AcSB

Not-for-Profit Advisory Committee Meeting Notes – May 1, 2024

The Not-for-Profit Advisory Committee’s purpose is to assist the Accounting Standards Board (AcSB) on maintaining and improving the accounting standards for not-for-profit organizations (NFPOs) in Part III of the CPA Canada Handbook – Accounting and in identifying the need for non-authoritative guidance about the standards. The Committee makes recommendations to the AcSB but is not authorized to interpret or provide authoritative guidance on accounting standards for NFPOs.

This document has been prepared by the staff of the AcSB and is based on discussions during the Committee’s meeting. The meeting notes do not necessarily represent the views of the AcSB and nothing in them constitutes authoritative guidance on acceptable or unacceptable application of accounting standards for NFPOs. Only the AcSB can make such a determination.

Contributions

The Not-for-Profit Advisory Committee continued its discussions on the Contributions project. These discussions reflected the AcSB’s decision in March 2024 to develop a new exposure draft proposing to continue allowing an accounting policy choice for recognizing contributions and propose improvements to both methods. Read the Board’s Feedback Statement for more information on this decision.

The Committee provided input on:

feedback on the proposals in the previous Exposure Draft, “Contributions – Revenue Recognition and Related Matters,” regarding the definitions of “restricted contributions” and “endowment contributions”;
the project proposal for the future direction of this project, including the scope, risks, and timeline; and
issues in practice with the current restricted fund method for contribution recognition and potential solutions to address the issues.

Definition of “restricted contribution” and “endowment contribution”

The Committee discussed the significant areas of feedback on the definition of “restricted contributions”. Committee members thought it would be helpful for the AcSB to include some examples and/or additional guidance to address specific aspects of the definition, such as determining when a restriction is “explicitly communicated” or for a “designated purpose”. The Committee also recommended that the definition of a “restricted contribution” be expanded to explicitly include contributions from related parties, and restrictions imposed by third parties (including restrictions imposed by laws and regulations), and not just restrictions imposed by the contributor.

The Committee discussed concerns respondents raised about contributions related to a “designated period of time” that are for general operations. Committee members thought one approach could be to provide an exception under the restricted fund method that would require deferral of contributions with restrictions related to future periods, instead of immediate recognition in a restricted fund.

The Committee also discussed significant feedback received on the definition of an “endowment contribution”. Most Committee members supported a narrower definition of “endowment contributions”, whereby only contributions that must be maintained permanently would be considered an endowment. The Committee recommended the Board consider whether organizations would account for contributions that are similar to endowments but do not meet the definition, such as those with long-term restrictions, as general restricted contributions or whether specific guidance is needed.

Project proposal

The Committee provided input on the proposed plan direction of the project. The Committee recommended that the AcSB take its time to work closely with the sector to understand the existing issues in practice and develop relevant proposals.

Problems with the restricted fund method, and potential solutions

The Committee discussed issues with the current restricted fund method and potential solutions to address these issues.

The Committee discussed the current requirement that restricted contributions are recognized in the general fund in accordance with the deferral method when no corresponding restricted fund exists. The Committee indicated that the current requirement results in diversity as organizations have discretion over the restricted funds presented. However, the Committee indicated that in some cases deferring restricted contributions under the restricted fund method may provide more useful information, such as for contributions restricted to a future period or with a measurable performance obligation.

The Committee discussed whether providing clear guidance on the funds to be presented when applying the restricted fund method would result in financial statements that are less complex and more useful. The Committee indicated that allowing discretion in determining what funds to report allows NFPOs to present financial statements in a way that is useful and understandable to their financial statement users. The Committee also noted that endowment contributions should be presented in a separate fund on the face of the statement of operations when applying the restricted fund method, given they cannot be spent like other restricted contributions.

The Committee encouraged the AcSB to perform additional research with financial statement users and preparers to identify potential areas for improvement in the restricted fund method. The Board will consider the Committee’s input on these topics, as well as input from additional research, in future meetings.

Relief from Recognition of Intangible Assets and Amortization of Goodwill

The Not-for-Profit Advisory Committee discussed proposals to include in a future exposure draft. These proposals will provide relief to private entities and as relevant, NFPOs, from the recognition of intangible assets acquired in combinations and allow them to amortize goodwill.

The Committee indicated that combinations of NFPOs are rarely observed in practice. In most instances, when NFPOs combine, it is typically accounted for as a merger rather than an acquisition. Some Committee members have seen transactions where NFPOs acquire for-profit entities, leading to acquisition accounting and the recognition of intangible assets and goodwill, but these situations are rare.

The Committee indicated that the potential proposals are not anticipated to have significant unintended consequences for the not-for-profit sector.

The AcSB will consider input from the Committee and from other outreach activities at its meeting on July 17, 2024.

Insurance Contracts with Cash Surrender Value

The Not-for-Profit Advisory Committee discussed feedback on the AcSB’s Exposure Draft, “Accounting for Life Insurance Contracts with Cash Surrender Value,” and the Board’s tentative decisions to address key issues raised.

The Committee supported the AcSB’s tentative decision not to provide a fair value measurement option for contributed insurance contracts. The Committee agreed that measurement of cash surrender value at the cash surrender amount provides the most useful information and is consistent with how many preparers currently recognize contributions. The Committee also noted that a difference between the amount reported on the tax receipt at fair value for contributions and the amount recognized in revenue is not likely to cause issues in practice.

The Committee supported the AcSB’s tentative decision to remove the requirement to disclose the amounts of acquisitions and terminations during the period and to retain the requirement to present change in cash surrender value and policy premiums on a net basis. The Committee also supported revising the proposed new Accounting Guideline (AcG) 21, Accounting for Life Insurance Contracts with Cash Surrender Value, to clarify that subsequent measurement of cash surrender value would occur on the entity’s reporting date.

The Committee supported the AcSB’s tentative decision to defer the effective date by one year to January 1, 2026, providing more time to implement the Guideline. The Committee also agreed with the Board’s tentative decision to provide a consequential amendment to Section 1501, First-time Adoption by Not-for-Profit Organizations, allowing the transition relief in AcG-21 to apply on a first-time adoption of Accounting Standards for Not-for-Profit Organizations.

The AcSB will consider input from the Committee as well as the Private Enterprise Advisory Committee at its June 19-20, 2024, meeting. The Board expects to issue the final Accounting Guideline in Q3 2024.

Evaluating the Preface

The Not-for-Profit Advisory Committee received an overview and preliminary research findings of the AcSB’s research project on the Preface to the CPA Canada Handbook – Accounting. The Committee discussed the Preface’s purpose and whether it directs entities to apply the most appropriate accounting framework based on their reporting needs and objectives.

The Committee indicated that in some scenarios an entity’s purpose changes over time. In such cases, an entity should consider whether they are still applying the most appropriate accounting framework.

The Committee also noted that in some cases it might not be clear which part of the Handbook to apply. For example, social enterprise entities, which are becoming more common, are typically set up to be profitable but can operate like an NFPO or vice versa.

The Committee also discussed some types of entities (e.g., sports and social clubs) that apply different accounting frameworks depending on their ownership structure or purpose (e.g.., member-benefit organizations versus for-profit clubs). Some members indicated that there can be differences in how these entities operate, which is why a different framework would be applied.

The AcSB will discuss the Committee’s feedback at its June 19-20, 2024, meeting as part of its ongoing Evaluating the Preface project.