Withdrawal of Disclosure of Related Party Transactions by Not-for-Profit Organizations, Section PS 4260 Issues Analysis January 2016

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1 Withdrawal of Disclosure of Related Party Transactions by Not-for-Profit Organizations, Section PS 4260 Issues Analysis January 2016 Prepared by the staff of the Public Sector Accounting Board

2 Table of Contents Paragraph Introduction Background Significant influence Economic interest

3 Introduction 01. This Issues Analysis is a supporting document to the Public Sector Accounting Board s (PSAB) Exposure Draft, Withdrawal of Disclosure of Related Party Transactions by Not-for-Profit Organizations, Section PS It provides information on how significant matters arising from comments received on the Accounting Standards Board (AcSB) and PSAB s joint Statement of Principles have been dealt with in the Exposure Draft. 02. The analysis is not issued under the authority of PSAB. Prior to approving the withdrawal of Section PS 4260, the Board will review and deliberate responses to the Exposure Draft. Background 03. Effective January 1, 2012, not-for-profit organizations (NFPO) that are controlled by a public sector entity began applying the CPA Canada Public Sector Accounting (PSA) Handbook. Government organizations were given the choice of either adopting the public sector accounting standards alone without the guidance related to not-for-profit issues or they could apply the public sector accounting standards with the guidance specific to not-for-profit issues (the PS 4200 series). 04. At the same time, NFPOs in the private sector had the choice to apply either Part I of the CPA Canada Handbook Accounting (International Financial Reporting Standards) or Part III of the CPA Canada Handbook Accounting (accounting standards for not-for-profit organizations). 05. Principle 12 of the jointly prepared Statement of Principles, Improvements to Not-for-Profit Standards, states that an NFPO applying the PSA Handbook including the PS 4200 series should continue to apply Section PS 4260, pending completion of PSAB s Related Party Transactions project. Respondents were generally supportive of the proposed principle, noting that related party transactions should be accounted for consistently by public sector entities. Some respondents did express concern regarding applicability of significant influence and economic interest in the public sector. It was noted that these concepts might be too broad to apply in the public sector. 06. PSAB s Related Party Transactions project was completed and RELATED PARTY DISCLOSURES, Section PS 2200, was issued in March Sections PS 2200 and PS 4260 are very similar. While some minor terminology differences exist, the basic intent of each Section is the same. However, Section PS 2200 does not currently include the notion of significant influence or economic interest. Withdrawal of Section PS

4 Significant influence 07. Section PS 4260 defines the term significant influence as the ability to affect the strategic operating, investing and financing policies of the entity. The Basis for Conclusions on Section PS 2200 notes that PSAB determined that a related party does not include entities that have significant influence over, or are subject to the significant influence of, another entity because public sector entities have wide-ranging powers that would typically allow them to exert significant influence over the operating and financial policies of a broad range of parties in all sectors of the economy. 08. For those NFPOs that adopted the PSA Handbook with the PS 4200 series, guidance regarding significant influence is available in REPORTING CONTROLLED AND RELATED ENTITIES BY NOT-FOR-PROFIT ORGANIZATIONS, Section PS Paragraph PS (e) defines and paragraph PS describes significant influence. Paragraph PS recommends the following disclosures: When the reporting organization has significant influence in another not-forprofit organization, the following should be disclosed: (a) a description of the relationship with the significantly influenced organization; (b) a clear and concise description of the significantly influenced organization's purpose, its intended community of service, its status under income tax legislation and its legal form; and (c) the nature and extent of any economic interest that the reporting organization has in the significantly influenced organization. 10. PSAB is of the view that these requirements provide similar disclosures to those in Section PS Economic interest 11. Section PS 4260 states that an economic interest in another NFPO exists if the other organization holds resources that must be used to produce revenue or provide services for the reporting organization or the reporting organization is responsible for the liabilities of the other organization. In the public sector, particularly for governments, this is a difficult concept to apply given that governments, through their transfer programs and legislative requirements, will direct the use of certain funds or guarantee the liabilities of non-controlled entities. Consequently, for reasons similar to why the concept of significant 2 Issues Analysis

5 influence was not included for related party disclosures, the notion of economic interest was also not included. 12. As a few of the respondents to the Statement of Principles noted, the concept of economic interest might be too broad for governments but useful for government organizations. For example, hospital foundations provide significant funding to hospitals but are often considered to be outside the control of the hospital itself. Currently, hospitals do provide disclosures about the nature of the relationship with their foundations because they represent an economic interest. 13. PSAB staff agree that the information disclosed related to economic interest for some government organizations provides useful information about economic resources available to an entity. Staff also feels that the disclosure requirements pertaining to holding an economic interest in another entity can also be found in Section PS 4250 and, thus, the withdrawal of Section PS 4260 should not impact current reporting practices. 14. For those not-for-profit organizations that adopted the PSA Handbook with the PS 4200 series, the withdrawal of Section PS 4260 will not impact the economic interest disclosure requirement as it can also be found in REPORTING CONTROLLED AND RELATED ENTITIES BY NOT-FOR-PROFIT ORGANIZATIONS, Section PS Paragraphs PS describe an economic interest..10 The reporting organization has an economic interest in another not-forprofit organization when the other organization holds resources for the benefit of the reporting organization. An economic interest also exists when the reporting organization is responsible for the other organization's liabilities. The following are possible indicators of economic interest: (a) (b) (c) The other organization solicits funds in the name of and with the expressed or implied approval of the reporting organization, and substantially all of the funds solicited are intended by the contributor or are otherwise required to be transferred to the reporting organization or used at its discretion or direction; The reporting organization transfers significant resources to the other organization, whose resources are held for the benefit of the reporting organization; The other organization is required to perform significant functions on behalf of the reporting organization that are Withdrawal of Section PS

6 integral to the reporting organization's achieving its objectives; or (d) The reporting organization guarantees significant liabilities of the other organization..11 Economic interests can exist in varying degrees of significance. At one extreme, the reporting organization would not be able to function in its current form without the organization in which it has an economic interest. In such cases, the existence of the economic interest may be a strong indicator that control exists. At the other extreme, economic interests are much more limited and exist without control or significant influence..12 In determining if an economic interest in another organization exists, the reporting organization would consider whether the other organization is required to transfer resources to or perform significant functions for the reporting organization. For example, externally imposed restrictions on the other organization's resources could create an economic interest. However, a funding relationship where the other organization is not obliged to provide resources to the reporting organization may not be considered to be an economic interest. Similarly, a situation where another organization holds fund raising events from time to time for the benefit of the reporting organization may not result in an economic interest. 16. Paragraph PS recommends: When an organization has an economic interest in another not-forprofit organization over which it does not have control or significant influence, the nature and extent of this interest should be disclosed. 17. Currently, those NFPOs that adopted the PSA Handbook without the PS 4200 series do not have any guidance regarding economic interest disclosures within the PSA Handbook. 18. CONTRACTUAL RIGHTS, Section PS 3380, issued June 2015, may warrant consideration to determine if the reporting organization s interest in another entity requires disclosures. 19. Contractual rights are rights to economic resources arising from contracts or agreements that will result in both an asset and revenue in the future. 20. Disclosure of a public sector entity s contractual rights is useful because it provides an understanding of the economic resources available in the future to meet the public sector entity s obligations or to finance future operations. 21. Paragraph PS recommends: 4 Issues Analysis

7 Information about a public sector entity's contractual rights should be disclosed in notes or schedules to the financial statements and should include descriptions about their nature and extent and the timing. 22. PSAB is the view that these requirements provide similar disclosures to those in Section PS Withdrawal of Section PS

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