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Not-For-Profit Accounting Rules

Accounting standards for NPOs were issued in 1996 and have for the most part remained unchanged since then. The not-for-profit Organizations Advisory Committee ("AdCom") has been in deliberations since 2003 relating to updates to these standards.

In January 2009 the Accounting Standards Board of Canada ("AcSB") issued a number of new rules or amendments to old rules, affecting financial statements year's beginning on or after January 1, 2009.

We present a summary of 3 key changes which we feel will affect the majority of our not-for-profit ("NPO") clients.

Section 4470 - Disclosure of allocated expenses by not-for-profit organizations

Many NPO's, particularly charities, report expenses by the function to which those costs relate. Examples include Administrative, Fundraising, and Research. It is common for NPO's to allocate administrative or fundraising expenses to a number of different departments. For example, the research function benefits from the usage of office space to conduct their affairs. As a result, a portion of rent expense will be classified under "research" in the financial statements.

In order to provide the users of the financial statements of an NPO with more relevant information, the AcSB issued Section 4470 - "Disclosure of allocated expenses by
not-for-profit organizations". Under this section, NPOs are required to disclose the following information relating to the allocations of Fundraising and General Support costs:

The accounting policy disclosure should explain the policies adopted for the allocation of expenses among functions, the nature of the expenses being allocated and the basis on which such allocations have been made.
The amounts allocated from "Fundraising" and/or "Operating and Administration (General Support Costs)", and the amounts and the functions to which they have been allocated, should be disclosed.

It is important to note that section 4470 does not require an NPO to allocate fundraising and general & administration expenses, but if an organization does allocate such expenses they must simply disclose the basis for the allocation.

Presentation of revenues and expenses

A new paragraph to section 4400 - Financial Statement Presentation has been issued. Paragraph 4400.37 states:

Revenues and expenses should be recognized and presented at their gross amounts when an organization is acting as a principal in transactions.

Previously, NPO's tended to disclose revenues of fundraising events (i.e. golf tournaments) in the financial statements net of direct expenses. With the new guidance only NPO's acting as an agent to the transactions can continue to disclose an event on a net basis, while principals are required to disclose revenues and expenses on a gross basis.

When trying to determine whether or not an NPO is an "agent" or a "principal", management must determine what level of risk the organization is taking in the enterprise, or what level of control does the NPO have.

Internally restricted assets

As with the original guidance, externally restricted resources can be presented either as deferred contributions or as part of net assets, depending on the organization's policies for accounting for contributions. The new guidance requires additional disclosures to identify net assets subject to internal restrictions and external restrictions (deferral method) or the amounts of net assets (or fund balances) attributable to each major category of internal restrictions and external restrictions (restricted fund method).

In conjunction with this additional disclosure is the elimination of the requirement to disclose net assets invested in capital assets as a separate component in the statement of financial position. NPO's now have the option to present the net assets invested in capital assets as a category of internally restricted net assets. When an organization segregates the amount of net assets invested in capital assets, the organization may either present the amount as a component of net assets in the statement of financial position or disclose the amount in a note to the financial statements.

Derrick Crowe, CA is an Audit Partner in the Toronto office of Collins Barrow.

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