After more than two decades since Section 4410, Contributions - Revenue Recognition, was implemented for not-for-profit organizations, the Accounting Standard Board has released an Exposure Draft which proposes a new Section 4411, Contributions - Revenue Recognition, replacing Section 4410 and Section 4420, Contributions Receivable, and related changes to Section 4400, Financial Statement Presentation by Not-For-Profit Organizations.
If implemented, the proposed changes will impact not-for-profit organizations using both the restricted fund and deferral methods of accounting for contributions, but more significantly those using the restricted fund method. A single approach for recognizing revenues for restricted contributions is proposed, which most closely aligns with the deferral method. There are no proposed changes in accounting for unrestricted contributions.
The Exposure Draft sets out a new definition of restricted contributions, and the following table shows a comparison of the definition under the proposed new Section 4411 and the existing section 4410:
| New Section 4411 | Existing Section 4410 |
| A restricted contribution is a contribution subject to an external restriction(s) that meets the following criteria: • the restriction has been explicitly communicated between the organization and the contributor; and • the restriction requires that resources be used for a designated purpose and/or within a designated period of time. | A restricted contribution is a contribution subject to externally imposed stipulations that specify the purpose for which the contributed asset is to be used. A contribution restricted for the purchase of a capital asset or a contribution of the capital asset itself is a type of restricted contribution. |
The proposed new definition incorporates restrictions related to a designated period of time, which is not explicitly included in the definition in Section 4410, and includes a requirement for the explicit communication of the restriction by the contributor to the organization. A designated purpose stipulation would need to be narrower than the mandate of the organization.
Revenues related to restricted contributions would be recognized when (or as) the external restriction(s) associated with the contribution is(are) met, provided reasonable assurance exists regarding the measurement of the contribution and collection is reasonably assured. While this represents a significant change for organizations using the restricted fund method of accounting, organizations using the deferral method of accounting may also be impacted due to the change in the definition of a restricted contribution.
The Exposure Draft also provides guidance on specific types of contributions.
Endowment contributions
The following table shows a comparison of the definition under the proposed Section 4411 and existing section 4410:
| New Section 4411 | Existing Section 4410 |
| An endowment contribution is a type of restricted contribution subject to an external restriction(s) specifying that the contribution must be maintained permanently, although the constituent assets may change from time to time. | An endowment contribution is 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. |
Endowment contributions are recognized as a direct increase in net assets in the period in which the organization is entitled to the resources, provided reasonable assurance exists regarding the measurement of the contribution and collection is reasonably assured. This method of accounting is consistent with the deferral method under Section 4410.
The proposed Section 4411 introduces new disclosure requirements for endowment contributions, including:
- information about how a not-for-profit organization manages its endowments, including monitoring the fair value of its endowments and compliance with agreements related to those endowments; and
- quantitative information about the extent to which the fair value of endowments is less than the amount the contributor requires the not-for-profit organization to maintain permanently.
Capital contributions
Proposed Section 4411 introduces a definition of capital contributions: Contributions of cash or other assets subject to an external restriction(s) requiring that the contributions be used to acquire, develop, or construct a capital asset. These contributions also include contributions of capital assets directly.
Organizations would be required to account for capital contributions using the approach set out in the deferral method in existing Section 4410. Capital contributions related to amortizable assets are deferred and recognized in revenue on the same basis as the amortization on the related capital asset. Capital contributions related to assets not subject to amortization are recognized as direct increases in net assets.
There are new requirements to present amortization of deferred capital contributions separately on the statement of operations, and to disclose the change in the deferred capital contributions balance during the period separately from other deferred contributions.
Contributed materials and services
The accounting policy choice whether or not to recognize contributed materials and services is still available under proposed Section 4411, with minor changes to the criteria for recognizing contributed materials and services:
| New Section 4411 | Current Section 4410 |
| There is an accounting policy choice for contributed materials and services to either: ◦ not recognize them in the financial statements; or ◦ recognize them only if the following criteria are met: ◦ fair value can be reasonably estimated; ◦ they are used in the normal course of the organization’s operations; and◦ they would otherwise have to be purchased to fulfill the organization’s mandate. | An organization may choose to recognize contributions of materials and services, but should do so only when a fair value can be reasonably estimated and when the materials and services are used in the normal course of the organization’s operations and would otherwise have been purchased. |
The accounting policy choice must be applied consistently to all contributed materials and services. If an organization’s choice is to recognize them, the recognition criteria are applied individually to each contributed material and service.
There are new requirements to present revenue from contributed materials and services separately on the statement of operations, and to disclose the following information:
- qualitative information about the nature of contributed materials and services not recognized in the financial statements; and
- any dependence by the organization on contributed materials and services to achieve future objectives.
Pledges and Bequests
In general, pledges and bequests would not be recognized as the organization has no control over the receipt of the related asset. As such, pledges and bequests would be recognized only when the proposed recognition criteria are met for each individual pledge or bequest, which includes the requirement that collection of each individual pledge or bequest is reasonably assured.
Other disclosure requirements
Proposed Section 4411 carries forward the presentation and disclosure requirements from the existing Section 4410 but also includes the following additional disclosure requirement not discussed above: economic dependence on another party when the ongoing operations depend on a significant contribution(s) from that party.
Related proposed amendments to Section 4410
The following presentation and disclosure requirements would be added to Section 4400:
- Organizations that use fund accounting presentation would be required to disclose comparative period information and information about the factors used to determine the funds presented; and
- Information about requirements related to restricted contributions, including endowment contributions, and the assets the organization determines are available to meet those requirements
When would the proposed changes be effective?
The proposed new and amended Sections 4411 and 4410 would be effective for fiscal years beginning on or after January 1, 2026, with earlier adoption permitted provided that they are adopted concurrently. The new and amended sections are required to be adopted retrospectively, with optional relief for capital asset contributions. Organizations would not be required to make retrospective adjustments for capital asset contributions that were recognized in revenue in full prior to the beginning of the earliest comparative period presented.
Providing your feedback on the proposed changes
Share your feedback with the Accounting Standards Board by submitting a comment letter, and/or attending a roundtable during the comment period, and/or taking a Connect.FRASCanada.ca survey by September 30, 2023.
Do you need help?
Need help understanding the impact of the proposed changes on your financial statements? Enkel can help! Contact us.
