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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.
Donors from households with net assets of $1 million or more — or those that bring home at least $200,000 annually — on average made donations totaling $25,509 in 2015 compared to an average of $2,124 from the general population, according to the 2016 U.S. Trust® Study of High Net Worth Philanthropy. And, on average, these high net worth households gave to eight different nonprofits. Also, wealthy donors who volunteered gave 56% more, on average, than those who didn’t volunteer. And 83% of wealthy donors plan to give as much or more in the next three years.
Large organizations such as United Way and the American Red Cross are turning to online appeals to reach Millennial donors who are “rewriting the rules of fundraising,” Adweek reports. One of the biggest challenges is engaging these donors through new fundraising channels. The not-for-profits are responding by ramping up efforts in crowdfunding, mobile and other digital modes of giving. United Way, for example, raised $570,000 for its “Restore Baltimore” campaign via crowdfunding.
According to this year’s Nonprofit Employment Practices Survey™ from Nonprofit HR and GuideStar, the ability to pay competitive wages ranks as the top staffing challenge faced by nonprofits for the fifth consecutive year. Since 2014, the second largest challenge has been finding qualified staff.
Organizations have the most trouble retaining employees in direct services (positions that work directly with clients), followed by fundraising development. And these are areas where the most job growth is expected in the coming year, suggesting the possibility of more staffing problems going forward. The survey report asserts that the increasing number of “entities that are blending purpose and profit” (for example, Ben & Jerry’s and Patagonia) means job seekers have more opportunities to engage in mission-driven work than ever before.
When the Financial Accounting Standards Board’s (FASB’s) new revenue recognition standard was released in 2014, it caused quite a stir across industries. But the standard applies only to revenue from “exchange transactions,” also known as reciprocal transactions. Contributions to nonprofits are nonreciprocal, and your grants may be, too — meaning different rules apply.
In Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, the FASB defines a contribution as an unconditional transfer of cash or other assets to an entity in a voluntary nonreciprocal transfer. It specifically distinguishes contributions from exchange transactions, which it describes as reciprocal transactions where each party receives and sacrifices approximately equal value.
That means that contributions don’t fall within the rules in ASU 2014-09, including its voluminous disclosure requirements. Instead, you generally should report contributions in the period you receive the pledge or commitment to donate. Restrictions imposed — directions given by the donor — as to how or when the funds may be used do not change the timing of recognition.
However, when the donor’s gift is available only after certain requirements are met by your organization, the timing may be different. Specifically, you should not recognize a conditional promise to give as revenue until the conditions are substantially satisfied. For example, a promise to give, requiring a minimum matching contribution, can not be recognized until the match is received.Transfers of assets with donor-imposed conditions should be reported as refundable advances until the conditions are substantially met or explicitly waived by the donor.
But you can recognize a conditional promise to give upon receipt of the promise, if the possibility is “remote” that the condition will not be met. An example is a grant requiring you to submit an annual report to receive subsequent annual payments on a multiyear promise.
Determining whether a grant is an exchange transaction, where the grantor expects goods and services for its money, or a type of restricted or conditional contribution, where the grantor intends to make a gift to support the organization, can be more complicated. For example, a grant based on the number of meals or beds a nonprofit provides its client population could be considered an exchange transaction because it is essentially a contract to provide goods or services. Similarly, a research and development grant could be characterized as an exchange transaction, if the grantor retains intellectual property rights in the outcomes.
A grant that is an exchange transaction is subject to ASU 2014-09’s five-step framework:
1. Identify the contract (or contracts) with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when (or as) you satisfy a performance obligation.
Say you received a fixed-fee grant to perform specific research for a governmental agency, and the agency will own the outcome. The grant is a contract because each party receives something of equal value (grant funds and research) (step 1). The provision and delivery of the research is the performance obligation under the contract (step 2). The fixed fee is the transaction price (step 3). With only one performance obligation, the entire transaction price is allocated to it (step 4), and you will recognize the grant revenue when you deliver the research to the agency (step 5).
This is a simplified example. Nonprofits can find it challenging merely to determine whether a grant is an exchange transaction or a contribution — or a combination of the two, requiring bifurcation for proper accounting treatment. And, when a grant is an exchange transaction, it can be tough to identify the performance obligations, when they’re satisfied and the proper allocation of the transaction price to those obligations.
ASU 2014-09 will take effect for some nonprofits as soon as 2018. Now is the time to start analyzing all of your revenues to determine when and how you should report them.
Determining how and when to recognize grant and contribution revenue can be tricky for many nonprofits, particularly those receiving government funds. The good news is that the Financial Accounting Standards Board (FASB) is at work on an Accounting Standards Update that will provide more guidance. As part of its “Revenue Recognition of Grants and Contracts by Not-for-Profit Entities” project, the board is considering two main issues:
• How to distinguish between grants and similar contracts that are exchange transactions (subject to the FASB’s five-step revenue recognition framework) and those that are contributions (not subject to the framework), and
• How to distinguish between conditions and restrictions for contributions.
Although still in the early stages of the project, the FASB has tentatively decided that a donor-imposed condition will require: 1) a right of return (either a return of the assets transferred or a release of the donor from its obligation to transfer the assets), and 2) a barrier that must be overcome before the recipient is entitled to the assets transferred or promised. (For example, the recipient must raise a threshold amount of contributions from other donors.) A final ASU is expected in first quarter 2018.
With baby boomers — the largest and wealthiest generation in U.S. history — expected to transfer trillions of dollars worth of assets in the next few decades, this could be the right time to launch an endowment. Nonprofits have long turned to endowments for help providing the necessary financial resources to carry out their mission, now and into the future.
All endowments are not created equal. With a permanent endowment, the original gift is usually intended to be held into perpetuity, with only certain income available for use in operations. With a term endowment, you are generally allowed to also use the principal after the designated term has ended. Either way, though, you need to consider several key issues before making the move.
Endowments appeal to nonprofits for several reasons. For example, the funds provide financial stability and can help ensure that programs stay focused on areas your board and donors rank as most important. An endowment also can reduce the headaches and uncertainty often experienced when you are forced to rely solely on work-intensive annual campaigns, special events and fundraising. Moreover, less event planning often equals more time to devote to your actual mission!
Endowments can help you attract additional donors, too. They demonstrate that your not-for-profit has earned the trust of other donors and will be around for the long haul. Endowments may also provide the added benefit of approaching donors from a position of strength and confidence, rather than neediness.
Be forewarned, however: An endowment can turn off potential donors, who might think your organization does not really need their contributions. Administrative tasks also could consume staff time, diverting it from the organization’s current needs.
Not surprisingly, endowments come with some restrictions. The Uniform Prudent Management of Institutional Funds Act (UPMIFA) lays out the standards for managing and investing endowments. You wil need to establish a written investment policy for your endowment that satisfies those standards by addressing, among other things, asset allocation and spending.
Your board’s investment committee, with input from an investment advisor, should determine the best allocation across asset classes (for example, stocks, bonds and real estate) to earn your desired return on investment. If board members do not have expertise in this area, consider hiring an investment manager to advise you. Each investment decision must be made in the context of the endowment’s total portfolio, taking into account the risk and return objectives of the endowment and the organization.
When it comes to spending, UPMIFA lets you spend or accumulate at a rate the board determines is prudent for the endowment’s uses, benefits, purposes and duration — subject to seven specific criteria. These include the purposes of the organization and the endowment, general economic conditions and the organization’s other resources. And UPMIFA lets you base spending on the expected total returns of the endowment, including earnings on original principal and appreciation.
If a traditional endowment does not seem like a good fit, do not worry — you are not necessarily out of luck. You can establish a “quasi endowment,” also known as a board-designated endowment or funds functioning as endowments. A quasi endowment could work well if your organization isn’t quite ready for a full-blown endowment campaign but wants the financial stability and other benefits associated with endowments, and has the funds to set aside for this purpose.
Unlike traditional endowments, quasi endowments are established by the board — not a donor. They are usually funded by unrestricted donor gifts or excess operating funds, and are not subject to UPMIFA. A quasi endowment may be more flexible than permanent or term endowments because the board can change its designation(s) at any time and for any reason.
If you decide to pursue an endowment of any kind, keep in mind that the arrangements are more complicated than for funds raised through ordinary fundraising or capital campaigns. You will need to make sure you have, or can acquire, the requisite expertise in areas such as drafting investment policies, managing the investments and related financial reporting.
Successful nonprofits typically proceed along a standard life cycle. Their early stage precedes a growth period that runs several years, followed by maturity. The maturity (or governance) stage generally begins around an organization’s eighth year. By this time, the nonprofit has built its core programs and achieved a reputation in the community.
But no organization can afford to rest on its laurels. In fact, mature not-for-profits often face a critical fork in the road. The next step can lead to renewal — or stagnation and eventual decline.
If you lead a nonprofit in the maturity stage, you should set your sights toward sustainability. By now, your organization should have a good handle on its current resources and be adept at forecasting its needs. From a financial perspective, that means maintaining sufficient cash on hand to support daily operations, as well as adequate operating reserves. This also may be the time to initiate your planned giving and endowment efforts to sustain programs into the future.
Your organization probably requires more funds than ever. However, a nonprofit of this age must be wary of “mission drift,” which happens when an organization begins to make compromises to generate funds rather than stick to its mission.
At this point, organizations often may need more program and operational coordination and more formal planning and communications. Your nonprofit also may explore the possibility of alliances with other organizations. Such affiliations can both extend your organization’s impact and increase its financial stability. Alliances also can help reinforce your mission focus and prevent your nonprofit from getting too bogged down by policy and procedures.
Another way to increase financial stability is to add members to your board. A mature nonprofit’s brand identity may enable it to attract more wealthy, prestigious and well-connected members. Ideally, these members will have more to offer than simply money, such as expertise in a certain area or a strong personal commitment to your mission.
As your executive director and staff concentrate more on operations, your board needs to take an even greater leadership role by setting direction and strategic policy. The board may become more conservative, though. (The boards of younger nonprofits are usually more entrepreneurial and willing to take risks because less is at stake.)
When it comes to programming, mature nonprofits must take care not to be lulled into complacency. It is important to regularly review your programming, including the actual curriculum or content, for relevance and effectiveness. Your strategic plan should focus on the long range and may outline new opportunities.
Surveys can be a good way of keeping up to date on your constituents’ needs and interests, which can change over time. The results might lead to dramatic changes. One literacy nonprofit, for example, stayed relevant to its community by shrinking its literacy programming and offering more English as a Second Language services instead.
In today’s competitive environment, any nonprofit that makes it to maturity has reason to celebrate. To continue to serve your mission, though, your organization must be strategic in both financial and program planning.
WASHINGTON – The Internal Revenue Service, state tax agencies and the tax industry on Jan. 25 renewed their warning about an email scam that uses a corporate officer’s name to request employee Forms W-2 from company payroll or human resources departments.
This week, the IRS already has received new notifications that the email scam is making its way across the nation for a second time. The IRS urges company payroll officials to double check any executive-level or unusual requests for lists of Forms W-2 or Social Security number.
The W-2 scam first appeared last year. Cybercriminals tricked payroll and human resource officials into disclosing employee names, SSNs and income information. The thieves then attempted to file fraudulent tax returns for tax refunds.
This phishing variation is known as a “spoofing” e-mail. It will contain, for example, the actual name of the company chief executive officer. In this variation, the “CEO” sends an email to a company payroll office or human resource employee and requests a list of employees and information including SSNs.
The following are some of the details that may be contained in the emails:
Working together in the Security Summit, the IRS, states and tax industry have made progress in their fight against tax-related identity theft, but cybercriminals are using more sophisticated tactics to try to steal even more data that will allow them to impersonate taxpayers.The Security Summit supports a national taxpayer awareness campaign called “Taxes. Security. Together.” This campaign offers simple tips that can help make data more secure.
In a recent blog post to AICPA Insights, guest blogger Tom Pender recognized the importance of not-for-profit organizations' mission and vision but then turned to galvanizing the staff and board to lead. "Having the right staff is critical and having the right board of directors is equally important. Scaling an organization’s impact means not just maintaining core processes, but also constantly sharing knowledge to build the organization’s capacity to affect change. Without leadership to keep the organization focused, staff can fall victim to fighting the daily fires that are a distraction from the larger goal of expanding the organization’s reach."
He gave four considerations to supercharge your board. The full post can be read here.
The Financial Accounting Standards Board (FASB) has issued the first major changes to the accounting standards for nonprofits’ financial statement presentation in more than two decades. Accounting Standards Update (ASU) No. 2016-14, Not-for Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, affects just about every nonprofit, including charities, foundations, private colleges and universities, nongovernmental health care providers, cultural institutions, religious organizations, and trade associations.
The new standard is intended to provide improved net asset classification requirements and information about nonprofits’ resources (and changes in those resources) to donors, grantors, creditors and other users of nonprofits’ financial statements. It changes the classification of net assets and the information presented in the financial statements and footnotes about an organization’s liquidity, financial performance and cash flows. As a result, stakeholders should find it easier to understand how nonprofits manage their funds.
Nonprofits’ financial statements currently are prepared according to guidance published in 1993 as Statement of Financial Accounting Standards No. 117, Financial Statements of Not-for-Profit Organizations (incorporated into Topic 958 in the FASB Accounting Standards Codification). The FASB believes that this reporting model remains sound, but stakeholders have expressed concerns regarding several areas, including:
In response, the FASB issued an Exposure Draft, Presentation of Financial Statements of Not-for-Profit Entities, in April 2015. After receiving an unusual amount of feedback, much of it negative, the FASB decided to split its deliberations into two phases.
The issuance of ASU No. 2016-14 represents the conclusion of Phase 1. Phase 2 will focus on certain issues considered more challenging, such as aligning the presentation of measures of operations between the statements of activities and cash flows, as well as those that might depend on a related FASB project addressing financial performance reporting by for-profit entities. The FASB hasn’t yet announced a timeline for the second phase.
One of the more notable changes in the new standard is the replacement of the existing three net asset classes (unrestricted, temporarily restricted and permanently restricted) with two new classes (net assets with donor restrictions and net assets without donor restrictions). The FASB expects this to reduce the complexity of financial reporting for nonprofits, while increasing the understandability for stakeholders.
The new approach recognizes changes in the law that now allow organizations to spend from a permanently restricted endowment even if its fair value has fallen below the original endowed gift amount. Such “underwater” endowments will now be classified as net assets with donor restrictions, rather than the current presentation as unrestricted net assets. The guidance also requires expanded disclosures regarding underwater endowments.
In addition, the new standard eliminates the current “over-time” method for handling the expiration of restrictions on gifts used to purchase or build long-lived assets such as buildings. Nonprofits must use the placed-in-service approach (in the absence of explicit donor stipulations to the contrary). In other words, nonprofits must reclassify these gifts as net assets without donor restrictions when the asset is placed in service, rather than over the asset’s useful life. As a result, organizations won’t be able to match the depreciation expense with the release of these restricted net assets unless stipulated by the donor.
The new standard includes specific requirements to help financial statement users better assess a nonprofit’s available financial resources. Organizations must provide:
An asset’s availability may be affected by its nature; external limits imposed by donors, grantors, laws and contracts with others; and internal limits imposed by board decisions. Disclosure is also required for board designations or other internal limits on the use of net assets without donor restriction.
To provide a clearer picture of a nonprofit’s spending, the new standard requires reporting of expenses by both function (which is already required) and nature in one location. This presentation, showing how the nature of expenses (for example, salaries and wages, employee benefits, supplies, and rent) relates to the functions (program services and supporting activities), can be presented on a separate statement, on the statement of activities or in the footnotes. In addition, the standard calls for enhanced disclosures regarding specific methods used to allocate costs among program and support functions.
This information will help financial statement users assess the degree to which expenses are fixed or discretionary, how the related resources are allocated, and the costs of the services provided.
Nonprofits will now be required to net all external and direct internal investment expenses against the investment return presented on the statement of activities. Financial statement users will be better able to compare investment returns among different nonprofits, regardless of whether investments are managed externally (for example, by an outside investment manager who charges management fees) or internally (by staff).
The new standard also eliminates the current required disclosure of those netted expenses. This should eliminate the difficulty some nonprofits had with identifying management fees embedded in investment returns.
One of the more controversial components of the FASB’s Exposure Draft was its requirement that organizations use the “direct method,” not the “indirect method,” to present net cash from operations on the statement of cash flows. The two methods produce the same results, but the direct method provides more understandable information to financial statement users.
The final version of the new standard allows nonprofits to use either method. But, should an organization opt for the direct method, it will no longer need to include an indirect method reconciliation. The FASB hopes this change, which should reduce the costs of the direct method, will encourage more nonprofits to use it.
The new standard takes effect for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early application is allowed.
Nonprofits should resist the temptation to delay preparations even though they may also be dealing with the implementation of the new accounting standards for lease accounting and revenue recognition. If you have questions about how the new standard will affect your nonprofit, please contact us.
The IRS recently announced a reduced user fee from $400 to $275 for filing the simplified form for recognition of tax-exempt status, Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Form 1023-EZ is shorter (only two pages) and more user-friendly than the regular Form 1023. The reduced fee became effective on 7/1/16.
To determine whether you are eligible to complete this simplified form, read the form instructions and click on the Form 1023-EZ Eligibility Worksheet link in the instructions.
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.