Download Not-for-profit organizations

Chapter 9
Reporting for
Not-for-Profit
Organizations
© 2013 Advanced Accounting, Canadian Edition by G. Fayerman
Not-for-Profit Organizations
There are several different types of not-for-profit
organizations, including the following:
• Charities : The Income Tax Act considers an
organization to be a charity if its goal is the relief of
poverty, the advancement of education, the
advancement of religion, or other purposes that
benefit the community.
• Foundations : Foundations are formed to support
causes or charities.
• Welfare organizations : These organizations are
concerned with the welfare of others and may
advocate on behalf of a group of individuals (e.g.,
lobbying).
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Not-for-Profit Organizations
• Professional and trade associations : These are
normally created to control entry into a profession,
maintain standards, educate, and represent the
profession in discussions with other bodies.
• Institutions : Educational institutions, such as private
schools, along with health institutions such as
private clinics or hospitals, are also considered notfor-profit organizations.
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Definition of a Not-for-Profit Organization
The CICA Handbook defines not-for-profit
organizations as follows:
Not-for-profit organizations (NFPO) are entities, 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.
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Definition of a Not-for-Profit Organization
• We can separate the not-for-profit sector into two
categories: those that operate in the public sector
and those that are private.
• Public sector not-for-profit organizations include
government entities such as municipal or local
governments or any agency run by the government.
• All other not-for-profit organizations are considered
private.
• A significant difference between the sectors is that:
o the public sector not-for-profit entity has the ability to obtain
revenues through taxation,
o a private sector not-for-profit must obtain its revenues
through fundraising.
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Definition of a Government
Not-for-Profit Organization
A government not-for-profit organization is defined
by the CICA Public Sector Accounting Handbook
as:
A government organization that meets the definition of a
not-for-profit organization in the CICA Handbook –
Accounting and that has counterparts outside the public
sector. “Public sector” refers to federal, provincial,
territorial and local governments, government
organizations, government partnerships, and school
boards.
• (These organizations and the related standards
will be covered in Chapter 10.)
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Accounting Rules
• The CICA Handbook, Part III follows the same
conceptual framework as ASPE and IFRS. As such,
a not-for-profit organization follows the same rules
of accounting as those required for all entities.
• The definitions of assets and liabilities are the same
and the not-for-profit organization must also follow
accrual accounting.
• The revenue recognition criteria are the same as
those of profit-oriented enterprises except that
contributions to a not-for-profit organization are
considered revenue.
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Financial Statements Required of
a Not-for-Profit Organization
• The CICA Handbook requires that a not-for-profit
organization present the following statements in its set of
financial statements (1001.4):
o Statement of financial position
o Statement of operations
o Statement of changes in net assets
o Statement of cash flows
• The not-for-profit organization is not required to use the
titles as presented above. It must, however, prepare the
information that is required for each statement.
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Statement of Financial Position
• The statement of financial position is required
to indicate the assets and liabilities at a point
in time, as is done for a profit-oriented
organization.
• The significant difference is that there is no
shareholder equity because a not-for-profit
organization has no “shareholders.” The
difference between the assets and liabilities
is shown as the net assets (or fund balance).
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Statement of Financial Position
• Not-for-profit organizations also have an
option of presenting their statement of
financial position using fund accounting. This
is a method whereby the assets and liabilities
are separated into different funds to reflect a
particular objective of the not-for-profit
organization.
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Statement of Operations
• The statement of operations reflects the
net income from operations for the
period.
• This net income may also be segregated
into distinct funds.
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Statement of Changes in Net Assets
• “Total net assets” represents the
organization’s residual interest in its assets
after deducting its liabilities.
• The statement of changes in net assets
replaces the statement of changes in
retained earnings and the statement of
changes in equity that you would see in a
profit-oriented entity.
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Statement of Changes in Net Assets
• This statement may be shown separately or
may be shown as a continuation of the
statement of operations.
• The net assets change provides information
about how the net resources the
organization has available for carrying out its
activities in the future have changed.
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Statement of Cash Flows
• The statement of cash flows is the same as that
shown for profit-oriented entities.
• Cash from operations would include those funds
and expenditures arising from the normal activities
of the operation.
• Cash from investing usually involves the acquisition
and sale of capital assets, and investments and
cash from financing activities would include
contributions that are endowments or are restricted
for the purchase of capital assets as well as debt
financing.
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Reporting for Not-for-Profit
Organizations: Summary
• Private not-for-profit organizations may follow IFRS
(Part I) or Part III of the CICA Handbook. If a not-forprofit organization selects Part III, it must also adopt
Part II (ASPE) for all issues not covered in Part III.
• All not-for-profit organizations should apply similar
accounting treatments to like transactions when the
needs of the users are aligned.
• Revenue recognition criteria mirror those of profitoriented entities except for contributions.
• A not-for-profit organization may disaggregate its
financial statements into funds based on its legal,
contractual, or voluntary actions.
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Description of Fund Accounting
• A not-for-profit organization may choose to
disaggregate, or separate, its assets and liabilities
by the activity that they belong to and/or to
disaggregate the operating activities by the
nature of the activity.
• One way to clearly reflect the results of various
different activities is to keep each activity in a
separate fund.
• You could liken this to setting up multiple different
sets of statements, one set for each activity.
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Description of Fund Accounting
• Each fund would then be added together to
present the overall financial statements of the
organization.
• When all the funds are added together, the interfund transfers are in effect eliminated as they are
inter-entity. The inter-fund transfers are not
considered revenue or expenses of the entity
and as such are reflected only in the statement
of changes in net assets.
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Types of Funds: Restricted Fund
• A restricted fund is a segregation of funds that
are externally or internally restricted for a
particular purpose.
• This restriction may be imposed externally by the
donors, by the legal requirements of the not-forprofit organization, or by the creditors.
• Alternatively, the not-for-profit organization can
internally restrict contributions for the purpose
that it deems appropriate. This restriction usually
requires the approval of the board of directors.
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Types of Funds: Endowment Fund
• An endowment fund is a type of restricted fund
where, even though funds are collected, the
principal is not allowed to be spent.
• The not-for-profit organization is only permitted to
use the growth in the funds for selected purposes.
• Many not-for-profit organizations have argued that
they may have a great deal of assets but they are
“cash poor.” This may be a result of the endowment
funds not earning a sufficient return to manage
operations.
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Types of Funds: Endowment Fund
• Endowment funds can be the best way to ensure
the long-term viability of the not-for-profit
organization. As the endowment grows, the annual
allocation to income will also increase (the
organization must determine the best possible way
to maximize the return on those investments and
limit the risk of loss).
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Types of Funds : Capital Asset Fund
• A capital asset fund is another type of restricted
fund.
• This is a fund that must be used for the acquisition
and maintenance of capital assets.
• The above are types of funds that any given notfor-profit organization may select. The not-for-profit
organization is not required to disaggregate based
on these funds nor is it restricted to only these types
of funds. It is up to the not-for-profit organization to
determine the best way to convey information to
the user.
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Fund Accounting : Summary
• Fund accounting is a self-balancing set of
accounts created for each fund.
• Net assets and net income are
segregated based on the activity or the
nature of the activity.
• Common funds are restricted funds,
endowment funds, and capital asset
funds.
LO 2
Definition of Contributions
• Contributions are considered revenue to the not-forprofit organization. Contributions may be made by
governments (in the form of grants and loans),
individuals, or corporations, or may be interest or gains
on investments. Contributions may be given in cash,
assets, or settlement of debt.
• A pledge is a promise to contribute cash or other
assets. A contribution receivable should be recognized
as an asset if it meets both of the following two criteria
(CICA Handbook 4420.03):
o The amount to be received can be reasonably estimated.
o Ultimate collection is reasonably assured.
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Definition of Contributions
• There are two methods to account for
contributions: the deferral method or the
restricted fund method.
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Deferral Method of Fund Accounting
• Using the deferral method of accounting,
expenses are recorded in the period in which
they occur and restricted contributions are
then brought into income to match against
those expenses.
• If the expenses will only be incurred in a
future period, the contribution is shown as a
deferred liability until such point as the
expenses are incurred.
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Deferral Method of Fund Accounting
• Externally restricted resources would be
presented as deferred contributions.
• Internally restricted resources are determined
by the entity, for instance an amount
invested in capital assets, and the
contribution is deferred to offset against the
related asset. This is sometimes referred to as
an “appropriation.”
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Restricted Fund Method of
Fund Accounting
• Under the restricted fund method, the
organization classifies its restricted operations by
fund and recognizes the contributions
immediately as revenue of that particular fund.
• When using the restricted fund method, the
organization will have at least a general fund,
which is composed of non-restricted contributions,
and an endowment fund. Any other funds that it
uses must be restricted by an external source.
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Restricted Fund Method of
Fund Accounting
• It is up to the not-for-profit organization to
decide how many restricted funds it wants to
report.
• Any restricted funds that do not have a
separate fund are reported using the
deferral method through the general fund.
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CICA Handbook, Part III, Section 4410
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Recording Contributions: Summary
• Not-for-profit organizations have the option of selecting
the deferral method or the restricted fund method to
record contributions.
• Under the deferral method, restricted contributions are
recorded as revenue in the same period as the related
expense is recorded.
• Under the restricted fund method, the not-for-profit
organization creates, at least, a general fund and an
endowment fund.
• Under the restricted fund method, contributions to the
restricted funds are considered revenues to those funds.
Unrestricted contributions are revenues to the general
fund.
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Inventories Held by
Not-for-Profit Organizations
Recognition of Contributed Inventory
• A not-for-profit organization is not required to
record materials or services that are donated to it.
• An NFPO can only recognize materials or services if
o the fair value can be reasonably estimated, and
o when the materials and services are used in the normal
course of the organization’s operations and would
otherwise have been purchased (4410.16).
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Inventories Held by
Not-for-Profit Organizations
Recognition of Contributed Inventory (cont.)
• If the not-for-profit organization records the
inventory, it measures it at fair value at the date of
the contribution.
• A not-for-profit organization typically will not
recognize the value of volunteers when it is heavily
reliant on volunteer services.
o In keeping with the cost-benefit principle, generally, the
cost necessary to determine the fair value is considered
to be greater than the benefit to be derived from
reporting the fair value.
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Inventories Held by Not-for-Profit
Organizations
Inventories to Be Distributed at No Charge or at a
Nominal Charge
• The NFPO measures the inventory (if it has decided
to recognize the inventory) at the lower of cost and
current replacement cost.
• The logic is that since the not-for-profit is giving
away the inventory, there is no relation to the
organization’s ability to generate cash flows.
• As such, the benefit of the inventory is the amount
that the organization saved if it would have to
replace this inventory so as to complete its
objective.
LO 4
Tangible Capital Assets and
Intangible Assets Held by NFPOs
• NFPOs basically follow the same criteria as profitoriented companies with respect to the recognition
and measurement of tangible capital assets and
intangibles;
o they are capitalized at cost and then amortized over their
useful life, or
o in the case of land or an intangible that has a nondeterminable life, at cost.
• If the capital asset is contributed, or if the organization
purchases the asset at an amount significantly below
fair value, cost is considered to be the fair value at the
date of the contribution.
LO 4
Tangible Capital Assets and
Intangible Assets Held by NFPOs
• If in the rare circumstance that the fair value
cannot be determined, the capital asset is
recorded at a nominal value.
• When an asset is to be constructed, the
contribution of labour is measured at the fair value
of that labour.
LO 4
Tangible Capital Assets and Intangibles:
Exemption from Capitalization
• If the organization’s average annual revenues
recognized in the statement of operations for the
current and preceding period are less than
$500,000, it does not have to capitalize and
depreciate its capital assets (Section 4431).
o This exception is premised on the cost-benefit principle.
• These “small NFPOs” may be more interested in
cash flows, and as such, they are allowed to
immediately expense these costs, or to capitalize
these assets and not depreciate them.
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Tangible Capital Assets and Intangibles:
Exemption from Capitalization
• If the NFPO subsequently has revenues more than
$500,000, it must begin to capitalize and
depreciate assets going forward. If the revenues
then fall below $500,000 again, the organization
still continues to capitalize and depreciate assets.
The exemption is lost forever and is no longer
available to it.
LO 4
Tangible Capital Assets and Intangibles:
Impairment
• Under Part III of the CICA Handbook, the
organization writes down the capital asset or
intangible asset when the asset no longer has any
long-term service potential to the organization.
• At that point, the carrying amount is written down to
its residual value.
• Once the asset is written down, it cannot be
reversed.
• It is possible that the organization has deferred
revenue that corresponds to that asset that is
impaired. The organization recognizes the revenue
for the amount of the impairment.
LO 4
Tangible Capital Assets and Intangibles:
Collections
• Collections are defined as works of art and historical
treasures that have cultural, aesthetic, or historical
value that is worth preserving perpetually (4431.21).
• The difficult aspect in presenting these collections is
valuation. These items are usually received as a
contribution and as such the organization does not
have the benefit of an arm’s length transaction to
determine fair value.
• Part III allows a not-for-profit organization to not record
any cost for these collections. The organization
decides whether the benefit to be derived from the
fair value outweighs the cost to determine the fair
LO 4
value.
Strategic Investments Held by NFPOs
• If the NFPO elects to follow the CICA Handbook, Part
III, it is not to follow Part II of the CICA Handbook with
respect to strategic investments.
• Rather, the organization adopts section 4450 of Part III.
• NFPOs may invest in profit-oriented entities, other notfor-profit entities, or other economic interests. The CICA
Handbook, Part III defines an economic interest as an
organization:
o that holds resources that must be used to produce revenue
or provide services for the reporting organization, or
o whose liabilities the reporting organization is responsible for
(4450.02f).
LO 4
Strategic Investments Held by
NFPOs: Control
• There is a presumption that control exists if the
organization has the right to appoint the majority
of the other entity’s board of directors.
• When two organizations have the same board of
directors, the presumption is that one organization
controls the other.
o For instance, it is very common for a not-for-profit
organization to create a separate entity to hold its
investments and major capital assets, where this entity is
often referred to as a foundation.
LO 4
Strategic Investments Held by
NFPOs: Significant Influence
• In the case that control does not exist, the not-forprofit organization may be able to exercise significant
influence over the strategic operating, financing, and
investing activities of the other entity. The criteria are
similar to that under ASPE.
• The fact that a not-for-profit organization relies on
another entity for resources does not in itself imply that
the entity has control or significant influence over the
organization. For example, many organizations rely on
government funding to exist; however, the
government is not considered to control or significantly
influence the organization.
LO 4
Strategic Investments Held by
NFPOs: Presentation
Control
• The organization has options for presenting controlled
investments, which are different options than those available
under ASPE:
o controlled profit-oriented organizations (4450.30): either (a)
consolidate, or (b) use equity method providing required
disclosures in 4450.32.
o controlled not-for-profit organizations (4450.14): (a) consolidate, or
(b) provide disclosure in 4450.22, or (c) if the NFPO is one of many
individually immaterial organizations, provide disclosures required
in 4450.26.
o for controlled organizations that are not consolidated(4450.22),
disclose: (a) total assets, liabilities and net assets; (b) revenues,
expenses and cash flows for the period; (c) details of any
restrictions; and (d) significant difference in accounting policies.
LO 4
Strategic Investments Held by
NFPOs: Presentation
Joint Ventures
• Part III provides an organization with the option of
reporting a joint venture either using proportionate
consolidation or the equity method. Regardless of which
method is chosen, the organization is required to provide
additional note disclosure.
Related-Party Transactions
• The disclosure requirements for related-party
transactions are basically the same as those for a
profit-oriented company. The definition is adjusted to
include entities where one has an economic interest
in the other.
LO 4
Allocated Expenses by NFPOs
• Section 4470 of the CICA Handbook is only relevant for
organizations that have chosen to separate their financial
statements by function.
• Some expenses contribute to or produce the output of more
than one function.
• The NFPO may consider it important information to the
reader to allocate the common costs (e.g., administrative
costs) to the specific functions in order to prevent a lack of
transparency.
• CICA Handbook Section 4470.A3 provides guidance as to
how an organization may perform this allocation. For
example, expense allocation may be based on: time,
usage, per capita, or space.
LO 4
Specific Not-for-Profit
Transactions: Summary
• The CICA Handbook, Part III includes sections that
deal with issues of particular interest to a not-forprofit organization (NFPO).
• Valuation of contributed assets such as inventory,
capital assets, or intangible assets is generally
difficult since a contribution lacks the arm’s-length
valuation of fair value.
• NFPOs generally have the option of determining a
fair value at the day of receipt or recording it at a
nominal value if it is materials or services.
LO 4
Specific Not-for-Profit
Transactions: Summary
• Not-for-profit organizations reflect capital assets and
intangibles at the fair value at the transaction date.
• Not-for-profit organizations determine control based
on the ability to control the board of directors of the
other entity. This ability is achieved in various ways
other than through voting shares.
• Not-for-profit organizations require additional
disclosure with respect to strategic investments,
related party transactions, and allocated expenses.
LO 4
Appendix 9A: Budgeting in a NFPO
• Budgeting in a NFPO is particularly
important as the entity’s liquidity is usually
a constant issue.
• It is very difficult for a not-for-profit
organization to take funds from one
activity to compensate for losses in
another. As such, planning is vital in these
types of organizations.
LO 5
Appendix 9A: Budgeting in a NFPO
• There are several ways that an organization
may choose to incorporate its budget into its
recording system:
o Budget to actual analysis : Reports the budgeted
figures along with the actual figures to date and
a projected actual figure to year end. Problem
areas can be identified on a timely basis and
remedied.
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Appendix 9A: Budgeting in a NFPO
o Internal budget restrictions: It is possible to
create a budget system where the budgeted
amounts are set up as opposite entries to the
account. For example, the budgeted salaries
expense above of $37,500 is set up as a credit
to the expense account. As the salaries are
paid, the account is debited. The account is not
permitted to become negative.
o Encumbrance accounting: An encumbrance is
any pre-expenditure, such as a purchase order,
that will lead to a charge against an account.
LO 5
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