Exposure draft of new accounting standards for NPOs
If you´ve been following Inside Internal Control over the past couple of years, you know that financial reporting standards for all organizations - public companies, private organizations, public service organizations and not-for-profits - have been evolving under the guidance of the Accounting Standards Board (AcSB).
Now that the standards for public companies and private enterprises have been settled, the AcSB is turning its attention to NPOs. The board´s objective is to ensure that accounting standards for not-for-profit organizations "are responsive to the diverse nature of the sector, allow for comparability between the private and public sectors and provide decision-useful financial statements for the multiple and varied users of these statements."
Not-for-profit organizations currently follow a series of rules in the CICA Handbook - Accounting. Most of the Handbook sections that apply to commercial companies also apply to NFPs. In addition, there are specific rules for NPO-specific issues in section 4400.
During 2009 the AcSB undertook a series of consultations with various NPO stakeholders. And in March it issued an Exposure Draft (asking for public comment by July 15th) to propose the future direction for financial reporting for NPOs. However, the board has already confirmed that the rules in section 4400 of the Handbook will remain the primary source of Canadian generally accepted accounting principles for not-for-profit organizations.
The exposure draft is available here. And for a recent article by Beth Deazeley, LL.B on CharityVillage.com, click here.
While we´re on the topic of new accounting standards, the AcSB recently issued Summary Comparison of Part II of the CICA Handbook - Accounting to XFI Version in Part V, a concise "before and after" snapshot of the new financial reporting standards for private organizations that were incorporated into the Handbook in December 2009. This comparison, in chart form, identifies the recognition and measurement differences between the former GAAP rules and the new private enterprise standards and, more importantly, evaluates the significance of the changes. Click here for this useful document.
Since its publication two years ago, Canadian NPOs have come to rely on Not-for-Profit PolicyPro (NPPP) for the model policies, in-depth information and practical tools they need to keep up with the recent changes in law and practice in the sector. For more information about NPPP and to try a 30-day trial, click here.
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Employee expense fraud
In No free lunch, a recent white paper from Grant Thornton , it´s estimated that fraudulent reimbursement of common employee expenses represents 20 percent of the cash misappropriation workplace fraud cases in Canada, and that the typical Canadian organization loses 5 percent of its annual sales to fraud every year. And fraud is on the rise, as organizations cut back on staff and their internal controls slacken as a result. As the paper points out, however, the monetary loss is just the beginning of the problem: "Failure to crack down on this unethical - and indeed criminal - behaviour blurs the line between right and wrong. It creates a culture of entitlement that can extend across the business. And it can open the door to more significant corporate theft."
The paper goes on to highlight the vital role that effective, well-enforced policies play in keeping a lid on expense fraud. Click here for a copy of this thought-provoking white paper.
The upcoming 2010-02 release of Finance and Accounting PolicyPro, includes updates to policy FN2.01 - Expense Authorization, FN2.02 - Petty Cash, FN2.03 - Company Credit Cards, FN2.04 - Expense Advances and Expense Allowances, and FN2.05 - Travel Guidelines.
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OSC issues notice re disclosure of corporate governance and environmental matters
The Ontario Securities Commission has announced that it will undertake a review of corporate governance practices and environmental disclosure requirements in 2010, as part of a broader corporate sustainability reporting initiative.
What´s the significance of this announcement? The review will result in a staff notice by the end of this year providing guidance on compliance with existing environmental disclosure requirements under National Instrument 51-102 Continuous Disclosure Obligations. But many observers also feel that this initiative is designed to bring Canadian practice in line with developments in the US, where the Securities and Exchange Commission has voted to provide public companies with interpretive guidance on existing SEC disclosure requirements as they apply to business or legal developments relating to the issue of climate change. Although in its press release the SEC is careful to sidestep any official position on the climate change "debate," it´s clear that it is becoming part of the US corporate reporting framework. And there´s every reason to believe that it will do the same on this side of the border.
All the policies and overviews in Chapter 5 - Environmental Management of Operations and Marketing PolicyPro (OMPP), including OP5.01 - Environmental Protection, OP5.02 - Hazardous Material Management, OP5.03 - Recycling, OP5.04 - Energy Conservation, OP5.05 - Sustainability, and OP5.06 - Emissions Trading have been added to the electronic version of Finance and Accounting PolicyPro (FAPP) with release 2010-01. For more information on FAPP, click here.
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Charities, not-for-profits and the Income Tax Act: Recent developments
There have been couple of recent articles dealing with the relationship between not-for-profit organizations and the Canada Revenue Agency.
In the first, Adam Aptowitzer of Drache LLP in Ottawa writes about a director of a not-for-profit being tried for contravening subsections 163.2(4) and (5) of the Income Tax Act. These subsections are aimed at individuals, often tax advisors, who assist others to make what the CRA believes is a false statement or omission on their tax returns. This case revolves around a plan to donate weeks of a time-share in the Turks and Caicos to the charity in exchange for charitable tax receipts. As it turned out, however, zoning restrictions prevented the property from being designated as a time share, so the CRA alleged that the gift failed because there was nothing to gift. And because a director of the charity gave blank pre-signed official tax receipts to the promoter for distribution to donors, the director was personally assessed for third party civil penalties of more than half a million dollars. Click here for the full story.
The second article, by Robert Hayhoe of Miller Thomson LLP in the March 5 issue of the Lawyers Weekly deals with the Canada Revenue Agency´s interpretation of the non-profit tax exemption in section 149(1)(l) of the Act contained in a November 2009 CRA opinion letter. Section 149(1)(l) is relied upon by every Canadian not-for-profit that is not a charity to establish its tax-exempt status. The question raised by the CRA letter is whether any profit earned by an NPO is unacceptable, even if the profit is inadvertent or will be used for a related not-for-profit activity or a capital expenditure. The CRA opinion indicates little wiggle-room on this question, which contradicts much of the case law. Needless to say, this issue is being closely watched. Click here to see the article, and here for the full text of the CRA opinion letter.
In Chapter 1 - Corporate Administration in Not-for-Profit PolicyPro (NPPP) includes policy 1.06 - Taxes and Charitable Returns. For more information about NPPP, click here.
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Service organization accounting standards
The Accounting Standards Board recently released a new document for comment: Reporting on Controls at a Service Organization. A service organization is defined as "An organization or segment of an organization that provides services to user entities that are likely to be relevant to those user entities´ internal control over financial reporting." So, for example, if an organization outsources its payroll to another company, that company would probably be considered a service organization, and its internal controls would need to be considered. Click here for a link to the AcSB document.
Comments are requested by May 6th.
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HST transition guidelines from CRA
As Ontario and British Columbia move closer to their July 1 HST in-force date, there are more questions being asked about transitional issues in those provinces.
For example, if a carrier provides a freight transportation service in July 2010, but receives a prepayment for the service in May 2010, does the HST apply to the prepayment? (Answer: Yes, HST applies to the prepayment, even if the amount has not become due, because the freight transportation service is performed on or after July 1).
The Canada Revenue Agency (which is administering the HST) has a very useful site that will help answer thorny transitional questions such as this.
We updated policy 2.13 - Sales Taxes Paid or Payable in Finance and Accounting PolicyPro (FAPP) in the 2009-06 update release to include information about the HST. You can count on FAPP to bring you the information that Canadian businesses need to know.
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About Inside Internal Control
Editor: Colin Braithwaite, Managing Editor, Internal Control Library.
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