The financial reporting standards that must be used by not-for-profit organizations are determined in Canada by the Accounting Standards Board and the Public Sector Accounting Board. New rules for accounting standards for not-for-profit organizations are effective January 1, 2012.
To determine the standards that apply to your organization, the first step is to determine whether it is a private sector not-for-profit organization or a government not-for-profit organization.
A not-for-profit organization (NFP) is defined as an entity, 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.
A government not-for-profit organization is an organization that is controlled by the government and has all of the following characteristics:
- It has counterparts outside the public sector
- It is an entity normally without transferable ownership interests
- It is an entity organized and operated exclusively for social, educational, professional, religious, health, charitable or any other not-for-profit purpose
- Its members, contributors and other resource providers do not, in such capacity, receive any financial return directly from the organization
“Control” refers to power to govern the financial and operating policies of the organization, with expected benefits or the risk of loss to the government from the other organization’s activities. Control exists by virtue of the government’s ability to exercise its power, even if it chooses not to do so.
Evidence of control includes being able to:
- Unilaterally appoint or remove a majority of the members of the governing body of the organization
- Access the assets of the organization, direct the ongoing use of those assets
- Hold the majority of the voting shares
- Dissolve the organization and thereby access its assets
- Provide significant input into the appointment of members of the governing body of the organization by appointing a majority of those members
- Appoint or remove the CEO or other key personnel
- Establish or amend the mission or mandate of the organization
- Approve the business plans or budgets for the organization and require amendments, either on a net or line-by-line basis
- Establish borrowing or investment limits or restrict the organization’s investments
- Restrict the revenue-generating capacity of the organization, notably the sources of revenue
- Establish or amend the policies that the organization uses to manage, such as those relating to accounting, personnel, compensation, collective bargaining or deployment of resources
However, being financially dependent on the government does not by itself establish that there is control by government.
If the organization is not a government NFP, then it is a private sector not-for-profit organization.
Private sector NFP accounting standards
For fiscal periods beginning on or after January 1, 2012, private sector not-for-profits are required to adopt either International Financial Reporting Standards (Part I of the CICA Handbook) or the new Accounting Standards for Not-for-Profit Organizations, which include the rules in former section 4400 of the Handbook, now in Part III. In cases where Part III is silent, private sector NFPs generally must follow Part II of the Handbook, “Accounting Standards for Private Enterprises.”
In general, there are no differences between accounting standards for for-profit enterprises and private not-for-profit organizations, except of course for certain matters that only apply to not-for-profits. To the extent that the particular circumstances are the same, accounting requirements are identical. For example, “development costs” incurred by not-for-profit organizations will be subject to the same rules as for for-profit enterprises. Such costs include those related to a series of plays or concerts, gallery exhibitions and fundraising events and campaigns.
Whether the private NFP follows Part I or Part III of the CICA Handbook, it may state that it complies with Canadian generally accepted accounting principles.
Government NFP accounting standards
For fiscal periods beginning after January 1, 2012, government not-for-profit organizations must follow the accounting rules set out in the CICA Public Sector Accounting Handbook. Such organizations have a choice between applying the Public Sector Accounting Handbook either with or without certain rules that apply specifically to not-for-profit organizations, referred to as sections PS4200 to 4270.
In many cases, public sector accounting standards are similar to the rules in Part II and Part III of the CICA Handbook, except for matters that apply solely to government-related organizations. For larger organizations with more complex accounting issues there may be some other differences as well.
Jeffrey D. Sherman, BComm, MBA, CIM, FCA