Notes on ASNPO Part III: Not-for-Profit Accounting – Capital Assets, Donated Goods/Services, Pledges, and Disclosures

67.4 Capital assets

• NPOs are required to capitalize and amortize the cost of tangible capital assets with a limited life according to ASPE 3061 Property, Plant and Equipment.
• ASNPO 4433 Tangible Capital Assets Held by Not-for-Profit Organizations provides a special rule for small NPOs.
• Small NPOs (with average annual revenues for the current and preceding period under $500,000) may choose one of the following:
  • Directly expense the costs of tangible capital assets.
  • Capitalize and amortize the cost of tangible capital assets.
  • Capitalize but not amortize (optional under small NPOs); however, the asset should not be overvalued.
• When the $500,000 threshold is exceeded, the NPO must capitalize and amortize its tangible assets on a prospective basis (ASPE accounting change treatment). The policy cannot be reversed if revenues later drop below $500,000.
• Contributions of capital assets are initially recognized at fair value, per the organization’s accounting policy (capitalize and amortize or directly expense).
• If a capital asset is purchased for substantially less than its fair value, it is recorded at fair value, with the difference treated as a contribution by the seller.

67.4a Example: Young-at-Heart Seniors Society (YSS) – under $500k revenue

• Scenario: YSS purchases a van with useful life of 6 years for $75,000.
• If YSS expenses the van:
  • DR Van expense 75{,}000
  • CR Cash 75{,}000
• If YSS capitalizes and amortizes the van:
  • DR Capital assets - van 75{,}000
  • CR Cash 75{,}000
• Amortization (straight-line) per year:
  • ext{Amortization per year} = rac{75{,}000}{6} = 12{,}500
• Journal entries when expensing vs. capitalizing are shown above; capitalization leads to annual amortization expense of 12{,}500.

67.4b Example: Policy change when revenue exceeds $500k

• Once an NPO exceeds the $500,000 limit, it must capitalize and amortize its tangible assets on a prospective basis (not retrospective).
• It must continue to do this on a prospective basis and cannot elect to revert if revenues decrease below $500,000 in the future.
• Contributions of capital assets are recognized at fair value per policy; if asset is purchased for substantially less than fair value, record at fair value with the difference as a contribution by the seller.
• Continuing with YSS earlier example where the asset cost is $50,000 but fair value is $75,000. YSS policy: capitalize and amortize; use the deferral method for contributions.
• Journal entry for the purchase of the van:
  • DR Capital assets - van {75{,}000}
  • CR Cash {50{,}000}
  • CR Deferred contribution {25{,}000}
• Subsequently, annual amortization remains 12{,}500 (75{,}000/6).
• Matching contribution revenue (to reflect the fair value in excess of cash paid) would be rac{25{,}000}{6} = 4{,}167 per year.

67.5 Donated goods and services

• An NPO may choose to recognize contributed goods and services if:
  • The fair value of the contributed goods and services can be reasonably estimated, and
  • The goods and services are used in the normal course of operations and would have been purchased otherwise.
• If both criteria are met and the organization chooses to record contributed goods and services, they should be recognized at fair value.
• The organization can also choose to disclose rather than record contributed goods and services.
• Donated services example considerations:
  • If volunteer or paid coaches would have been hired, and the fair value can be measured (equal to the amount the NPO would pay hired coaches), the organization may recognize revenue and an equivalent expense.
  • If the organization records revenue from donated services, the net effect on excess or deficiency of revenue over expense is nil (contribution revenue equals coaching expense).
  • Tracking volunteer hours and estimating a reasonable per-hour cost can be burdensome; if not recognized, the notes should disclose reliance on volunteers.
• Note on measurement challenges: measuring fair value of donated services (especially volunteers) can be time-consuming; disclosure may be preferred if measurement is impractical.

67.5a Example: Forest Hill Lodge (Lodge) – donated bingo dabbers

• Donated bingo dabbers valued at $5,000.
• If criteria are met (estimate available and used in operations as would have been purchased):
  • DR Bingo night expense 5{,}000
  • CR Revenue-donated materials 5{,}000
• This records both revenue and offsetting expense for donated materials.

67.6 Other considerations for NPOs

• NPOs reporting under Part III of the Handbook apply Part II (ASPE) standards for topics not addressed in Part III.
• Practical implication: fair value measurement and other general accounting rules still apply, with some Part III-specific exceptions.

67.6.1 Pledge receivables (donor pledges)

• Pledge receivable vs. other receivables: pledge is non-binding; no legal recourse if donor defaults.
• Recognition criteria:
  • Recognize a contribution receivable only when the amount can be reasonably estimated and ultimate collection is reasonably assured.
• In some cases, pledges may be recognized at the time of the pledge if they can be reliably estimated and historically honoured (net realizable value with an allowance for uncollectable pledges).
• Recognition timing affects comparability across NPOs due to uncertainty in measurement/collection.

67.6a Example: Pledges and deferral method

• Example: A campaign raises $600,000 cash and $100,000 in pledges; 90% of pledges expected to collect by end of Q1 next year.
• Fund accounting: general fund (restricted for next year operations), capital asset fund, endowment fund.
• Total to defer for next year: $690,000 (cash plus expected collectable pledges).
• Allowance for uncollectable pledges: $10,000 (10% of $100,000).
• Journal entry for the year to record proceeds and pledges:
  • DR Cash 600{,}000
  • DR Pledges receivable 100{,}000
  • CR Deferred contribution revenue 690{,}000
  • CR Allowance for uncollectable pledges 10{,}000
• Note: The $690,000 is deferred for next year's operations; 90% collectable is assumed for timing considerations.

67.6.2 Internal restrictions

• Some NPOs impose internal restrictions (internally restricted net assets or reserves/appropriations).
• For users to understand net assets, disclose portions attributable to endowments, external restrictions, and internal restrictions.
• If using the restricted fund method:
  • Disclose the amount of internally restricted net assets.
  • Allocation of resources under internal restrictions is recorded as interfund transfers to the restricted fund.
• If using the deferral method:
  • Internally restricted balances are reflected as appropriations of unrestricted net assets in net assets.

67.6.3 Encumbrance accounting

• Encumbrance accounting controls spending against budgets by recording commitments when goods/services are ordered, even if not yet delivered.
• This shows funds that have been committed and are not yet expended.
• For reporting, expenditures that do not meet recognition criteria (ordered but not delivered) must be reversed at reporting date.
• Additional discussion of encumbrance accounting is beyond this chapter.

67.7 Financial statements for NPOs

• Not-for-profit terminology differs from profit-oriented entities; core statements:
  • Statement of financial position (SFP): assets, liabilities, and fund balances or net assets.
  • Fund balances reflect net assets; separate disclosures for restricted net assets, endowments, and unrestricted net assets.
  • Statement of operations: revenues and expenses; net of revenues minus expenses is the excess or deficiency of revenue over expense; not called net income.
  • Statement of changes in net assets (or fund balances): closes revenues and expenses from the statement of operations to this statement; shows how net resources have changed from the prior period.
  • Statement of cash flows: cash from operating, investing, and financing activities (analogous to a cash flow statement for profit-oriented entities).
• Fund accounting note:
  • Some NPOs report on an aggregate basis (no separate funds) similar to profit-oriented statements.
  • Others use fund accounting, with funds organized to match activities and user needs; may present separate statements for each fund or use a columnar presentation to show balances by fund (e.g., a combined statement of operations and changes in net assets).

67.8 Presentation and disclosure

• NPOs reporting under Part III face extensive presentation and disclosure requirements; must also comply with applicable Part II disclosures.
• Highlights of presentation/disclosure requirements (Part III) are summarized below; detailed requirements are in Part III of the Handbook.

ASNPO 4400 Financial Statement Presentation by Not-for-Profit Organizations

• Disclose the NPO's purpose, intended community served, status under income tax legislation, and legal form.
• If fund accounting is used, include a brief description of each fund reported.
• For each financial statement item, the SFP should present a total that includes all funds reported.
• If fund accounting is used, a single-column SFP may be prepared; or use a multi-column approach to present balances by fund (e.g., for the statement of operations and changes in net assets).
• Interfund transfers should be presented in the statement of changes in net assets.

ASNPO 4410 Contributions - Revenue Recognition

• Required disclosures:
  • The accounting policy for endowment and restricted contributions.
  • Contributions by major source.
  • Policy for contributed materials and services and the nature and amount recognized in the financial statements.
  • Information related to net investment income earned on resources held for endowment, including total earned in the period and any amounts deferred in the period.
• Deferred contributions balances must be presented in the SFP outside net assets if the deferral method is used, or if restricted contributions are recognized in the general fund under the restricted fund method.

ASNPO 4433 Tangible Capital Assets Held by Not-for-Profit Organizations

• If a small NPO elects not to follow the usual capitalize-and-amortize protocol, it must disclose:
  • The policy followed for tangible capital assets.
  • Information about major categories of tangible capital assets not recorded in the SFP.
  • The amount expensed in the current period if tangible capital assets are expensed on acquisition.
• An NPO that is not small or that chooses to apply the full requirements of Section 4433 must follow the disclosure requirements of the relevant sections in Part II of the Handbook.

ASNPO 4434 Intangible Assets Held by Not-for-Profit Organizations

• An NPO should disclose:
  • The nature and amount of contributed intangible assets received in the period and recognized in the financial statements.
  • Information about contributed intangible assets recognized at nominal values.