Not-for-Profit Reporting 

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Not-for-Profit Reporting

A recent exposure draft proposes updates to accounting standards for NFPOs.

FROM: NOV-DEC 2007 ISSUE | BY STEPHEN SPECTOR

The Accounting Standards Board (AcSB) has issued an exposure draft proposing to amend the Introduction to Accounting Standards that Apply Only to Not-for-Profit Organizations and several of the sections in the 4400 series.

Accounting standards for not-for-profit organizations (NFPOs) were issued in 1996 and, for the most part, have remained unchanged since then.

The proposals fall into several categories: clarifying amendments, changes to existing requirements, and new requirements. The objective is to improve financial reporting by NFPOs prior to the adoption of International Financial Reporting Standards (IFRS).

Clarifying Amendments

• Additional guidance in the application of Section 1100: This amendment makes specific reference to Accounting Guidelines and EIC Abstracts as well as other primary sources of GAAP in the Introduction to Accounting Recommendations that Apply Only to Not-for-Profit Organizations to assist NFPOs in applying Section 1100.
• Reporting internally restricted net assets and net assets invested in capital assets: The amendments to Section 4400 better describe the different treatment accorded internal and external restrictions on net assets in general, rather than on net assets invested in capital assets specifically. An NFPO reporting internally restricted amounts would disclose what they represent and how they were determined, including the extent to which related debt has been taken into account.
• Reporting gross amounts of revenues and expenses: Paragraph 4400.37 states that “revenues and expenses should be disclosed at their gross amounts,” but the material that currently follows this paragraph tends to undermine the principle. The proposals amend the existing language to make it clearer.
• Capitalization, amortization, and write-down of capital assets: The amendments to Section 4430 make it clear that an NFPO that chooses to recognize capital assets must subsequently depreciate them and assess them for impairment.
• Conforming amendment to Section 4460: The amendment relating to related-party transactions will result in paragraph 4460.02 conforming to paragraph 3840.02 in respect of employee future benefits.

Changes to Existing Requirements

• Statement of cash flows: This amendment to Section 4400 will require NFPOs to apply Section 1540. As a result, NFPOs will no longer be permitted to group cash flows from financing and investing activities.
• Interim financial statements: This amendment to Section 4400 makes Section 1751 applicable to the relatively rare situations where an NFPO is required to prepare interim financial statements in accordance with GAAP.
• Reporting controlled and related entities: The amendments to Section 4450 will require that all assets controlled directly or indirectly by an NFPO, and all obligations to which those assets are subject, be recognized in the NFPO’s statement of financial position. Specifically, Section 4450 will require all controlled entities to be consolidated, and eliminate the current consolidation exemption available when an NFPO has a large number of individually immaterial controlled organizations.

New Requirements

• Disclosure of allocated fundraising and general support costs: A new Section 4470 will require NFPOs that are making allocations of general support and fundraising costs to other functions to disclose the policies adopted for the allocation of expenses among functions, the nature of the expenses being allocated, the basis on which such allocations have been made, and the functions to which they have been allocated. The allocations that are to be disclosed are those made after individual expenses have been attributed among the functions to which they relate and all of the expenses of a function have been accumulated within that function.

The following changes are expected to be the most controversial:

• No longer requiring net assets invested in capital assets to be a separate component of net assets;
• The requirement to consolidate controlled entities; and
• The requirement to disclose allocations of fundraising and general support expenses.

The AcSB expects to issue the amendments in early 2008 with an effective date for interim and annual periods relating to fiscal years beginning on or after January 1, 2009. However, the AcSB will extend the transitional period for the changes to Section 4450 for NFPOs that control a large number of individually immaterial organizations and are currently applying paragraph 4450.26. This will allow those NFPOs to make the necessary changes in their accounting systems in order to consolidate their controlled organizations. They will apply the proposed amendments to Section 4450 for interim and annual periods relating to fiscal years beginning on or after January 1, 2012.

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