Accounting Standards for Private Enterprises and Not-for-Profits

November 14, 2014

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.

NPO Updates;

ASPE Updates;

Governance

Accounting standardsUpdate on incorporated NPO’s

Information returns

Current standards applicable to NPO’s:

Part I – IFRS

Part III – ASFNPO (with Part II ASPE)

Public Sector Accounting Handbook (with or without S.4200 series)

Statement of PrinciplesIssued April 2013

Comments received by December 2013

Why - “better meet user’s needs”

Impacts both private and public sector NPO’s (Part III and PSA)

Excludes IFRS and non-S.4200 PSA

Notable proposed changesEliminate “deferral” and “restricted fund”

methods – replaced by concept of controlRemove size exemption for capitalization

of tangible assetsPartial impairment of capital assetsControlled entitiesFS expense presentation – function AND

object

Public responsesOver 250 responses receivedSerious concerns raised by some

stakeholders

Status of the ProjectJoint NPO Task Force is reviewing commentsNo timeline for Exposure Draft providedUpdates posted on frascanada.ca

Federal ActApplicable now

Should have transitioned by now, or asap if not dissolved.

Ontario ActNot expected to come into force before 2016

Have 3 years to transition once in force

Resources:CPA Canada Not-for-profit Organizations

Director Alerts:“The New Ontario Not-for-Profit

Corporations Act – questions for directors to ask”

“The New Canada Not-for-Profit Corporations Act – questions for directors to ask”

Industry Canada “Search for a Federal Corporation”

Not-for-profit organization:T2 and T1044 NPO Information ReturnT1044 has to be paper-filed

Registered CharitiesT3010 Registered Charity Information Return

has to be paper-filed

Due 6 months after fiscal year-end

Information return issues:T3010 is not the most recent version

T1235 Directors/Trustees and Like Official Worksheet – information missing/outdated

RC232 Ontario Corporation Information Act Annual Return – mandatory for Ontario corporations

Missing charity labels provided by CRA

Others: cra-arc.gc.ca “Avoiding common mistakes when filing the T3010 information return”

charityfocus.ca – information submitted by charities in easy-to-follow format

Consolidation

Joint Arrangements

Subsequent Events

New standard S.1591, subsidiaries, approved to replace existing S. 1590 SubsidiariesEffective Jan 1, 2016 – but early adoption is allowed

Standard has been released and in the online version of the Handbook

Scope – In this section, entity reports its rights and obligations related to another enterprise under COMMON CONTROL in accordance with the applicable section in its consolidated OR non-consolidated FSs.

Definition of Control Subsidiary – A subsidiary is an enterprise controlled by

another enterprise (the parent) that has the right and ability to obtain future economic benefits from the resources of the enterprise and is exposed to the related risks.

Control – Control of an enterprise is the continuing power to determine its strategic operating, investing and financing policies without the co-operation of others

S. 1591 has the following additional guidance:

When the rights of equity interests may not be the dominant factor in determining who controls an enterprise, there are explanations in the new standard of how to apply the existing definitions of a subsidiary and control of an enterprise

New standard describes the types of contractual arrangements that may give one enterprise control over another

New standard includes other facts and circumstances to consider when assessing whether an enterprise has control over another enterprise

An enterprise shall make an accounting policy choice to either:

Consolidate its subsidiaries (S.1601 – consolidated FSs)

If sub is controlled through voting interests –equity or cost method (S. 3051 – Investments)

If sub is controlled through contractual arrangements then account for it in accordance with applicable sections (S. 3856 financial instruments – financial assets/liability OR S.3065 leases)

An entity that accounts for its subsidiaries using the Cost or equity method shall apply the following accounting:

Contingent consideration at acquisition – shall be measured @ FV at the date of acquisition & included in the carrying amount of the investment

Contingent consideration in subsequent periods – shall be measured at the same basis as required in S. 1582 – Business Combinations

Acquisition-related costs – shall be recognized as expense in the periods in which costs are incurred and the services are received with one exception (cost to issue debt and equity securities –S.3856 financial instruments & S.3610 capital transactions

Example:

An individual shareholder has two companies that are fully owned by him

One Corp is active and has employees

The other Corp holds title to the land and building that’s rented out to the active company – it has no other business activity

Since S. 1591 doesn’t apply to common control situations, each company would simply apply the lease standard in the HB

New standard S. 3056, Joint Arrangements to replace S. 3055 Interests in Joint Ventures

Standard is effective January 1, 2016 with early adoption allowed

Standard has been released and is in the online version of the HB

Distinction made between Joint Operations, Joint Assets & Joint Enterprises (this is not new – but related accounting choices have changed)

1. Jointly controlled operations

Involves the use of the assets & other resources of the investors

Rather than the establishment of a Corporation, Partnership or other enterprises

Each investor uses its own PPE & carries its own inventories for the purposes of the Joint Arrangement Activities

Accounting – an investor in a jointly controlled operation shall recognize:BS - the assets that it controls and the liabilities that it incurs IS - the share of Revenue of the Joint Arrangement & its share

of the expenses incurred by the Joint Arrangement

2. Jointly controlled assets

Jointly controlled assets are used to obtain benefits for the investors

Each investor may take a share of the output from the assets & each bears an agreed share of the expenses incurred

Such a Joint Arrangement does not involve the establishment of a Corporation, Partnership or other enterprises

Accounting – an investor in jointly controlled assets shall recognize: BS - its share of the Jointly controlled assets & its share of any

liabilities incurred jointly with the other investors IS - any revenue from the sale or use of its share of the output of the

Joint Arrangement & its share of any expenses incurred by the Joint Arrangement

3. Jointly controlled enterprises

Para.27 -- An investor in jointly controlled enterprises generally has rights to the Net Assets of the Joint Arrangement, rather than rights to the individual assets & obligations for the individual liabilities

3. Jointly controlled enterprises - Accounting

Account for all such interests using the Equity or Cost Method (S.3051 Investments)

Perform an analysis of each such interest and determine whether it represents a right to the Net Assets or to the individual assets & obligations for the individual liabilities relating to the Joint Arrangement &

a) account for all interest in the Net Assets of a Jointly controlled enterprise in accordance with para. 3056.29 &

b) account for all interest representing rights to the individual assets and obligations for the individual liabilities relating to a joint arrangement in accordance with para. 3056. 17-.18

Summary of accounting for all joint arrangements:

Jointly controlled operations & Jointly controlled assets – investor accounts for share of assets/liabilities/revenue/expenses. Similar to proportionate consolidation method

Jointly controlled enterprises – cost or equity method. Or require the investor to analyze whether the arrangement is a right to individual assets or net assets

Financial Statements shall be adjusted when events occurring between the date of the FS & the date of their completion provide additional evidence relating to conditions that existed at the date of the FS

Key is the period between approval date & release date

After approval, no requirement to seek out additional evidence or perform more procedures

However, if brought to your attention (for example from the client), then must update accounting & redo the approval process

Approval of Financials for Owner Managed business:

The rep letter can serve as the formal approval

If management and the Board are distinct such as in NPO’s then the rep letter must be obtained first and then the approval is the motion to accept by the Board

Approval of Financials for other organizations:

They have to determine who has the authority to approve the FS

Have to plan for special meeting to approve FS in this case

Note to consider subsequent events, communication issues, legal letters etc. If a longer period is needed before approval of the financials.

What is corporate governance?It is a framework of processes, rules and policies

that control an entity;

It includes many individuals in an entity such as directors, shareholders, board members, management, regulators, etc;

It sets out the responsibilities for these various individuals to ensure that an entities’ interests and objectives are achieved fairly. It makes all parties accountable to ensure the entities objectives are met.

What are financial policies?

Financial policies refers to policies related to the regulation, supervision, and oversight of the financial and payment systems, including markets and institutions, with the view to promoting financial stability, market efficiency, and client-asset and consumer protection. (OECD Glossary of Statistical Terms)

Why are financial policies important?

Mitigates the risk of something negative happening financially

Protects an Organization’s financial assetsMitigates the risk for shareholders, directors and Board

members charged with governanceMay lead to a more efficient and organized entity

Every entity has financial policies

Financial policies will vary depending on the size and complexity of the entity

What are internal controls?

Internal controls is a set of processes and policies within an entity which are designed to maximize the efficiency and

effectiveness of business operations in the entity;

help to ensure there is reliable financial information and financial statements;

assist in detecting and preventing errors and fraud;

protect assets; and

assist the entity to be in compliance with other laws and regulations.

Internal controls include: Entity level controls

Activity (cycle) level controls

Revenues, receivables, and receipts cycle

Purchases, payables, and payments cycle

Payroll cycle

What are Entity level controls?Entity level controls are internal controls which

impact the whole entity rather than any one account balance or transaction stream. Entity level controls has a pervasive impact on the entire entity and is usually has a top-down approach/tone

Entity level controls are important because they have a pervasive influence on the attitude and the processes throughout an entity

A key aspect of entity level control is segregation of duties. But what happens if you are too small to have

proper segregation of duties?

You can put in place compensating controls such as

Review of certain account reconciliations (bank recs) and source documents (bank statements)

Active involvement by shareholders and board members

Proper physical safe guards of assets

Proper signing authority and authorization of cheques and other transactions

Other common entity level controls include:Internal assessment of the entities financial, business

and fraud risks – where and what can go wrong?Ongoing monitoring – review of reports, periodic

financial results, reviewing risk assessment and policiesEffective communication, tone setting and code of

conduct (integrity and values)Assignment of responsibility and limiting access of

certain information to authorized individuals through the use of passwords, etc.

Budgeting and variance analysisGood hiring and retention policiesFraud prevention and detection procedures

AIS sem 1 2011 - Fraud, Ethics and Internal Control-COSO

reportais12011.wikispaces.com500 × 274Search by

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What are activity level controls?

Controls that relate to specific account balances, class of transactions or financial disclosure.

Revenues, receivables, and receipts Common risks

Goods shipped / services performed

... not invoiced

... not recorded in the GL

Revenue recorded incorrectly in the GL

Fictitious sales / sales credits recorded in the GL

Revenues, receivables, and receipts (cont’d) Common risks (cont’d)

Goods shipped / services provided to bad credit risk

Receipts partially or not deposited (fraud/error)

Receipts credited to the wrong account (fraud/error)

Revenues, receivables, and receipts (cont’d) Common risks (cont’d)

No allowance recorded for doubtful/uncollectible accounts

Revenues, receivables, and receipts (cont’d) Common controls

Competence, training and supervision of sales employees

Segregation of duties

Restricted access

Approval of sales credits

Standard price list

Revenues, receivables, and receipts (cont’d) Common controls (cont’d)

Reconciliation of cash sales to cash receipts

Cheques received – listed, totalled, and reviewed before deposit

Donation receipts – pre-numbered and serial continuity reviewed on a regular basis

Bank reconciliation

Revenues, receivables, and receipts (cont’d) Common controls (cont’d)

Regular review of significant overdue customer accounts by management

Integration of sales and GL modules

Risks

ControlsFictitious sales /sales credits

Bad credit riskOverdue receivables

Documentation& approval of sales credits

X

Overduecustomer accounts reviewed by mgmt

X X

Revenues/Receivables/Receipts

Payroll Common risks

Fictitious personnel paid

Payments made for work not performed

Inaccurate pay (fraud/error)

Benefits not accrued

Inaccurate deductions (taxes, benefits)

Payroll expense inaccurately recorded in GL

Payroll (cont’d) Common controls

Competence, training, and supervision of personnel

Restricted access to records

Segregation of duties

Documented approval for new hires/terminations/pay rate changes

Documented approval of timesheets

Payroll (cont’d) Common controls (cont’d)

Review and approval of payroll coding and distribution by manager

Reconciliation of payroll register to GL

Payroll costs by department/division are compared to budget

Payroll accruals recalculated/reviewed and agreed to payroll register

Risks

ControlsFictitious

personnel paidInaccurate pay

Payroll expense inaccurate in GL

Documented approval of new hires

X

Review & approval of payroll

X X

Payroll

Safeguarding of assets Common risks Theft (physical, intangible)

Obsolescence

Common controls Good hiring practices

Restricted access

Patents, copyrights

Inventory count

Review of inventory movement

Purchases, payables, and payments cycleRisks

Purchases made that are not needed (not authorized) or not made for business purpose

Kickbacks

Purchases made that are not recorded in the G.L.

Purchases made that are recorded in the G.L. In the wrong period.

Payments made to fictitious vendors

Purchases, payables, and payments cycle (cont’d)Common controls

Purchase requisitions with proper approval

Proper tendering process for large purchases

Cheque payment with proper support and authorized signatories

Matching of purchase requisitions with packing slips and invoices

Bank reconciliations

Review of AP aging listing

Review of budget to actual expenses – variance analysis

Segregation of duties

Risks

ControlsPayments made

to fictitious vendors

Kickbacks

Purchases madenot needed or not for business purpose

Purchase requisition approval and tendering process

X X X

Cheque signing authority and support

X X

Purchases, payables and payments

An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.

What distinguishes fraud from error is whether the underlying action is intentional or unintentional.

2012 Fraud Study released by the Association of Certified Fraud Examiners:The typical organization loses 5% of its

revenues to fraud each year

Fraud lasted a median of 18 months before being detected

Median loss caused by fraud was $140,000

87% of fraudsters are first-time offenders with clean employment histories.

Source: Knotia.ca

Fraud is more prevalent in entities with:

Lack of internal controls (36%)

Ability to override internal controls (19%)

Lack of management review (19%)

Poor tone at the top (10%)

Lack of competent personnel in oversight roles (7%)

Other (9%)

Source: Knotia.ca

Source: Knotia.ca

Fraud is most likely to occur when three factors are present:Opportunity

Pressure

Rationalization

OpportunityPertains from individuals perception that they can

get away with fraud

Often emanates from a poor corporate culture or from trust placed in individuals

Perpetrators often believe that they will not be detected or if caught, the repercussions will not be serious

PressureMeeting an analyst's or bank's expectations for

profit.

Meeting the threshold for a performance bonus.

Having significant personal debts or poor credit.

Trying to cover financial losses.

Being involved in gambling, drugs and/or affairs.

Living beyond one's means.

Being dissatisfied with a job or wanting revenge against an employer.

RationalizationIts not a big deal

I was only taking what should be mine

I'm not really hurting anyone

Everyone does it

The company does the same thing to its customers and supplier – why shouldn't I

Discovering fraud

Look for warning signs such as patterns, oddities and exceptions, and follow the trail.

Don’t ignore immaterial amounts, since they may be indicative of a larger issue

Be alert to any signs that might indicate that fraud is taking place. These may include:staff under stress without a high workloadalways working latereluctance to take leaverefusal of promotionunexplained wealthsudden change of lifestylenew staff resigning quicklycosy relationships with suppliers/contractorssuppliers/contractors who insist on dealing with

one particular member of staff

Preventative measuresPhysical security

Segregation of duties

Monitoring

Adequate staffing

Proper training

Reward for whistleblowers

Surprise audits

NPO Updates;

ASPE Updates;

Governance