Aug 2023 Charity & NFP Law Update
The Accounting Standards Board (“AcSB”) of the Chartered Professional Accountants of Ontario, the regulator for chartered professional accountants in the province, released an exposure draft in March 2023 (“Exposure Draft”). This Exposure Draft proposes amending Section 4400, Financial Statement Presentation by Not-for-Profit Organizations, of the Accounting Standards for Non-Profit Organizations, as well as introducing a new Section 4411 to replace Section 4410, Contributions – Revenue Recognition and Section 4420, Contributions Receivable.
The AcSB has indicated that the Exposure Draft’s proposals are intended to improve financial reporting by not-for-profit organizations (“NFPs”) by creating a guidance that will result in financial statements that are less complex and more comparable for those who are using financial statements, as well as to provide specific guidance on special types of contributions, including contributed materials and services, capital asset contributions, and endowments.
If approved, the proposals in the Exposure Draft will result in a change in accounting for many NFPs in several ways, including the following:
- NFPs will be required to defer the recognition of revenue for restricted contributions until the external restriction(s) associated with the contributions are met, provided the contribution is measurable and collection is reasonably assured. Depending on the accounting method used by a NFP, this could result in a change to timing for revenue recognition of certain contributions.
- NFPs will be required to defer and amortize capital asset contributions over the useful life of the related asset and recognize endowment contributions as direct increases in net assets. This will be a change for NFPs currently using the restricted fund method.
- In many cases pledges will no longer be recognized until the cash is received. This is because the proposed recognition criteria, which include the requirement of reasonable assurance of collection, must be applied to each individual pledge.
The proposed changes to Section 4400 involve extra presentation and disclosure obligations for NFPs. Organizations using fund accounting would need to provide both comparative period data and details about the criteria for selecting the displayed funds. Additionally, NFPs would have to disclose information about their obligations concerning restricted contributions, encompassing endowment contributions, along with specifications about the assets they consider available to fulfill those obligations.
The proposed Section 4411 introduces additional presentation and disclosure requirements. Notably, a NFP will be required to disclose how it manages its endowments, including fair value monitoring and agreement compliance, reveal quantitative information if endowment fair value falls short of donor-mandated levels, and provide qualitative insights about unreported contributed materials and services and their role in the NFP’s future goals.
The proposals, if approved, will come into effect on January 1, 2026. The AcSB will consider the proposals, along comments from the public, consultation with stakeholders, and “field testing” of the changes. Comments on the Exposure Draft can be submitted to the AcSB until September 30, 2023, with the AcSB being particularly interested in feedback on the proposals related to restricted contributions.