A State of Change - May 2017

Published on: May 10, 2017

In this issue, we provide you a summary of the major proposed changes to Part III - Accounting Standards for Not-for-Profit organizations, in the recently issued Exposure Draft by the Accounting Standards Board.

AcSB Exposure Draft – Accounting Standards Improvements for Not-for-Profit Organizations

On February 1, 2017, the Accounting Standards Board (AcSB) issued an Exposure Draft that proposes to replace the following sections of Part III of the Accounting Standards for Not-for-Profit organizations (“NFPOs):

Section 4431, Tangible Capital Assets held by Not-for-Profit Organizations, with Section 4433;
Section 4432, Intangible Assets held by Not-for-Profit Organizations, with Section 4434; and
Section 4440, Collections held by Not-for-Profit Organizations, with Section 4441.

The proposed effective date for Part III, Sections 4433, 4434, and 4441 is for annual financial statements with fiscal years beginning on or after January 1, 2019.Stakeholders are encouraged to submit their comments to the AcSB by May 31, 2017.To access the Exposure draft issued by the AcSB use the link provided here: AcSB Exposure Draft – Accounting Standards Improvements for Not-for-Profit Organizations

The following table provides a brief overview of the major proposed changes to the above-noted Sections:

Tangible Capital Assets Held by Not-for-Profit Organizations	Under the new standard, NFPOs will be directed to the Property, Plant, Equipment, Section 3061, and Asset Retirement Obligations, Section 3110, in Part II of the Handbook, with the exception of the guidance related to contributed assets and write-downs of assets included in Sections 4433. NFPOs will be required to consider the guidance on componentization included in Part II, Section 3061, which is that the cost of an item of a capital asset made up of significant separable component parts is allocated to the component parts when practicable and when estimates can be made of the lives of the separate components. NFPOs will also be required to follow the amortization guidance under Part II, Section 3061, which states that amortization should be calculated as the greater of cost, less residual value, over the asset’s estimated useful life, and cost, less salvage value, over the life of asset. This differs from the amortization guidance included under Part III, Section 4431, which requires amortization to be based on cost, less residual value, and is calculated over the asset’s estimated useful life in a rational and systematic manner.
	Definition of “replacement” cost will be added. This is the amount that will be required currently to acquire an equivalent asset.
	Clarification of the amount to be included in the cost of a contributed tangible capital asset. The cost of a contributed tangible capital asset will be the fair value at the date of contribution, plus all costs directly attributable to the acquisition of the tangible capital asset. When fair value cannot be determined, the tangible capital asset and the related contribution will be recorded at nominal value.
	The previous requirement for full impairment will be removed. Instead, a tangible capital asset will be written down to its fair value, or replacement cost, to reflect a partial impairment of the asset when conditions indicate that the asset no longer contributes to an NFPO’s ability to provide goods and services, or that the value of future economic benefits or service potential associated with the asset is less than its net carrying amount. Disclosure requirement for the partial impairment measurement basis has been included. NFPO’s will now be directed to follow the disclosure requirements in Impairment of Long Lived Assets, Section 3063 in Part II, for impairments of tangible capital assets.
	Guidance on the concepts “future economic benefits” and “service potential” will be added. An NFPO may hold tangible capital assets that are not directly related to their ability to generate net cash flows. In these cases, the future economic benefits or service potential of the tangible capital assets for financial reporting purposes is represented by the amount the organization would need to pay to acquire the economic benefits or service potential if this was necessary to achieve the objectives of the NFPO.
	A list of indicators for impairment will be added to provide examples of conditions that may be present that will indicate impairment of tangible capital assets.
	Transition guidance to Section 4433 will be included. Prospective application of Section 4433 will be required, except as permitted by the transition provisions. The transition provisions allow an NFPO to: Allocate the costs of tangible capital assets to their component parts based on their relative cost; or at fair value or replacement cost at the date the Section is first applied; and Recognize an adjustment to opening net assets for partial impairments of tangible capital assets existing at the date the Section is first applied.
Intangible Assets Held by Not-for-Profit Organizations	Under the new standard, NFPOs will be directed to Property, Plant, Equipment, Section 3061, Goodwill and Intangible Assets, Section 3064, and Asset Retirement Obligations, Section 3110 in Part II of the Handbook, with the exception of the guidance related to contributed assets and write-downs of assets included in Sections 4434.
	Guidance that directed NFPOs to Part II for write-downs has been removed.
	The previous requirement for full impairment will be removed. Instead, an intangible asset will be written down to its fair value, or replacement cost, to reflect a partial impairment of the asset when conditions indicate that the asset no longer contributes to an NFPO’s ability to provide goods and services, or that the value of future economic benefits or service potential associated with the asset is less than its net carrying amount. Disclosure requirement for partial impairment measurement basis has been included. NFPO’s will now be directed to follow the disclosure requirements in Impairment of Long Lived Assets, Section 3063, in Part II, for impairments of intangible assets.
	Guidance on the concepts “future economic benefits” and “service potential” will be added. A NFPO may hold intangible assets that are not directly related to their ability to generate net cash flows. In these cases, the future economic benefits or service potential of the intangible assets for financial reporting purposes is represented by the amount the organization will need to pay to acquire the economic benefits or service potential if this was necessary to achieve the objectives of the NFPO.
	A list of indicators for impairment will be added to provide examples of conditions that may be present that will indicate impairment of intangible assets.
	Transition guidance to Section 4434 will be included. Prospective application of Section 4434 will be required, except as permitted by the transition provisions. The transition provisions allow an NFPO to recognize an adjustment to opening net assets for partial impairments of intangible assets existing at the date the Section is first applied.
Collections Held by Not-for-Profit Organizations	Collections will be required to be recognized on the statement of financial position at cost or nominal value. The amount recognized as a collection will be presented on a separate line in the statement of financial position.
	Scope has been expanded to include measurement and disclosure of collections.
	Definition of “cost” and “fair value” will be added, and guidance for determining cost will be added.Cost will be the amount of consideration given up to acquire items making up the collection and will include all costs directly attributable to the acquisition of the collection. For contributed items, cost is fair value at the date of contribution, plus all costs directly attributable to the acquisition of the collection.Fair value is the amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act.The cost of a collection (in addition to the purchase price of acquired items or the fair value of the contributed items) will also include all other costs directly attributable to the acquisition of the collection. The cost incurred in protecting and preserving the items in the collection is a repair or maintenance activity and should be expensed.
	Guidance for amortization will be added. Collections will not be subject to amortization due to the nature of collections, which requires an NFPO to preserve these assets in perpetuity.
	Guidance regarding partial impairment will be included. A collection recorded at cost would be written down to its fair value or replacement cost to reflect partial impairment of the collection whenever events or changes in circumstances indicate its net carrying value may exceed fair value.
	A list of indicators for impairment will be added to provide examples of conditions that may be present that would indicate impairment of collections.
	Guidance for disposal of items in a collection will be added. For disposal of items contributed to a collection that are subject to external restrictions, the gain or loss would be accounted for in accordance with Contributions – Revenue Recognition, Section 4410. For items in a collection that do not have external restrictions, and are disposed of, the gain or loss will be recognized in the statement of operations.
	Disclosure whether the write-down of a collection is measured at the collection’s fair value or replacement cost will be required.
	Transition guidance to Section 4441 will be included. Retrospective application of Section 4441 will be required, except as permitted by the transition provisions. The transition provisions allow an NFPO that has chosen to record its collection at cost to: Capitalize items in a collection acquired in previous periods at cost or fair value at the date of acquisition, or at fair value or replacement cost at the date the Section is first applied; Measure items in a collection at nominal value when the cost cannot be reasonably determined; and Recognize as an adjustment to opening net assets for partial impairments of collections existing at the date the Section is fist applied.

Contacts

	Sam Persaud Partner, Public Sector Audit Sam has over 35 years of public accounting experience, specializing in the provision of audit and assurance services to many NPO clients of our firm. Sam’s extensive experience has allowed him to provide valuable insights to his clients in the areas of financial reporting, governance, internal controls and risk identification and risk management. Sam has volunteered with a number of organizations, including the United Way of Greater Toronto. He is an editor of A State of Change, our Canadian National not-for-profit newsletter.
	Lilian Cheung Senior manager, National Assurance Services Lilian specializes in audits of not-for-profit and public sector organizations. She is an editor of A State of Change, our Canadian National not-for-profit newsletter. Currently, she is on secondment with the Canadian National office, providing support to client service teams on assurance matters in the private company, public sector, and not-for-profit spaces.
	Trisha Patel Senior manager, National Assurance Services Trish is with the Canadian National office and specializes in developing tools, and guidance for client service teams working on not-for-profit and public sector audits. She was previously in the GTA Public Sector group where she primarily worked on audits of not-for-profit organizations. She is an editor of A State of Change, our Canadian National not-for-profit newsletter.