Viewpoint: Generally Accepted Accounting Principles for Non-Profit Organizations: A University Perspective

Viewpoint expresses the particular view of contributors but does not necessarily reflect the views ofThe Philanthropist. Readers are invited to respond to articles in this section. If appropriate, their views will be published.

Colin Graham’s timely article in The Philanthropist, Volume VII, No. 1, “Current Accounting Deliberations: Issues and Concerns for Non-Profit Organizations” summarized the Accounting Standards Committee of the Canadian Institute of Chartered Accounts’ Exposure Draft on Non-Profit Organizations, issued in July 1987. The article provided a brief history of the research on this subject which has been undertaken since the 1960s and com­mented on the procedures the Committee followed in developing the proposals in the exposure draft. The article also identified the jurisdictional problems which have been encountered in the United States as a result of the Financial Accounting Standards Board and the Government Accounting Standards Board issuing conflicting pronouncements on accounting stan­dards for United States colleges and universities.

The article reported that, rather than attempting to address the many addi­tional topics identified by preliminary reviewers of the exposure draft material, the Accounting Standards Committee had concluded that priority should be given to bringing non-profit organizations into the CICA Handbook.
In January 1988 the Committee approved inclusion of non-profit organiza­tions within the scope of the CICA Handbook, making only minor changes to the exposure draft material. In effect the exposure draft will now become Sec­tion 4230 of the CICA Handbook with the recommendations becoming effec­tive for fiscal years commencing on, or after, January I, 1989.

The Committee recognized that urgent attention will need to be given to addressing several fundamental issues which were not covered in the exposure draft but which were identified in many of the responses they received. These issues include: fund accounting; the differentiation of capital and revenue expenditure; special considerations with respect to the matching of income and expenditures within accounting periods; formats for basic financial statements; and the consolidation of related enterprises and ancillary opera­tions. An evaluation of the appropriateness of the methods used by non-profit organizations for accounting measurement of the fixed assets is currently under review by the Committee. In particular, the question of whether non­profit organizations should adopt depreciation accounting represents an important and controversial issue which the Committee will be required to resolve as a matter of some urgency. The Committee also recognized the need to modify several of the existing Handbook sections so as to increase their relevance for non-profit organizations.

These issues are important for non-profit organizations who have long been neglected in the accounting standard-setting process in Canada. Currently, considerable inconsistency exists in the financial reporting practices of non­profit organizations and there was little disagreement that something should now be done to achieve consistent accounting standards. As a result, there has been general support for the CICA’s initiative in extending the scope of the accounting recommendations in the CICA Handbook to include non-profit organizations.

However, a number of concerns were expressed with respect to the manner in which the Committee has proposed to achieve this objective. Many of those who responded to the exposure draft expressed concern about the number of fundamental accounting issues of significant concern to the non-profit sector which have not been addressed at this time. Several felt, for example, that the issue of depreciation accounting should have been resolved before non-profit organizations were brought into the Handbook. Specific subject areas that have been given particular consideration at this time include: Donated Materials, Services and Fixed Assets, Pledges, Restricted Amounts, and the Valuation ofPooled Investment Funds. In addition, the new Handbook section will recommend that care should be exercised in extending the existing recom­mendations on accounting for Government Assistance to non-profits since the nature of the relationship between governments and non-profit organi­zations often differs from that between governments and profit-oriented enterprises.

Several of the responses to the exposure draft also noted that the current Handbook recommendations were developed with profit-oriented enterprises in mind and that, as a result, many of the recommendations are either totally or partially inapplicable to the non-profit sector.It was also noted that the dis­tinct character of non-profit organizations had not been recognized, particularly with respect to the basic differences in their financial reporting objectives, the users of their financial statements, and the motivational and other factors which differentiate them from the commercial sector.

The Council of Finance Officers-Universities of Ontario pointed out that many of these issues had been specifically addressed by Canadian univer­sities in the development of their own Guide to Accounting Principles, Practices, and Standards ofDisclosurefor Universities and Colleges of Canada, published by the Association of Universities and Colleges of Canada in 1984. This guide drew on many of the conclusions reached in the 1980 CICA research study to deal with issues of particular relevance to universities and colleges. Topics covered in the guide included: Basic Annual Financial Statements, Standards of Disclosure, Fund and Functional Reporting, Consolidated Combined and Condensed Financial Statements, Encumbrances and Appropriations, Pledges, Requests and Donated Services, Plant Assets, Depreciation, Replace­ment and Major Renovations, and Accounting for Ancillary Enterprises.

The universities’ accounting guide also identified specifically which of the CICA Handbook sections were currently applicable to Canadian university accounting and indicated the changes required in certain other Handbook sec­tions which would be required to adapt them to the university environment. The development of this guide by university business officers from across Canada represented a comprehensive review process which was designed to ensure both the appropriateness of the recommendations and the general support of the university community. Many of the issues addressed in the guide would, with appropriate modification, have similar relevance to other sectors of the non-profit community.

The universities’ experience would suggest that the approach now being taken by the CICA, i.e., bringing non-profit organizations within the scope of the existing accounting recommendations in the CICA Handbook. has the poten­tial to create uncertainty and confusion, unless these fundamental issues are addressed as a matter of some urgency.

The development of common accounting standards for non-profit organi­zations will require that careful consideration be given to each issue in order to ensure that an appropriate and generally accepted consensus is achieved. It is therefore important that hospitals, universities, and other sectors of the non­profit community pool their resources and assist the CICA in the development of appropriate accounting standards which will adequately meet their needs and which will have general acceptance within the entire non-profit sector.

CHRISTOPHER I. TORRES

Comptroller, University of Toronto