presented by: julie floch partner and director of not-for-profit services eisneramper llp (212)...
TRANSCRIPT
“How to Use a CPA”Presented by: Julie Floch
Partner and Director ofNot-for-Profit Services
EisnerAmper LLP(212) 891-4109
Accounting 101 Terms Non-Cash Donations Endowment Accounting GAAP vs Tax What Exactly is an Audit? Resources
Topics
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Accounting 101 Terms
AUTHORITATIVE GUIDANCE:
Financial Accounting Standard Board (“FASB”)
Generally Accepted Accounting Principles (“GAAP”)
Accounting Standards Codification (“ASC”)
International Accounting Standards Board (“IASB”)
Generally Accepted Auditing Standards (“GAAS”)
Public Company Accounting Oversight Board (“PCAOB”)
Committee of Sponsoring Organizations (“COSO”)
Basic Terms to Know:
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NOT-FOR-PROFIT INDUSTRY TERMS:
Contributions vs Exchange Transactions◦ Restrictions◦ Conditions◦ Variance power◦ Non-cash activities◦ Governmental grants◦ Deferred revenue
Net Assets◦ Unrestricted◦ Temporarily restricted◦ Permanently restricted◦ Endowment
UPMIFA vs UMIFA Board actions State distinctions
Investment vs Endowment◦ Fair market value (“FMV”)◦ Fair value hierarchy◦ Net asset value (“NAV”)◦ Investment income
Unrealized gains & losses Realized gains & losses Dividend and interest income
Release of restrictions◦ Programmatic◦ Time◦ Board appropriations
Functional expenses◦ Programmatic◦ Ratios
Basic Terms to Know:
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Statements of Financial Position: Assets
December 31,
2011 2010
ASSETS Cash and cash equivalents $ 1,953,000 $ 2,193,000 Investments 10,250,000 10,108,000 Pledges receivable, net 3,108,000 3,207,000 Grants receivable 1,175,000 943,000 Prepaid expenses and other current assets 37,000 55,000 Inventory 34,000 31,000 Property and equipment, net 5,729,000 4,761,000 Security deposits 3,000 3,000 $ 22,289,000 $ 21,301,000
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Statements of Financial Position: Liabilities
December 31,
2011 2010
LIABILITIES Accounts payable and accrued expenses $ 671,000 $ 569,000 Deferred revenue 301,000 290,000 Accrued vacation 231,000 228,000 Annuities payable 150,000 125,000 Accrued pension liability 650,000 645,000 Bonds payable 3,700,000 4,000,000 Total liabilities 5,703,000 5,857,000 Commitments and contingency (Note M)
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Statements of Financial Position: Net Assets
December 31,
2011 2010
Net assets: Unrestricted: Operating fund 6,996,000 6,649,000 Board-designated fund 325,000 301,000 Total unrestricted 7,321,000 6,950,000 Temporarily restricted 2,491,000 2,494,000 Permanently restricted 6,774,000 6,000,000 Total net assets 16,586,000 15,444,000 $ 22,289,000 $ 21,301,000
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Statements of Activities: Support and Revenue
Year Ended December 31, 2011 Year Ended
Temporarily Permanently December 31, Unrestricted Restricted Restricted Total 2010
Operating support and revenue: Support: Government grants $ 2,519,000 $ 2,519,000 $ 2,685,000 Contributions 2,853,000 $ 578,000 $ 774,000 4,205,000 3,483,000 Direct mail campaigns 1,293,000 1,293,000 1,462,000 Special events (net of direct benefit to donors of $280,000 and $145,000 in 2011 and 2010, respectively)
1,295,000
1,295,000
843,000
Donated services and materials 688,000 688,000 814,000
Total support 8,648,000 578,000 774,000 10,000,000 9,287,000 Revenue: Catalog sales 206,000 206,000 124,000 Change in value of split-interest agreements 30,000 30,000 15,000 Investment income allocated for operations 55,000 25,000 80,000 50,000 Other income 101,000 101,000 103,000 Total revenue 392,000 25,000 417,000 292,000 Support and revenue before net assets released from restrictions 9,040,000 603,000 774,000 10,417,000 9,579,000 Net assets released from restrictions: Satisfaction of program and time restrictions 626,000 (626,000) 0 0 Total support and revenue 9,666,000 (23,000) 774,000 10,417,000 9,579,000
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Statements of Activities: Expenses
Year Ended December 31, 2011 Year Ended
Temporarily Permanently December 31, Unrestricted Restricted Restricted Total 2010
Expenses: Program services: Program 1 3,101,000 3,101,000 2,849,000 Program 2 2,338,000 2,338,000 2,442,000 Program 3 2,534,000 2,534,000 2,269,000 Total program services 7,973,000 7,973,000 7,560,000 Supporting services: Management and general 734,000 734,000 699,000 Fund-raising 528,000 528,000 539,000
Total supporting services 1,262,000 1,262,000 1,238,000 Total operating expenses 9,235,000 9,235,000 8,798,000 Change in net assets from operations 431,000 (23,000) 774,000 1,182,000 781,000 Change in net assets from non- operating activities Investment results, net of allocation to operations 30,000 20,000 50,000 21,000 Pension-related charges other than periodic costs (90,000) (90,000) (200,000) Change in net assets 371,000 (3,000) 774,000 1,142,000 602,000 Net assets - beginning of the year 6,950,000 2,494,000 6,000,000 15,444,000 14,842,000 Net assets - end of the year $ 7,321,000 $ 2,491,000 $ 6,774,000 $ 16,586,000 $ 15,444,000
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Statements of Activities: Statement of Functional Expenses
Year Ended December 31, 2011 Program Services Supporting Services Management Program Program Program and Fund- 1 2 3 Total General Raising Total 2011
Salaries $ 832,000 $ 742,000 $ 779,000 $ 2,353,000 $ 335,000 $ 164,000 $ 499,000 $ 2,852,000 Employee benefits and payroll taxes 373,000 251,000 439,000 1,063,000 114,000 33,000 147,000 1,210,000 Donated materials 128,000 128,000 18,000 18,000 146,000 Professional fundraising fees
60,000 60,000 60,000
Professional fees (including
Contributed services)
465,000 202,000 72,000 739,000 80,000 78,000 158,000 897,000
Program supplies 943,000 674,000 879,000 2,496,000 2,496,000 Occupancy 134,000 267,000 34,000 435,000 20,000 11,000 31,000 466,000 Telephone 8,000 30,000 19,000 57,000 9,000 15,000 24,000 81,000 Office expenses and supplies
3,000 3,000 16,000 22,000 7,000 4,000 11,000 33,000
Equipment repair and maintenance
95,000 31,000 29,000 155,000 15,000 3,000 18,000 173,000
Insurance 31,000 15,000 8,000 54,000 13,000 5,000 18,000 72,000 Conferences and related costs
12,000 7,000 21,000 40,000 7,000 8,000 15,000 55,000
Marketing and promotion
10,000 9,000 19,000 19,000
Printing and publications
33,000 33,000 39,000 28,000 67,000 100,000
Direct mail and other fund-raising
19,000 11,000 30,000 39,000 39,000 69,000
Postage and shipping 1,000 1,000 5,000 7,000 1,000 29,000 30,000 37,000 Depreciation expense 183,000 114,000 60,000 357,000 12,000 21,000 33,000 390,000 Interest expense 70,000 70,000 Miscellaneous 2,000 1,000 1,000 4,000 2,000 3,000 5,000 9,000 Total expenses $ 3,101,000 $ 2,338,000 $ 2,534,000 $ 7,973,000 $ 734,000 $ 528,000 $1,262,000 $ 9,235,000
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Non-Cash Donations
THE IMPORTANCE OF A GIFT ACCEPTANCE AGREEMENT
May outline the terms of a contribution so that the donor and charity agree on how the contribution will be used
Have a clear understanding of the donor’s purpose and the charitable organization’s requirements
Important to understand ultimate beneficiary of gift
Common problem gifts: Ambiguous Gifts Overly Restrictive Gifts Naming Rights Gifts Large Gifts Hard to Value Gifts Split Interest Agreements
Non-Cash Donations:
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Art, Antiques and Collectibles
Securities and Business Interests
Split Interest Agreements
Real Estate
Life Insurance
Medical Supplies
Clothing
Non-Cash Donations:
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ART, ANTIQUES AND COLLECTIBLES
FASB ASC 958-360-25-3 states that an NFP that holds works of art, historical treasures, and similar items that meet the definition of a collection has the following three alternative policies for reporting that collection: (a) capitalization of all collection items, (b) capitalization of all collection items on a prospective basis (that is, all items acquired after a stated date), or (c) no capitalization. Capitalization of selected collections or items is precluded.
Non-Cash Donations:
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SECURITIES AND BUSINESS INTERESTS
Publicly Traded Securities May include stocks, bonds or mutual funds
Great incentive to contribute rather than sell on the part of the donor
• Avoid Federal and state income taxes on gain
• But not securities held at a loss
Recorded at FMV at the date of the gift
C-Corporation Stock Deduction generally equal to fair market value of stock
No tax on gain
Charity will want an exit strategy
Recorded at FMV at the date of the gift
Non-Cash Donations:
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SECURITIES AND BUSINESS INTERESTS
S-Corporation Stock Ensure charity is permitted S Corp shareholder
Alternative: Have S Corp gift assets to charity
Recorded at FMV at the date of the gift (hard to value)
LLC and Partnership Interests Deduction generally equal FMV less any ordinary income gain
Charity subject to UBTI on trade or business income
Recorded at FMV at the date of the gift
Non-Cash Donations:
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SPLIT INTEREST AGREEMENTS
Charitable Remainder Trusts (CRT) Pays an annual stream of income to a non-charitable beneficiary for one life, two lives or
a term of years
Assets remain in the CRT at the end of the trust term
and pass to charity
Recorded at present value of the trust at the date of the gift (third party trustee)
Record the present value of the assets at the date of the gift along with the present value
of the annual income stream payable to the beneficiary (npo trustee)
Charitable Gift Annuities (CGA) Donor may transfer assets to a charity and in return the charity will make the annuity
payment to one or more individuals for their lifetimes
Allows donor to retain income interests and deduct the fair market value for the
contribution
Record the FMV of the assets at the date of the gift and the present value of the annual
income stream payable to the beneficiary
Non-Cash Donations:
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REAL ESTATE
Gift of unencumbered real estate to public charity Charitable deduction equal to the fair market value of the real estate
If private foundation, donor may deduct his or her basis
Qualified appraisal required
Recorded at FMV at the date of the gift
Real estate encumbered by a mortgage Must reduce contribution deduction by the mortgage
Unrelated Business Taxable Income (“UBTI”)
• Debt-financed property will often result in UBTI (gross income from an unrelated trade or business)
Recorded at FMV at the date of the gift less the amount of the mortgage
Non-Cash Donations:
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LIFE INSURANCE
Must contribute the entire policy to receive maximum tax benefits
No immediate income tax deduction for the mere payment of premiums for a policy with a
charity named as beneficiary where the donor still maintains the ability to change the
beneficiary
Recorded at the estimated present value at the date of the gift
In order to donate an existing life insurance policy to charity, you must assign all rights in the policy to the charity. You must also deliver the policy itself to the charity. By doing this, you give up all control of the life insurance policy forever. This strategy provides the full tax advantages of charitable giving because the transfer of ownership is irrevocable. You may be able to take an income tax deduction equal to your basis or its fair market value. The policy is not included in your gross estate when you die, unless you die within three years of the transfer. In this case, your estate would get an offsetting charitable deduction.
Non-Cash Donations:
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MEDICAL SUPPLIESThe estimated fair value of the donations of medical supplies and equipment should be recorded at fair-value based upon the wholesale list value for new items and resale values listed by local and national dealers. The estimated fair value of these contributions is recorded in the financial statements as inventory and contribution revenue. As the medical supplies and equipment are distributed, program expenses are recorded.
CLOTHINGThrift storesGoodwillRecorded at FMV at the date of the gift
Could be poundageCould be by appraisalHard to measure
Non-Cash Donations:
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Endowment Accounting
WHAT IS AN ENDOWMENT?
To a donor, an endowment is a sum of money given to a charity for charitable purposes, with only the “income” being spent and “principal” being preserved.
To an accountant, it is a fund which is “permanently restricted”, or if board restricted then clearly labeled as such in unrestricted net assets.
To a lawyer, it is an institutional fund not wholly expendable on a current basis under the terms of the gift instrument.
Thus, a “true” endowment is one established or created by the donor.
Endowment Accounting:
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WHAT IS THE ENDOWMENT BALANCE?
A simple question that does not have a simple answer
Each endowment has at least three answers to this question:
The book valueThe market valueThe amount available for appropriation
Endowment Accounting:
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THE BOOK VALUE
Also referred to as corpus or principal Equal to the original gift amount Only changes if additional gifts are made,
spending occurs from corpus (not income), or in some cases, if payout is re-invested
Has important legal and accounting implications under Uniform Prudent Management of Institutional Funds Act (UPMIFA)
Endowment Accounting:
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THE MARKET VALUE
What the corpus is worth today
Includes both the book (corpus) value and all accumulated income and/or losses
Payout reduces the market value, not the corpus
Endowment Accounting:
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AMOUNT AVAILABLE FOR APPROPRIATION
Board of Trustees authorizes a payout rate annually for the following year
Once distributed, the payout no longer participates in earnings, even if it is not spent
Endowment Accounting:
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Donor directed/permanently restricted net assets
Quasi endowment/board designated unrestricted net assets
Uniform Management of Institutional Funds Act (“UMIFA”)
Uniform Prudent Management of Institutional Funds Act (“UPMIFA”)
Endowment Accounting:
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Donor directed/permanently restricted net assets The part of the net assets of a not-for-profit organization resulting (a) from
contributions and other inflows of assets whose use by the organization is limited by donor imposed stipulations that neither expire by passage of time nor can be fulfilled or otherwise removed by actions of the organization, (b) from other asset enhancements and diminishments subject to the same kinds of stipulations, and (c) from reclassification from (or to) other classes of net assets as a consequence of donor imposed stipulations.
Quasi endowment/Board designated net assets An action by a not-for-profit organization's board of directors to earmark an
asset for a specified purpose. Since this is not a donor imposed restriction, the designated asset is classified and reported as part of unrestricted net assets.
Endowment Accounting:
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Uniform Management of Institutional Funds Act (“UMIFA”) Is a uniform law which provides rules regarding how much of an endowment a charity
can spend, for what purpose, and how the charity should invest the endowment funds. The drafters of UMIFA thought charities should be able to spend a prudent portion of the gains earned by an endowment.
Uniform Prudent Management of Institutional Funds Act (“UPMIFA”) The most significant change made by UPMIFA is its elimination of the “historic dollar
value” limitation on expenditures from endowment funds. Under UMIFA, while net appreciation could be spent, the “historic dollar value” of an endowment had to be preserved. Institutions are no longer limited in their ability to spend from “underwater” endowment funds (i.e., those with assets having current values less than when they were given). Under UPMIFA, an institution may spend as much as it deems “prudent” (subject to donor intent), depending on its particular state law.
Endowment Accounting:
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Endowment Accounting: December 31, 2011
Permanently
Unrestricted Restricted Total
Donor-restricted endowment funds $ 6,774,000 $ 6,774,000 Board-designated endowment funds $ 325,000 0 325,000 Total funds $ 325,000 $ 6,774,000 $ 7,099,000
Endowment net asset composition by type of fund
December 31, 2011
Permanently
Unrestricted Restricted Total
Endowment net assets, beginning of year $ 301,000 $ 6,000,000 $ 6,301,000 Investment return: Investment income 19,000 19,000 Net depreciation (realized and unrealized) (4,000) 0 (4,000)
Total investment return 15,000 0 15,000
Contributions 14,000 774,000 788,000 Appropriation of endowment assets for
expenditure (5,000) 0 (5,000) Endowment net assets, end of year $ 325,000 $ 6,774,000 $ 7,099,000
Changes in endowment net assets
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GAAP vs. Tax
GAAPDonated servicesUnrealized gains and lossesVariance powerSpecial events revenue and expenseMateriality
TaxInvestment expensesEntity level reporting vs consolidationRelated party transactions
GAAP vs Tax:
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GAAP Treatment Record gifts of property at fair market value
Record gifts of use of facilities if otherwise needed to be paid
Recognize contributions of services if: Create or enhance nonfinancial assets or
Require specialized skills and would typically need to be purchased if not provided by donation
Disclose in footnotes the extent of donated services even if not at a level that leads to recognition
Tax Treatment Record gifts of property at fair market value
Do NOT record use of facilities or gifts of donated services
Form 990 provides for a reconciliation to audited GAAP financial statements
GAAP vs Tax: Donated Services
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GAAP Treatment Show most investments at fair market value
Investment expenses are generally netted against investment earnings
Tax Treatment Unrealized gains and losses are not reported
Investment expenses are detailed on the schedule of functional expenses
Form 990 provides for a reconciliation to audited GAAP financial statements
GAAP vs Tax: Investments
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GAAP Treatment Consolidated financial statements must be prepared if certain criteria are met
Functional expenses not required for all organizations
Related party transactions are required to be disclosed for material items
Audit although not a matter of GAAP may be required by some states, funders and watchdog agencies
Tax Treatment Consolidated filings may not be filed, except under a group exemption
Functional expenses required for all 501 (c)(3) and (4) organizations
Related party transactions are required to be disclosed under various circumstances and thresholds on Schedules L and R
Audit not required by IRS
GAAP vs Tax: Other examples
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What Exactly is an Audit?
The objective of an audit is for a professional auditor to evaluate or measure a subject matter that is the responsibility of another party against identified suitable criteria, and to express a conclusion (opinion) with a level of assurance about the subject matter for the intended user.
The Objective of an Audit
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Kind of audit / assurance engagementsA three party relationshipThe subject matterThe scope of the auditSuitable criteriaThe audit processThe report
The elements of an audit:
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The auditor has to observe:IntegrityObjectivityIndependenceProfessional competence and due careConfidentialityProfessional behaviorApplication of technical standards
The auditor should be:A member of a respected institute or organization with:• quality control policies and procedures• disciplinary rules• a code of ethics• auditing standards
The auditor:
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Pre-auditPreliminary investigationAssignment process
Performing the auditInitial investigationEvaluating and forming an opinion
CompletionReportingEvaluating the audit
The audit process:
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GAAS
Internal ControlManagement letter
Material weakness• A material weakness is a deficiency, or a combination of deficiencies, in
internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.
Significant deficiency
• A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
Audit Terminology:
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Resources
American Institute of Certified Public Accountants (“AICPA”)
Audit & Accounting Guide: Not-for-Profit EntitiesAudit Risk Alerts: Not-for-Profit Entities Industry DevelopmentsNPO Audit Committee Toolkit
Financial Accounting Standards Board (“FASB”)
FASB CodificationEmerging Issues Task Force (“EITF”)
Resources:
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Watchdog Agencies
Charity NavigatorBetter Business Bureau Wise Giving AllianceGuideStar
Resources:
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