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Summer hours are in effect: Our offices close at NOON on Fridays from May 17th to July 12th
Our offices are closed tomorrow 1/7/25 from 8am – 1pm for a firm event. Thank you.
The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update (ASU) which would significantly change a 20-year-old financial reporting model. ASU No. 2015-230, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities, is intended to simplify the current net asset classification requirements and the presentation of information in financial statements and footnotes about liquidity, financial performance and cash flows. The ASU wouldn’t change the information being reported, but would require it to be presented in a more consistent manner that would be easier for users of financial statements to understand.
Among other changes, the proposed update would eliminate the requirement that nonprofits present temporarily restricted assets and permanently restricted net assets — and transactions in each of those asset classes — separately. Instead, a nonprofit would report amounts for “net assets with donor restrictions” and “net assets without donor restrictions,” along with the currently required amount for total net assets.
The proposed update also would require changes to the reporting of operating activities on the statements of activities, with investment income generally not included in the results of operations. The proposed presentation would be more consistent with the method many nonprofits currently use to track budget vs. actual results. In another change, nonprofits would be required to present on their statements of activities a uniform measure of operations — reflecting their mission and the availability of funds.
Additionally, nonprofits would be required to present their operating cash flows using the direct method, which provides more meaningful information to users than the currently allowed indirect method. And nonprofits would need to provide enhanced disclosures on several matters, including liquidity of assets and operating expenses by nature and function.
This fall, the FASB received harsh feedback on the proposal and has decided to focus its efforts on the aspects of the proposal that received support and delay work on some of the more controvercial parts.
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.
A U.S. charity recently made the news when it was accused of reporting an inaccurately high percentage of every donated dollar that went to its program services. The media outlet that uncovered the discrepancy looked beyond that claim, though, to scrutinize the organization’s outcomes — a strong sign of the growing importance of outcome measurement. Savvy stakeholders, as well as savvy not-for-profit's, realize that outcomes can convey a more complete picture of an organization’s performance than figures pulled from financial statements.
Outcome (or performance) measurement is essentially a method of determining the impact of a program or activity. Unlike traditional measures, such as number of clients served or the amount of donations received, outcome measures allow an organization to assess whether a program is achieving its intended results. An “outcome” is generally described as a specific desirable result or quality of a not-for-profit’s services.
Outcome measures should gauge the level of accomplishment of a program goal in terms of changes in the lives of individuals, families or the community at large. For example:
Bear in mind, though, that outcome measurement won’t prove that the results — good or bad — are due solely to your efforts.
An outcome measurement program will require an organization to identify appropriate outcomes and indicators of those outcomes. It will also involve the collection of data relevant to the indicators and analysis of that data. This is done utilizing surveys or interviews of clients, program dropouts and their family members
The not-for-profit should release regular user-friendly reports of its findings to stakeholders. And, of course, the organization must take appropriate action based on the findings.
Some not-for-profit's may have no choice when it comes to outcome measurement — grant makers or other stakeholders often require it. But even organizations free of such demands should consider engaging in the process.
Outcome measurement can act as a check that the not-for-profit is successful in reinforcing its mission and goals for board members, staff and volunteers. Measuring and reporting outcomes can take the focus away from how resources are being allocated, such as the percentage of funds spent on “program related activities.” Achieving sustainable success may include investing in such non-program-related activities as training, leadership development and strengthening internal controls, all of which improve outcomes.
The results of outcome measurement can be shared with other existing and potential stakeholders to demonstrate the impact of the organization’s programs and activities and, in turn, support marketing and fundraising efforts. The results can also prove helpful with short and long term planning. It makes it easier for the not-for-profit to identify effective programs and activities, as well as those in need of improvement.
Yes. Outcomes need to be measured on an ongoing basis, rather than examining client or other conditions only shortly after the completion of service. A not-for-profit should also return to evaluate the conditions down the road.
Additionally, not every important outcome will be immediately measurable. Some outcomes take years or longer to materialize. In such cases, a not-for-profit can identify milestones to measure progress as time goes by. For example, stronger relationships among community members can be difficult or impossible to measure but still merit regular consideration.
Finally, while outcome measurement can be helpful for planning, organizations should remember that it’s an approach used for looking backwards. Budgeting, policymaking and other long-range planning decisions, on the other hand, are about the future, and conditions should be treated as such.
While different organizations will take different approaches to outcome measurement, every not-for-profit can expect some stumbles along the way. Nothing is written in stone, though. The process can be adjusted as necessary. The important thing is to make outcome measurement a regular, ongoing activity that reflects the organization’s mission-driven priorities.
Outcome measurement isn’t only effective for larger organizations — in fact, it might be even more important for smaller not-for-profit's with fewer resources. Organizations that need to make every dollar and staff or volunteer hour count can use outcome measurement to determine which programs and efforts truly work and then either eliminate or strive to improve those that don’t.
Moreover, smaller not-for-profits can’t afford to stick with traditional metrics such as overhead ratios while larger organizations move on to outcome measurement. Like it or not, those organizations tend to set the trends. As larger not-fot-profit's increasingly make their outcome measures available, grant makers, social investors and individual donors will increasingly expect to see such measures before they pull out their wallets. Smaller organizations that fail to adopt outcome measurement risk being left behind when it comes to funding support.
Feel free to contact us with questions, clarifications, or assistance with Outcome Measurement.
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Your donors are gearing up for tax-filing season soon. It’s not too late to make sure that your organization is following the IRS donation “substantiation rules” so that your benefactors have the proof they need to deduct financial gifts. Proper documentation is also crucial so that your donors don’t have any future problems with the IRS.
Case law generally supports the IRS. In the court ruling Durden v. Commissioner, a church had received $25,171 in contributions from a married couple. The taxpayers had canceled checks documenting these 2007 donations, and the church sent them a written acknowledgment of receipt. But the acknowledgment didn’t note whether the taxpayers had received any goods or services in exchange for their contributions. The IRS requires such a statement, so it disallowed the taxpayers’ deduction.
The taxpayers then obtained a second receipt from their church, stating that they hadn’t received any goods or services in exchange for their donations. The second receipt was dated June 21, 2009, and the IRS rejected it for failing to meet the “contemporaneous” requirement, which requires the notification to be obtained at the time of the gift.
The taxpayers appealed the IRS decision. Concluding that the couple had “failed strictly or substantially to comply with the clear substantiation requirements of Section 170(f)(8),” the Tax Court upheld the IRS’s disallowance of the deduction.
For donors’ charitable contributions to be eligible for deductions on their income tax returns, they must follow the IRS “substantiation rules.” These requirements vary with the nature and amount of the donation, but clearly state that, if a taxpayer fails to meet the substantiation and recordkeeping requirements, no deduction will be allowed.
For cash gifts of under $250, a canceled check or credit card receipt is generally sufficient substantiation. If, however, any goods or services were provided in exchange for a cash gift of $75 or more, the charity must provide a contemporaneous written acknowledgment that includes a description and good-faith estimate of the value of the goods or services.
For cash gifts of $250 or more, as well as noncash gifts of $500 up to $5,000, the rules generally also require a contemporaneous written acknowledgment from the charity, which must include these four elements: 1) the donor’s name, 2) the amount of cash or a description of the property contributed (separately itemized if one receipt is used to acknowledge two or more contributions), 3) a statement explaining whether the charity provided any goods or services in consideration, in whole or in part, for the gift, and 4) if goods or services were provided, a description and good-faith estimate of their value.
If the only benefit the donor received was an “intangible religious benefit,” this must be stated. Goods or services of “insubstantial value,” such as address labels or other small incentives in a fundraising campaign, don’t need to be taken into account.
The requirements for noncash donations valued over $500 include attaching a completed Form 8283 to the donor’s tax return and, if valued over $5,000, include obtaining a qualified appraisal of the donated property. Before you accept such donations, it may be wise to confirm with the donors that they are aware of the requirements and have obtained an appraisal, if necessary.
A donation at the end of the year might be your supporters’ holiday gift to your nonprofit. Make sure that you reciprocate by giving them credit and verifying that their donations are properly documented.
The Blackbaud Index reported that online charitable giving to nonprofits jumped 8% for the first half of 2014 compared with the first half of 2013, while overall charitable giving increased 1.6% for the same period. In addition, for the three months ending June 2014, compared with the same period in 2013, online giving grew 8.7%, and overall charitable giving increased 1.5%. The Blackbaud Index analyzes fundraising data from more than 4,200 U.S. not-for-profits.
Charity Navigator has published a report on the performance of the 30 largest U.S. philanthropic marketplaces. The watchdog group considered the financial health, accountability and transparency of these charities. According to its report, regional factors — such as the cost of living, a market’s maturity and a city’s tendency to support one or two specialized causes — greatly influence the ability of charities to raise money, manage costs and adhere to good governance policies and procedures.
St. Louis’s not-for-profit sector ranked as the top performer overall. Portland charities had the greatest commitment to ethical best practices, and Miami charities were the most efficient fundraisers. Boston not-for-profits proportionately received the most donations.
The Financial Accounting Standards Board (FASB) has released Accounting Standards Update (ASU) No. 2014-05, Service Concession Arrangements, its initial guidance on the reporting of these in financial statements. A service concession arrangement is made between a public-sector entity grantor and an operating entity, such as a not-for-profit, under which the operating entity operates or maintains the grantor’s infrastructure, as can be the case with airports, roads, prisons or hospitals. FASB believes these arrangements may become more prevalent as governmental agencies seek alternative ways to provide public services more efficiently.
ASU 2014-05 also addresses the conditions under which the operating entity shouldn’t account for a service concession arrangement as a lease.
The Office of Management and Budget’s (OMB’s) so-called Omni Circular supersedes and streamlines requirements from eight existing circulars that apply to federal awards. Although the new audit threshold has received much of the attention, not-for-profits that receive federal awards should be aware of other significant changes that take effect for new contracts starting after Dec. 26, 2014.
The Omni Circular, or the “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards,” includes significant reforms to the cost principles formerly found in Circulars A-21, A-87 and A-122. For example, a not-for-profit that’s never had a negotiated indirect cost rate may now use a de minimis rate of 10% of modified total direct costs. Not-for-profits that have an approved federally negotiated indirect cost rate can apply for a one-time extension up to four years without further negotiation.
The Omni Circular also clarifies when administrative salaries can be considered direct costs, adds reporting requirements for compensation, and includes some computer costs with materials and supplies. Changes may be necessary to comply with the specific requirements for time and effort tracking. Overall, the guidance should allow not-for-profits to recover more costs from the federal government, according to the OMB.
The final guidance clarifies expectations for awardees about the oversight and management of any “subawards” not-for-profits provide to other entities (known as “subrecipients”) to carry out part of the awardee’s grant. One example is when a not-for-profit passes some of its award funds to another not-for-profit to conduct research or run a program. The guidance requires the original awardee to evaluate each subrecipient’s risk of noncompliance with federal statutes and regulations and the terms and conditions of the subaward to determine monitoring procedures.
Monitoring must include review of any performance or financial reports the awardee requires from its subrecipients to meet its oversight requirements under the terms of the federal award. Monitoring also must include follow-up to ensure that these organizations take timely and appropriate action on all deficiencies detected through audits and on-site review. The original awardee, referred to in the Omni Circular as a “pass-through recipient,” must verify that a subrecipient receives the required audit. But, for smaller subrecipients where an A-133 audit isn’t required, additional monitoring may be needed.
Awardees must set and maintain effective internal control over the award. This means providing reasonable assurance that the award is being managed in compliance with the award’s terms and conditions and federal laws.
Internal controls should comply with the U.S. Comptroller General’s “Standards for Internal Control in the Federal Government” and the Committee of Sponsoring Organizations of the Treadway Commission’s “Internal Control — Integrated Framework.” The Circular also requires awardees to take reasonable measures to protect information that’s personally identifiable or designated as sensitive.
The Omni Circular stresses that the awardee’s performance should be measured in a way that will help an awarding agency and other nonfederal entities (for example, other not-for-profits) improve program outcomes, share lessons learned, and spread the adoption of promising practices.
Awarding agencies (for instance, the Department of Health and Human Services) must require awardees (such as community clinics) to relate financial data to performance accomplishments of the award. These recipients also may need to provide cost information to demonstrate cost-effective practices. All awarding agencies are required to state clear performance goals, indicators and expected outcomes.
The Omni Circular also changes the threshold for requiring a single audit. Since 2004, a single audit was required when an organization spent $500,000 or more in federal funds. The Circular raises the threshold to $750,000 for fiscal years beginning on or after Jan. 1, 2015. The Council on Financial Assistance Reform noted that this increased threshold would still encompass 99.7% of the dollars currently covered under a single audit.
Federal funding is critical for the survival of many not-for-profits, making compliance with the rules critical, too. Your CPA can help you set up the necessary systems and controls to comfortably comply with these changes.
Overseeing a nonprofit’s endowment fund is one of the most important roles for the board of directors. A strong investment committee, made up of board members and staff, will not only ensure the continued health of the endowment and the organization but also attract other donors looking for good stewards for their contributions. Effective endowment management lies in the following building blocks.
Every endowment should have a comprehensive investment policy that drives the management of the fund. According to the Uniform Prudent Management of Institutional Funds Act (UPMIFA), investment decisions must be made in relation to the nonprofit’s overall resources and purposes. And the endowment investment policy should be different from 920-192 the policy for other investments of the organization.
“Prudent” investment decisions must consider the entire portfolio and be made as part of an investment strategy with risk and return objectives reasonably suited to the fund and the organization. UPMIFA also permits “only investment costs that are appropriate and reasonable.” (UPMIFA applies only to “true” endowments funded by donors, not “quasi” endowments created by boards.)
The endowment’s objectives should guide its investments and management. For this reason, it’s important not to simply adopt a generic objective but to articulate an objective that reflects the organization’s own circumstances. For many not-for-profits, the primary goal is to preserve and grow funds for the organization’s long-term stability while providing a predictable contribution to support current activities. As a living document, the investment policy can change over time as objectives or other factors change.
The investment policy will include an optimal asset allocation. The investment committee must analyze the risk and return of potential investments (including stocks, bonds and alternative investments such as hedge funds and private equity) to determine the best LOT-950 mix and to obtain the total desired return. To maintain flexibility for responding to changes in the investment environment, it’s best to establish ranges for each asset class instead of set percentages.
On a quarterly basis, the investment committee should review information on the performance of each asset class. Allocations can then be adjusted based on both performance and any change in circumstances.
The investment policy should include a spending policy for the endowment, setting a percentage that can be spent annually. The spending policy will impact the performance of the fund, as well as its ability to fulfill the donor’s intent.
UPMIFA sets standards for endowment fund spending. It provides that an organization can spend as much of a fund as it determines to be prudent for the “uses, benefits, purposes and duration” for which the fund is established. UPMIFA lists seven criteria to guide annual spending decisions:
Unlike its predecessor, the Uniform Management of Institutional Funds Act, UPMIFA allows nonprofits to adopt a “total return” strategy that bases the spending rate on the endowment’s total value (including appreciation) rather than on only income. To ensure reasonably consistent cash flows, many organizations using a total return spending policy apply “smoothing” mechanisms to minimize the effect of market volatility. An organization might, for example, use a three- or five-year rolling average calculation.
The investment policy should include benchmarks for evaluating the performance of investments and managers, too. Performance should be assessed over both full market cycles (seven to 10 years) and the shorter time periods that compose them.
An internal investment committee can meet quarterly to review performance, consider recommendations for changes to the investment strategy and rebalance asset allocation as necessary.
Endowment management can seem overwhelming, especially for volunteer board members with many other demands vying for their time. Your financial advisor can help with many of the critical decisions, including asset allocation, vetting of fund managers and financial reporting compliance. (See the sidebar “Don’t forget the disclosure requirements.”)
With donors gearing up for tax-filing season, it’s not too late for not-for-profits to make sure that they’re following the IRS donation “substantiation rules” so that their benefactors have the proof they need to deduct financial gifts. Proper documentation is also crucial so that donors don’t have any future problems with the IRS. This article explains what the IRS requires to document various levels of gifts and offers a real-life example of the consequences of not closely adhering to the rules.
The Office of Management and Budget’s (OMB’s) so-called Omni Circular supersedes and streamlines requirements from eight existing circulars that apply to federal awards. This article explains that, although the new audit threshold has received much of the attention, not-for-profits that receive federal awards should be aware of other significant changes that take effect for new contracts starting after Dec. 26, 2014. They include significant reforms to the cost principles and procedures regarding the monitoring of award subrecipients, maintaining effective internal control over the award, and demonstrating successful performance.
In this issue, “Newsbits” looks at a a report that online charitable giving to not-for-profits jumped 8% for the first half of 2014; a Charity Navigator report on the performance of the 30 largest U.S. philanthropic marketplaces; and a new FASB standard involving service concession arrangements and that could affect NFP accounting.
