Accounting Standards for Private Enterprises and Not-for-Profits

September 23, 2015

Leanne Mongiat CPA, CA – Partner

Jan Kundakci CPA, CA – Manager

Christina Ajith CPA, CA- Manager

Amna Fiaz – Staff Accountant

Although the presentation and related materials have been carefully prepared, neither the presentation authors, firm, nor any persons involved in the preparation and/or instruction of the materials accepts any legal responsibility for its contents or for any consequences arising from its use.

New developments ASPE refresher NPO refresher

Website - Financial Reporting & Assurance Standards – Canada

www.frascanada.ca

Agriculture – discussion paper to be issued in Q4 ◦ when should a biological asset be recognized◦ how it should be measured on initial

recognition◦ how it should be measured in subsequent

periods◦ how agricultural produce at the point of

harvest should be accounted for◦ what disclosures should be required

Redeemable Preferred Shares Issued in a Tax planning Arrangement – deliberating on comments ◦ There are many inconsistencies with current

standards being used◦ The scope of the project was more than an annual

improvement to an existing standard thus a major project was undertaken

Accounting for subsidiaries and investments –exposure draft being developed (Q3)◦ Section 1582, Business Combinations, Should this section apply when a private enterprise

chooses to account for its subsidiaries using the cost or the equity methods of accounting under Section 1591.

Fair Value Measurement

Financial Statement Concepts

A Statement of Principles was released

Deliberating comments received on Statement of Principles

Review standards in 4400 series (Part III) Goal is to better meet users’ needs and to

provide a recommendation of improvements to the accounting standards

Next steps are still to be determined but some project proposals have been approved.

Areas to be covered:

Subsequent events Cut-off Inventory costing Accounting for event costs Foreign exchange Preferred share classification

This section establishes recognition and disclosure standards for events subsequent to the financial statement date

In general, there are two types of subsequent events: those that provide further evidence of conditions that existed at the financial statement date; and

those that are indicative of conditions that arose subsequent to the financial statement date.

For events that did not exist at the date of the financial statements, the statements may require disclosure if: cause significant changes to assets or liabilities in the subsequent period; or

will, or may, have a significant effect on the future operations of the enterprise.

Examples of these types of events may only require disclosure are: an event such as a fire or flood that results in

a loss a decline in the market value of investments; purchase of a business commencement of litigation when the cause

of action arose subsequent to the date of the financial statements

the issue of capital stock or long-term debt

Disclosure at a minimum, shall include: a description of the nature of the event; and

an estimate of the financial effect, when practicable, or a statement that such an estimate cannot be made.

Refers to the period between the financial statement date, and a date determined by management to ensure all transactions are recorded in the correct accounting period.

Per Section 3031.11:“The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.”

Costs of purchase should include:

Purchase price Import duties and other non-recoverable

taxes Transport Handling costs Any other costs directly attributable to the

acquisition of the finished goods

Cost of conversion must include the following:

Costs directly attributable to the units of production, such as direct labour

A systematic allocation of fixed and variable production overheads incurred in converting the material into finished goods. Some examples are: Amortization Maintenance of building and equipment Cost of factory management and administration

Should the following costs be included or excluded from inventory?

Storage costs Office admin costs Cost of wasted materials Selling costs

Types of events typically held:

Seminar, webinar, etc. Gala, golf tournament, etc. Conference, trade show Award ceremony Meeting, business dinner Product launch

Typical event costs include:

Venue Event specific promotional material Event specific advertising Speakers/entertainment Event management

What section of handbook applies to event costs incurred in a period before the event is held?

Prepaids which are …◦ Intangible assets (s.3064 of Part II of the HB)

Criteria to be recognized as prepaid (intangible asset) Identifiable Control over the resources/future economic benefits Existence of future economic benefits Cost of asset can be measured reliably

If any of these criteria are NOT MET, the items MUST be expensed when incurred!

Identifiable

Definition – separable OR arises from contractual/other legal rights

How this applies to event costs◦ Event specific vs general promotional

materials/advertising?

Control

Definition – power to ◦ Obtain future economic benefits from underlying

resource◦ Restrict access of others to those future economic

benefits

How this applies to event costs◦ Does the organization get to keep event proceeds?

Existence of Future Economic Benefits

Probability should be assessed by management

How this applies to event costs◦ Will the event’s revenue exceed expenses?

Example - question

Scenario 1 – Gala to be held in fiscal 2016. $100k of gala specific costs have been incurred and $70k of gala revenues collected in fiscal 2015.◦ Both fiscal 2014 and 2015 galas have resulted in

revenues exceeding expenses of approximately $10k each year◦ Only one organization hosting the event

Example - analysis

Factors to consider◦ Identifiable –all costs are gala specific...MET◦ Control –organization alone is hosting the event and

is retaining the proceeds...MET◦ Future economic benefits - history of excess of

revenue over expenses indicates that event will result in future economic benefits...MET◦ Cost can be measured reliably – assuming that there

are supporting invoices...MET

Example - answer

Defer the entire $100k until fiscal 2016

Example - question

Scenario 2 – Gala to be held in fiscal 2016. $100k of gala specific costs have been incurred and $70k of gala revenues collected in fiscal 2015.◦ Both fiscal 2014 and 2015 galas have resulted in

expenses exceeding revenues of approximately $10k each year◦ Only one organization hosting the event

Example - analysis

Factors to consider◦ Identifiable –all costs are gala specific...MET◦ Control – assume that the organization alone is hosting

the event and is retaining the proceeds...MET◦ Future economic benefits - History of excess of

expenses over revenues indicates that event may not result in future economic benefits over the $70k of revenues...NOT MET COMPLETELY

◦ Cost can be measured reliably – assuming there are supporting invoices...MET

Example - answer

Defer a portion of the costs (up to $70k) until fiscal 2016 and expense the remainder in fiscal 2015 as a period cost

Two ways foreign exchange (FX) gain or loss can result:◦ Foreign currency transactions ◦ Foreign operation

Temporal Method: the method used to convertforeign currency transactions. Gains and losses are included in net income for the current period.

Temporal Method Monetary vs. Non Monetary Items◦ Money or claims to money (AR, cash, AP, etc.) vs.

other than claims to money (equipment, inventory)◦ Consider whether there is a right to receive a fixed

or determinable amount of money Monetary Items: translated at exchange rate

in effect at the balance sheet date Non Monetary items: translated at historical

exchange rates, unless they are carried at market (if so use B/S date exchange rate)

Revenue and expense items: translated at the exchange rate in effect on the dates they occur

Depreciation/amortization: translated at the same rate as the asset to which it relates

Conversion occurs both at the financial statement date and settlement date, using the above rules

Presentation in the FS Two options◦ Record the gain/loss from foreign exchange as a

separate line item on the income statementOR◦ If not included as a separate line item, disclose in

the notes the line in which the gain/loss is included, along with the amount

Current standard (section 3856.23): ◦ Redeemable preferred shares issued in a tax

planning arrangement such as (s. 51, 85, 85.1, 86, 87, or 88) be reported under the equity section as a separate line.

Nature of the shares: ◦ Meet the definition of a liability as they are a

contractual obligation to deliver cash to the holder of the shares

Initial intended purpose of the section was to provide relief for estate freezes

Proposed change per exposure draft: to eliminate the section entirely and thus restate as a liability

Implications of proposed change◦ Retrospective adjustment per ASPE◦ Confusion to users

Most recent decision: status quo, if any change does occur, it will not be in effect any time before January 1, 2018.

Fund accounting comprises ◦ the collective accounting procedures resulting in a

self-balancing set of accounts for each fund established by legal, contractual or voluntary actions of an organization◦ Elements of a fund can include assets, liabilities,

net assets, revenues and expenses (and gains and losses, where appropriate)◦ Fund accounting involves an accounting

segregation, although not necessarily a physical segregation, of resources

What is a contribution?

Three types of contributions:◦ Restricted ◦ Endowment◦ Unrestricted

How to account for contributions?

◦ Deferral method

◦ Restricted fund method

Deferral method◦ General contributions – recognized in the period◦ Restricted contributions – deferred until the related

expense is incurred

Restricted fund method◦ Reports a general fund◦ Reports 1 or more restricted funds◦ May report an endowment fund ◦ Contributions are recognized into the applicable

funds in the period earned◦ If there is no appropriate restricted fund, an

external restricted contribution is deferred in the general fund until expense is incurred

How to determine if an “external” restriction exists?

This is key as different accounting principles apply for internal vs. external stipulations

Most externally imposed restrictions will be explicitly stated by the contributor

Implicit stipulation- may be clear from the purpose for which the amount was solicited

Example Externally restricted

Deferral treatment

Restricted fund treatment

1) Donor gives a donation for education purpose

Yes Defer until education expense is incurred

- if education funds exist recognize in period

- If no fund defer in general fund

2) Flyer is mailed by NPO that requests a donation for building construction purposes

Yes Defer until building is in use

- If capital asset fund exists recognize in capital asset fund

- If no capital asset fund defer in general fund until building is in use

Example Externally restricted

Deferral treatment

Restricted fund treatment

3) A run is held for the 1st time by an NPO and the purpose of the contributions is posted on the website prior to run

Yes - Same as #1 above

- Same as #1 above

4) A run is held for the 1st time by an NPO and the purpose of the contributions is posted on the website only after to run

No - Recognize in current period

- Recognize in current period in general fund

Example Externally restricted

Deferral treatment

Restricted fund treatment

5) An NPO (y-e Dec 31) receives a government grant for the period from June 1 to May 31

Yes - Same as # 1 above

- Same as # 1 above

- Same as # 1 above

- Same as # 1 above

Yes6) An NPO (y-e Dec 31) receives a government grant for funding employment services

Background/history

◦ Condominium Corporations are created by and governed by the Condo Act

◦ Condo Act (s.66) states that financial statements should be prepared in accordance with CPA Canada HB, Part III (for NPOs)

Background/history

◦ Who are the important parties in a condo? Board of directors Owners Property management Other external parties – potential purchasers, auditors,

lawyers, engineers

Condo specific accounting

◦ Fund accounting & contributions Reserve fund

◦ Banking and investments

◦ Receivables from owners

Condo specific accounting

◦ Capitalization Real property directly associated with units Real property not directly associated with units Common personal property

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