Canadian Association of University Business Officers

Transcription

1 Canadian Association of University Business Officers Financial Reporting Information Note Endowments February 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 controlled under the Public Sector Accounting Standards definition are considered government not-for-profit organizations (GNPO) and they will be reporting under the Public Sector Accounting standards either with or without the 4200 series. Part III of the CICA Handbook Accounting Standards for Not for Profit Organizations includes section 4410, Contributions Revenue Recognition on endowments specific to not for profits. Within the 4200 series, section PS4210, Contributions Revenue Recognition addresses the accounting and disclosure for endowments. The Public Sector Accounting standards alone (i.e. without the 4200 series) do not have a Section which specifically addresses accounting for endowments. Section PS 3100, Restricted Assets and Revenues, addresses external restrictions or stipulations imposed by an agreement with an external party. Similarly, Public Sector Guideline PSG-4, Funds and Reserves, which does not apply to funds and reserves with external restrictions, indicates that when a government chooses to provide information about any funds or reserves, it does so only in the notes and schedules to the financial statements. The accounting and disclosure requirements with respect to endowments are identical under PS4210, and section 4410, and consistent with an Institution s current existing accounting and disclosure requirements related to endowments. This financial reporting information note assesses the impact of adoption of each basis of accounting on the accounting for endowments by Canadian Institutions. Endowments Page 1 of 11 February 2012

2 Key Topics This financial reporting information note will address the following key areas with respect to endowments: Purpose 1 Key Topics 2 Endowments Held By Canadian Institutions 3 Current Accounting for Endowments 3 Summary of Key Elements in PS 4210, and Section Analysis of Accounting Treatment under PSA and ASPE 3 Accounting Treatment Under PSA and ASPE 3 Accounting Treatment under PSA(Without the 4200 Series) 8 Transitional Provisions 11 Endowments Page 2 of 11 February 2012

3 Endowments Held By Canadian Institutions Canadian Institutions typically receive endowment contributions from donors, including individuals, foundations, corporations and governments. Canadian Institutions invest and hold endowment funds with respect to resources contributed by donors who have directed that the original donation amount (commonly referred to as the capital or the principal amount) must be held in perpetuity by the institution. Investment earned on the endowment fund s is typically used for institution activities but is often subject to use restrictions, such as for scholarships or research. Section 4410, Contributions Revenue Recognition defines an endowment contribution as a type of restricted contribution subject to externally imposed stipulations specifying that the resources contributed be maintained permanently, although the constituent assets may change from time to time. Section 4410 emphasizes that restrictions on contributions may only be externally imposed, not internally imposed by the institution itself. Current Accounting for Endowments Prior to the requirement for adoption of a new basis of accounting for all entities for fiscal years beginning on or after January 1, 2012, an Institution s accounting for endowments has been based upon the accounting standards issued by the Accounting Standards Board of the Canadian Institute of Chartered Accountants currently included in Part V of the CICA Handbook Accounting (hereinafter referred to as commercial GAAP ) contained in Section 4410, Contributions Revenue Recognition with respect to the recognition, measurement, presentation and disclosure of contributions, and related, received by not-for-profit organizations.. Summary of Key Elements in PS 4210, and Section 4410 The key elements of sections PS4210 and Section 4410, Contributions Revenue Recognition are referenced throughout the analysis presented in this financial reporting information note. Analysis of Accounting Treatment under PSA and ASPE Accounting Treatment Under PSA and ASPE Since the accounting and disclosure requirements with respect to endowments are addressed in the notfor-profit standards and are identical under PSA Section PS4210, and ASPE Section 4410, the accounting for endowments under both Part III of the CICA Handbook 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. Endowment Contributions Accounting and disclosure requirements with respect to endowments under each of PS4210 and Section 4410 are exactly the same with an institution s present treatment of endowments under commercial GAAP with the former 4400 Series of standards for not-for-profit organizations. The accounting treatment for individual endowments often requires professional judgment because endowment Endowments Page 3 of 11 February 2012

4 agreements can contain unusual terms and requirements. Therefore, this information note does not endeavour to describe specific, potential scenarios of restrictions on endowment principal or restrictions on. However, for those Institutions who have historically accounted for endowments under Section 4410 of the former Handbook, the accounting treatment of individual endowments should not change as a result of the transition to ASPE or to PSA , unless the organization also changes their method of accounting between the deferred to the restricted fund method of accounting. An Institution s accounting for endowment contributions is dependent upon whether the institution follows the deferral method or the restricted fund method of accounting for contributions. Institutions applying the deferral method of accounting for contributions recognize endowment contributions as direct increases in net assets in the year in which they are received. Under the deferral method, endowment contributions are not revenue since the capital must be maintained permanently. Institutions applying the restricted fund method of accounting for contributions recognize endowment contributions as endowment fund in the year in which they are received. Section defines an endowment fund as a self-balancing set of accounts which reports the accumulation of endowment contributions. Only endowment contributions and subject to restrictions stipulating that it be added to the principal amount of the endowment fund would be reported as revenue of the endowment fund. Allocations of resources to the endowment fund that result from the imposition of internal restrictions are recorded as interfund transfers. Investment An Institution s accounting for is significantly influenced by whether the Institution adopts Part III of the CICA Handbook Accounting Standards for Not for Profit Organizations, or the Public Sector Accounting Standards with the Section 4200 series. For institutions reporting under the PSA standards, unrealized net would only be recognized in the Losses, as discussed in the following section. For institutions reporting under the ASPE standards, net is defined to include revenue, and gains or losses on s regardless of whether they are realized or unrealized. Both remeasurement gains and losses and realized gains and losses without external restrictions are recognized in net through the Operations. Whether an Institution follows the deferral or restricted fund method of accounting also has a significant influence on how is accounted for. These accounting considerations related to are highlighted in the following table: Endowments Page 4 of 11 February 2012

5 Deferral Method Restricted Fund Method PSA Series Part III Not-For- Profit Standards (ASPE) PSA Series Part III Not-For- Profit Standards (ASPE) Externally restricted net that legally must be added to the principal amount of resources held for endowment. accounted for as direct increase or decrease in net assets. Unrealized externally restricted net which must be added to the endowment balance would be recorded in the, including both realized and unrealized gains or losses on s accounted for as direct increases, or decreases, in net assets. endowment fund. Unrealized externally restricted net which must be added to the endowment balance would be recorded in the, including both realized and unrealized gains or losses on s endowment fund. Restriction is placed on the use of net earned on an endowment contribution for a specific purpose. recorded as a deferred contribution on the Financial Position, and recognized in on the Operations as the net is used for that specific purpose. Unrealized externally restricted net, including both realized and unrealized gains or losses on s recorded as a deferred contribution on the Financial Position, and recognized in on the Operations as the net is used for that specific most applicable fund, or if there is no applicable fund in the general fund as a deferred amount. Unrealized externally restricted net for a specific purpose would be recorded in the, including both realized and unrealized gains or losses on s most applicable fund, or if there is no applicable fund in the general fund as a deferred amount. Endowments Page 5 of 11 February 2012

6 Deferral Method for a specific purpose would be recorded in the purpose. Restricted Fund Method No external restriction placed on the net. (excluding any unrealized fair value gains and losses) recognized in the Operations in the period earned. Unrestricted net which has not yet been realized would be recorded in the (including both realized and unrealized fair value gains and losses) recognized in the Operations in the period earned. general fund. Unrestricted net which has not yet been realized would be recorded in the (including both realized and unrealized fair value gains and losses) general fund. Endowment Investments Institutions must ensure the accounting for their endowment s is consistent with applicable guidance on financial instruments. PSAB For Institutions who are government not-for-profit organizations (GNPO) reporting under the Public Sector Accounting standards with the 4200 series, the accounting and reporting of financial instruments will be based upon Section PS 3450, Financial Instruments, along with related amendments to existing Section PS 1200, Financial Statement Presentation (now renamed PS 1201 Financial Statement Presentation). The effective date of Section PS 3450 for these Institutions is April 1, 2012, though earlier adoption is permitted. Under these sections, Institutions are only required to present derivatives or equity instruments traded in an active market at fair value. For all other s, an institution can select the fair value Endowments Page 6 of 11 February 2012

7 basis of measurement if they have a risk management or strategy which manages and evaluates the performance of those assets using fair value. PS3450 of the Public Sector Accounting standards requires that fair value remeasurement gains and losses be distinguished from those revenues and expenses that are not remeasurement gains and losses. Consequently, Institutions adopting the PSA standards need to include a Losses in their financial statements, and unrealized gains and losses for endowment s should be recorded in this new statement. The accumulated remeasurement gains and losses comprising a component of the Institution s net assets would be adjusted each year for that fiscal period s unrealized gains and losses. Realized gains and losses will continue to be recognized in the Institution s net through the Operations, or recorded to deferred contributions depending on the restrictions on net of the underlying endowment. In December 2011 the Public Sector Accounting Board approved an exposure draft to address the issue of government organizations including Institutions reporting under the PSA standards who have gains and losses on financial instruments in the available-for-sale category upon their transition to Public Sector Accounting standards. Based upon this exposure draft, an Institution transitioning from the standards in the CICA Handbook Accounting would recognize an amount in accumulated remeasurement gains and losses at the beginning of the fiscal year in which Section PS3450 is initially applied equal to the closing accumulated other comprehensive attributable to items which were categorized as available-forsale prior to transition. Institutions who did not report any financial instruments as in the available-for-sale category prior to transition would not be impacted by this exposure draft. The handbook currently requires that an Institution s accumulated remeasurement gains and losses at the beginning of the fiscal year in which Section PS3450 is initially applied would be equal to $0. However, the replies to the Exposure Draft have not yet been received and the Public Sector Accounting Board may identify yet another alternative once the replies to the exposure draft are received. Part III of the CICA Handbook Part III of the CICA Handbook Accounting Standards for Not for Profit Organizations does not include a section on financial instruments specific to not-for-profit organizations. Rather, Institutions who will be applying Part III of the Handbook as their basis of accounting are directed to follow CICA Handbook Section 3856 Financial Instruments which is found in Part II of the Handbook. Similar to the PSA standards, Institutions are required under Section 3856 to measure free standing derivatives or equity instruments traded in an active market at fair value. For all other s, an institution can select either the cost or fair value basis of measurement. Unrealized gains or losses on fair value adjustments for s classified in the fair value category would typically be recorded on the Operations under Section 3856 if there is no external restriction present on the net. However, for endowment s with external restrictions on net they would either be directly recorded to net assets or be recorded in deferred contributions depending on the nature of the restriction of the underlying endowment. For Institutions which had previously designated endowment s as available for sale and consequently recorded all changes in fair value through the statement of changes in net assets, this Endowments Page 7 of 11 February 2012

8 treatment of unrealized gains and losses will result in a change in accounting policy and financial statement presentation. Disclosure With respect to disclosure requirements, PS4210 and Section 4410 each indicate that Institutions must disclose the following with respect to their endowments: (a) the policy followed in accounting for endowment contributions; and (b) the institution s contributions by major source (restricted and non-restricted). Institutions are also required to disclose the following with respect to net earned on resources held for endowment: (a) the amounts recognized in the statement of operations in the period; (b) the amounts deferred in the period; (c) the amounts direct increases or decreases in net assets in the period; and (d) the total earned in the period. Accounting Treatment under PSA(Without the 4200 Series) As noted above, PSA (without the 4200 series) does not have specific guidance for the accounting of endowments. Currently, there is significant debate as to the appropriate accounting treatment for endowments under public sector accounting standards. A definitive consensus has not been developed by practitioners across the country. In some jurisdictions, it is anticipated that the provincial government will prescribe an accounting treatment for endowments for their higher education Institutions. In this section, a description of the considered accounting treatments using existing PSA standards is provided. There are different types of endowments, each type of which may result in different accounting treatments. As an example, many universities have internally endowed amounts which would have a different accounting treatment than externally endowed amounts. In addition, endowment agreements often have unique terms and conditions, including those relating to the use of the funds, which could result in differing accounting treatments under PSA standards. Institutions adopting the PSA accounting framework without the 4200 series must review their individual endowment agreements carefully to form their conclusions as to the appropriate accounting treatment for endowment contributions. Endowment contributions There are three potential ways to account for endowment contributions under PSA depending on the facts and circumstances of each individual endowment agreement and arrangement. The three potential approaches are: (1) as a trust arrangement; (2) as revenue; (3) as a liability. The thought process which should be undertaken in determining the appropriate approach is as follows: Endowments Page 8 of 11 February 2012

9 Is it a trust arrangement? If it is a trust arrangement, Institutions would account for contributions off balance sheet. Trusts would not be recorded on the Institutions financial statements but rather disclosed separately in the notes. If it is not a trust arrangement, then the contribution should be recorded as an asset, and further thought should be taken on whether it should be recognized by the Institution as revenue or a liability. Discussion on each of these methods of accounting is provided below. Is it a trust arrangement? The first determination for the Institution to make is whether the endowment agreement constitutes a trust arrangement. PSA defines trusts as property that has been conveyed or assigned to a trustee to be administered as directed by agreement or statute. In a trust relationship, the trustee holds title to property for the benefit of, and stands in a fiduciary relationship to, the beneficiary. Further, the property conveyed or assigned to the government or government organization acting as a trustee, must be provided to fulfill a particular objective of the donor of the property conveyed or assigned. Under a trust arrangement, the Institution merely administers the funds in accordance with the terms and conditions embodied in the agreement and has no unilateral authority to change the conditions set out in the trust indenture. As noted above, in a trust arrangement, the endowment contributions would not be recorded on the financial statements but would be disclosed in the notes. If it is not a trust arrangement? If analysis of the agreements show that a trust arrangement does not exist, then treatment of the contributions as assets would be appropriate. Endowment contributions would be assets of the institution if the institution controls the asset regardless of the fact that they cannot access the principal, and that the Institution expects that future economic benefits will be obtained from this asset because the endowment principal will earn which will be used for the benefit of the Institution. If it is determined that the contributions are assets, then the remaining resulting determination to be made would be whether the corresponding accounting entry should be to revenue or to liability. PSA defines revenues as increases in economic resources, either by way of increases of assets or decreases of liabilities, resulting from the operations, transactions and events of the accounting period. PSA also defines liabilities as present obligations to others arising from past transactions or events, the settlement of which is expected to result in the future sacrifice of economic benefits and to be payable at a fixed or determinable date or on demand. If endowment contributions have been determined to be assets, increases in these assets result in revenue treatment, unless there are characteristics of a liability in the arrangement. Recognition as a liability would mean that the institution has determined that it has a duty to pay the endowment principal assets back to the donor in the future. If endowment contributions are treated as revenue, the corresponding asset and revenue are presented on the face of the statement of financial position and statement of operations, respectively. The contributions also form part of an Institution s accumulated surplus, having flowed through the statement Endowments Page 9 of 11 February 2012

10 of operations. This method of accounting is the closest method to current not-for-profit accounting for endowments. If endowment contributions are treated as a liability, the liability and related assets are presented on the statement of financial position and released only if the donor changes the terms of the endowment agreement allowing the use of the capital by the institution. This method of accounting is significantly different from the current method used by not for profit entities for accounting for endowment contributions as these contributions do not form part of an Institution s accumulated surplus. It is encouraged that all Institutions discuss treatment of endowments with their auditors for their individual circumstances due to the lack of consensus on interpretations of the accounting treatment under the PSA standards amongst the interested parties such as the Institutions themselves and, in the case of government-controlled Institutions, the governments Investment Under PSA without 4200, fund accounting for contributions as under PS4210 is not allowed. However, Section PS 3100, Restricted Assets and Revenues deals with external restrictions or stipulations imposed by an agreement with an external party. This section would be applicable when analyzing the accounting treatment for on endowment contributions. (defined to include revenue, gains or losses on s) that, under the terms and conditions of the endowment agreement must be added to the principal amount of resources held for endowment, should be treated in the same manner as endowment contributions are to be treated (as noted above, still under discussion). Note that the distinction of realized vs unrealized net is important due to the introduction of a new Losses under PS 3450 Financial Instruments. If no external restrictions are placed on the net, the realized net would be recognized in the Operations in the period earned. If external restrictions are placed on the net such as in circumstances where they have been restricted to be spent by the Institution only on certain activities, these realized net amounts would be recorded as a restricted asset on the Financial Position. In both cases above, all unrealized net such as fair value changes on s would be recorded in the Losses until such time that the related s are disposed of, or a write-down for permanent impairment is required. Endowment s Depending on the conclusions reached on the treatment of endowment contributions, there would be different treatments of endowment s. If the conclusion reached is that endowments are trusts (option #1 above), the related endowment s would not be recorded on the Financial Position of the Institution. Trust assets would only be disclosed in the notes to the financial statements. If the conclusion reached is that endowment contributions are to be treated either as liabilities or revenues, the accounting treatment would be similar to the guidance for those Institutions following PSA Endowments Page 10 of 11 February 2012

11 with Institutions must ensure the accounting for their endowment s is consistent with applicable guidance on financial instruments which is included in PS 3450 Financial Instruments. The discussion and guidance above for treatment under PSA with 4200 is also applicable in this case. Consideration should also be given as to the type of asset these endowment s are whether they are financial assets or non-financial assets on the statement of financial position. Disclosures It is expected that the disclosures of endowment s will be essentially the same to those as noted above under PSA plus 4200 and ASPE disclosures, if there is no trust arrangement. However, adjustments would need to be made to the disclosures depending upon the conclusions reached on treatment of endowment contributions. Transitional Provisions PS4210 and Section 4410 For Institutions who are government not-for-profit organizations (GNPO) and reporting under the Public Sector Accounting standards with the 4200 series, and for Institutions following Part III of the CICA Handbook Accounting Standards for Not for Profit Organizations, no transitional provisions need to be considered as PS4210 and Section 4410 in Part III are both identical to the accounting standards currently being followed by Institutions using commercial GAAP. Consideration should be given as to whether the endowment s will continue to be reported at fair value based on the management and reporting of the Institution s s. PSA Standards For Institutions adopting the Canadian Public Sector Accounting standards without the 4200 series, the transitional provisions will depend largely on the conclusions reached on the treatment of accounting for endowment contributions discussed above. All of the three options would result in some form of retroactive restatement and adjustment, with the Trust option having the largest impact. Consideration should be given in conjunction with PS3450 Financial Instruments as to whether the Institution would want to continue to record the endowment s at fair value. Endowments Page 11 of 11 February 2012