Future of Financial Reporting for NPO's

« article list

"An entity, normally without transferable ownership interests, organized and operated exclusively for social, educational, professional, religious, health, charitable or any other not-for-profit purpose. A not-for-profit organization's members, contributors and other resource providers do not, in such capacity, receive any financial return directly from the organization". - CICA Handbook 2010, Definition of a Not-for-Profit Organization.

In its Strategic Plan, issued in January 2006, the CICA noted that "one size does not necessarily fit all" and decided to pursue separate strategies for publicly accountable profit-oriented enterprises, private profit-oriented enterprises, and not-for-profit organizations. The result has led to the introduction of International Financial Reporting Standards ("IFRS") for publically accountable entities and Accounting Standards for Private Enterprises ("ASPE") for private entities. Of continuing discussion is where NPOs fit into the new frameworks presented.

Under the current structure, NPOs report primarily under Section 4400 series of the CICA Handbook. They also fall under the general framework for profit oriented entities, unless a particular standard is superseded by Section 4400 (for example, exemption from capitalization of capital assets under specific scenarios).

Historically, NPOs have shifted between being considered as publically accountable entities or not. Application of certain standards (and the subsequent reversal) of items like financial instruments indicated that NPOs cannot simply be grouped into predetermined categories such as public or private. Given the diversity of NPOs, in both size and structure, the CICA agreed with stakeholders "that options were required and that the choice between the options should be one that an organization can make freely."

Accordingly, an NPO can choose to apply IFRS or continue to apply the existing Section 4400 rules and the remaining existing framework. The decision to provide an IFRS option was made early on, so those NPOs, particularly those with international operations, had the ability to begin their transition process early. A drawback to adopting IFRS was a lack of specific standards on NPOs similar to those that exist in Section 4400.

In March 2010, the CICA exposed for comment its proposal to continue to use Section 4400 series. It should be noted that once these rules are adopted into the CICA Handbook, the underlying framework of Section 4400 will be the ASPE. One of the comments requested from stakeholders is whether the underlying platform should continue to be based on the profit oriented entity framework, being the ASPE.

The standards will be adopted in their current form without modification; however, the CICA will in the near future be looking to improve these standards.
While these standards effectively remain the same, they are considered a change in the primary basis of GAAP - as such, the CICA has introduced an adoption standard, Section 1501, First-time Adoption by Not-for-Profit Organizations which contain certain transition rules. The transition date has been set for years beginning January 1, 2012, with early adoption possible.

Please watch for future releases of our NPO Financial Reporting Series as we bring you additional information on changes including detailed guidance on Section 1501, First Time Adoption by Non-Profit Organizations. A copy of the exposure draft is found at http://www.acsbcanada.org/documents-for-comment/item35455.pdf.

The CICA is actively seeking comments on the future of financial reporting for NPOs and has opened up the comment period to July 15th, 2010.

Maruf Raza, CA is a Standards Partner in the Toronto office of Collins Barrow.

« article list