Proposed accounting principles: headaches for charities, confusion for donors

publication date: Nov 6, 2013
author/source: Bill Kennedy

Under new accounting principles proposed by the Accounting Standards Board (AcSB) of the Chartered Professional Accountants of Canada, charities will no longer be able to defer contributions until they are spent, a practice followed by the vast majority of charities. And charities operating as a group, or with a large number of autonomous locations, such as churches and national charities with regional chapters, would have to consolidate their financial statements.

Bill Kennedy photoImagine Canada and the Ontario Nonprofit Network will report soon on the issue. In the meantime, charity leaders and boards are urged to familiarize themselves with the proposed revisions and respond to the AcSB by December 15 as described below.

Executive summary

Who is making the changes

  • The Accounting Standards Board (AcSB) of the Chartered Professional Accountants of Canada, i.e. the institution that sets the rules for Canadian audits.

Why you should care

  • These changes will have a significant impact on all audited charity financial statements in Canada, particularly for any charity that defers designated donations to match them with program spending.  There is no implementation date set, but the AcSB is giving charities an opportunity to speak frankly about the financial reporting challenges they face.
  • Financial statements that do not reflect the organization’s economic reality (e.g. creating “paper” surpluses or deficits) lead to stakeholder misunderstanding. 
  • Time spent explaining overly complex financial statements is time taken away from the work of the organization.
  • Potential donors use financial statements to assess charities.  They need to understand what they read.  The accounting principles underlying the financial statements need to reflect the unique economic and legal conditions faced by charities.

What you can do

  • Use the response form created by AcSB and the Public Sector Accounting Board for your response, or email written comments in Word format.
  • Forward this article to your Treasurer, Accountant and / or Board Chair.
  • Involve other interested professionals, like your fundraising team or lawyer.
  • Sign up for the Ontario Nonprofit Network (ONN) E-News and watch for its task force report to the sector.
  • Complete the KPMG Survey by November 8.
  • Watch for a Technical Brief from Imagine Canada in consultation with experts from across the sector.

Where to go for more information

  • The full text of the Principles can be found here:  Statement of Principles
  • Many accounting firms are providing seminars and analysis.  Check with your auditor.
  • A summary of each Principle is provided at the end of this article.


  • The deadline for submissions is December 15, 2013.  There is currently no set implementation date.

Canadian donors want better information

A recently released 2013 survey by the Muttart Foundation concluded that:

Canadians feel that charities are not meeting expectations in providing information about how they use donations (the percentage saying they are doing a good or excellent job at this has decreased steadily from 32% in 2004 to 26% presently) and their fundraising costs (the percentages have dropped from 29% in 2004 to 21%).

Whether you look at the fact that two-thirds of Canadians are unhappy with the reporting or at the steady decline, improving charities’ financial disclosure can only help Canadians trust their charities.

The Accounting Standards Board of the Chartered Professional Accountants of Canada (CPAC – formerly the CICA - Canadian Institute of Chartered Accountants) has issued a draft statement of accounting principles for Not-for-Profit organizations in order to harmonize the standards with other international accounting initiatives.

These principles are not yet binding.  There is a process of issuing more detailed proposals (“Exposure Drafts”) to go through yet.  Still, all of the developments will flow from these principles, and the Committee needs to hear from real charities how they will be affected by the changes.  In their current form, the Principles talk more about harmonizing existing rules than any of the unique accounting challenges faced by charities, let alone any transition costs of switching to the new principles.

Contentious changes

Deferring designated donations disallowed (Principle 2)

Under the new principles, charities will no longer be able to defer contributions until they are spent, a practice followed by the vast majority of charities.  The theoretical argument is that there is no contractual liability attached to those funds requiring them to be spent in the future, so there is no basis for deferral.  The economic reality is that a charity which did not spend the contributions on the programs for which they were raised would seriously compromise its future fundraising ability. 

By definition, a donation is a voluntary contribution.  If there were an associated legal liability, then it would not be a donation.  At the same time, there is a binding promise between a charity and its donors.  If I raise a dollar for next year’s camp program, I am not free to spend it this year, regardless of the lack of a contractual liability.

For a Canadian legal perspective, here is an excerpt from “When a registered charity must return gifts to donors” which demonstrates how the binding promise can sometimes crystallize into a liability:

A charity is occasionally obliged by law to return gifts to donors. This can happen, for instance, when a charity asks the public to contribute to a special project and later events make it impossible to carry out the project. Under certain laws, ownership of the gifted property can revert to the donors if the project becomes impossible to fulfill.

The return of gifts to donors falls more appropriately under trust law than the Income Tax Act and is ultimately a matter for a court to decide.

Consolidation of controlled charities (Principle 10)

In the for-profit world, companies that share a common ownership are routinely consolidated into one set of financial statements.  This is rare in the charitable sector.  Arguably, a consolidated statement gives stakeholders a better sense of the resources and demands on the whole organization, but in practice, this kind of financial presentation may invite more questions than it answers, as donors try to discern what happened to their particular contributions.  There are also significant potential implementation issues if the charity hasn’t presented consolidated statements before.


Canadian donors want more information about their charities, particularly in the administration and fundraising areas.  They want to know how their money is spent and they want to compare similar organizations.  The process of improving accounting standards is worthwhile, as long as a broadly-based consensus is reached on accounting principles and their implementation.

Charities and their stakeholders need to be involved in the conversation. Download this summary of the individual principles so you can evaluate them in the context of your specific organization. (NFPO is used to mean not-for-profit organization.)

Bill Kennedy is a Toronto based Chartered Accountant with Energized Accounting, focusing on financial and reporting systems in the charitable sector. He blogs at Find out more at; follow Bill @Energized

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