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Our client portal will be unavailable from 9PM MST, April 26 until 9PM MST April 28th due to a scheduled maintenance.
Office alert – Friday March 15th, 2024.
Due to the road conditions, majority of our staff will be working remotely today.
We want you to be safe, we have a drop off at COS on 3rd floor. If you are planning to come by the Denver and Springs office please make contact with your SKR contact first.
Our client portal will be unavailable from 9PM MST, April 26 until 9PM MST April 28th due to a scheduled maintenance.
Office alert – Friday March 15th, 2024.
Due to the road conditions, majority of our staff will be working remotely today.
We want you to be safe, we have a drop off at COS on 3rd floor. If you are planning to come by the Denver and Springs office please make contact with your SKR contact first.
In the wake of the most recent recession, many nonprofits are taking a hard look at their sustainability over the long term to be ready to face uncertain economic times. After all, an organization in poor financial health may find itself forced to cut programs and services when they’re needed the most. Fortunately, steps you can take now may help reduce such risks while allowing your nonprofit to fulfill its core mission.
Having a limited number of funding sources is the biggest sustainability challenge for many organizations. U.S. nonprofits typically receive funds from the government, foundations and individual and corporate donors, and often depend heavily on a few funding sources — for example, an annual government or foundation grant.
The danger in such limited reliance was amply illustrated when government and foundation support dried up during the economic downturn, and many nonprofits were forced to close their doors. The problems compounded for nonprofits serving low-income populations that could no longer provide any financial support themselves.
If you don’t have a variety of funding sources, it’s imperative that you branch out. The broader the base, the more stability and protection from economic challenges your organization will have.
A nonprofit needn’t rely solely on outside funders to improve financial sustainability. It might increase revenue by expanding its fee-based service offerings to new locations or populations. For example, an organization that provides services to children with disabilities in schools also could offer the services to children with disabilities in foster homes.
More and more, nonprofits are pursuing formal partnerships with other organizations — sometimes at the prompting of funders — to share costs. Organizations with similar missions and serving similar populations can collaborate to make better use of limited resources while reducing competition for funding. They also can more quickly scale up high-demand programs or services by joining forces.
Maintaining an adequate reserve is a key component of financial sustainability, but some organizations still lack such a fund. Even some nonprofits that have reserves haven’t established a formal policy for determining the appropriate amount, maintaining that amount and allocating funds when necessary.
Of course, having multiple funding sources is no guarantee of security — a harsh economy can have widespread consequences that affect multiple sources. Additional strategies that more indirectly affect financial sustainability include the following:
Step up branding. Strategic marketing and branding are key for promoting an organization and achieving stable financial standing, yet many organizations neglect this approach. A brand that clearly communicates a nonprofit’s mission and services helps to establish a solid reputation that builds trust among donors. This can be particularly crucial when funding pools are shrinking.
Evaluate outcomes. Donors and other nonprofit stakeholders are showing greater interest in the outcomes of programs and services and other nonfinancial measures. Often the number of lives improved has a greater impact on funders than the number of dollars spent. And they want to fund programs that are successful. By evaluating and sharing outcomes, a not-for-profit can demonstrate value, effectiveness and accountability.
Outcome evaluation also is an essential tool for decision making. You can use the process to identify underperforming programs and make necessary tweaks or to prioritize expenditures if funding declines or additional funding becomes available.
Assess your financial standing. No organization can accurately evaluate its financial sustainability without timely, comprehensive and accurate financial reporting. How can a nonprofit know how much funding it needs to support its programs and services without knowing how much it costs to operate?
In addition to providing a current picture of financial standing, financial reports should compare actual figures with historical and projected numbers. Some nonprofits also are introducing “dashboards” that give real-time financial data, ratios and trends in easily understood graphic form.
Involve the board. It’s not enough for the board to simply review financial statements before its meetings. Board members also must provide true fiscal oversight and not leave major financial decisions to staff, no matter how trusted and loyal.
Every board member should undergo training on relevant financial issues and be able to understand financial statements. The finance committee should report regularly to the full board and engage in dialogue about their reports and the organization’s financial health. The board shouldn’t merely take a backward-looking view but should also consider the future — for example, taking into account how current trends and developments might affect future plans for funding the nonprofit’s mission.
Plan for contingencies. When budgeting, every nonprofit should take the time to engage in annual contingency planning exercises. How could your organization continue to serve its mission if it suffered a 10% drop in funding? A 20% drop? Evaluating such scenarios in advance can provide valuable guidance and preserve mission-critical programs and services in times of crisis.
Achieving financial stability is a critical part of sustainability and should reflect both the organization’s mission and its financial needs. Your financial advisor can help you objectively assess and improve your nonprofit’s position.
If your nonprofit became a victim of fraud, it wouldn’t just hurt your organization’s bottom line — the infraction also could do devastating damage to your reputation. By implementing some simple controls, though, your organization can help protect itself from these risks.
One of the most important preventive measures is the segregation of accounting duties, especially those related to executing outgoing payments. You should assign different employees to approve, record and report transactions. And the employee who generates checks for payment or approves invoices shouldn’t also be responsible for signing checks or initiating online payments.
Similarly, the staffer who makes bank deposits shouldn’t be charged with reconciling the organization’s bank statements. If the nonprofit is too small to segregate duties fully, consider rotating staff through the various duties regularly, or involving a board member to oversee the process. You also can adopt a mandatory vacation policy to make it more difficult for fraudster employees to conceal their schemes.
Research conducted by the Association of Certified Fraud Examiners (ACFE) shows that organizations with antifraud training programs experience lower losses, and frauds of shorter duration, than those without. Nonprofits should provide targeted fraud awareness training not just for managers but also for employees.
At a minimum, the ACFE recommends explaining which actions constitute fraud, how fraud harms everyone in the organization and how to report suspicious activity. Managers and employees also should be educated on the behavioral red flags of perpetrators and encouraged to keep an eye out for them. Red flags include an employee who appears to be living beyond his means or one who refuses to take time off. Additionally, some insurance providers offer discounts if certain antifraud training is attended by a majority of staff members.
Fraud hotlines are one of the most effective strategies for uncovering fraud. The ACFE has consistently found that tips are the most common means of detecting fraud. The majority of tips come from employees, but the hotline also should be available and publicized to vendors and constituents.
Management should encourage employees to report any suspicious activity and enforce an anti-retaliation policy so employees aren’t reluctant to speak up. Ideally, the hotline should be anonymous, or at least confidential.
In 2013, the AICPA published its Audit Risk Alert: Not-for-Profit Entities Industry Developments. The alert urges not-for-profits to develop a formal fraud risk management program, including a fraud risk assessment.
According to the AICPA, a fraud risk assessment should identify:
The goal of the assessment is to identify any vulnerabilities and gaps in internal controls that could leave your nonprofit susceptible to financial and reputational damage.
Cutting the risks of fraud requires the board of directors and management to be aware of your nonprofit’s vulnerabilities. Staff also must pitch in, staying on the lookout for red flags, conflicts of interest and other potential issues — and they must be comfortable reporting any concerns. Your financial advisor can help, too, by conducting a fraud risk assessment and suggesting ways to establish appropriate controls.
The Office of Management and Budget’s Uniform Guidance (the Omni Circular) has brought sweeping changes for nonprofits that receive federal funding. This is particularly true with the new rule requiring agencies and other entities allocating federal dollars to reimburse organizations for indirect costs (also known as administrative or overhead costs). Nonprofits need to get up to speed on their rights and responsibilities under the rule — to avoid forfeiting reimbursement dollars.
The rule on indirect costs applies to new awards and additional funding on existing awards made after December 26, 2014. Under the guidance, federal agencies — and pass-through entities that allocate federal funding, including states, local governments and nonprofit intermediaries — must reimburse nonprofit recipients for their “reasonable” indirect costs. The guidance cites several “typical examples” of indirect costs, including:
Nonprofits are now reimbursed for indirect costs under one of three methods: according to an existing federally approved negotiated rate, a new negotiated rate or a default de minimis rate of 10% of the modified total direct costs.
The ability to recover part of their overhead should relieve some of the financial pressure on nonprofits that receive federal awards and allow them to carry out a program with less impact on the overall organization. By being able to charge overhead costs to the federal grant, organizations are able to build infrastructure and focus on sustaining their activities.
What should you be doing now?
Despite the clarity of the new reimbursement requirements, nonprofits may still encounter some obstacles to recovering their indirect costs. Grantors have obvious incentives not to get on board. Some might even attempt to persuade organizations to waive their ability to collect — waivers, however, are prohibited by the guidance. Others may not be up to speed on the requirements or may reduce other line items being funded to allow for indirect costs.
It’s critical that your accounting system distinguish between, and closely track, direct and indirect costs. To accomplish this goal, you might need to make adjustments to the method you’re using to account for indirect costs.
You also may need to reach out to government agencies and pass-through entities to negotiate an indirect cost rate. In some cases, you might find that the default rate of 10% is higher than what you can negotiate. Organizations that have an approved negotiated rate must use that rate for all federal awards and can’t opt for the default rate. If you have an existing negotiated rate, you’ll need to request a one-time extension good for up to four years. If it’s granted, you can’t request another review during that period. At the end of the period, you’ll be required to reapply for a new rate or elect the default rate of 10%.
The new indirect cost reimbursement rule ultimately should be a boon for nonprofits. But it may require you to make some critical decisions, including which reimbursement method to use, and potentially how to adapt your accounting system. Your financial advisor can assist with these decisions.
As you plan for the year ahead, you may wonder how changes to the accounting standards might affect the information you report on your company’s financial statements, including how it’s presented and what details are disclosed. The Financial Accounting Standards Board (FASB) establishes the standards for public and private companies to follow when they issue financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Here’s an overview of what the FASB is currently working on.
Although the FASB sometimes experiences delays in its publication schedule, it expects to issue final standards on the following topics by the end of the first quarter of 2016:
Leases. This revised recognition and measurement standard is big news for retailers, manufacturers, contractors and other companies that lease significant amounts of property and equipment. But the changes won’t be as far reaching as the FASB originally intended — and the standard won’t be aligned with international accounting rules for leases.
The revised standard aims to increase transparency and comparability among organizations by recognizing assets and liabilities on the balance sheet for leases with terms of more than 12 months and disclosing key information about leasing arrangements. The project addresses lease accounting from the perspective of both the lessee and the lessor.
The revised guidance wouldn’t apply for public companies until fiscal years beginning after December 15, 2018. Private businesses would have an extra year. Once the final standard is issued, however, the FASB would encourage early application.
Revenue recognition amendments. Revenue is considered one of the most important measures of a company’s financial health. In 2014, the FASB published Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. This standard replaces about 180 pieces of individual guidance under GAAP with a single principles-based model for recognizing revenue from customer contracts worldwide.
After fielding complaints that companies won’t have enough time to apply the standard, the FASB decided in April 2015 to delay the effective date by one year to give companies more time to implement the changes. Public companies, certain employee benefit plans and some not-for-profit organizations can wait to apply the new standard until annual financial statements for fiscal years that start after December 15, 2017. Private companies can wait until annual financial statements for fiscal years that start after December 15, 2018.
In the meantime, the FASB has been issuing amendments to the revenue recognition standard to clarify confusing parts of the standard — but not to change the core of the standard. One amendment aimed at identifying performance obligations and licenses would differentiate between 1) a license to intellectual property that has significant standalone functionality, and thus, satisfies the entity’s promise to the customer to use the intellectual property at a point in time, and 2) a license to symbolic intellectual property that includes support or maintenance of the intellectual property during the license period and, thus, that is satisfied over time.
The amendment also would address when to recognize revenue for a sales-based or usage-based royalty promised in exchange for a license of intellectual property. In terms of performance obligations, the amendment is expected to add guidance on goods and services that aren’t material in the context of the contract and accounting for shipping and handling activities.
Other revenue recognition amendments are in the works, too. The FASB is currently drafting a final standard to clarify the revenue recognition guidance for principal vs. agent arrangements. And it’s reviewing public comments on another proposal for narrow-scope improvements and practical expedients for implementing the revenue recognition standard. The effective dates for these revenue recognition amendments would be the same as the revised implementation date for ASU 2014-09.
Employee share-based payment accounting. This narrow-scope project aims to reduce complexity and improve the accounting for share-based payments that public and private companies award to employees. It would provide simplifications in accounting for income taxes, including tax benefits and deficiencies arising from the difference between the deduction for tax purposes and the compensation cost in the financial statements. The standard also would allow for an election to simplify accounting for forfeitures.
Transition to the equity method of accounting. Under current accounting, an equity method investor is required to determine the acquisition-date fair value of the identifiable assets and liabilities assumed in the same manner as for a business combination. The entity’s proportionate share of the difference between the fair value of the investee’s identifiable assets and liabilities assumed and the book value of recorded assets and liabilities generally must be accounted for in net income in subsequent periods.
This narrow-scope simplification project would eliminate the requirement to separately account for this basis difference. In other words, the equity method investment would be recognized at cost. The final standard is also expected to eliminate the requirement that an entity retroactively adopt the equity method of accounting if an investment unexpectedly qualifies for the method as a result of an increase in the level of ownership interest.
Finally, the FASB recently approved Private Company Council (PCC) Issue No. 2015-01, Effective Date and Transition Guidance. When it’s finalized, this standard would allow private companies an unconditional, one-time option to adopt four PCC accounting alternatives that were developed in 2014 related to goodwill, hedging, common control leasing arrangements and intangible assets.
The FASB has announced that it will issue proposed standards updates — also known as exposure drafts — on the following topics:
Classification of debt. This proposal would simplify the process for determining whether a liability should be classified as current or long term on the balance sheet. It replaces the existing fact-pattern-specific guidance in GAAP with a principle to classify debt as current or noncurrent based on the contractual terms of a debt arrangement and an entity’s current compliance with debt covenants.
Presentation of the costs of net periodic pension and postretirement benefits. This narrow-scope project would simplify the ways employers report “net benefit costs” on their financial statements.
During the FASB’s December 11 meeting, it also agreed to release a proposal to clarify eight narrow pieces of guidance for cash flow statements in the first quarter of 2016. This is a complex area of accounting — and the leading cause of financial restatements. The proposal would attempt to settle some of the frequent questions that crop up about the statement of cash flows.
The FASB has been working on several projects to simplify the disclosure requirements under GAAP by eliminating disclosures that don’t provide sufficient benefits to justify the costs of collecting the information to provide them. It plans to issue exposure drafts on required disclosures for defined benefit plans. It’s also reviewing public comments on the disclosure framework overall, including how the board and companies decide what’s appropriate to disclose in financial statement footnotes.
Public comments on the FASB’s exposure drafts on fair value and government assistance disclosures are due in February 2016. In addition, the FASB has begun to address disclosure requirements for income taxes, inventory and interim reporting.
We’ve only scratched the surface of these FASB projects. GAAP is constantly evolving to address the concerns of businesses and other users of financial statements. The FASB plans to conduct additional research and is beginning initial deliberations on many other areas of financial reporting. Contact us for more information and the latest updates on any of the items on the FASB’s current technical agenda.
A not-for-profit’s accounting function is its financial backbone. Efficient accounting processes along with sound controls to monitor them will put the organization on the right track for financial stability and growth.
Are you satisfied with your not-for-profit’s accounting function? Does it seem less efficient than you think it could be? Here are some suggestions for improving this important piece of your operation.
A good first step toward accounting function improvement is creating policies for the monthly cutoff of invoicing and recording expenses. For instance, require all invoices to be submitted to the accounting department by the end of each month. Too many adjustments, or waiting for tardy employees or departments to weigh in can waste time and delay the completion of your financial statements.
Another time saver: You may be able to spare days at the end of the year by reconciling your bank accounts shortly after the end of each month. It’s a lot easier to correct errors when you catch them early. Also reconcile accounts payable and accounts receivable data to your statements of financial position.
Designing a coding cover sheet is another step toward boosting efficiency. An accounting clerk or bookkeeper needs a variety of information to enter vendor bills and donor gifts into your accounting system. Speed up the process by collecting all of that information on one page. The cover sheet should list your not-for-profit’s general ledger account numbers so that the employee entering data doesn’t have to look them up each time.
Additionally, cover sheets should indicate whether the invoice is to be paid by check, electronic transfer or credit card and provide a place for the appropriate person to approve the invoice for payment. Use multiple-choice boxes to indicate which cost center the amounts should be allocated to. The invoice or copy of the donor’s check can be attached to the cover sheet for reference.
Another invoice tip: Don’t enter only one invoice or cut only one check at a time. Set aside a block of time to do the job when you have multiple items to process.
Many organizations underuse the accounting software package they’ve purchased because they haven’t invested enough time to learn its full functionality. If needed, hire a trainer to review the software’s basic functions with staff and teach time-saving tricks and shortcuts.
Become more efficient by avoiding any calculations or financial report presentations in Excel or other spreadsheet programs. Standardize the reports coming from your accounting software to meet your needs with no modification. This will reduce input errors and will also provide helpful financial information, not only at month end but throughout the year.
Consider performing standard journal entries and payroll allocations automatically within your accounting software. Many systems have the ability to recall transactions and can automate payroll allocations to various programs or vacation accrual reports. Make sure to review any estimates against actual figures periodically, and always adjust to the actual amount before closing your books at year end.
Accounting systems can become inefficient over time if they aren’t monitored. Look for labor-intensive steps that could be automated or steps that don’t add value and could be eliminated.
Make sure that the individual or group that’s responsible for the organization’s overall financial oversight (for example, your CFO, treasurer or finance committee) promptly reviews monthly bank statements, financial statements and accounting entries for obvious errors or unexpected amounts.
Make sure that you’re optimizing your accounting resources. Considering the growing list of tasks that arise, implementing one or more of the above processes can help free up valuable time. This will allow management to focus on larger projects or initiatives as well as the big picture.
If you have questions on how to make the accounting process in your not-for-profit more efficient, don’t hesitate to reach out to us.
One of the top priorities for nonprofits is engaging with their supporters and building relationships. It’s no surprise, then, that interest is surging in technology that can help nonprofits do just that. How can your organization maximize the potential of current technology tools and avoid wasting time with passing fads? Let’s look at what’s working.
According to the Pew Internet and American Life Project, 58% of American adults had a smartphone as of January 2014, and 42% had a tablet computer (a dramatic jump from only 4% in September 2010). As of May 2013, Pew reports, 63% of adult cell phone owners used the Internet on their phones — twice as many as four years earlier. And 34% of the cell Internet users said that they mostly use their phones to go online, as opposed to using a desktop or laptop computer.
With mobile Internet access poised to surpass that of conventional computers in the coming years, some nonprofits are wisely taking steps now to develop mobile websites and apps. Why do you need a mobile-specific website? Imagine a supporter who receives an e-mail call to action on his phone and immediately clicks through to your regular site, only to find that it’s difficult to read and use on his phone’s small screen. That’s a lost opportunity — one that will only multiply as users increasingly rely on phones for their online communications.
Mobile websites and apps provide your supporters with information at their fingertips and allow them to act, including donating, on the go. As with any type of online transaction, of course, it’s important to establish strong internal controls to protect users’ data and privacy and prevent the fraudulent misappropriation of funds.
Mobile websites and apps also can help nonprofits leverage their supporters’ social networks. The past few years have taught many organizations the critical role that social networks can play in spreading their missions to wider audiences than ever and attracting new supporters and donors.
Some may have initially scoffed at the idea that Facebook or Twitter could provide real value. But few can argue with the power of social media at this point, particularly for nonprofits. It’s an indisputable fact that people are much more likely to engage with organizations endorsed by friends, families and trusted sources.
That’s one reason why peer-to-peer fundraising has taken off in recent years. Thanks to social media, it’s much easier for participants in your 5K race, cycling event or dance-a-thon to drum up financial support for their efforts. By providing social media tools as part of your registration materials, you empower your participants to personalize their pitches and meet or surpass their — and your — fundraising goals. Again, though, you’ll need to have proper internal controls in place, such as firewalls, encryption and other protections for credit card data.
Social media also allows nonprofits to easily and cost-effectively participate in back-and-forth, multiparty conversations, rather than just one-way communications. A single posting might elicit numerous enthusiastic responses that can snowball as the posting is passed along by readers with a click of a button.
Engaging in social media doesn’t mean you can afford to neglect your existing website, though. Instead, savvy nonprofits are expanding their Web presence.
Your website visitors should find a simple, secure way to donate, as well as a range of compelling content that will bring them back again and again. Online videos, for example, offer effective, inexpensive opportunities to tell your organization’s story and mobilize viewers. Partnering with an experienced Web-design firm to improve your online presence can be an investment with results measuring far greater than the cost.
The tools listed above are by no means the only technological advances that can pay off for your organization or enhance your outreach efforts. Nonprofits are also turning to cloud computing, social analytics and software that produce solid financial metrics. Such advances are no longer a luxury — they’re a matter of survival. If your organization has lagged behind, now is the time to jump into the water.
With contributions hard to come by, your organization should eliminate any of these shortcomings, if applicable.
The Financial Accounting Standards Board (FASB) has issued new guidance that permits private companies following Generally Accepted Accounting Principles (GAAP) to, in some circumstances, elect not to consolidate the financial reporting from variable interest entities (VIEs) that lease property to them. It may apply in situations where an owner of a private company is also an owner of a second business entity that leases property to the company.
The guidance, Accounting Standards Update (ASU) 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements, is a consensus of the Private Company Council (PCC). It’s intended to improve private company financial reporting regarding consolidation of lessors.
The Financial Accounting Foundation, FASB’s parent organization, established the PCC in May 2012. Its purpose is to improve the process of setting accounting standards for private companies that prepare their financial statements in accordance with GAAP.
Among other things, the body was tasked with working with FASB to determine whether alternatives to existing GAAP standards can ease the burden on private companies of preparing GAAP-compliant financial statements while better addressing the needs of users of those financial statements. Earlier this year, FASB issued the first two private-company GAAP alternatives, ASU 2014-02 and ASU 2014-03, addressing goodwill and interest rate swaps, respectively. ASU 2014-07 is the third private company alternative that FASB has issued.
Under GAAP, a company must consolidate the financial reporting from an entity in which it has a controlling financial interest. Two models are typically used to determine whether a company has a controlling interest in an entity: the voting interest model or the VIE model.
Under the VIE model, a company is deemed to have a controlling financial interest in an entity when it has 1) the power to direct the activities that most significantly affect the entity’s economic performance, and 2) the obligation to absorb losses, or the right to receive benefits, of the entity that could potentially be significant to the entity. To determine whether the VIE model applies, a company must determine whether it has an explicit or implicit variable interest in the entity and whether that entity is a VIE.
An explicit variable interest stems from contractual, ownership or other financial interests in the entity that directly absorb or receive the variability of the entity. An implicit variable interest involves the absorbing or receiving of variability from the entity indirectly. The identification of such interests is a matter of judgment based on the relevant facts and circumstances.
A VIE generally is a corporation, partnership or any other legal structure that is used for business purposes and either doesn’t have equity investors with voting rights or has equity investors that don’t provide sufficient financial resources for the entity to support its activities.
The new guidance specifically applies to leasing arrangements. Private companies commonly lease facilities from separate lessor entities owned by one of the company’s owners. The lessor entity usually is established for tax, estate planning or legal liability purposes — not to structure off-balance sheet debt arrangements. Typically, the lessor entity’s only asset is the leased facility, and the lease is the only contractual relationship between the lessee company and the lessor entity.
Existing GAAP guidance requires the lessee company to determine whether it holds a variable interest in the lessor entity (for example, a guarantee of the lessor’s debt). If it does, and the lessor is a VIE, the lessee company must assess whether it holds a controlling financial interest in the lessor under the VIE model. If the entities are under common control, the lessee generally must consolidate the financial reporting from the lessor.
The PCC found that, despite the cost and complexity of applying the GAAP VIE guidance in such a case, most users of private company financial statements consider the consolidation of the lessors under common control irrelevant. These users tend to focus on the cash flows and tangible worth of the stand-alone lessee entity, not the cash flows and tangible worth of the consolidated group presented under GAAP.
Moreover, consolidation of the lessor distorts the lessee’s financial statements. As a result, users who receive consolidated financial statements often request a consolidating schedule that they can use to reverse the effects of consolidation.
Under ASU 2014-07, a private company lessee can elect an alternative not to apply the GAAP VIE guidance to a lessor if:
In addition, if the private company explicitly guarantees or provides collateral for any obligation of the lessor related to the asset leased by the private company, the principal amount of the obligation at inception can’t exceed the value of the asset leased by the private company from the lessor.
If a private company elects to apply the accounting alternative, it should apply the alternative to all current and future leasing arrangements satisfying the above conditions.
Electing the alternative would also free a private company from providing GAAP-compliant VIE disclosures about the lessor entity. The private company won’t be totally off the hook, though. It must disclose the following information:
These disclosures are required in combination with the other GAAP-required disclosures about the private company’s relationship with the lessor entity, such as those for guarantees, leases and related party transactions.
A private company that elects the accounting alternative must apply it retrospectively to all periods presented on financial statements. The alternative will be effective for annual periods beginning after Dec. 15, 2014, and interim periods within annual periods beginning after Dec. 15, 2015. Early application is permitted for any period for which the company hasn’t yet issued financial statements.
If you have questions regarding how this guidance affects the preparation of your financial statements, please give us a call. We’d be happy to answer your questions.
The Department of Housing and Urban Development (HUD) has made several changes to the reporting requirements for supervised mortgagees. Beginning with HUD Mortgagee Letter 2009-31, supervised lenders were required to submit annual audited financial statements electronically through HUD’s LASS on-line system.
In January 2011, HUD issued Mortgagee Letter 2011-05 that revised the audit reporting requirements for supervised lenders. The revised reporting requirements allow a supervised lender in a parent-subsidiary structure to submit audited consolidated financial statements of the parent company if the parent company executes a written guarantee of the on-going net worth and liquidity compliance of the FHA approved subsidiary. The FHA approved lender is also required to submit their fourth quarter Call Report, a Compliance Report and an Internal Control Report. This Mortgagee Letter still requires submission of audit reports on the LASS system.
In July 2011, HUD issued Mortgagee Letter 2011-25 that further revised the reporting requirements for small supervised lenders and provided a reprieve from the audited financial statements requirement. Supervised lenders with assets of less than $500 million are not required to submit audited financial statements nor an audited computation of net worth. This new exemption for audited financial statements will expire on April 7, 2012 and there has been no guidance regarding what will happen after the expiration date. The lender must still submit their fourth quarter Call Report and Compliance and Internal Control Reports issued by an independent auditor.
HUD has issued Frequently Asked Questions for Mortgagee Letter 2011-25 in which HUD states that supervised lenders with less than $500 million in assets may mail hard copies of the required reports rather than submitting them on the LASS system. This is because the LASS system has not yet been updated to accept submissions under these revised reporting requirements. There are specific requirements for mailed hard copies such as
1) you must submit two copies of each report,
2) you must include a cover letter with the FHA lender/mortgagee identification number that claims the exemption for supervised lenders under the April 7, 2011 waiver, and
3) the FHA lender/mortgagee identification number must be written on the upper right-hand corner of each separate document.
Financial institutions need to engage a CPA firm to perform the necessary compliance and internal control audit procedures and to issue the compliance and internal control reports. The procedures to be performed by the CPA firm and report examples are outlined in chapters 1, 2 and 7 of the HUD Handbook Consolidated Audit Guide for Audits of HUD Programs.
In summary, as it stands right now, if you are an FHA Supervised Lender with total assets under $500 million, there is no financial statement audit requirement for 2011. You are required to submit your fourth quarter call report and both the Compliance and Internal Control Reports as previously discussed. These reports may be submitted via mail which is a significant reprieve from the challenges of the LASS system.
If you have any questions on these reporting requirements, please feel free to contact Ellen Fisher at any time by phone at (719) 630-1186 or email efisher@skrco.com.