Not-for-Profit Organizations (ASNPO, IFRS) – Study Notes

Not-for-Profit Organizations: Policy Options and Overview

Accounting standards options for NPOs in Canada:
- IFRS or ASNPO (Accounting Standards for Not-for-Profit Organizations).
- If applying ASNPO:
- Must follow all ASNPO standards.
- Apply ASPE where a topic is not addressed in ASNPO.
Financial statements overview for NPOs:
- Statement of financial position: assets, liabilities, and fund balances or net asset balances.
- Fund balance represents net assets.
- Requires separate disclosure of restricted net assets, endowments, and unrestricted net assets.
- Statement of operations: revenues and expenses; the net amount is the excess or deficiency of revenue over expense.
- Statement of changes in net assets or fund balances: the net excess/deficiency from the statement of operations is closed to net assets/fund balances.
- Statement of cash flows: cash from operating, investing, and financing activities.
Reporting approaches:
- NPOs may report on an aggregate basis or use fund accounting.
Fund accounting (summary):
- Results in segregated accounting information for identified funds with self-balancing accounts.
- Funds established for legal, contractual, or voluntary actions.
- Each fund has its own revenues, expenses, assets, liabilities, and net balance.
- Common fund types: general fund, restricted funds, capital asset fund, endowment fund.

Financial Statements: Details and Fund Concept

General concepts:
- Fund accounting allows segmenting financial information by projects/programs/expenditures.
- The fund balance (net asset balance) summarizes net assets for each fund.
- Net assets indicate resources available for future use and reinvestment in organizational objectives.
- Funds do not necessarily require separate bank accounts; resources can be in a single bank account with fund-specific balances.
Interfund transfers:
- Interfund transfers are presented in the statement of changes in net assets.
Practical notes:
- The number and composition of funds are not mandated, but a general fund (unrestricted) is always included when fund accounting is used.

Types of Contributions and Revenue Recognition

Types of contributions: 1) Unrestricted contributions: can be used for any purpose.
- Recognized in revenue when:
  - the amount can be reasonably estimated, and
  - ultimate collection is reasonably assured.
    2) Restricted contributions: subject to externally imposed stipulations that specify purpose for use.
    3) Endowment contributions: principal must be maintained permanently (or for an extended period).
Donated goods and services:
- May be recognized if:
- fair value can be reasonably estimated, and
- goods/services are used in normal course of operations and would have been purchased otherwise.
Revenue recognition under two methods (Deferral method and Restricted fund method):
- Deferral method:
- Unrestricted contribution: Recognize as revenue.
- Restricted contribution – Current-period expense: Defer and recognize as revenue when the related expense is incurred.
- Restricted contribution – Future-period expense: Defer and recognize as revenue over the future period(s).
- Contribution of capital assets that are amortized over time or cash restricted for the purchase of capital assets that are amortized over time: Defer and recognize over the asset’s useful life (in line with amortization).
- Contribution of capital assets that are not amortized over time or cash restricted for the purchase of capital assets that are not amortized over time: Recognize as a direct increase in net assets.
- Endowment contribution: Recognize as a direct increase in net assets.
- Restricted fund method:
- Revenue is recognized in the period received or when receivable in the appropriate restricted fund.
- If a separate restricted fund is not disclosed, the NPO applies the deferral method of revenue recognition in the general fund.
- Recognition mapping (summary):
  - Unrestricted contribution → Recognize as revenue
  - Restricted contribution – Current-period expense → Recognize as revenue
  - Restricted contribution – Future-period expense → Defer and recognize revenue when expense is incurred
  - Capital assets amortized (restricted fund) → Defer and recognize over useful life
  - Capital assets not amortized → Recognize as a direct increase in net assets
  - Endowment contribution → Recognize as a direct increase in net assets
Capital asset treatment and thresholds:
- NPOs with revenues under the threshold may choose to account for tangible assets by either:
- Directly expensing costs, or
- Capitalizing and amortizing.
- Threshold: when annual revenues reach or exceed 500{,}000, the organization must capitalize and amortize and continue to do so even if revenues drop below the threshold in a future year.

Lesson 1: Introduction to Not-for-Profit Organizations and Fund Accounting

Technical competency: 1.2.3 – Evaluates treatment for non-routine transactions.
Learning outcomes:
- Discuss not-for-profit organizations.
- Describe the relevant accounting standards for not-for-profit organizations.
- Describe fund accounting.
67.1 Not-for-profit organizations defined:
- The CPA Canada Handbook - Accounting defines an NPO 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." In simple terms, an NPO exists to further a social cause, rather than to earn a profit for its owners.
- NPOs meet a wide variety of needs:
- Some provide products or services to a broad user base (e.g., food banks, hot-lunch programs, hospices, amateur theatre groups) and may receive government funding, donations, fundraising, and user fees.
- Others serve a specific user group (e.g., member-based organizations like Chartered Professional Accountants) and operate on a cost-recovery basis.
- Other professional associations, amateur sports groups, and community groups may follow similar models.
- All NPOs must provide clear, unambiguous information to stakeholders. Part III of the Handbook addresses special reporting needs (Sections 4400 to 4470).
67.1.1 Relevant accounting standards:
- Canada uses two handbooks for standards: the PSA Handbook (Public Sector Accounting) and the Handbook - Accounting.
- The Handbook - Accounting contains four parts:
- Part I: International Financial Reporting Standards (IFRS)
- Part II: Accounting standards for private enterprises (ASPE)
- Part III: Accounting standards for not-for-profit organizations (ASNPO)
- Part IV: Accounting standards for pension plans
- Private sector NPOs may prepare under Part I (IFRS) or Part III (ASNPO).
- Part III is not a complete set of standards; it provides guidance on specific areas where ASNPO differs from guidance for for-profit private enterprises.
- The introduction to Part III states that an NPO applying Part III should rely on Part II (ASPE) where Part III does not provide explicit guidance.

Fund Accounting in ASNPO: Practical Details

67.2 Fund accounting:
- Under ASNPO, NPOs may apply fund accounting to segment financial statements by the nature of projects, programs, and expenditures.
- A fund is a self-balancing set of accounts established for legal, contractual, or voluntary reasons; it includes revenues, expenses, assets, gains/losses, liabilities, and the fund balance (net assets).
- Frequently shown as columns in the financial statements for each fund.
- Common funds:
- General fund: includes items not subject to restriction in use.
- Restricted funds: include items subject to restriction in use (e.g., donor restrictions); multiple restricted funds may exist for major programs.
- Capital asset fund: related to capital assets (property, plant, equipment), amortization expense, etc.; often called the capital fund.
- Endowment fund: includes endowments; principal must be maintained; generally interest earned may be spent (either in general fund if unrestricted or in restricted fund if restricted).
- Fund accounting is required when an NPO uses the restricted fund method of accounting for contributions.
- The use of fund accounting is optional when using the deferral method for contributions, though it is common in practice to help track externally restricted contributions and internally restricted net assets demanded by donors or government grants.
- Fund balance (net assets) summarizes the net excess/deficiency of assets over liabilities for each fund, aiding users in understanding available resources and potential reinvestment in organizational objectives.
- Resources are not necessarily physically segregated; one bank account can hold balances for multiple funds.
- Interfund transfers are presented in the statement of changes in net assets.
- While the number and composition of funds is not mandated, a general fund with no restrictions is always included when fund accounting is used.