Changes in financial reporting requirements for Canada’s not-for-profit organizations

In December 2010, the Canadian Accounting Standards Board issued new accounting standards for not-for-profit organizations (NPOs) and changes for government not-for-profit organizations (GNPOs). Under the previous approach, both GNPOs and non-government NPOs were directed to follow the Canadian Institute of Chartered Accountants’ (CICA) Handbook, which includes standards developed to deal with the unique circumstances of many NPOs — the 4400 series. The new accounting framework will now be dependent on your organization’s classification as either an NPO or GNPO.

So as a director, what do you need to know? Firstly, it is important to understand the options available to your organization. The following table summarizes the new framework:

Definition Existing Canadian Generally Accepted Accounting Principles (GAAP) New Canadian Generally Accepted Accounting Principles
Non-government not-for profit organizations
Organizations that are not controlled by the government and that are organized and operated exclusively for social, educational, professional, religious, charitable or any other NPO purposes. Its members, contributors and other resource providers do not, in such capacity, receive any financial return directly from the organization.
Former CICA Handbook, including CICA 4400 Series (standards that apply only to NPOs) Choice between:
a. Part I of the CICA Handbook — International Financial Reporting Standards (IFRS)
b. Part III of the CICA Handbook — Accounting Standards for Not-For-Profit Organizations (based largely upon Part II of the CICA Handbook -Accounting Standards for Private Entities plus CICA 4400 Series)
Government not-for profit organizations
Organizations controlled by the government that have counterparts outside the public sector and that are organized and operated exclusively for social, educational, professional, religious, charitable or any other NPO purposes. Its members, contributors and other resource providers do not, in such capacity, receive any financial return directly from the organization. Under the current definition, schools, hospitals, colleges and universities typically fall under this category.
Former CICA Handbook, including CICA 4400 Series Choice between:
a. Public Sector Accounting (PSA) Handbook
b.PSA Handbook supplemented by CICA 4400 series for NPOs which have been incorporated into the PSA Handbook as PS4200

Once you have determined the framework applicable to your organization, it is important to understand the accounting and reporting implications of the options available.

Potential impacts of adopting Part III of the CICA Handbook — Accounting Standards for Not-For-Profit Organizations

It is expected that the majority of non-government NPOs in Canada will adopt Part III of the CICA Handbook. While for many organizations, this will not result in any significant accounting or disclosure changes, for others the implications may be more significant. The potential differences for NPOs that elect to adopt Part III of the Handbook include:

Accounting

  • Intangible assets — A new intangible assets section reaffirms the applicability of section 3064 Goodwill and intangible assets, unless provided otherwise in the new section.
  • Financial instruments
    • The disappearance of the “available for sale” option means that organizations will no longer have the option to recognize unrealized gains and losses in the statement of changes in net assets/fund balances. Going forward, all changes in the fair value of the financial instruments will be recognized in the statement of operations.
    • All financial instruments can be carried at fair value if the option is selected on initial recognition. If not, the default treatment for quoted debt securities will be cost or amortized cost. For quoted equity securities, it will continue to be fair value. This creates a different default accounting treatment for investments depending on their nature.
  • Transaction costs — Transaction costs incurred to acquire or issue financial instruments measured at amortized cost will be required to be netted against the carrying value rather than being expensed.
  • Defined benefit plans — For organizations with a defined benefit plan, there will be an option to select between the “immediate recognition approach”, where actuarial gains or losses would be recognized immediately in the statement of operations each period, or the “deferral and amortization approach”.
  • Capital assets — On transition to these standards, the organization may measure any individual capital asset at fair value and then use that fair value as its deemed cost at that date.

Presentation and disclosure

  • Primary Generally Accepted Accounting Principles — Various items have been eliminated from the primary principles including Emerging Issues Committee (EIC) abstracts, background information, basis of conclusion documents, illustrative material and implementation guides.
  • Cash flow statements — All organizations must prepare and present a cash flow statement. There is no longer the option to omit the cash flow statement if the required cash flow information is readily apparent from other financial statements or note disclosures.
  • Government remittances — Government remittances payable that are outstanding at the balance sheet date are required to be disclosed and include federal and provincial sales tax, payroll taxes, health taxes and workers’ safety insurance premiums among other items.
  • Capital disclosures — The requirement to disclose the organizations policy and capital restrictions has been eliminated.

Potential impacts of adopting Part I of the CICA Handbook — International Financial Reporting Standards

The option to adopt International Financial Reporting Standards (IFRS) is available to all non-government NPOs but will likely initially only be considered by those organizations that:

  • Are part of a global organization whose affiliates have chosen to use IFRS;
  • Participate in an industry with for-profit companies who report under IFRS; or
  • Have international funders or other users of the financial statements who require the use of IFRS.

IFRS was originally developed for use in the for-profit world and does not contain specific guidance for NPOs. In addition, there is currently no intention to modify IFRS for NPOs; these organizations will be subject to the same standards and requirements as publicly accountable entities. Some of the most significant accounting and reporting implications of adopting IFRS include:

Accounting

  • Revenue recognition — Under IFRS, there are no specific standards to address the unique nature of contribution revenue for NPOs. This specifically impacts the recognition of contributions restricted for specific purposes or time periods as well as endowment contributions that currently have specific recognition criteria under Canadian Generally Accepted Accounting Principles. Under IFRS, revenue is recognized under a general revenue recognition standard that may result in timing differences for recognition of contributions.
  • Property and equipment — IFRS permits an entity to revalue property and equipment to fair value on the date of transition to the new accounting framework.
  • Consolidation — Current Canadian accounting standards provide NPOs with various alternatives to report controlled and related entities. Under IFRS, no similar standard exists, so accounting for controlled and related entities would follow general consolidation standards. This would result in the consolidation of all controlled entities and equity accounting for all entities in which a NPO has significant influence.

Presentation and disclosure

  • General financial statement presentation and fund accounting — IFRS does not have an equivalent standard to Handbook Series 4400. As a result, the concept of fund accounting and the presentation of separate funds in the financial statements does not exist under IFRS. Related statements, such as the statement of changes in net assets, are replaced with IFRS statements, and would include a statement of comprehensive income.
  • Financial statement notes — Under IFRS, note disclosure is generally more extensive, with detailed note requirements for specific accounts and balances. For example, disclosure of the compensation of key management personnel is required under IFRS in the notes to the financial statements.

Potential impacts of adopting the PSA Handbook

The status quo will no longer be an option for GNPOs as the PSA Handbook guidance differs from the CICA Handbook. Some of the more significant differences include:

Accounting

  • Pension plans — Neither the corridor approach nor full recognition of actuarial gains and losses are allowed – all actuarial gains and losses are amortized over the average remaining service life of the employee group. There are other changes in the calculation methodology including the discount rate and a requirement to recognize plan amendments immediately.
  • Other employee future benefits — Leave benefits, such as sick pay, are accrued under the PSA Handbook regardless of vesting provisions.
  • Intangibles — Other than software, intangibles are not recognized as assets. Goodwill is rarely capitalized, but rather expensed in the period of acquisition.
  • Financial Instruments — There are currently no standards dealing with financial instruments, although draft standards are currently under review. If adopted in their current form, there would be several changes, including the requirement to recognize unrealised gains and losses associated with derivatives and the translation of foreign denominated balances in a statement of remeasurement gains and losses.

Presentation and disclosure

  • If an organization elects to adopt the PSA Handbook excluding Sections PS 4200 to 4270, there are numerous differences in presentation with respect to the primary statements. For example, statement of financial position classifications will now include financial and non-financial assets. The statement of operations will include budget information, and a statement of changes in net debt will be required. However, if an NPO elects to adopt the PSA Handbook including the PS 4200 series of standards, financial statement presentation will be largely unchanged

Organizations converting to the PSA Handbook will need to identify the differences in the standards that impact them and quantify these differences. In addition, the PSA Handbook contains specific exemptions and exceptions applicable to the first time adoption of PSA Standards by government organizations.

Next steps

Organizations are required to transition to the appropriate standards by the fiscal year beginning on or after January 1, 2012, although early adoption is permitted. Now is the time to discuss with management the options available to your organization and to start to think about the appropriate implementation date of the new standards.