Canadian Association of University Business Officers

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1 Canadian Association of University Business Officers Financial Reporting Information Note Reporting Models April 2012 Purpose Canadian colleges and universities hereinafter referred to as higher education Institutions ( Institutions ) will be adopting a new basis of accounting for fiscal years beginning on or after January 1, Depending on their provincial jurisdiction and control structure, Institutions will be preparing their financial statements using (1) Part III of the CICA Handbook Accounting Standards for Not for Profit Organizations, (2) Public Sector Accounting Standards with the Section 4200 series, or (3) Public Sector Accounting Standards without the Section 4200 series. Institutions who are government not-for-profit organizations (GNPO) will be reporting under the Public Sector Accounting ( PSA ) standards either with or without the 4200 series. Institutions who are other notfor-profit organizations and not considered to be controlled by the government will report under Part III of the CICA Handbook. Depending on which basis of accounting Institutions adopt, their financial reporting model could vary significantly from current reporting requirements. Within the 4200 series, section PS4200, Financial statement presentation by not-for-profit organizations establishes presentation and disclosure standards for financial statements of Institutions. Part III of the CICA Handbook Accounting Standards for Not for Profit Organizations includes section 4400, Financial statement presentation by not-for-profit organizations. The financial statement presentation and disclosure requirements for Institutions are very similar under PS4200, and section 4400, and generally consistent with the current presentation and disclosure standards. For Institutions reporting under the Public Sector Accounting standards without the 4200 series, section PS1201, financial statement presentation establishes the presentation and disclosure standards for financial statements. The financial reporting model under PS1201 varies significantly from existing financial reporting requirements. This financial reporting information note assesses the impact of adoption of each basis of accounting on financial statement presentation and disclosure requirements for Canadian Institutions. Financial reporting models Page 1 of 12 April 2012

2 Key Topics This financial reporting information note will address the following key areas with respect to financial reporting models: Purpose 1 Key Topics 2 Current Financial Reporting of Canadian Institutions 3 Summary of Key Elements in the PSA Standards and Part III of the Handbook 3 Analysis of Financial Reporting Models under PSA and Part III 3 Transitional Provisions 11 Financial reporting models Page 2 of 12 April 2012

3 Current Financial Reporting of Canadian Institutions Canadian Institutions have typically prepared their financial statements in accordance with Canadian Generally Accepted Accounting Principles for not for profit organizations following the presentation and disclosure requirements of section 4400, Financial statement presentation by not-for-profit organizations. In accordance with section 4400, the financial statements of Institutions have generally included a statement of financial position, statement of operations, statement of changes in net assets, and a statement of cash flows, as well as accompanying note disclosure. Financial statement presentation is also significantly influenced by whether Institutions apply the deferral method or the restricted fund method of accounting for contributions. The recognition, measurement, presentation and disclosure of contributions are separately assessed in another financial reporting information note. Summary of Key Elements in the PSA Standards and Part III of the Handbook The key elements of relevant sections of the PSA Standards, and Part III of the Handbook are referenced throughout the analysis presented in this financial reporting information note. Analysis of Financial Reporting Models under PSA and Part III Since the financial statement presentation and disclosure requirements are generally consistent under PSA Section PS4200, and Section 4400 of Part III of the CICA Handbook, the financial reporting models under both Part III Accounting Standards for Not for Profit Organizations, and the Public Sector Accounting Standards with the Section 4200 series are considered together in this financial reporting information note. For Institutions reporting under the Public Sector Accounting standards without the 4200 series, the presentation and disclosure standards for financial statements under section PS1201, financial statement presentation differ significantly from current practice under Section The financial reporting presentation and disclosure standards under each basis of accounting are considered in the following table: General reporting requirements PSA Series A clear and concise description of an Institution s purpose, its intended community of service, its status under income tax legislation and its legal form No similar specific disclosure requirement. The function of an Institution s financial statements is to communicate information to users that is relevant to the Financial reporting models Page 3 of 12 April 2012

4 Financial statements PSA Series should form an integral part of the financial statements. The financial statements of an Institution should include a statement of financial position, statement of operations, statement of changes in net assets, and a statement of cash flows, as well as notes and schedules supporting the statements. For Institutions reporting under the PSA standards with the 4200 series, a statement of remeasurement gains and losses must also be included in accordance with section PS3450, financial instruments. Financial statement presentation is impacted by whether an Institution accounts for contributions using the restricted fund (also called fund accounting) or the deferral method. Financial statements that are reported using fund accounting may follow the multicolumn format whereby resources or similar groups of resources are each assigned a separate column. The multicolumn format presents information about fund components together with certain totals for an Institution as a whole to give a complete understanding of the total resources available. needs of those for whom the statements are prepared, reliable, comparable, understandable and clearly presented in a manner that maximizes its usefulness. Financial statements of an Institution should include a statement of financial position, a statement of operations, a statement of remeasurement gains and losses, a statement of change in net debt and a statement of cash flow, as well as notes and schedules supporting the statements. In accordance with PS1200, an Institution s financial statements should present financial information on an aggregate basis. This presentation requirement is inconsistent with the use of fund accounting by an Institution. Institutions which choose to provide information about any funds or reserves may only do so in the notes and schedules to the financial statements. Financial reporting models Page 4 of 12 April 2012

5 Statement of Financial Position Objective: to present the economic resources (assets), obligations (liabilities) and net assets as at the reporting date. An Institution distinguishes current assets and liabilities from non-current balances. With respect to net assets, the statement of financial position should present: (a) net assets subject to restrictions requiring that they be maintained permanently as endowments; (b) other restricted net assets; (c) and (d) unrestricted net assets; total net assets For Institutions following the deferral method of accounting for contributions, one common type of internal restriction is to present net assets invested in capital assets as a component of net assets separately from the unrestricted net assets balance. Net assets may also be referred to as fund balances or as accumulated surplus or deficit. Institutions following the restricted fund method of accounting for contributions present a total on the statement of financial position that includes all funds reported. Objective: to present information which enables an understanding of, and an assessment of the state of, an Institution s finances at a point in time. This information should facilitate assessments of the Institution's financial viability, future revenue requirements, and ability to maintain and expand the level and quality of its services. The presentation of the statement of financial position is based upon the net debt model. The statement of financial position presents net debt as the difference between an Institution s liabilities and financial assets. Financial assets are those assets which could be used to discharge an Institution s existing liabilities or finance future operations and are not for consumption in the normal course of operations. Financial assets typically include cash, accounts receivable, investments, inventory for sale, and any other realizable asset that is convertible to cash. Net debt is a key presentation requirement under the PSA standards since it directly impacts an Institution s future revenue requirements as well as its ability to finance its activities and meet its liabilities and commitments. Net debt provides a measure of the future revenues required to pay for past transactions and events. If the Institution's financial assets exceed its liabilities, this Financial reporting models Page 5 of 12 April 2012

6 Statement of Operations Objective: to communicate information about changes in an Institution's economic resources and obligations for the period. This statement provides information about the cost of an Institution s service delivery activities for the period and the extent to which these expenses were financed or funded by contributions and other revenue. For institutions following the deferral method of accounting for contributions, the statement of operations should present: (a) for each financial statement item, a total that includes all funds reported; and (b) total excess or deficiency of revenues and gains over expenses and losses for the indicates a net financial asset position, showing that there are net financial assets on hand, which can provide financial resources to finance future operations. An Institution s tangible capital assets and other non-financial assets (such as prepaid expenses and inventory not for resale) are presented separately from financial assets to support an understanding of an Institution's debt position, financial position and future operating requirements. An Institution s net debt, plus its nonfinancial assets determines its accumulated surplus or deficit. Objective: to provide important information about an Institution's accountability for its operations and the related achievement of its objective, by summarizing cost-of-service information at a functional level. The statement of operations reports the surplus or deficit from an Institution's operations in the accounting period and measures the change in accumulated operating surplus or deficit in the period. The statement displays the cost of services provided and the revenues recognized in operations for the accounting period and the difference between them. Based upon PS1201, an Institution s statement of operations should: Financial reporting models Page 6 of 12 April 2012

7 period. For institutions following the restricted fund method of accounting for contributions, the statement of operations should present: a) the total for each financial statement item recognized in the general fund; (b) the total for each financial statement item recognized in the restricted funds, other than the endowment fund; (c) the total for each financial statement item recognized in the endowment fund; and (d) excess or deficiency of revenues and gains over expenses and losses for each of the general fund, restricted funds other than the endowment fund and the endowment fund. For Institutions reporting under Part III of the Handbook or the PSA standards with the 4200 series, a comparison of actual to budgeted results for the accounting period is not required. (a) report revenues, other than remeasurement gains, of the accounting period segregated by significant types of revenues; (b) report expenses, other than remeasurement losses, of the period by function or major program; (c) account for the difference between revenues and expenses reported in the statement of operations in the period, as the measure of the operating surplus or deficit for the period; and (d) report the accumulated operating surplus / deficit at the beginning and end of the period, unless these figures are reconciled with the surplus / deficit for the period on a separate statement. The Statement of Operations must also present a comparison of the results for the accounting period with those originally planned and budgeted. An Institution s planned results should be presented for the same scope of activities and on a basis consistent with that used for actual results. Statement of Remeasurement Gains and Losses Objective: to distinguish remeasurement gains and losses from those revenues and expenses that are not remeasurement gains and losses. Objective: to distinguish remeasurement gains and losses from those revenues and expenses that are not remeasurement gains and losses. Financial reporting models Page 7 of 12 April 2012

8 Institutions reporting under the PSA standards with the 4200 series must present a statement of remeasurement gains and losses. In accordance with section PS3450, financial instruments, remeasurement gains and losses during the period are distinguished from nonremeasurement gains and losses by presenting them separately in the statement of remeasurement gains and losses. The statement of remeasurement gains and losses is analyszed further in the financial reporting information note on financial instruments. In accordance with section PS3450, financial instruments, remeasurement gains and losses during the period are distinguished from nonremeasurement gains and losses by presenting them separately in the statement of remeasurement gains and losses. The statement of remeasurement gains and losses is analyszed further in the financial reporting information note on financial instruments. Statement of changes in net assets/ debt Statement of changes in fund balances Institutions reporting under the are not required to present a statement of remeasurement gains and losses in their financial statements. Remeasurement gains and losses would flow through the statement of operations consistent with realized gains and losses. Objective: to provide information regarding changes in the portions of net assets attributable to endowments and to other external and internal restrictions as well as those revenues, expenses, gains and losses that have not been included in the statement of operations. In addition, the statement shows the extent to which an Institution s operations and other revenues, expenses, gains and losses that have not been included in the statement of Objective: to report the extent to which an Institution s expenditures of the accounting period (representing the cost of goods and services acquired in the period) are met by the revenues recognized in operations for the period and the extent to which net debt changed due to net remeasurement gains and losses in the accounting period and other significant items. The statement of changes in net Financial reporting models Page 8 of 12 April 2012

9 operations have resulted in an accumulation or depletion of net assets. An Institution s statement of changes in net assets (also referred to as the statement of changes in fund balances when an Institution uses fund accounting) presents changes in the following for the period: (a) net assets subject to restrictions requiring that they be maintained permanently as endowments; (b) internally restricted net assets and, separately, externally restricted net assets other than those in (a); (c) and unrestricted net assets; debt reports the increase or decrease in net debt due to net remeasurement gains and losses and other significant items that explain the difference between the operating surplus or deficit for the accounting period and the change in net debt in the period, such as the acquisition of tangible capital assets, the amortization of tangible capital assets, and the net carrying value of tangible capital assets disposed of. The statement of change in net debt presents a comparison of the items that comprise the change in net debt for the accounting period, as well as the change in net debt for the period, with the figures originally planned and budgeted. (d) total net assets. Institutions may combine the statement of changes in net assets with the statement of operations depending on the complexity of the changes to be presented. Statement of Cash Flows Objective: The statement of cash flows helps financial statement users evaluate how management of an Institution has discharged its stewardship responsibilities over the resources with which it has been entrusted. Resource providers may look to the statement of cash flows in determining whether the cash provided to the organization was Objective: The statement of cash flows helps financial statement users evaluate how management of an Institution has discharged its stewardship responsibilities over the resources with which it has been entrusted. Resource providers may look to the statement of cash flows in determining whether the cash provided to the organization was Financial reporting models Page 9 of 12 April 2012

10 used in the manner that the resource provider intended. Institutions reporting under the PSA standards with the 4200 series would prepare the statement of cash flows in a manner consistent with Institutions reporting under the PSA standards without the 4200 series. Institutions reporting under the report the cash and cash equivalents at both the beginning and end of the accounting period, and cash flows during the period classified by operating, investing and financing activities. Institutions may report cash flows from operating activities using either the direct method or the indirect method, though the direct method is encouraged since it provides better information for users to estimate future cash flows. With certain exceptions, Institutions should report separately major classes of gross cash receipts and gross cash payments arising from investing and financing activities (rather than on a net basis). Disclosure should be provided by an Institution of the policy it adopted in determining the composition of cash and cash equivalents. An Institution should present a reconciliation of the amount of cash and cash equivalents in the statement of used in the manner that the resource provider intended. The statement of cash flow reports how an Institution generated and used cash and cash equivalents in the accounting period, and the change in cash and cash equivalents in the period. The statement of cash flow reports the cash and cash equivalents at both the beginning and end of the accounting period, and reports cash flows during the period classified by operating, capital, investing and financing activities. Institutions may report cash flows from operating activities using either the direct method or the indirect method, though the direct method is encouraged since it provides better information for users to estimate future cash flows. With certain exceptions, Institutions should report separately major classes of gross cash receipts and gross cash payments arising from capital, investing and financing activities (rather than on a net basis). Institutions must also disclose the components of cash and cash equivalents, and present a reconciliation of the amounts in the statement of cash flow with the equivalent items presented in the statement of financial position. Disclosure should be provided by an Institution of the Financial reporting models Page 10 of 12 April 2012

11 cash flow with the equivalent items presented in the statement of financial position. Institutions should also disclose the amount of cash and cash equivalents for which use is restricted. policy it adopted in determining the composition of cash and cash equivalents. An Institution following the restricted fund method of accounting for contributions which presents its statement of cash flows using the indirect method must reconcile the excess of revenues over expenses for the general fund and any restricted funds of an operating nature to cash flows from operation. Transitional Provisions Irrespective of whether Institutions adopt the Public Sector Accounting standards with or without the 4200 series, or Part III of the CICA Handbook Accounting Standards for Not for Profit Organizations, certain common financial statement presentation matters must be considered in the year of transition. In the first year of adoption of the new basis of accounting, Institutions must prepare and present an opening statement of financial position as at the date of transition. In an Institution s financial statements for the first fiscal year end under the new basis of accounting, the statement of financial position will include three columns one representing the current fiscal year end, another presenting the comparative period, and a third column for the opening balances at the date of transition. For Institutions with a fiscal year end of March 31 st, the statement of financial position would include columns for March 31, 2013 (the first fiscal year end under the new basis of accounting), March 31, 2012 (the comparative period), and the April 1, 2011 opening balances. Institutions must apply the same accounting policies in the opening statement of financial position and throughout all periods presented in the first financial statements consistent with the new basis of accounting. As a general rule, Institutions must apply the new basis of accounting on a retrospective basis, unless they choose to apply one of the elections, or mandatory exemptions to restrospective Financial reporting models Page 11 of 12 April 2012

12 application as provided under PS2125, First time adoption by government organizations of the Public Sector Accounting standards, or Section 1501, First time adoption by a not for profit organization for Institutions adopting Part III of the CICA Handbook. Resulting adjustments from the changes in accounting policies applied by Institutions related to events and transactions before the date of transition to the new basis of accounting are recognized directly in net assets or accumulated surplus / deficit at the date of transition. If Institutions choose to use one or more of the exemptions to retrospective application of the new accounting standards as provided under PS2125 of the Public Sector Accounting standards, or Section 1501 for Institutions adopting Part III of the CICA Handbook, the use of the election should be disclosed. In addition, Institutions must disclose: (a) the amount of each charge to net assets or accumulated surplus / deficit at the date of transition to the new basis of accounting resulting from the adoption of the standards and the reason for the adjustment; and (b) a reconciliation of the excess of revenue over expenses or net income reported in the Institution's most recent previously issued financial statements to its annual surplus / deficit under the new basis of accounting for the same period. If Institutions presented a cash flow statement under their previous accounting policies, they should explain the material adjustments to the statement of cash flow as well. Financial reporting models Page 12 of 12 April 2012

Canadian Association of University Business Officers

Canadian Association of University Business Officers Financial Reporting Information Note Endowments February 2012 Purpose Canadian colleges and universities hereinafter referred to as higher education