Improvements to Section 4450 Reporting Controlled and Related Entities by Not-for-Profit Organizations

The Not-for-Profit Advisory Committee discussed the AcSB’s project to make improvements to Section 4450, Reporting Controlled and Related Entities by NFPOs. This project seeks to improve the transparency for financial statement users when reviewing the relationships organizations have with related and controlled entities.

The Committee discussed the AcSB’s decision to expand the scope of the project to include re-evaluating the approach for identifying and assessing relationships with related entities in Section 4450 and other options to simplify the application of the standard. The Committee also discussed potential approaches to be explored in a consultation paper for identifying and assessing relationships between NFPOs, as well as relationships between NFPOs and for-profit enterprises.

The Committee will continue discussing topics to be explored in a consultation paper at a future meeting.

The AcSB considered whether the scope of its project to make Improvements to Section 4450, Reporting Controlled and Related Entities by Not-for-Profit Organizations, should be expanded. The Board received feedback from its Reporting Controlled and Related Entities Focus Group that illustrative examples may not be sufficient to address challenges in applying of Section 4450.

The AcSB discussed expanding the scope of the project to include re-evaluating the approach to determining relationships between entities in Section 4450. The expanded scope would include considering options to simplify the application of the standard. Through its discussions, the Board decided that a consultation paper would be a useful tool to gather feedback.

The AcSB will discuss next steps to prepare a consultation paper with its Not-for-Profit Advisory Committee at its October 2024 meeting.

The AcSB discussed feedback from its Not-for-Profit Advisory Committee on improvements to the current disclosures and proposed additional disclosures in Section 4450, Reporting Controlled and Related Entities by Not-for-Profit Organizations in Part III of the Handbook. The Board also discussed proposed next steps to develop illustrative examples to support the application of definitions in Section 4450. These steps include forming a small focus group of experts who will help to provide a better understanding of the diverse scenarios encountered in practice.

The AcSB then approved a project proposal to:

• amend Section 4450 to improve the disclosures related to controlled and related entities;
• introduce illustrative examples to assist in the application of the definitions of control, significant influence, and economic interests in not-for-profit organizations in Section 4450; and
• revisit the current definitions of control, significant influence, and economic interests held in not-for-profit organizations, if necessary, based on any relevant learnings gained from the development of illustrative examples.

The Not-for-Profit Advisory Committee discussed potential improvements to the existing disclosures in Section 4450, Reporting Controlled and Related Entities by Not-for-Profit Organizations, as part of the AcSB’s project to Research Improvements to Section 4450. Improvements are being considered for the following:

• description of the controlled or related entity;
• disclosures related to the statement of financial position;
• disclosures related to the statement of operations; and
• disclosures of restrictions.

The Committee also provided feedback on potential new disclosure requirements for controlled and related entities. Examples of potential new disclosure requirements include:

• commitments and contingent liabilities;
• changes in control;
• debt and other liabilities; and
• material changes in operations and/or unusual transactions.

In determining next steps for this project, the AcSB will consider the Committee’s feedback at the December 2023 Board meeting.

The Not-for-Profit Advisory Committee continued its discussion of staff’s research on the definitions and disclosure requirements of controlled and related entities used by standard setters in other jurisdictions. This research is part of the AcSB’s project to Research Improvements to Section 4450, Reporting Controlled and Related Entities by Not-for-Profit Organizations. The Committee considered improvements to the definitions in Section 4450 and discussed what additional disclosure requirements might enhance the usefulness of information disclosed in Section 4450.

In determining next steps for this project, the AcSB will consider the Not-for-Profit Advisory Committee’s feedback at the September 2023 Board meeting.

The Not-for-Profit Advisory Committee received an update on the AcSB’s March 2023 discussion about the accounting for reporting controlled and related entities. This update noted the purpose of the Board’s research is to consider how to improve transparency in financial statement disclosures about the relationships NFPOs have with related and controlled entities.

The Committee discussed an analysis of the current environment and considered how the analysis might inform improvements to Section 4450, Reporting Controlled and Related Entities by Not-For-Profit Organizations. The Committee provided feedback on staff’s research on the definitions of controlled and related entities used by standard setters in other jurisdictions and discussed how these definitions could be used to improve the definitions in Section 4450.

The Committee will continue discussing the staff’s research on improving the disclosure requirements of related and controlled entities at its July 2023 meeting.

The AcSB received an update on initial research discussions held with the Not-for-Profit Advisory Committee on Section 4450, Reporting Controlled and Related Entities by Not-for-Profit Organizations.

The AcSB discussed its rationale for making changes to Section 4450. The Board also decided that their research activities will not include changes to the choice between consolidating and disclosing controlled entities for not-for-profit organizations, as described in paragraph 4450.14. Rather, the initial purpose of the research is to improve the transparency of financial statements for users regarding the relationship entities have with related and controlled entities.

The AcSB asked staff to further research definitions of control, significant influence, and economic interest, and to consider potential improvements to the disclosure requirements of related and controlled entities. These research topics will be discussed with the Not-for-Profit Advisory Committee at its next meeting.

The Not-for-Profit Advisory Committee considered feedback from stakeholders on the AcSB’s previously deferred project to improve Section 4450, Reporting Controlled and Related Entities by Not-for-Profit Organizations. The Committee advised the Board that assessing whether a NFPO has control over a related entity under the existing guidance continues to cause diversity in practice. Members also noted that providing optionality in accounting for controlled and significantly influenced entities allows NFPOs to best reflect the results of their operations. However, this prevents comparability among similar NFPOs.

The Committee also advised the AcSB that consolidating certain entities can cause significant issues for some NFPOs and, in some cases, may not accurately reflect the financial position and results of the NFPOs. For example, consolidating certain types of entities may affect the ability of some NFPOs to raise or receive funding. 

The Committee advised the AcSB to reconsider the criteria used to assess control relationships in a not-for-profit group to reduce diversity in how the guidance is interpreted. The Board will discuss the Committee’s feedback at its March 2022 meeting and consider whether to recommence work on this project as part of its 2022-2023 Annual Plan.

The Not-for-Profit Advisory Committee continued its discussion on identifying issues for further research related to Section 4450, Reporting Controlled and Related Entities by Not-for-Profit Organizations. The Committee provided feedback on the relevance of the principles relating to significant influence and economic interests. The Committee also proposed some improvements to the Section 4450 disclosure requirements and discussed prioritization of research topics related to Section 4450.

The AcSB will consider the Committee’s feedback at its March 2023 meeting.

The Not-for-Profit Advisory Committee received an update on the AcSB’s recent discussions on Section 4450, Reporting Controlled and Related Entities by Not-for-Profit Organizations. The Committee provided feedback on applying the definition of control and the application of consolidation principles in practice with the purpose of identifying issues for further research.  

Generally, the Committee noted that there can be challenges in applying the current definition of “control”, and that judgment is required when assessing control. Committee members identified limited circumstances in practice where consolidation is applied, noting that more often, controlled organizations are disclosed.
AcSB staff will continue the discussion with the Committee at its next meeting.

The AcSB discussed feedback from the Not-for-Profit Advisory Committee on research activities related to Section 4450, Reporting Controlled and Related Entities. The Board directed its staff to conduct additional research on the topic before considering next steps. The Committee will discuss and provide input on next steps at its October 2022 meeting.