of NFPOs, such as arts organizations, makes up a significant portion of their revenue. A few Committee members noted that they would not want the timing of the Contributions Project to be delayed because of activities, such as research, being done on revenue in Part II. Other Committee members expressed concerns with using the same model to recognize revenue from contributions as is used for sales of goods and services. However, the Committee agreed that consistency in how different types of revenue is recognized and the resulting comparability between organizations using Parts II and III would be beneficial, particularly for those users who read financial statements prepared using different accounting frameworks in the CPA Canada Handbook – Accounting.
Possible Options to Account for Donor Stipulated Contributions
The Committee discussed the differences between Canada and other jurisdictions (Australia, New Zealand, U.K. and the U.S.) relating to the accounting for contributions. The Committee also continued their discussion from their November 2016 meeting relating to the pros and cons of each of the deferral and restricted fund methods.
The Committee discussed the following options for accounting for donor stipulated contributions:
- Specify the types of NFPOs permitted to use a particular method. The Committee agreed that this would increase comparability among similar types of NFPOs.
- Amend the deferral method to limit the deferral of donor stipulated contributions to only those that have enforceable rights of return. This would mean that donor restricted contributions without enforceable rights of return would no longer be deferred and would be recognized immediately as revenue. Unrestricted contributions would be unaffected and would continue to be recognized as revenue immediately. The Committee noted that by not deferring all donor restricted contributions, this may have a negative effect as an NFPO would show higher revenues. For example, it could affect the funding received by an NFPO or a charity’s evaluation from a rating agency. One Committee member also noted that it could create tension between donors and recipients since it may inadvertently encourage contributions with enforceable rights of return. This could also affect the ability of a charity to issue income tax receipts since donations with enforceable rights of return would not qualify.
- Amend the restricted fund method to defer donor stipulated contributions that have enforceable rights of return since they meet the definition of a liability. Unrestricted contributions and donor restricted contributions without enforceable rights of return would continue to be recognized immediately as revenue as long as the organization had established a restricted fund for that purpose. One Committee member noted that for most NFPOs, this amendment would have a minimal impact since most contributions are unrestricted or have no enforceable rights of return.
- Amend the restricted fund method to require that a restricted fund must be established for all purposes for which donor restricted funds are received. If a restricted fund is not created, the NFPO would be required to only use the deferral method to account for all of its contributions. This removes the ability of an NFPO applying the restricted fund method to also use the deferral method for contributions that have no corresponding restricted funds. Various Committee members thought this amendment was appropriate since currently it is confusing for users when an NFPO uses both methods simultaneously.
- Simplify the presentation requirements of the restricted fund method since the financial statements look different than what many people are accustomed to seeing.
Some Committee members observed that in principle developing one method could be beneficial. However, other Committee members noted the challenges of developing one method since it would need to meet the needs of different types of NFPOs and their users. The Committee agreed that both the deferral and restricted fund methods have merit and are appropriate in different circumstances and for different types of organizations or transactions. A majority of the Committee noted their preference for retaining both methods. However, the Committee agreed that some improvements could be made to increase comparability among similar types of NFPOs.
Combinations of Not-for-Profit Organizations
Currently, Part III does not contain guidance on combinations of NFPOs and, instead, refers NFPOs to other sources of GAAP. The Committee thinks that there are a variety of approaches being used in Canada to account for combinations of NFPOs. The most common method used is U.S. GAAP. The Committee discussed the emerging trends in practice, as well as the accounting requirements in other jurisdictions (Australia, New Zealand, and the U.K.).
The Committee agreed that the motivation for performing combinations of for-profit enterprises is different than for NFPOs since for-profit enterprises focus on maximizing shareholder value. However, the reason for combinations between NFPOs is to combine resources and save costs. The Committee thinks that combinations between NFPOs in Canada are becoming increasingly complex with multiple parties involved. The Committee observed that there is helpful guidance in other jurisdictions; however, the information is difficult to find. Therefore, the Committee agreed to advise the AcSB that until guidance is developed in Part III for combinations of NFPOs, the requirements in other jurisdictions should be made available.
Part II Proposals
As part of the Committee’s mandate to monitor changes in Part II that may affect NFPOs, the Committee was provided with a summary of current projects. The Committee discussed proposed changes relating to the following:
- redeemable preferred shares issued in a tax planning arrangement; and
- 2017 annual improvements.
The Committee also discussed issues for consideration in the 2018 annual improvement process for Part II and considered the following additional issues:
- The accounting for the cash surrender value of insurance contracts- The Committee noted that there is inconsistency in whether the cash surrender value is accounted for and presented on the face of the financial statements or disclosed in the notes.
- The increasing use of new types of financial instruments (for example, social impact bonds) by NFPOs since traditional forms of funding (for example, donations and government funding) are declining. The Committee noted that it is unclear how to account for these instruments since they are based on non-financial measures.
The Committee agreed to recommend that the AcSB consider these issues when assessing its future project priorities.
The Committee also received an update on the AcSB’s consultation with stakeholders about the relative priorities for Part II. One Committee member observed that changes to revenue recognition in Part II could significantly affect those NFPOs that have substantial sales of goods and services since they use Part II to account for them.
Some Committee members emphasized the need for guidance relating to cap and trade programs since currently there is no guidance. This is particularly important for certain types of NFPOs, such as universities.
Another Committee member noted that additional guidance on various topics might be helpful to NFPOs. For example, one member noted that there is no guidance in Part II for determining whether an arrangement contains a lease.
The Staff noted that both of these issues also affect private enterprises and have also been raised by the AcSB’s Private Enterprises Advisory Committee. The Committee agreed to recommend that the AcSB also consider these additional issues when assessing its future project priorities.
Public Sector Accounting Board Update
The Public Sector Accounting Board’s (PSAB) Director presented an update on PSAB’s 2017-2020 Strategic Plan and the 2017-2018 Work Plan as it relates to NFPOs. This update highlighted that a key focus in PSAB’s Strategic Plan, which received favorable support from stakeholders, relates to developing guidance for NFPOs in the public sector. The next steps will include further research and consultations to better understand the financial reporting needs of the NFPO and users of their financial statements.