Canadian Association of University Business Officers
Financial Reporting Information Note– Endowments
February 2012
Purpose
Canadian colleges and universities hereinafter referred to as higher education institutions (“Institutions”)
will be adopting a new basis of accounting for fiscal years beginning on or after January 1, 2012.
Depending on their provincial jurisdiction and control structure, Institutions will be preparing their financial
statements using (1) Part III of the CICA Handbook – Accounting Standards for Not for Profit
Organizations, (2) Public Sector Accounting Standards with the Section 4200 series, or (3) Public Sector
Accounting Standards without the Section 4200 series.
Institutions who are government controlled under the Public Sector Accounting Standards definition are
considered government not-for-profit organizations (GNPO) and they will be reporting under the Public
Sector Accounting standards either with or without the 4200 series.
Part III of the CICA Handbook – Accounting Standards for Not for Profit Organizations includes section
4410, Contributions – Revenue Recognition on endowments specific to not for profits.
Within the 4200 series, section PS4210, Contributions – Revenue Recognition addresses the accounting
and disclosure for endowments.
The Public Sector Accounting standards alone (i.e. without the 4200 series) do not have a Section which
specifically addresses accounting for endowments. Section PS 3100, Restricted Assets and Revenues,
addresses external restrictions or stipulations imposed by an agreement with an external party. Similarly,
Public Sector Guideline PSG-4, Funds and Reserves, which does not apply to funds and reserves with
external restrictions, indicates that when a government chooses to provide information about any funds or
reserves, it does so only in the notes and schedules to the financial statements.
The accounting and disclosure requirements with respect to endowments are identical under PS4210,
and section 4410, and consistent with an Institution’s current existing accounting and disclosure
requirements related to endowments.
This financial reporting information note assesses the impact of adoption of each basis of accounting on
the accounting for endowments by Canadian Institutions.
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Key Topics
This financial reporting information note will address the following key areas with respect to
endowments:
Purpose ____________________________________________________________________________ 1
Key Topics __________________________________________________________________________ 2
Endowments Held By Canadian Institutions________________________________________________ 3
Current Accounting for Endowments ___________________________________________________ 3
Summary of Key Elements in PS 4210, and Section 4410______________________________________ 3
Analysis of Accounting Treatment under PSA and ASPE ______________________________________ 3
Accounting Treatment Under PSA + 4200 and ASPE _______________________________________ 3
Accounting Treatment under PSA(Without the 4200 Series)_________________________________ 8
Transitional Provisions _______________________________________________________________ 11
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Endowments Held By Canadian Institutions
Canadian Institutions typically receive endowment contributions from donors, including individuals,
foundations, corporations and governments. Canadian Institutions invest and hold endowment funds
with respect to resources contributed by donors who have directed that the original donation amount
(commonly referred to as the “capital” or the “principal” amount) must be held in perpetuity by the
institution. Investment income earned on the endowment fund investments is typically used for institution
activities but is often subject to use restrictions, such as for scholarships or research.
Section 4410, Contributions – Revenue Recognition defines an endowment contribution as “…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.”
Section 4410 emphasizes that restrictions on contributions may only be externally imposed, not internally
imposed by the institution itself.
Current Accounting for Endowments
Prior to the requirement for adoption of a new basis of accounting for all entities for fiscal years beginning
on or after January 1, 2012, an Institution’s accounting for endowments has been based upon the
accounting standards issued by the Accounting Standards Board of the Canadian Institute of Chartered
Accountants currently included in Part V of the CICA Handbook – Accounting (hereinafter referred to as
“commercial GAAP”) contained in Section 4410, Contributions – Revenue Recognition with respect to the
recognition, measurement, presentation and disclosure of contributions, and related investment income,
received by not-for-profit organizations..
Summary of Key Elements in PS 4210, and Section 4410
The key elements of sections PS4210 and Section 4410, Contributions – Revenue Recognition are
referenced throughout the analysis presented in this financial reporting information note.
Analysis of Accounting Treatment under PSA and ASPE
Accounting Treatment Under PSA + 4200 and ASPE
Since the accounting and disclosure requirements with respect to endowments are addressed in the notfor-profit standards and are identical under PSA Section PS4210, and ASPE Section 4410, the
accounting for endowments under both Part III of the CICA Handbook – Accounting Standards for Not for
Profit Organizations, and the Public Sector Accounting Standards with the Section 4200 series are
considered together in this financial reporting information note.
Endowment Contributions
Accounting and disclosure requirements with respect to endowments under each of PS4210 and Section
4410 are exactly the same with an institution’s present treatment of endowments under commercial
GAAP with the former 4400 Series of standards for not-for-profit organizations. The accounting
treatment for individual endowments often requires professional judgment because endowment
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agreements can contain unusual terms and requirements. Therefore, this information note does not
endeavour to describe specific, potential scenarios of restrictions on endowment principal or restrictions
on investment income. However, for those Institutions who have historically accounted for endowments
under Section 4410 of the former Handbook, the accounting treatment of individual endowments should
not change as a result of the transition to ASPE or to PSA + 4200, unless the organization also changes
their method of accounting between the deferred to the restricted fund method of accounting.
An Institution’s accounting for endowment contributions is dependent upon whether the institution follows
the deferral method or the restricted fund method of accounting for contributions. Institutions applying the
deferral method of accounting for contributions recognize endowment contributions as direct increases in
net assets in the year in which they are received. Under the deferral method, endowment contributions
are not recognized as revenue since the capital must be maintained permanently.
Institutions applying the restricted fund method of accounting for contributions recognize endowment
contributions as revenue of the endowment fund in the year in which they are received. Section 4210.02
defines an endowment fund as a “…self-balancing set of accounts which reports the accumulation of
endowment contributions. Only endowment contributions and investment income subject to restrictions
stipulating that it be added to the principal amount of the endowment fund would be reported as revenue
of the endowment fund. Allocations of resources to the endowment fund that result from the imposition of
internal restrictions are recorded as interfund transfers.”
Investment income
An Institution’s accounting for investment income is significantly influenced by whether the Institution
adopts Part III of the CICA Handbook – Accounting Standards for Not for Profit Organizations, or the
Public Sector Accounting Standards with the Section 4200 series.
For institutions reporting under the PSA standards, unrealized net investment income would only be
recognized in the Statement of Remeasurement Gains and Losses, as discussed in the following section.
For institutions reporting under the ASPE standards, net investment income is defined to include revenue,
and gains or losses on investments regardless of whether they are realized or unrealized. Both
remeasurement gains and losses and realized gains and losses without external restrictions are
recognized in net income through the Statement of Operations.
Whether an Institution follows the deferral or restricted fund method of accounting also has a significant
influence on how investment income is accounted for.
These accounting considerations related to investment income are highlighted in the following table:
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Deferral Method
Externally restricted net
investment income that
legally must be added to
the principal amount of
resources held for
endowment.
PSA + 4200
Series
Part III Not-ForProfit Standards
(ASPE)
PSA + 4200
Series
Part III Not-ForProfit
Standards
(ASPE)
Net investment
income
accounted for as
direct increase or
decrease in net
assets.
Net investment
income, including
both realized and
unrealized gains
or losses on
investments
accounted for as
direct increases,
or decreases, in
net assets.
Net investment
income
recognized as
revenue of the
endowment
fund.
Net investment
income,
including both
realized and
unrealized
gains or losses
on investments
recognized as
revenue of the
endowment
fund.
Net investment
income, including
both realized and
unrealized gains
or losses on
investments
recorded as a
deferred
contribution on
the Statement of
Financial
Position, and
recognized in
income on the
Statement of
Operations as the
net investment
income is used
for that specific
Net investment
income
recognized as
revenue of the
most applicable
fund, or if there
is no applicable
fund in the
general fund as
a deferred
amount.
Unrealized
externally
restricted net
investment
income which
must be added to
the endowment
balance would be
recorded in the
Statement of
Remeasurement
Gains and
Losses.
Restriction is placed on the
use of net investment
income earned on an
endowment contribution for
a specific purpose.
Net investment
income recorded
as a deferred
contribution on
the Statement of
Financial
Position, and
recognized in
income on the
Statement of
Operations as the
net investment
income is used
for that specific
purpose.
Unrealized
externally
restricted net
investment
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Restricted Fund Method
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Unrealized
externally
restricted net
investment
income which
must be added
to the
endowment
balance would
be recorded in
the Statement of
Remeasurement
Gains and
Losses.
Unrealized
externally
restricted net
investment
income for a
specific purpose
would be
recorded in the
Net investment
income,
including both
realized and
unrealized
gains or losses
on investments
recognized as
revenue of the
most applicable
fund, or if there
is no applicable
fund in the
general fund as
a deferred
amount.
February 2012
Deferral Method
No external restriction
placed on the net
investment income.
Restricted Fund Method
income for a
specific purpose
would be
recorded in the
Statement of
Remeasurement
Gains and
Losses.
purpose.
Statement of
Remeasurement
Gains and
Losses.
Net investment
income
(excluding any
unrealized fair
value gains and
losses)
recognized in the
Statement of
Operations in the
period earned.
Net investment
income (including
both realized and
unrealized fair
value gains and
losses)
recognized in the
Statement of
Operations in the
period earned.
Net investment
income
recognized as
revenue of the
general fund.
Unrestricted net
investment
income which
has not yet been
realized would be
recorded in the
Statement of
Remeasurement
Gains and
Losses.
Unrestricted net
investment
income which
has not yet been
realized would
be recorded in
the Statement of
Remeasurement
Gains and
Losses.
Net investment
income
(including both
realized and
unrealized fair
value gains and
losses)
recognized as
revenue of the
general fund.
Endowment Investments
Institutions must ensure the accounting for their endowment investments is consistent with applicable
guidance on financial instruments.
PSAB + 4200
For Institutions who are government not-for-profit organizations (GNPO) reporting under the Public Sector
Accounting standards with the 4200 series, the accounting and reporting of financial instruments will be
based upon Section PS 3450, Financial Instruments, along with related amendments to existing Section
PS 1200, Financial Statement Presentation (now renamed PS 1201 Financial Statement Presentation).
The effective date of Section PS 3450 for these Institutions is April 1, 2012, though earlier adoption is
permitted. Under these sections, Institutions are only required to present derivatives or equity instruments
traded in an active market at fair value. For all other investments, an institution can select the fair value
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basis of measurement if they have a risk management or investment strategy which manages and
evaluates the performance of those assets using fair value.
PS3450 of the Public Sector Accounting standards requires that fair value remeasurement gains and
losses be distinguished from those revenues and expenses that are not remeasurement gains and
losses. Consequently, Institutions adopting the PSA standards need to include a Statement of
Remeasurement Gains and Losses in their financial statements, and unrealized gains and losses for
endowment investments should be recorded in this new statement. The accumulated remeasurement
gains and losses comprising a component of the Institution’s net assets would be adjusted each year for
that fiscal period’s unrealized gains and losses.
Realized gains and losses will continue to be recognized in the Institution’s net income through the
Statement of Operations, or recorded to deferred contributions depending on the restrictions on net
investment income of the underlying endowment.
In December 2011 the Public Sector Accounting Board approved an exposure draft to address the issue
of government organizations including Institutions reporting under the PSA standards who have gains and
losses on financial instruments in the “available-for-sale” category upon their transition to Public Sector
Accounting standards. Based upon this exposure draft, an Institution transitioning from the standards in
the CICA Handbook–Accounting would recognize an amount in accumulated remeasurement gains and
losses at the beginning of the fiscal year in which Section PS3450 is initially applied equal to the closing
accumulated other comprehensive income attributable to items which were categorized as available-forsale prior to transition. Institutions who did not report any financial instruments as in the available-for-sale
category prior to transition would not be impacted by this exposure draft. The handbook currently requires
that an Institution’s accumulated remeasurement gains and losses at the beginning of the fiscal year in
which Section PS3450 is initially applied would be equal to $0. However, the replies to the Exposure
Draft have not yet been received and the Public Sector Accounting Board may identify yet another
alternative once the replies to the exposure draft are received.
Part III of the CICA Handbook
Part III of the CICA Handbook – Accounting Standards for Not for Profit Organizations does not include a
section on financial instruments specific to not-for-profit organizations. Rather, Institutions who will be
applying Part III of the Handbook as their basis of accounting are directed to follow CICA Handbook
Section 3856 Financial Instruments which is found in Part II of the Handbook. Similar to the PSA
standards, Institutions are required under Section 3856 to measure free standing derivatives or equity
instruments traded in an active market at fair value. For all other investments, an institution can select
either the cost or fair value basis of measurement.
Unrealized gains or losses on fair value adjustments for investments classified in the fair value category
would typically be recorded on the Statement of Operations under Section 3856 if there is no external
restriction present on the net investment income. However, for endowment investments with external
restrictions on net investment income they would either be directly recorded to net assets or be recorded
in deferred contributions depending on the nature of the restriction of the underlying endowment.
For Institutions which had previously designated endowment investments as “available for sale” and
consequently recorded all changes in fair value through the statement of changes in net assets, this
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treatment of unrealized gains and losses will result in a change in accounting policy and financial
statement presentation.
Disclosure
With respect to disclosure requirements, PS4210 and Section 4410 each indicate that Institutions must
disclose the following with respect to their endowments:
(a) the policy followed in accounting for endowment contributions; and
(b) the institution’s contributions by major source (restricted and non-restricted).
Institutions are also required to disclose the following with respect to net investment income earned on
resources held for endowment:
(a) the amounts recognized in the statement of operations in the period;
(b) the amounts deferred in the period;
(c) the amounts recognized as direct increases or decreases in net assets in the period; and
(d) the total earned in the period.
Accounting Treatment under PSA(Without the 4200 Series)
As noted above, PSA (without the 4200 series) does not have specific guidance for the accounting of
endowments. Currently, there is significant debate as to the appropriate accounting treatment for
endowments under public sector accounting standards. A definitive consensus has not been developed
by practitioners across the country. In some jurisdictions, it is anticipated that the provincial government
will prescribe an accounting treatment for endowments for their higher education Institutions.
In this section, a description of the considered accounting treatments using existing PSA standards is
provided.
There are different types of endowments, each type of which may result in different accounting
treatments. As an example, many universities have internally endowed amounts which would have a
different accounting treatment than externally endowed amounts. In addition, endowment agreements
often have unique terms and conditions, including those relating to the use of the funds, which could
result in differing accounting treatments under PSA standards. Institutions adopting the PSA accounting
framework without the 4200 series must review their individual endowment agreements carefully to form
their conclusions as to the appropriate accounting treatment for endowment contributions.
Endowment contributions
There are three potential ways to account for endowment contributions under PSA depending on the facts
and circumstances of each individual endowment agreement and arrangement. The three potential
approaches are: (1) as a trust arrangement; (2) as revenue; (3) as a liability. The thought process which
should be undertaken in determining the appropriate approach is as follows:
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•
Is it a trust arrangement?
•
If it is a trust arrangement, Institutions would account for contributions off balance sheet. Trusts
would not be recorded on the Institutions’ financial statements but rather disclosed separately in
the notes.
•
If it is not a trust arrangement, then the contribution should be recorded as an asset, and further
thought should be taken on whether it should be recognized by the Institution as revenue or a
liability.
Discussion on each of these methods of accounting is provided below.
Is it a trust arrangement?
The first determination for the Institution to make is whether the endowment agreement constitutes a
trust arrangement. PSA defines trusts as property that has been conveyed or assigned to a trustee to
be administered as directed by agreement or statute. In a trust relationship, the trustee holds title to
property for the benefit of, and stands in a fiduciary relationship to, the beneficiary. Further, the property
conveyed or assigned to the government or government organization acting as a trustee, must be
provided to fulfill a particular objective of the donor of the property conveyed or assigned. Under a trust
arrangement, the Institution merely administers the funds in accordance with the terms and conditions
embodied in the agreement and has no unilateral authority to change the conditions set out in the trust
indenture. As noted above, in a trust arrangement, the endowment contributions would not be recorded
on the financial statements but would be disclosed in the notes.
If it is not a trust arrangement?
If analysis of the agreements show that a trust arrangement does not exist, then treatment of the
contributions as assets would be appropriate. Endowment contributions would be assets of the
institution if the institution controls the asset regardless of the fact that they cannot access the principal,
and that the Institution expects that future economic benefits will be obtained from this asset because the
endowment principal will earn investment income which will be used for the benefit of the Institution. If it
is determined that the contributions are assets, then the remaining resulting determination to be made
would be whether the corresponding accounting entry should be to revenue or to liability.
PSA defines revenues as increases in economic resources, either by way of increases of assets or
decreases of liabilities, resulting from the operations, transactions and events of the accounting period.
PSA also defines liabilities as present obligations to others arising from past transactions or events, the
settlement of which is expected to result in the future sacrifice of economic benefits and to be payable at
a fixed or determinable date or on demand.
If endowment contributions have been determined to be assets, increases in these assets result in
revenue treatment, unless there are characteristics of a liability in the arrangement. Recognition as a
liability would mean that the institution has determined that it has a duty to pay the endowment principal
assets back to the donor in the future.
If endowment contributions are treated as revenue, the corresponding asset and revenue are presented
on the face of the statement of financial position and statement of operations, respectively. The
contributions also form part of an Institution’s accumulated surplus, having flowed through the statement
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of operations. This method of accounting is the closest method to current not-for-profit accounting for
endowments.
If endowment contributions are treated as a liability, the liability and related assets are presented on the
statement of financial position and released only if the donor changes the terms of the endowment
agreement allowing the use of the capital by the institution. This method of accounting is significantly
different from the current method used by not for profit entities for accounting for endowment
contributions as these contributions do not form part of an Institution’s accumulated surplus.
It is encouraged that all Institutions discuss treatment of endowments with their auditors for their
individual circumstances due to the lack of consensus on interpretations of the accounting treatment
under the PSA standards amongst the interested parties such as the Institutions themselves and, in the
case of government-controlled Institutions, the governments
Investment income
Under PSA without 4200, fund accounting for contributions as under PS4210 is not allowed. However,
Section PS 3100, Restricted Assets and Revenues deals with external restrictions or stipulations imposed
by an agreement with an external party. This section would be applicable when analyzing the accounting
treatment for investment income on endowment contributions.
Net investment income (defined to include revenue, gains or losses on investments) that, under the terms
and conditions of the endowment agreement must be added to the principal amount of resources held for
endowment, should be treated in the same manner as endowment contributions are to be treated (as
noted above, still under discussion). Note that the distinction of realized vs unrealized net investment
income is important due to the introduction of a new Statement of Remeasurement Gains and Losses
under PS 3450 Financial Instruments.
If no external restrictions are placed on the net investment income, the realized net investment income
would be recognized in the Statement of Operations in the period earned.
If external restrictions are placed on the net investment income such as in circumstances where they
have been restricted to be spent by the Institution only on certain activities, these realized net investment
income amounts would be recorded as a restricted asset on the Statement of Financial Position.
In both cases above, all unrealized net investment income such as fair value changes on investments
would be recorded in the Statement of Remeasurement Gains and Losses until such time that the related
investments are disposed of, or a write-down for permanent impairment is required.
Endowment investments
Depending on the conclusions reached on the treatment of endowment contributions, there would be
different treatments of endowment investments.
If the conclusion reached is that endowments are trusts (option #1 above), the related endowment
investments would not be recorded on the Statement of Financial Position of the Institution. Trust assets
would only be disclosed in the notes to the financial statements.
If the conclusion reached is that endowment contributions are to be treated either as liabilities or
revenues, the accounting treatment would be similar to the guidance for those Institutions following PSA
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with 4200. Institutions must ensure the accounting for their endowment investments is consistent with
applicable guidance on financial instruments which is included in PS 3450 Financial Instruments. The
discussion and guidance above for treatment under PSA with 4200 is also applicable in this case.
Consideration should also be given as to the type of asset these endowment investments are – whether
they are financial assets or non-financial assets on the statement of financial position.
Disclosures
It is expected that the disclosures of endowment investments will be essentially the same to those as
noted above under PSA plus 4200 and ASPE disclosures, if there is no trust arrangement. However,
adjustments would need to be made to the disclosures depending upon the conclusions reached on
treatment of endowment contributions.
Transitional Provisions
PS4210 and Section 4410
For Institutions who are government not-for-profit organizations (GNPO) and reporting under the Public
Sector Accounting standards with the 4200 series, and for Institutions following Part III of the CICA
Handbook – Accounting Standards for Not for Profit Organizations, no transitional provisions need to be
considered as PS4210 and Section 4410 in Part III are both identical to the accounting standards
currently being followed by Institutions using commercial GAAP. Consideration should be given as to
whether the endowment investments will continue to be reported at fair value based on the management
and reporting of the Institution’s investments.
PSA Standards
For Institutions adopting the Canadian Public Sector Accounting standards without the 4200 series, the
transitional provisions will depend largely on the conclusions reached on the treatment of accounting for
endowment contributions discussed above. All of the three options would result in some form of
retroactive restatement and adjustment, with the Trust option having the largest impact. Consideration
should be given in conjunction with PS3450 Financial Instruments as to whether the Institution would
want to continue to record the endowment investments at fair value.
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