The purpose of this memo is to inform organizations of changes to Canadian Generally Accepting Accounting Principles applicable to all government not-for-profit organizations (GNFPOs).  These changes apply to fiscal years beginning on or after January 1, 2012.  All of the changes discussed below are to be applied retrospectively, meaning that your prior year comparative amounts will also have to be adjusted in order to be presented in compliance with the new accounting standards.  GNFPOs adopting Public Sector Accounting (PSA) Standards for the first time would refer to Section PS 2120 in the (PSA) Handbook.

Background
Canada’s accounting standards are in transition and the current framework is being replaced.  Accounting standards for the public (government) sector are set by the Public Sector Accounting Board (PSAB) and this framework includes a series of standards known as the 4200 series which addresses the unique circumstances of NFPOs.

Definition
A GNFPO is an organization that is controlled by the government and has counterparts outside of the public sector.  It is an entity normally without transferable ownership interests, and is an entity organized and operated exclusively for social, educational, professional, religious, health, charitable or any other not-for-profit purpose.  In addition, its members, contributors and other resource providers do not receive any financial return directly from the organization.  A GNFPO must exhibit all of the above characteristics.  In many cases, a government organization includes hospitals, colleges, some universities and arts organizations.

Transitional Timeline
The general rule is that first-time adoption is mandatory for annual financial statements relating to fiscal years beginning on or after January 1, 2012. Early adoption is permitted.  The following timelines are examples of the transitional timelines:

Organization A – December 31 , 2012 year end
January 1, 2012 – first time adoption
December 31, 2012 – year end
January 1, 2011 – date of transition

Organization B – March 31 year, 2013 year end
April 1, 2012 – first time adoption
March 31, 2013 – year end
April 1, 2011 – date of transition

Standards
All GNFPOs must adopt the PSA Standards as its new underlying financial accounting framework.  GNFPO’s have a choice to (a) continue to apply the eight Handbook sections (PS 4200 to 4270) which incorporate the current Not-for-Profit accounting standards into the PSA Handbook (PSA + NPO), or apply the CICA PSA Handbook alone without sections PS 4200 to 4270 (PSA Only.)

Reporting and Operational Considerations
Adopting a new accounting framework may also create a variety of reporting and operational issues that may need to be addressed.  The following table is a summary of some of the challenges, and suggested strategies to mitigate them.

PSA
Handbook    Current
Canadian GAAP

Standard
Changes to Standard
PS 4200    4400    Financial statements presentation by Not-for-Profit Organizations.    Changes generally relate to removing references to other sections in current Canadian GAAP.

Reference to interim financial statements removed as the PSA Handbook does not have a standard in the area.
PS 4210    4410    Contributions – Revenue recognition.    None.
PS 4220    4420    Contributions receivable.    None.
PS 4230    4430    Capital assets held by Not-for-Profit Organizations.    Elimination of reference for asset retirement obligations (PSA Standards do not include an accounting standard on asset retirement obligations).
PS 4240    4440    Collections held by Not-for-Profit Organizations.    None.
PS 4250    4450    Reporting controlled and related entities by Not-for-Profit Organizations.    Controlled profit oriented enterprises would be accounted by consolidating the controlled organization or accounting for it using the modified equity method.
PS 4260    4460    Disclosure of related party transactions by Not-for-Profit Organizations.    None.
PS 4270    4470    Disclosure of allocated expenses by Not-for-Profit Organizations.    None.

A GNFPO, that adopts the PSA Handbook including the 4200 series, will face fewer changes in accounting policies and financial statement presentation on transition.  For all matters covered in the 4200 series, the accounting policies and presentation will not change.  Instead only matters not covered by the 4200 series require accounting policy changes on transition from another basis of generally accepted accounting principles (GAAP).

Since Not-for-Profit Organizations currently follow current Canadian GAAP, it is important to understand the differences between current Canadian GAAP and PSA Standards for those areas not covered by the eight Not-for-Profit Handbook sections.  Some potentially significant differences include:

Topic  
Current Canadian GAAP    PSA Standards
Financial
Instruments    Organizations are required to classify financial instruments into one of four categories.

Investments are typically carried at fair value, with immediate recognition of any changes in fair value, either in the statement of Operations or in the Statement of Net Assets.    PSAB is in the process of finalizing a new standard on financial instruments.  The proposed standard requires that certain investments and all derivatives be carried at fair value.

The proposed standards introduces a new statement – statement of remeasurement gains and losses.  For financial instruments measured at fair value, unrealized gains and losses are reported in the statement of remeasurement.

The expected effective date for the new standard (years beginning on or after April 1, 2012) aligns with the transition.
Retirement and Post-employment

Benefits
Discount rate: the rate used to discount post-employment benefit obligations is determined by reference to market yields at the end of the reporting period on high-quality corporate bonds.

Actuarial gains and losses are recognized either in net income using the “corridor” approach or immediately.

Sick leave benefits that accumulate do not vest are not required to be accrued.    Discount rate: The rate used is determined by applying a discount rate with reference either to its plan asset earnings or to its cost of borrowing.

For defined benefit plans, a government organization amortizes actuarial gains and losses to the liability or asset and the related expenses in a systematic and rational manner over the expected average remaining service life of the related employee group.

Sick leave benefits that accumulate but do not vest are accrued unless they are not significant.
Leases    The classification of a lease as either operating or capital is based on an analysis of whether substantially all of the benefits and risks have been transferred from the lessor to the lessee.

Sale-leaseback transactions generally result in the deferral of any gain resulting from the transaction.    The classification of a lease as either operating or capital is also based on an analysis of the transfer of benefits and risks, however, additional guidance is provided in assessing the impact of leasing an asset that provides an essential service.

PSA Standards for sale-leaseback transactions utilize a components approach and there is a substantive difference in the recognition of gains depending on whether the leaseback constitutes lease tangible capital asset or an operating lease.

GNFPO’s who choose not to apply the eight handbook sections (PS 4200 to 4270) – those who choose the PSA only alternative – will also have to consider differences in accounting between the guidance provided by these sections and PSA Standards.  Some potentially significant differences include:

Topic    Not-for-Profit accounting standards    PSA Standards
Presentation of financial statements

Financial statements include:
–    Statement of financial position
–    Statement of operations
–    Statement of changes in net assets, and
–    Statement of cash flows

With accompanying notes to the financial statements.

Entities may report separate funds and within those funds use either the restricted fund method or the deferral method of recognizing contributions.  Entities who do not report separate funds use the deferral method of recognizing contributions.

 Financial statements include:
–    Statement of financial position
–    Statement of operations (either by function or by program)
–    Statement of change in net debt, and
–    Statement of cash flows

With accompanying notes to the financial statements.

As noted in the section above on financial instruments, PSAB has recently released an exposure draft that, if approved, will require an additional statement – statement of remeasurement gains and losses.

In addition to the comparative figures, budgeted amounts as originally approved and adjusted to conform to PSA Standards must be presented on the statement of operations and the statement of change in net debt.
Tangible capital assets and intangible assets

Entities may record intangible assets (such as patents, licenses, etc.) at cost.  These assets are generally amortized over their useful lives, with amortization expense recorded in the statement of operations.    Intangible assets (other than software), works of art and historical treasures are not recognized in the financial statements.

Revenue
recognition    Entities follow either the deferral method or the restricted fund method of recognizing contributions.  Both methods provide detailed guidance on timing of recognition.  Under the deferral method, contributions restricted for expenses related to a future period or the purchase of capital assets are deferred until the expenses are incurred or the capital asset is amortized.    PSA Standards provide guidance on accounting for both restricted revenues and government transfers.  The timing of recognition is dependent upon the criteria and/or restrictions in the funding agreement.

PSAB is in the process of finalizing a new standard on government transfers.

Exemptions
The guidance provides specific optional exemptions to retroactively restating prior periods in the following areas:

•    Retirement and post-employment benefits
•    Business Combinations
•    Investments in Government Business Enterprises
•    Government Business Partnerships
•    Tangible Capital Assets

Exception to Retroactive Application
This section prohibits retroactive application on some aspects of hedge accounting and accounting estimates.

Disclosure
In the year of adoption of PSA Standards, a government organization should disclose:
a)    Amount of each charge to accumulated surplus/deficit at the date of transition to PSA Standards resulting from the adoption of these standards and the reason therefor; and
b)    A reconciliation of the net income reported in the government organization’s most recent previously issued financial statements to its annual surplus/deficit under PSA Standards for the same period.

The disclosures required should give sufficient detail to enable users to understand the material adjustments made to the financial statements as a result of the transition to PSA Standards.

Please keep in mind that this is only a basic introduction to the upcoming changes.

For further advice or assistance with these or any other financial issues, please contact a Millards representative at (519) 759-3511.