Practice Advisory
(Originally published in April 2012)
Is your Not-for-Profit Organization Controlled by Government?
By: Sean Johnson, CA
Director, Professional Services
Institute of Chartered Accountants of Alberta
This article has been prepared by the Institute of Chartered Accountants of Alberta’s Professional
Services department and is aimed at assisting members with the transition to new Accounting
Standards.
For fiscal years commencing on or after January 1, 2012, not-for-profit organizations (NPO’s) will be
faced with the requirement to transition from their current financial reporting framework to either
standards set by the Public Sector Accounting Board (PSAB) or those set by the Accounting
Standards Board (AcSB). The critical question that management needs to address is whether they
are part of a government reporting entity, which is defined in Section 1300.07 of the Public Sector
Accounting Handbook (PSA Handbook) to “comprise the organizations controlled by government”. If
the answer is yes, the organization will transition to the PSA Handbook. Otherwise, it will transition
to the standards established by the AcSB, and will apply Part III Accounting standards for not-forprofit organizations of the CICA Handbook – Accounting (Handbook), or in some cases Part I –
International Financial Reporting Standards.
From discussions with a number of NPO’s, there is great uncertainty surrounding the determination
of control. This is due to the fact that the concept of control is typically considered only in the context
of legal ownership. Who holds the most legal units of ownership (shares, partnership or joint venture
interest)? However, for most NPO’s, there are no legal ownership units as these organizations are
typically incorporated as entities without share capital. Therefore, the assessment of control needs
to be undertaken in a more conceptual framework of who has “the power to govern the financial and
operating policies of another organization.”
One of the resources available to assist NPO’s with this determination is the PSAB publication 20
Questions About the Government Reporting Entity (the “Publication”), which is found in the
Resources for board members section of Government not-for-profit organizations in the Applying the
Standards area of the CICA’s website at http://cpacanada.ca/. This publication outlines a series of
indicators of control, segregated between ‘persuasive indicators’ and ‘other indicators ’for
consideration in the determination of whether or not government control exists. The four persuasive
indicators identified are copied below:
1) “The government has the power to unilaterally appoint or remove a majority of the members
of the organization’s governing body.
2) The government has ongoing access to the assets of the organization, has the ability to
direct the ongoing use of those assets, or has ongoing responsibility for losses.
Chartered Professional Accountants of Ontario
(The Institute of Chartered Accountants of Ontario)
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T. 416 962.1841 F. 416 962.8900 Toll Free 1 800 387.0735
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3) The government holds the majority of the voting shares or a “golden share” that confers the
power to govern the financial and operating policies of the organization.
4) The government has the unilateral power to dissolve the organization and thereby access its
assets and become responsible for its obligations.”
A more detailed discussion of each of these indicators is provided in the publication. It is interesting
to note that economic dependence arising from a significant component of the organization’s funding
coming from government is not included in the list of persuasive indicators, as explained in more
detail further below. Furthermore, no one of the above noted indicators should be considered to be
the ‘magic bullet’ for determination of control.
In addition to these persuasive indicators, other factors should also be considered by the
organization when determining whether or not government control exists. These include:
1) “The government provides significant input into the appointment of members of the
organization’s governing body, by appointing a majority of those members from a list of
nominees provided by others or by being involved in the appointment or removal of a
significant number of members.
2) The government can appoint or remove the CEO or other key personnel.
3) The government establishes or can amend an organization’s mission or mandate.
4) The government approves the organization’s business plans or budgets and requires
amendments, either on a net or line-by-line basis.
5) The government establishes borrowing or investment limits or restricts the organization’s
investments.
6) The government restricts the revenue-generating capacity of the organization, notably the
sources of revenue.
7) The government establishes or can amend the policies an organization uses to manage,
such as those governing accounting, personnel, compensation, collective bargaining or
deployment of resources.”
On an individual basis, these indicators are less persuasive than the four discussed earlier.
However, when taken in consideration with other factors, evidence of control may be provided. In
making the determination of what constitutes control, guidance on some areas that do not by
themselves constitute control may be helpful. For instance:
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Financial dependence may require the organization to demonstrate compliance with certain
funding terms and conditions, but the organization may still otherwise operate independently
in respect of its financial and operating policies.
The regulatory environment may impose conditions or sanctions, but still allow the regulated
organizations to operate independently within that framework.
Many areas where governments have constitutional responsibility, such as in respect of
health care, may be delivered directly or indirectly through other organizations. It is the
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nature of the relationship between these entities rather than the responsibility that
determines whether control exists.
Once the organization has determined whether or not government control exists, they are in a
position to conclude whether they will be adopting the financial reporting standards established by
PSAB, or those set by the AcSB. Once that determination has been made, there are a number of
resources available through the CICA, PSAB, and the AcSB to assist the NPO with the transition
process. These can be found at http://cpacanada.ca/ and at http://www.frascanada.ca/.
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