Nonprofit Accounting Policies in Canada

• Nonprofits often work with donated funds, making good accounting even more important. Accounting and finance image by MAXFX from Fotolia.com

  Accounting policies govern what organizations report about their finances, the format in which they must report them and how often they must do so. In Canada, the Canadian Institute of Chartered Accountants, or CICA, is responsible for setting these standards and recognizes that nonprofits are not concerned with their financial bottom line or shareholder benefits but instead on maximizing the utility from their available resources. There a number of standard policies and products produced by nonprofit accounting.

Fund Accounting

• This is the most distinct principle of nonprofit accounting. While businesses keep a single ledger that records a profit or loss, nonprofits manage their money in multiple ledgers or funds. These funds are usually separated either by the source of the money or by how the money is to be used, allowing donors to track their contributions and the organization to be clear on how much resources are being devoted to any one area. Each of these funds must be individually balanced, even if all the money is in one account. Financial reports for nonprofits need to report on each fund separately as well as on the organization as a whole.

Terminology

• The terms used to describe accounting practices differ for nonprofits. What the business world calls an income statement, a nonprofit calls a "statement of operations." Similarly, balance sheets become "statements of financial position" and a statement of retained earnings becomes a "statement of changes in net assets." The term "net income" disappears, being replaced by "excess of revenues over expenditures." Not all terms change; nonprofits still use the terms "statement of cash flows" and "revenues and expenditures" in the same way as a for-profit would.

Recognizing Donations and Grants

• There are two accounting methods used by Canadian nonprofits to recognize donations and grants -- deferral and restricted. The deferral method, which recognizes revenue only when expenses directly related to it are incurred. For example, a donor might give $200,000 for an advertising campaign. Under deferral accounting, that gift only appears on the books when money starts to be spent from the advertising campaign fund. In the restricted fund method, donations and grants are classified by the way they can be used. There are two subgroups in the restricted fund method -- temporarily restricted or permanently restricted. Unrestricted assets can be used to cover any costs at the organization, while temporarily restricted funds are reserved for a certain period of time or in support of specific activities. Temporarily restricted funds can generally be spent on other things once the specified activity has been completed, but they are usually put on the books at the moment of the gift. Permanently restricted funds can only be used for the purpose originally specified. A statement of change in net assets will report the amount in each category and any shifts between them.

Report Timing

• Reports to the board are a very important part of nonprofit accounting since boards are often very active guides of their organizations. These reports should happen at least quarterly and be approved by all the members of the organization at an annual general meeting. Both of these are not only accounting conventions; they are mandated by Canadian corporate law.

External Auditing

• It is standard policy for Canadian nonprofits to have their financial statements audited by an impartial outsider, usually an accounting firm, before presenting them to be approved by the membership at the annual general meeting.