Welch LLP 2013 NPO Accounting Updates Seminar

transcript

Annual Update for Not-for-Profits

Welcome to Welch LLP’s

2013 NPO Update Seminar

Moderator

Garth Steele, CPA, CAIndirect Tax Partnergsteele@welchllp.comwww.welchllp.comTwitter: @garthsteelehttp://ca.linkedin.com/in/garthsteele

Agenda

• Top Technical Skills Required to

run an NPO

• Real estate updates on the

market for space

• Income tax & HST updates

• 15 minute Break

• Possible upcoming NPO

updates; Pros/Cons

• Polling

A PRACTICAL PERSPECTIVE TO A NOT-FOR-PROFIT

Karen Meades CPA, CA CPA(USA)November 29, 2013

Not-For-Profit EnvironmentIn recent years Not-for-Profit organizations have undergone significant change

1- Accounting Changes

2- Income Tax Changes

3- On-going Operational Pressures to Change

» Now in a category of their own

» Separate and distinct from for-profit organizations

» What does this mean to a typical Not-for-Profit organization:

˃ Capital assets revaluation˃ Employee future benefits recognize gains and losses˃ Investment revaluation

Not-For-Profit Accounting Changes

Capital assets» Can elect to measure items of capital assets at fair value on date of

transition and use that as deemed cost.

Employee future benefits » Can elect to recognize all cumulative actuarial gains and losses at

the date of transition, including any transitional amounts.

Financial instruments» Can elect to record any previously unrecorded gains/losses at the

date of transition» Can designate any financial asset or liability to be measured at fair

value at the date of transition. 7

A Typical Not-For-Profit Organization

Notes to the Financial Statements

For the year ended December 31,

Tangible capital and intangible assets: 2012

Accumulated Net book

Cost amortization value

General

Tangible capital assets:

Land 625,000

- 625,000

Building 4,439,567

204,098 4,235,469

Furniture and equipment 1,835,561

1,247,203 588,358

Computer equipment 2,101,591

1,814,931 286,660

9,001,719

3,266,232 5,735,487

Capital Assets at Fair Value

Statement of Operations

For the year ended December 31,

2012 2011

Excess of revenue over expenses before undernoted 1,623,441 2,329,694

Valuation gain (loss) - pension 529,000 (545,000)

Unrealized gain (loss) on investments 787,595 78,706

Excess of revenue over expenses 2,940,036 1,863,400

Employee Future Benefits Recognize Gains/ LossesFinancial Instruments at Fair Value

CRA - Risk Identification Project (RIP)» Perceived abuse; increased audit activity

˃ 1,400 Not-for-Profits selected for audit˃ Educational letters issued

» Focus on “other” revenue generating activities˃ For-Profit activities˃ “Related” business activities

» Financial reserves

Not-For-Profit Income Tax Changes

Looking Forward

New tax legislation expected in 2015

Not-For-Profit Income Tax Changes

Industry Knowledge

Business Knowledge

On-Going Operational Pressures to Change

Technical Knowledge

Innovation

Key Activities13

Industry Knowledge

Strategic Planning

System & Issues

Security

Key Resources

Key Partners

Key Activities

Business Knowledge

A Documented Mission

Strategic Planning

Mission Statement

Core Values

Basic Service Goals

Legal Advice on Contracts and Employment Agreements

Conflict of Interest

Code of Conduct

Compliance with Applicable Laws and Regulations

Business Knowledge

Business KnowledgeEffective Governance

Infrastructure

Incorporate• Not-for-Profit• Charity

Committee and Board Structure

Terms of Reference

Liability Insurance

Finance Committee

Oversee Financial Activities

Terms of Reference

Risk Management

Organization’s Vulnerability

Security

Continuity of Operations Plan

OH&S and Fire Marshalls Committee

Business KnowledgeExcellent Record Keeping Practices

FinanceAccounting

Internal Control

Revenue Sources

Procurement

Processes and Procedures

Project Management

Facilities & Operations

Compliance with Applicable Laws &

Regulations

Compliance

Filing

Benefits,

Pension Plan

Statutory Deductions

Data Security, Privacy, Cloud

Computing

Business Knowledge

Establish & Maintain Funding Sources

Economic Sustainability

Volunteers

Don’t Forget About Public Relations

Communications

Sustainability

Business Knowledge

AVOID FOUNDER’S SYNDROME

Questions?

Karen Meades CPA, CA CPA (USA)karen@meadesconsulting.ca

613-795-8138

THANK YOU!

Before we talk space,We talk business.

Real Estate 101Not For Profit

Strategic Planning

Identify & evaluate needs early.

Ensure the most productive and cost-effective plan.

Transaction Management

Comprehensive data, objective counsel, and skillful negotiation.

Reduced operating costs, greater

flexibility, and stronger leverage.

Project Management

Unmatched expertise and the utmost attention to detail.

Minimize business disruption and

maximize return on investment.

Our Core Services

Not For ProfitChallenges

Funding

Struggle forRelevance

The Way Ahead Is Foggy

People

Obstacles

The Board

So What Do I Do?

Leverage The Market

Large Downtown Vacancies

Office space isn’t getting cheaper. So why pay for more than you need?

Is this a cafeteria,

meeting room or somewhere to

hold “all hands” sessions?

The answer is Yes!

200 square feet per person is no

longer the industry standard for office

space needs.

Flexibility

Get Unbiased Advice

NPO Update – Tax Changes

Rob Meers, CPA, CASenior Tax Managerrmeers@welchllp.comwww.welchllp.comhttp://www.linkedin.com/pub/rob-meers/10/6b3/292

• What is it?• How does it work?• Will it work?

First-time Donor’s Super Credit

• What is it?– New non-refundable tax credit– Effectively adds 25% to the

existing donation credit on up to $1,000 of eligible donations

– Available to first-time donors (you or your spouse cannot have claimed a donation in past 5 years)

– Only available on cash donations from March 20, 2013 to 2017

• How does it work?– Regular Credit

• 15% x the first $200 of charitable donations• 29% x charitable donations in excess of $200

– First-time donor’s will receive an additional 25% credit on cash donations up to $1,000

• 40% x the first $200 of charitable donations• 54% x the donations in excess of $200 to max $1,000

• How does it work – example– $1,000 cash donation

• Non-eligible taxpayer would be entitled to a federal credit of $262:

$200 x 15% = $30 +

$800 x 29% = $232

• Eligible first-time donor would be entitled to a federal credit of $512:

$200 x 40% = $80 +

$800 x 54% = $432

• Will it work?– Designed to encourage

people who have not donated before (or in the past five years) to donate

– Marketing tool for charities to promote to potential donors

– Do you think the new credit will work?

Polling Question #1

Do you think the new first-time donor’s super credit will encourage

more people to donate?

#1 - RESULTS

A. Yes, definitely

B. Possibly, but not likely

C. Definitely not!

Yes, definite

Possibly, b

ut not li

Definitely not!

• Currently first $400K of Ontario payroll is exempt from EHT and exemption is shared between associated employers

• Budget proposes 2 changes1. The exemption will be raised to $450K effective January 1,

2014 and inflation-adjusted every 5yrs (projected $500K in 2019)

2. Exemption will be eliminated for private-sector employers or associated groups with Ontario payroll in excess of $5M

• Registered charities will be exempt from this measure

• EHT and charities with multiple locations– Each location can claim its own exemption

Employer Health Tax (EHT)

GST / HST Update for Not-for-Profit Organizations

Mona Tessier, CPA, CASenior Manager, Indirect Taxmtessier@welchllp.comwww.welchllp.comhttp://www.linkedin.com/pub/mona-tessier/30/a3b/98

• Charities with multiple locations treated as separate employer for purposes of exemption

• Eligibility Registered Charity Not under control of government

• Formalized evidence that location is separate Supporting evidence – i.e. lease or ownership documents in name

of charity Location advertised on letterhead, business cards etc.

• OR

Separate charity number• OR

Separate charity return

NPO Issues – EHT Separate Location

• Provincial Tax Roundup– Manitoba sales tax increase from

7% to 8% - effective July 1, 2013– PEI now an HST province rate of

14% - effective April 1, 2013– BC no longer an HST province –

effective April 1, 2013– QST rate 9.975%, GST no longer

included in base – effective January 1, 2013

What’s New

• Separate registration required for the following provinces– Quebec– Manitoba– Saskatchewan– British Columbia

• Requirement to register for out of province vendors– Solicits orders – Delivers taxable goods in to province– Goods are acquired for consumption

in Province, i.e. not for resale

Provincial Tax Round Up

• Changes enacted from Federal Budget 2013 - 2014– Health Care Services– Governor General– Business ID– Pension Plan Rules

Bill C-60

• Health Care Services– Health Care Services exemption expanded for home care services

• Bathing• Feeding • Assistance with dressing and taking medication• Household services such as;

– Cleaning– Laundering– Meal preparation– Child care

• Exemption only applies to publicly subsidized or funded personal care services rendered to an individual who, due to age, infirmity or disability requires such assistance at home

Bill C-60

• Time limits for claiming PSB rebate• Article in Excise GST/HST Tax News• Rebate calculated on a claim period by

claim period basis• If PSB registrant, claim period = regular

GST filing period• If PSB not registrant, claim period = first/last

six months of fiscal year• Must file rebate claim for each claim period

if eligible• Must be eligible on;

– last day of claim period, or– last day of fiscal year that includes the

claim period

NPO Issues – Rebate Claims

• Not all auditors assess correctly!• NPO client regularly offers conferences• GST/HST is collected on the conference fee• Conference brochure clearly indicates which meals are included in

the conference fee• NPO should be entitled to full ITC on food costs • Auditor assessed under section 236 of ETA• Section 236 based on 67.1(1) of the ITA• Exception in s.67.1(2)(a)• Ordinary course of business includes provision of meals for

compensation.

NPO Issues – Conference

Improvements to Not-for-Profit Standards

Christa Casey, CPA, CAPartner & Director of the Not-for-Profit Sectorccasey@welchllp.comwww.welchllp.comhttp://www.linkedin.com/pub/christa-casey/1b/a16/439

Shawn Kelso, CPA, CAPartner & Director of Professional Standardsskelso@welchllp.comwww.welchllp.comhttp://www.linkedin.com/pub/shawn-kelso/16/599/4a1

Presentation objectives:

• Outline key elements in the SOP

• Provide insight & perspective

• Obtain your input on key questions

Comments due December 15, 2013

Objective of Today’s Presentation

Promote consistency

• Address inconsistent recognition (or non-recognition) of

certain assets and liabilities

Enhance comparability

Address confusion amongst users regarding

differences amongst the different basis of

accounting

Reasons for the SOP Project

To review & amend, where appropriate, NFP

accounting standards to:

• eliminate guidance already included in the other (or reference) standards;

• conform guidance for consistency with the

other (or reference) standards;

• retain guidance to address transactions and circumstances unique to NFPOs; and

• include new or amended

guidance.

SOP Project Objectives

Review and analysis of SOP responses• The Boards will give

significant consideration to the impact or effect of the proposals on NFPOs.

Likely the development of separate Exposure Drafts for the public and private sectors.

Anticipated Next Steps

Contributions Size exemption – capital assets Controlled entities Presentation of expenses by nature and function

Analysis of Key Topics

Contribution Revenue

Existing StandardsContribution revenue should be recognized using either:• Deferral method• Restricted fund method

Proposed under SOPContribution revenue would be recognized:• When received or

receivable• Except when contribution

gives rise to an obligation that meets the definition of a liability

Deferral Method

Statement of Financial PositionAssets

Cash $ 100,000

Building 9,500,000

$ 9,600,000

Liabilities & Net AssetsA/P $ 25,000

Def. Contrib. 9,500,000

Net Assets 75,000

$ 9,600,000

Statement of Operations

Membership fees $300,000

Amort. of DC 500,000

Total revenue 800,000

Amort. of bldg. 500,000

Other expenses 225,000

Total expenses 725,000

Net revenue $ 75,000

Restricted Fund Method

General Fund Education Fund TotalMembership fees $ 1,000,000 0 $ 1,000,000

Government grants 500,000 2,000,000 2,500,000

Total revenue 1,500,000 2,000,000 3,500,000

Salaries & benefits 1,100,000 1,100,000

Rent 400,000 400,000

Education expenses 1,200,000 1,200,000

Total expenses 1,500,000 1,200,000 2,700,000

Net revenue $ 0

$ 800,000 $ 800,000

Recognize contributions that would be consistent with other revenue recognition standards

Eliminates credits on the balance sheet that don’t meet the definition of a liability (deferral method)

Eliminates revenue being recognized when stipulations have not been met (restricted fund method)

Positive Impact of Change

Eliminates common practices that are understood by the users of NPO statements (restricted fund and deferral methods)

Will cause swings in net revenue when timing of revenue and expenditures do not occur in the same period

May affect current funding models

Inconsistent with guidance in ASPE

Negative Impact of Change

Do you agree that a contribution should be revenue, except when the

contribution gives rise to an obligation that meets the definition of a liability

(i.e. eliminating the deferral & restricted fund methods)?

Polling Question #2

A. Yes – I agree

B. No – I disagree

C. Indifferent

Yes –

I agree

No – I disa

Indiffere

#2 - RESULTS

Will the proposed principles on contributions have an impact on

your organization?

Polling Question #3

a. A significant negative effect

b. A significant positive effect

c. Inconsequential impact

d. Would not apply

A sign

ificant n

egative

A sign

ificant p

ositive

Inconse

quential im

Would not a

23%28%

#3 - RESULTS

Capital Assets – Size Exemption

Existing StandardsNFPO’s with average annual revenues < $500,000 can choose to record their capital asset purchases as an expense instead of as a capital asset on the statement of financial position.

Proposed under SOPA capital asset would be recognized by a NFPO on its statement of financial position regardless of the size of the NFPO.

NFPOs capitalize and amortize capital assets

consistent with other entities

Enhances comparability between NFPOs

Promotes better accountability and stewardship

by NFPOs

Positive Impact of the Change

90% of NFPOs in Canada currently eligible for

exemption

Difficult and costly for small NFPOs to

implement

Key information about nature of assets are

already disclosed in the notes to the financial

statements

Negative Impact of the Change

Do you agree with eliminating the size test that currently permits qualifying

NFPOs to expense their capital assets?

Polling Question #4

A. Yes – I agree

B. No – I disagree

C. Indifferent

Yes –

I agree

No – I disa

Indiffere

#4 - RESULTS

Will the proposed principle on the capital asset size exemption have an impact on your organization?

Polling Question #5

d. Would not apply

A sign

ificant n

egative

A sign

ificant p

ositive

Inconse

quential im

Would not a

#5 - RESULTS

Controlled NFPO’s

Existing StandardsA NFPO that controls another NFPO has a choice to:• Consolidate• Not consolidate – with

disclosure• Not consolidate – for large

number of individually immaterial NFPOs

Proposed under SOPA NFPO that controls another NFPO has a choice to:• Consolidate• Not consolidate – for large

number of individually immaterial NFPOs

Provides better big picture of the total assets,

liabilities, revenues, expenses and cash flows

controlled by the NFPO

Still have the option to not consolidate or

disclose for large number of individually

immaterial NFPOs

Key information about controlled entities’ assets, liabilities, revenues, expenses and cash flows are already disclosed in the notes to the financial statements

Many users want to focus on the core activities

Do you agree that controlled NFPOs should be consolidated (subject to an exclusion from consolidation of a large

number of individually immaterial organizations)?

Polling Question #6

a. Yes – I agree

b. No – I disagree

c. Indifferent

Yes –

I agree

No – I disa

Indifferent

#6 - RESULTS

Will the proposed principle on consolidating controlled NFPOs

have an impact on your organization?

Polling Question #7

d. Would not apply

A sign

ificant n

egative

A sign

ificant p

ositive

Inconse

quential im

Would not a

#7 - RESULTS

Controlled Profit-Oriented Entities

Existing StandardsA NFPO that controls a profit-oriented enterprise has a choice to:• Consolidate• Use equity method

Proposed under SOPA NFPO that controls a profit-oriented enterprise will be required to:• Use equity method

Using equity method does not convolute the general operations of the NFPO with the ancillary for-profit activities

Inconsistent treatment between controlled NFPOs and profit-oriented entities

ASPE permits an entity to apply “professional judgement” as to which methodology applies

Do you agree with eliminating the option to consolidate controlled profit-

oriented enterprises (i.e. only use equity method)?

Polling Question #8

a. Yes – I agree

c. Indifferent

Yes –

I agree

No – I disa

Indiffere

#8 - RESULTS

Will the proposed principle on eliminating the consolidation option to account for

controlled profit-oriented entities have an impact on your organization?

Polling Question #9

d. Would not apply

A sign

ificant n

egative

A sign

ificant p

ositive

Inconse

quential im

Would not a

#9 - RESULTS

Presentation by Function & Nature

Existing StandardsOn the statement of operations, a NFPO can present its expenses by:• Function• Object (nature)

Proposed under SOPOn the statement of operations, a NFPO will present its expenses by:• FunctionAnd disclose them by object (nature) in the financial statement notes

Presentation by Function & Nature

Expenses by Function

Patient care $5,000,000Education 3,000,000Research 1,500,00Total expenses $9,500,000

Expenses by Object

Salaries $7,000,000Rent 1,000,000Travel 900,000Amortization 600,000Total expenses $9,500,000

This model is currently used by entities in the public sector (i.e. governments)

Provides meaningful information to users about the NFPO’s activities as well as types of expenditures incurred

Increases administrative burden on NFPOs to meet proposed presentation and disclosure standards

Additional info is not useful to all users – if they want it, they will demand it

Do you agree that information regarding expenses should be provided by function and by object (nature) in the

financial statements?

Polling Question #10

a. Yes – I agree

c. Indifferent

Yes –

I agree

No – I disa

Indiffere

#10 - RESULTS

Will the proposed principle on presenting expenses by function and

disclosing by object have an impact on your organization?

d. Would not apply

A sign

ificant n

egative

A sign

ificant p

ositive

Inconse

quential im

Would not a

#11 - RESULTS

Fundraising & General Support Expenses

Existing StandardsInformation regarding total fundraising and general support expenses is provided when they are allocated to other functions.• Accounting policy• Nature of expenses allocated• Basis of allocations

Proposed under SOPTotal fundraising expenses and general support expenses:• Presented as separate

functions on the statement of operations

OR• Disclose in the notes to the

financial statements

Improves transparency for expenses sensitive to public scrutiny

Improves comparability of such expenses between different NFPOs

Increases administrative burden on NFPOs to meet proposed presentation and disclosure standards

Potential inconsistency among NFPOs as to what costs are considered to be fundraising and general support in nature

Too much variability & interpretation to make them truly comparable

Do you agree that total fundraising expenses and general support expenses

should be presented separately in the statement of operations or disclosed in the

notes to the financial statements?

a. Yes – I agree

c. Indifferent

Yes –

I agree

No – I disa

Indiffere

#12 - RESULTS

Will the proposed principle on separately presenting or disclosing

fundraising and general support costs have an impact on your organization?

d. Would not apply

A sign

ificant n

egative

A sign

ificant p

ositive

Inconse

quential im

Would not a

#13 - RESULTS

Improvements to

Not-For-Profit Standards

Question & Answers

To be considered, written comments are to be received by December 15, 2013

Send written comments by e-mail in Word format to: ed.accounting@cpacanada.ca

Refer to the Accounting Standards website (NPO Section): http://www.frascanada.ca/

Correspondence to:

Peter Martin, Director, Accounting Standards

Tim Beauchamp, Director, Public Sector Accounting

277 Wellington St. W., Toronto, ON M5V 3H2

Provide your Comments

Watch for more information be provided soon:• Pension plans• Other matters from Statement of Principles

Coming Soon!

Special thanks to ClearPicture

for use of their polling system!

All event registrants will receive a

digital copy of the presentation via e-mail.

Video & Slide also content available soon at www.welchllp.com

Thank you.