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Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Please Note: Our office will be closed Wednesday, April 16th.
SKR+Co Nonprofit Newsletter
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Meet our Nonprofit Specialists
Steve Hochstetter, CPA, CVA, Audit Partner
Our Nonprofit Services
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There is much talk about accountability, especially financial accountability for charitable and other exempt organizations.
Nonprofits need to embrace accountability to protect the organization and its people, to demonstrate openness and forthrightness in external dealings and to support the greater good. Embracing accountability also helps not-for-profits fulfill their fiduciary responsibilities to donors, constituents and the public. But how can nonprofits truly embrace this abstract term?
There can be no accountability without good governance. You must set in place the means and measures to keep your organization in compliance with all applicable laws and rules as well as best practices. And most important, your not-for-profit must keep in line with its mission and guiding principles, including integrity.
Author and nonprofit expert J. Steven Ott describes an organization’s governance as “a product of its purposes, people, resources, contracts, clients, boundaries, community coalitions and networks, and actions as prescribed (or prohibited) in its articles of incorporation and bylaws, state laws and codes, and the IRS codes and rules.”
When it comes to accountability and governance, the buck unquestionably stops with your board. Therefore, it’s critical that you help the board understand its responsibilities and focus its attention on carrying out the not-for-profit’s mission — not the process-oriented details best handled at the staff or committee level.
Keeping the financials spotless is critical. So make sure you conduct regular, board-approved audits that are attested to by the executive director and principal financial manager. Management should present internal financial statements to the board — or its audit or finance committee — and review performance against approved budgets on at least a quarterly basis. In addition, the board should establish and regularly assess financial performance measurements.
Your nonprofit must comply with all legally required reporting procedures — and certain financial practices that may apply to a specific activity. For example, one of your major funders or a national affiliate of your organization might require you to provide key performance indicators or other reports linking operational results with financial information.
As you carry out your initiatives, do so fairly and in the best interests of your constituents and community. Your status as a not-for-profit means you’re obligated to use your resources only toward your mission and to benefit the community that you serve. Programs should be evaluated accordingly, both in respect to the activities and the results or outcomes.
Communication is a big part of accountability. Your annual report, for example, should reflect your mission and summarize the year’s activities. It’s best practice for the report to also provide financial data for the year and other information, such as a list of board members, management staff and other key employees.
As a public document, your nonprofit’s Forms 990 for the previous three years will give your public a good overview of your organization’s exempt activities, finances, governance, compliance and compensation methods.
Your organization’s demonstration of accountability is likely to generate a positive response from your constituents, whether it’s in the form of donations, funding, volunteering or simply spreading the word about the merits of your nonprofit. And that’s the kind of outcome worth pursuing.
Do you bite your nails before your not-for-profit’s external audit each year? Does your staff start showing signs of anxiety in anticipation of the auditors walking in the door?
If this sounds like your situation, take a deep breath. Here are five tips for making the audit experience run more smoothly for you and your auditors.
Ask your auditor for a list of items they’ll need during the audit, with deadlines for each item, if such a list isn’t provided automatically. Talk to your auditor before the fieldwork if you have questions about any of the items, and let your auditor know right away if you won’t be ready by the agreed-upon dates.
Because surprise is a required element in the audit, you’ll also need to produce some information on the spot, such as specific expense reports, journal entry support, or grantor or program reports. But you can still prepare by establishing files during the year to collect the information you may need.
Your expectations of the audit should mirror your contract with the auditing firm. It will spell out what the audit will accomplish and your responsibilities.
Auditors once did accounting “clean-up” work for their clients during the audit, such as preparing year-end journal entries, fixed asset schedules, and various prepaid expense and accrued liability analyses. But today’s professional standards draw a clear line between accounting and auditing services, and your auditor must stay independent of your accounting processes, and as a result may be limited as to what he or she can do.
If there are accounting tasks you can’t do internally due to a lack of expertise, consider hiring a different firm to handle them. But if you’re fully capable and “own” the process, you can engage your audit firm to assist with certain analysis and adjustment information outside of the audit.
Draft and review your accounting and procedures manual. Self-assess inherent internal control weaknesses and determine the necessary internal controls to mitigate such weaknesses. Periodically ascertain whether your organization’s policies and procedures are being followed.
If your operations have changed or evolved, discuss these developments with your auditor during the year and update your policies and procedures accordingly. Waiting until fieldwork begins can delay the audit process.
Your auditor will apply risk standards during the audit. AICPA Statement on Auditing Standards No. 115, Communicating Internal Control Related Matters Identified in an Audit (SAS 115), defines deficiencies in internal control and other “material weaknesses” and “significant deficiencies.”
The auditor, for example, will look to see if there’s:
After reviewing the risk and internal control information you’ve assembled, your auditor could determine there is a “significant deficiency” or the more serious “material weakness.”
For any matter identified in the auditor’s SAS 115 letter, prepare a written response including whether you have taken or intend to take any action in response to the finding. This is important to the audit committee and board as they oversee the audit and the overall system of checks and balances.
Don’t let the annual audit be the only time you talk to your auditor. If you save up all your questions, it’s likely to extend the length of the audit.
Also ask if there are new accounting pronouncements or changes for the year so you and the board aren’t surprised after year end. Be proactive in understanding the new guidance and its impact on your next audit and future financial reporting.
Although the audit — and the preparation that precedes it — requires some work, the benefits are plentiful. The audit not only assesses your overall financial condition, but also can pinpoint problems with financial management and financial reporting, identify ways to reduce risk and strengthen internal controls.
Since the revised IRS Form 990 debuted a few years ago, many nonprofits have been reviewing the policies on their books, improving them, and adding new policies to their collections. Form 990 doesn’t state that these policies are required, but asking about them implies that they should be in place. Form 990 aside, the public — concerned by stories of nonprofit mismanagement — has put more emphasis on nonprofit governance, including policy adoption and enforcement.
There’s good news about this policy-making uptick: Because so many organizations already have policies on the books, you can learn from their successes.
What types of policies do nonprofits need? Form 990 asks nonprofits if they have policies on:
Policies on gift acceptance, investment practices and joint ventures also have become more popular in recent years.
Here is a selected listing of organizations and websites that can help you in developing or improving your nonprofit’s policies:
BoardSource. At http://www.boardsource.org, you can purchase policy samplers on a variety of topics. An extensive policy sampler contains 241 policies on 48 topics under the categories of ethics and accountability, board and board members, chief executive, finance and investments, fundraising, personnel, communications and committees.
Independent Sector. This nonpartisan coalition of approximately 600 national organizations, foundations and corporate philanthropy programs posts model policies at http://independentsector.org under “The Principles for Good Governance and Ethical Practice Resource Center.” You can download them for free.
National Council of Nonprofits. At http://www.councilofnonprofits.org, members have access to a variety of policy-related information, including a Form 990-related “governance practices” checklist and sample policies on conflict of interest, document retention and destruction, board review of compensation policy, joint venture and partnership, and other topics.
Although you should customize your own policies — rather than go with a boilerplate — there’s something to be said about not reinventing the wheel. Just be sure to carefully adjust policies from other sources to fit your operation. Make sure, for example, that the processes are practical for your size and structure, and that the titles and positions listed for policy oversight are correct.
Your CPA can help you customize a policy or review the one you devise. Your lawyer also should review any policy before it’s adopted.
September 22, 2011
There have been discussions about separate private company accounting standards for years. Now standard-setters may actually do something about it. The Financial Accounting Foundation (FAF) — parent organization to the Financial Accounting Standards Board (FASB) — will soon decide whether to adopt recommendations made earlier this year by a blue-ribbon panel on standard setting for private companies.
The panel recommended that the FAF establish a separate, private company standards board to develop appropriate exceptions and modifications to U.S. Generally Accepted Accounting Principles (GAAP) that would “better respond to the needs of the private company sector.” The new board would work closely with FASB, and its standards would be incorporated into FASB’s Accounting Standards Codification (ASC).
However, the board would have final authority over all exceptions and modifications. The panel also recommended the creation of a “differential framework” to guide the new board’s standard-setting activities.
In the United States, public and private companies, for the most part, are subject to the same set of accounting standards — GAAP. Public companies are required under SEC rules to prepare audited, GAAP-compliant financial statements. Generally, private companies aren’t legally obligated to follow GAAP, but they may need to do so to satisfy lenders, sureties, venture capitalists or other stakeholders.
Preparing GAAP financial statements can be a challenge for private companies, particularly in the current environment. During the last several years, FASB has been shifting toward a fair-value-based accounting approach. In other words, GAAP increasingly requires companies to report assets and liabilities at fair value rather than historical cost. This trend is increasing the complexity and cost of complying with GAAP, which now demands periodic valuations and impairment testing for many financial statement items.
This type of information is valuable to public company investors, who use it to evaluate the price of securities traded in the stock exchanges or other public markets. But lenders and other users of private company financial statements tend to be less interested in fair value and more interested in free cash flow and a company’s ability to pay its debts. In some cases, GAAP can make it more difficult for these users to get the information they need.
Consider, for example, employee stock options. Historically, these options were reported at their “intrinsic value” — that is, the amount (usually zero) by which the underlying stock’s market value on the grant date exceeded the option exercise price. Several years ago, however, FASB modified its standards to require companies to expense employee stock options based on their grant-date fair value, using one of several option-pricing models.
Valuing options can be complex — especially for private companies with limited trading data. Plus, many lenders view stock options as a noncash expense that has little effect on a company’s ability to pay its debts. So, from their perspective, reporting options at grant-date fair value actually distorts the company’s income. For that reason, they add the expense back into net income when evaluating a company’s financial statements.
Proponents of separate private company accounting standards point to fair value reporting as well as other GAAP provisions that may be irrelevant at best and counterproductive at worst in a nonpublic setting. They include:
As a result, many private companies prepare non-GAAP financial statements — on a cash or income tax basis, for example — while others opt to receive “qualified” opinions from their auditors. Many lenders accept these financial statements or waive certain GAAP requirements because they recognize that compliance can be burdensome and that many GAAP standards lack relevance for private companies.
The concept of separate standards for private companies isn’t without its critics, however. Some opponents argue that financial statements are either correct or they aren’t, and that separate standards will lead to inconsistency and lack of comparability.
They advocate a single set of standards that can be modified, if appropriate, on a case-by-case basis by agreement between a company and its financial statement users. They also contend that, if GAAP standards are overly complex or burdensome, they should be simplified for all companies, both public and private.
The blue-ribbon panel considered several models for addressing the needs of private companies, including a standalone GAAP built from the ground up and several versions of International Financial Reporting Standards (IFRS), including IFRS for Small and Medium Entities.
In settling on U.S. GAAP with exceptions and modifications for private companies, the panel explained that a standalone set of standards could take a significant amount of time to create and could be significantly different from current U.S. GAAP. It also rejected the various IFRS options, noting that “U.S. private companies should not be leading the charge, en masse, to an IFRS-based set of standards before the SEC makes a decision on U.S. public companies…”
The panel concluded that a new board with standard-setting power would be the most effective approach. In the panel’s view, FASB is too focused on public company financial reporting to address the needs of private companies.
The panel noted that FASB’s Private Company Financial Reporting Committee (PCFRC) has submitted approximately 40 recommendation letters since it was formed in 2007. Although FASB has modified some standards, generally by changing effective dates or disclosure requirements for private companies, the panel concluded that many private company stakeholders view the PCFRC’s work as “not being wholly successful because the FASB has not also shown a willingness to consider carefully and approve, where appropriate, the possibility of measurement, recognition, or presentation differences.”
It’s not yet certain how the FAF will respond to the blue-ribbon panel’s recommendations. But there’s widespread support for the panel’s approach among accountants and finance executives, as reflected in the vast majority of nearly 2,000 letters the FAF has received. Keep in mind that the FAF’s decision and ultimate approach may be affected by the SEC’s decision, expected later this year, on whether to adopt IFRS for U.S. companies.
If you own a private company and have questions about how the blue-ribbon panel’s proposed recommendations might affect how you prepare your financial statements, please give us a call. We would be happy to answer your questions.
DATE: Tuesday, December 6, 2011
TIME: 3:00-4:30 p.m.
LOCATION: The FIne Arts Center, Music Room
PRESENTERS:
Judy Kaltenbacher, CPA, Managing Tax Partner
Doreen Merz, CPA,Tax Manager
Jordan Empey, CPA, Supervising Senior Tax Consultant
For more information on this seminar, CLICK HERE
Date and location to be determined.
For more information on this seminar, check back with us.
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If your nonprofit needs to finance a project or program, you may be discouraged by reports that credit is still tight. But if you understand the choices available to you, your chances of securing financing will grow.
Bank financing generally comes in two basic forms: line of credit or term loan. Your nonprofit’s underlying cash needs will determine which one you should pursue.
A line of credit is a negotiated amount of financing you can draw against as needed. When the goal is to smooth out cash flows over the year, it’s usually the best option. The maximum amount is available to you, but you use only what you need.
If you obtain a $200,000 credit line, for example, you may use up to the $200,000 limit. Once the line has been paid down to $180,000, you again have $20,000 available to borrow. You can continue this draw-down and repayment cycle until the credit line’s term expires. (But check with your lending officer, because some banks are terminating unused lines of credit.)
Required monthly payments may be limited to interest expense, while principal payments can be made any time cash flow permits. So you have flexibility in how much you repay each month.
When you obtain a term loan, you receive a lump sum, usually for a specific purchase. The term loan application process is usually more complicated, and approval typically takes more time. Repayment is in installments, which means you’ll make equal monthly payments consisting of interest and principal throughout the entire loan term.
An alternative to a traditional bank line of credit or loan is a tax-exempt bond issued by a municipal, county or state government. The interest payments to investors aren’t subject to federal income tax and may be exempt from state and local income tax.
Tax-exempt bond financing may benefit your nonprofit because tax-exempt interest rates are generally two to three percentage points lower than on money raised from other sources. The Internal Revenue Code allows a nonprofit to use the proceeds, which are borrowed from the issuer, to further the organization’s stated charitable purpose.
The first step in planning a bond issue is to identify which local government unit has the ability to issue bonds on a nonprofit’s behalf. This unit (the issuer) then lends the bond proceeds to you.
The next step is selecting a team of specialists to work out the mechanics of the bond issue, including a bond counsel who’ll draft the documents and deliver an opinion. An underwriter advises on the bond issue’s structure and then buys the bonds from the issuer and offers them to investors.
Tax-exempt bonds make the most sense for larger capital investments. Although interest payments over the bond’s term can be significantly lower than on a term loan, the up-front legal and other fees can be substantial.
Also consider that the process may take longer due to more stringent financial disclosure requirements and tighter scrutiny overall. While a line of credit or term loan can be approved in a matter of weeks, bond financing can take six months to a year before the funds are received.
In any economy — whether credit is tight or plentiful — a smart nonprofit will research and weigh its options carefully before seeking financing. Your CPA can assist you in preparing the financial documentation, such as a multiyear cash flow projection and a project budget, which you likely will need to secure financing.
Your 501(c)(3) organization generally is required to pay tax on income that isn’t related to its main purpose — even if that income keeps the not-for-profit afloat. This unrelated business income (UBI) is something to watch closely, because if your nonprofit is ever audited, the IRS will likely scrutinize your records to see whether you’ve accurately reported UBI.
If you haven’t reported UBI correctly, your organization may be responsible for back taxes, interest and penalties that can easily go into the thousands. And worse, if the IRS determines that your not-for-profit has significantly strayed from its mission because of UBI-generating activities, your tax-exempt status could be jeopardized. Fortunately, if you understand and follow the rules, you can avoid such scenarios.
According to the IRS, an activity generally is an unrelated business and its income subject to UBI tax if the activity:
Typically, all three situations must exist for the income to be considered UBI.
The types of activities that can generate UBI sometimes fall under the fundraising umbrella and include the following:
Sale of products unrelated to your purpose. Examples might include sales from a hospital gift shop or a zoo restaurant. To determine if the revenue is UBI, ask:
If you answer “yes” to these questions, you’ll likely need to report the income from the activity as UBI.
Sale of advertising space. Do you sell ad space in your organization’s journal, magazine or newsletter or on its website? Language that induces the reader to buy or use a product or service typically is considered advertising — for instance, a description of the product’s or service’s quality or a favorable comparison to a similar product or service. And the income from that activity is considered UBI. Conversely, a brief acknowledgment — listing, for instance, the supporter’s name and logo in a program — probably isn’t advertising, but rather is sponsorship and considered a donation.
Sale of unrelated services. In an online tutorial, the IRS uses the example of parking lots to explain this type of UBI. If an organization owns a parking lot and opens it regularly to the general public, the parking fee income is taxable. That’s because the activity — charging a fee for public parking — isn’t substantially related to the not-for-profit’s exempt purpose.
But, if only members and visitors use the parking lot while participating in the organization’s activities, the parking fee income isn’t taxable. The excellent tutorial can be found at http://www.stayexempt.org/VirtualWorkshop.aspx.
These are only some of the activities that can generate UBI. Income from certain investments, from selling membership lists and from gaming activities (see the sidebar “It’s all in the game”) also can produce UBI.
Keep in mind that there are many exceptions to the rules — for example, when your volunteers run the activity. According to the IRS, income from any trade or business where uncompensated volunteers perform 85% of the work is exempt from UBI tax.
A transaction’s structure also can exclude the resulting income from taxation. While being paid to directly promote products compatible with your mission probably will result in UBI, receiving royalties for licensing others to use your name or logo to promote such products may avoid it.
Other situations in which your nonprofit’s income may be exempt from tax include when the merchandise you sell is largely donated, such as in a book sale, or when gross income from the activity is less than $1,000. See IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations, for more exemptions.
These examples of activities that produce UBI are straightforward. But your not-for-profit may sponsor activities that seem to fall into a gray area, making them more difficult to evaluate. For instance, an exception that often applies to museum restaurants is when the nonprofit effectively documents that the operation is held for the “convenience of the members or attendees.” Additionally, fundraising activities often are exempt because they aren’t held regularly.
Your CPA can help you to analyze and quantify potential unrelated business activities and allocate expenses against this income. With proper planning, UBI often can be avoided and taxes reduced.
Do you bite your nails before your not-for-profit’s external audit each year? Does your staff start showing signs of anxiety in anticipation of the auditors walking in the door? If this sounds like your situation, take a deep breath. Here are five tips for making the audit experience run more smoothly for you and your auditors.
There is much talk about accountability, especially financial accountability for charitable and other exempt organizations. Nonprofits need to embrace accountability to protect the organization and its people, to demonstrate openness and forthrightness in external dealings and to support the greater good. Embracing accountability also helps not-for-profits fulfill their fiduciary responsibilities to donors, constituents and the public. But how can nonprofits truly embrace this abstract term?
If you’re like many nonprofits, you probably have an accountable plan for employee business expense reimbursements. If you don’t, you’re at risk for having to add reimbursements to your employees’ wages for income tax and Social Security tax purposes. But do you have the necessary policies and procedures in place to comply with IRS requirements? Here are eight tips for making sure that your plan is beyond reproach.
About two-thirds (67%) of the not-for-profit executive directors who participated in the Daring to Lead 2011 study, sponsored by the Meyer Foundation and CompassPoint Nonprofit Services, said they plan to leave their current jobs within five years. The percentage was somewhat lower than in the prerecession 2006 study, in which 75% of participating executive directors said they’d leave their position within that five-year period.