Accounting for Investments
By Tom McGivney, CA
New accounting rules for financial instruments and
investments, dictated by the Canadian Institute of Chartered Accountants, are effective
for fiscal years beginning October 1, 2006 for non-profit organizations (NPOs) and public companies. Implementation for private companies has been
deferred for a year. This is of particular interest to NPOs that own significant
investments and reserve funds.
The discussion below is directed
specifically at non-profit organizations and co-operatives.
These rules indicate that market value
fluctuations may now have to be reflected in financial statements. There are three
possible investment classifications:
• investments
held-to-maturity
• investments
held-for-trading and
• investments
available-for-sale
Investments with fixed maturities, like bonds and
guaranteed investment certificates, can be classified as "held to maturity" when
an organization has the ability and intention to hold the investments to maturity. In this
case market value fluctuations are not recorded because they are not intended to be
realized. The accounting for these investments involves tracking the original cost and
calculating and recognizing income in a uniform manner over the term of the investment.
This is generally how these investments have been accounted for in the past and may
involve considerable record keeping.
Investments classified as
"held-for-trading" include portfolios that are traded often, derivatives and
investments designated as "held-for-trading" by the organization. Market value
fluctuations in this case are reflected directly in the statement of operations along with
any other investment income. This will likely be the preferred classification because the
accounting is easy. Investments are simply recorded at market value at each period end
with the increase or decrease reflected in operations. This classification may be used for
any investment provided the designation is made when the investment is initially recorded
or when changing policies to follow theses rules initially.
All other investments are classified as
"available-for-sale". These
investments are reflected on the statement of financial position at market value. The
investment income and market value fluctuations are split between the statement of
operations and the statement of changes in net assets depending on their nature. Changes in market values would initially be
recorded in the statement of changes in net assets. When
investments mature or are sold, realized income would be reflected in the statement of
operations and the effect of the initial market value changes would be removed.
These rules are complicated. We encourage you to
consider the implications for your organization in consultation with your chartered
accountant or auditor as soon as possible.
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