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A State of Change - October 2015

Published on: Oct 31, 2015

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In this issue

Finance Transformation: how not-for-profit organizations can benefit

An update on the joint review on accounting standards for not-for profit organizations


In this issue of the newsletter, we introduce you to the subject of Finance Transformation, one that is becoming a trend and that is being undertaken by organizations that seek to renew their corporate focus, maximize efficiency, and improve the value that the finance function can bring to an organization. We also provide an update on the status of the Statement of Principles issued by the Accounting Standards Board and the Public Sector Accounting Board on the accounting standards for not-for-profit organizations, since the close of the comment period.

Finance Transformation: how not-for-profit organizations can benefit

Although traditionally, a Finance function is known for its historical cost and control focus, it also has a role in helping an organization to anticipate and quickly develop different financial and marketplace scenarios that portray the impact of changes on the organization and its stakeholders, and then determine an appropriate strategic and operational response. That is not an easy task.

Finance transformation is the process of establishing and revising the strategy and vision for the finance function, and the resulting people, process, and technology changes that can result from this exercise.

Finance Transformation is a hot topic these days and to some organizations it represents a significant shift in thinking. In the not-for-profit sector where resources are scarce, Finance Transformation can seem like a monumental task due to the potential financial commitments required. While resources are important to determining the long term strategic investments that need to be made in a finance department, resourcing is something that can be built into the strategy.

The need for Finance Transformation can vary, but often the most important driver is the widening gap between the service level of a finance department and the needs of the overall organization it serves. The business case for Finance Transformation comes from a desire within to better align the finance function as a comprehensive business partner to the entire organization. Undertaken properly, Finance Transformation can serve to realign an organization with its strategy, and proactively add value through maximizing its resources.

A recent Deloitte survey of Canadian CFOs across all industries found that. In particular, many respondents are not fully utilizing technology in their finance function:

  • Approximately 27 percent operate with either obsolete or fragmented systems “bolt on” transactional reporting systems that require inefficient workarounds.
  • Almost three-quarters still rely on spreadsheets to prepare budgets, and only 17 percent of survey respondents felt they have sufficient time for strategic activities.

Many CFOs also deal with an inefficient and labor intensive financial close process and extended reporting timelines. For those affected, almost all of the reporting function’s time is spent on compiling information from across the organization, rarely leaving time for value-added analysis and information prioritization. Instead of providing insight to support the operating needs of the organization, often the finance function hinders decision making by generating even larger reports, leaving users to sift through this data to identify those of relevance. All of these factors affect the decision making ability of an organization.

Many organizations are turning to cloud technologies as they offer a cost effective way to invest in finance functions. A Deloitte survey found that 14 percent of respondents already use cloud technologies, 34 percent are currently transitioning to the cloud, and a further 24 percent are in the planning stages, or are implementing pilot projects.

To support its move to the cloud, however, finance functions will need a plan for transitioning from manual to automated processes, a key consideration of which will be to develop integrated approaches that improve efficiency, avoid duplications of effort, create team alignment, and replace ad hoc approaches with standardized, documented procedures.

In addition to updating processes, finance functions will also need to consider their talent strategy. When investing in talent, organizations will need to critically assess the current structure and talent pool, determine the required training and development for current team members, and identify where new talent and expertise need to be recruited.

By focusing on improving processes and revisiting the talent strategy, this will help finance functions prepare for systems that are more beneficial to the organization. Highly integrated systems that are seamlessly linked across the organization will make it easier and faster to gather information about all aspects of the organization. To achieve this, most organizations will need to more clearly define “performance” and then identify the most relevant key performance indicators to assess their results in real time.

Transforming a finance function will be a complex, longer-term process in which multiple activities will need to be carefully coordinated and undertaken in appropriate timeframes. Finance will need to work in partnership with others to minimize the disruptions that will occur during the transition; as such, the development of a comprehensive change management plan will be critical to manage all of these activities. The result of this effort will be a finance function that fully supports and is aligned with the rest of the organization.

An update on the joint review on accounting standards for not-for profit organizations

The Accounting Standards Board (AcSB) and the Public Sector Accounting Board (PSAB) both set standards for not-for-profit organizations (NFPs) in Canada. The AcSB focuses on standards for private NFPs, while PSAB focuses on standard setting for those NFPs that are controlled by the government.

In late 2013, both Boards requested feedback on a joint Statement of Principles (SOP) that was developed to better align the accounting standards across all NFPs in Canada, which resulted in over 2,200 pages of responses from hundreds of organizations. The responses received indicated to both boards that many NFPs are passionate about their applicable accounting standards, and more importantly, that there are diverging practices that needed to be addressed. The Boards deliberated for approximately a year and half to provide stakeholders with an update, which was done through the decision summary of the AcSB in May 2015.

The AcSB reaffirmed its commitment to continue:

  • to maintain a separate set of standards for NFPs in the private sector that addresses transactions and circumstances unique to this group;
  • with the improvements process to review the standards in Part III of the CPA Canada Handbook - Accounting and update the standards as necessary; and
  • to work in collaboration with the PSAB, with the objective of achieving consistency between private and public sector standards for not-for-profit organizations when appropriate.

While the AcSB has started to unveil its plan around private sector NFPs, PSAB has not communicated in the same detail how it plans to move forward, except for the fact that PSAB has just introduced a new related party transactions standard that will now replace PS 4260 for year ends beginning on or after April 1, 2017. Other than this one standard, PSAB is still working on its plan to address the issues that were raised during the SOP process.

The AcSB’s plan for improving standards for NFPs can be broken down into 3 parts:

  1. Accounting Standards Improvements (Phase 1)
  2. Accounting Standards Improvements (Phase 2)
  3. Contributions Revenue Recognition

Accounting Standards Improvements (Phase 1)

The first phase of the project on accounting standards improvements will address whether and how to amend the standards regarding the accounting for capital assets other than the size exemption, but including collections of works of arts and historical treasures and the disclosure of related party transactions and allocated expenses (Principles 5, 6, 8, 9, 12 and 15). Overall, it appeared that these were the less controversial topics covered in the SOP, and while any changes would go through the AcSB’s typical due process, this is an area where there could be some consensus building, which would be a good start to the project.

Accounting Standards Improvements (Phase 2)

The second phase of the project will address whether and how to amend Section 4450, Reporting Controlled and Related Entities by Not-for-Profit Organizations, regarding how to account for controlled not-for-profit organizations and profit-oriented enterprises (Principles 10 and 11). NFPs have unique standards and choices with respect to consolidating organizations that they control, or jointly control. There are some fundamental differences between the public sector accounting standards and Part III of the CPA Canada Handbook when it comes to controlled entities; thus, collaboration between the Boards will be critical in this phase of the project. One of the bigger questions that this project will focus on is changing the option to consolidate controlled organizations to a requirement. This will likely be very impactful for those NFPs that currently control many individually insignificant NFPs and choose not to consolidate them.

This phase of the project will also address the proposals related to the presentation and disclosure of expenses (Principle 14), which discussed the requirement to present expenses by function and disclose the expenses by objects in the notes to the financial statements.

Contributions – Revenue Recognition and Related Matters

The most controversial project coming out of the SOP related to revenue recognition for contributions. The AcSB approved a project to conduct further research on the recognition of revenue from contributions (Principles 1 to 4). This project will also address the implications of the deliberations relating to the size exemption for capital assets (Principle 7) and financial statement presentation (Principle 13). This research project will be significant to the AcSB’s decision making process on a go forward basis. Again, this is an area where both Boards will need to collaborate. Currently, PSAB is undergoing a post-implementation review of its Government Transfers standard which, while not the same as a contribution, certainly has many similarities in terms of recognition considerations. It is likely that PSAB will leverage some of its work with respect to Government Transfers to frame its thoughts around contributions. While the AcSB has a project plan in place on this topic, the PSAB can certainly be expected to provide significant input when both Boards discuss this topic further.

Not‑For‑Profit Organizations Advisory Committee

A final important move that the AcSB undertook as part of its deliberations was the recognition that more stakeholder involvement is required in its decision making process. Currently the AcSB uses a number of advisory committees (for example, the Private Enterprise Advisory Committee) as support in the development and review of accounting standards. In May 2015, the AcSB approved the creation of a standing not-for-profit organizations advisory committee to assist the Board with its standards improvements initiatives, as well as providing input on other standard-setting matters of interest to private sector not-for-profit organizations.

When the SOP was released in 2013, the changes that were being contemplated were fundamentally different than those to which many NFPs were accustomed. This created a significant response from the sector and the AcSB has responded with a plan of action. Increased stakeholder involvement is expected to enhance the continuing decision making process. While PSAB’s direction on this project is still unclear, it is obvious through recent decisions and other projects, that it is already considering a number of issues that affect its NFPs. The collaboration between both Boards will be an important step in building a consensus on how to improve financial reporting for NFPs on a go forward basis.

Key contacts

Sam Persaud
Partner, Public Sector
Doreen Hume
Dennis Alexander
Partner, Tax
Trisha Patel
Senior Manager, Public Sector
Lilian Cheung
Senior Manager, Public Sector
Matthew Colley
Senior Manager, Audit
Francis Seguin
Senior Manager, Audit

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