Essential Form 990 Considerations For Auditors

GAQC Member Conference CallPresented by

Jane M. Searing and Vincent J. Stevens of Clark Nuber P.S.

December 10, 2009

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Overview Intended for auditors Essential matters to be aware ofWays to gain efficiency through overlap with tax workFirst major redesign in nearly 30 yearsFAQ on Governance, Executive Compensation,

Foreign Activities, Related Organizations & Attachments

Sample Case Study Form 990, Sch A and ODraft of 2009 Form 990 – Now 12 pages!

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Three Guiding PrinciplesTransparency

Compliance

Burden Minimization

Accountability

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Revised Form 990

Core Form • 11 Pages (12 for 2009)

• Applies to all organizations filing the form

16 Schedules• A through O and R

• Only file if the organization meets certain criteria

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Core Form 990 StructurePage 1 – Summary Schedule & Signature blocksPage 2 – Description of ActivitiesPages 3 & 4 – Questions for Add’l SchPage 5 – Compliance QuestionsPage 6 – Governance/Policy/DisclosurePage 7 & 8 – CompensationPage 9 & 10 – Detail Rev & ExpPage 11 – Balance Sheet

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Schedules A – Public Charities

B – Donations

C – Political and Lobbying

D – Financial

E – Schools

F – Foreign

G – Events & Gaming

H – Hospitals

I – Domestic Grants

J – Compensation

K – Bonds

L – Interested Persons

M – Non-cash

N – Discontinued

O – Other

R – Related Orgs

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FundamentalsMateriality is an audit concept – Thresholds are for tax

• Gross receipts and asset thresholds determine which form is filed (990/990EZ/990N)

• Each schedule has a threshold • Questions within the form or schedule may have a threshold

Three “flavors” of Form 990• Public Charities – Form 990 (or variation above)• Private Foundations – Form 990PF• Both if UBTI – 990T

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Transition Relief (May File EZ)Year Gross Receipts Total Assets

2008(File in 2009)

>$25,000 & < $1 Million

< $2.5 Million

2009(File in 2010)

>$25,000 &< $500,000

< $1.25 Million

2010 & Later(File in 2011 &

Later)

> $50,000< $200,000

< $500,000

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FundamentalsGenerally no “consolidated” Form 990

• Affiliated organizations under a group exemption may file consolidated

• Must deconsolidate financial information• Deconsolidating entries inform Schedule R disclosures• Part IV Q 12 Audit Question – Separate vs. Consolidated

“Board Questionnaires” • Reasonable efforts standard beginning in 2008• May be helpful to auditor with related party transaction

disclosures

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Do Not Prepare In Order1. Page 1 header except Line G (gross revenue)

2. Schedule R – Need to identify related orgs

3. Identify T/D/O/KE for Part VII – Names only

4. VIII – Revenue, IX – Expense, X Balance Sheet

5. Back to page 1 Line G – we now have gross revenue

6. Part III – program with revenue, expense and grants; Part V – Compliance checklist; Part VII – Compensation; Part XI – Financial statement reporting

7. Schedule L – Transactions with interested persons (if required)

Needed to answer Part VI, line 1b – independent board

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Do Not Prepare In Order – (continued)

8. Complete Part VI – Governance, Policies, Disclosure

9. Carry information forward to Part I

10. Part IV – Determine additional schedules

11. Complete applicable schedules based upon Part IV

12. Complete additional disclosures/explanations on Schedule O

13. Complete Part II – Signature Block

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Form 990 In Preparation OrderHeader

• Form is for the year the tax year began

• Everything except Line G complete first

• Type of entity

• Year of formation

• State of legal domicile

Line 6 Volunteers – Don’t forget Sch O

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Schedule R – Entities Identification of Disregarded entities, Taxable and Exempt

“Related Organizations” & Related and Unrelated Partnerships Threshold reduced to 5% of the organization’s activities in a

joint venture (Part VI) No threshold for reporting to 512(b)(13) transactions (interest,

rent, royalty, etc) Added check the box section to disclose type of transactions Part V >$50K Threshold (organization or transaction type?)

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Part VII – Compensation All current trustee, officer, director, and key employee

• For 990 purposes, top management official and top financial official are officers

5 Highest paid employees >$100K (including related org)• W-2 box 5, 1099 box 7, or actual amt paid

Former T/D/O/KE/HCE > $100K comp (including related org)

Former T/D > $10K as a former T/D (including related org)

All on a calendar year basis even if fiscal year organization

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Who is a Key Employee?Reportable compensation exceeds $150,000

and Manages a discrete segment or activity, or has

authority to control 10% or more of activities, assets, income or expenses of the organization

Within group of top 20 highest paid employees

Note: Even though not a Key Employee may still be a High 5

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Part IX – Functional ExpensesColumns (B) thru (D): (c)(3) & (c)(4) onlyQ3: separate reporting of foreign grantsQ11a – g: non-employee servicesQ12 – 15, 18 & 23: Added common “other”

• Advertising/promotion - Office exp• Information technology - Royalties• Insurance - Gov’t emp. travel

UBI tax must be listed on line 245% “misc” limit moved to face of form

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Part VIII – Statement of Revenue

All revenue including contributions on one pageElimination of UBI and exempt codesBusiness code for exempt revenueQ8 & 9 $15K threshold for Sch G filingMemberships split by typeTrack certain revenue streams (Part III)

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Public SupportSchedule A

• Splits two types of public support exempt organizations

• Moves to normal method of accounting

• Now on a 5 year (including current year) basis

• Facts and circumstances on face of the form

• Revenue from activity on face of the form

• Added prior year support % to make “normally” relevant

• Directs to try other method before PF status determination

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Facts and Circumstances 10% minimum public support Continuous bona fide fundraising program Diverse sources of support Public board Ongoing provision of services or facilities to the public Member organizations have dues rates that make the

organization accessible to the public Activities of the organization have broad public appeal

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Part X – Balance Sheet Separates PRI from Program bldg, land,

equip, etc. Structured attachments/schedules

• Sch D provides detail in the aggregate

• Sch L for related party receivables and liabilities

Pay attention to thresholds for Schedule D

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Schedule DDetails previously only in footnotes to audited

financial statements• Collections of art, historical treasures, etc.

• Endowments

• Book to tax reconciliation of net assets, revenue and expenses

• Fin 48 Disclosures • 2008 below Part X

• 2009 added as a separate line 2

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What is an Uncertain Tax Position?Whether the organization is still exempt from tax

• Revenue from related sources• Only “insubstantial” UBI• No political activity• No repeated violations of lobbying rules, or pattern of abusive

private inurement or private benefit transactions• Aggressive allocation of expenses to offset UBI

Organization’s public support is in facts and circumstances

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FAS 109 Tax Accrual and Disclosure Review Form 990T from prior years

• NOL carry forwards• Passive investments creating federal or state UBTI

Quick Calculation

1. Materiality level for the audit ($1M total $10K per)

2. This would be the amount of tax ($10K)

3. Working backwards to taxable income ( Approx. $28K)

4. Assess if there is likely this amount of UBTI from all sources

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Part III – Programs Activity change – Sch OCodes (do not use for 2008)3 Largest by expensesReport direct revenue from programsExempt purpose achievementsStill recommend illustrating with data

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Part V – ComplianceList of Yes/No questions: HighlightsQ1 & 2: Reporting related to Form 1096,

Forms W-2G, Form W-3Q5b: Notified party to prohibited tax shelter

(Form 8886 Careful Review of Investment K-1’s)

Q7a – h: Expanded quid pro quo, non-cash and potential donor abuse questions

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Part VII – Compensation Fiscal year organizations report compensation

based on calendar year that ends during the reporting year• e.g. FYE 6/30/09 org reports 2008 comp

“Current” means served in that role at any time during the reporting year

“Former” means (5-year look-back)• 1) not a current employee, 2) received $100K+, 3)

would be in current top 5

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Part XI – Financial Statements & Reporting

Method of accounting moved from header

Compilation/review or audit? Changed for 2009

Audit (review/comp) committee?A-133 audit for federal funds

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Schedule L “Interested Persons”Transactions with “interested persons”

• Definitions varies by Part

Replaces free-form attachments• Schedule O for supplemental explanations

Also includes non-loan transactions• Excess benefit (listed property risk area)• Grants• Business transactions: reporting threshold of greater of

$10K or 1% of revenue

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Part VI – Governance - IndependenceVoting members on governing board on the

last day of the tax yearNumber of independent members (Also on

Part I Summary)• Not an employee• Independent contractor under $10K• No reportable Schedule L transactions

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Part VI – Governance RelationshipsClarification on family & business relationships

• Family member• Business relationship

• Employee/Employer (direct or indirect)

• > $10K Business transaction – not ordinary course of business

• Common director, trustee, officer or 10% ownership of business or investment (NOT NFP board positions)

• Note: Excludes privileged relationships.

• Describe in Schedule O (FAQ differs from instructions)

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Part VI – Auditor ConsiderationsQ5 – Material diversion of assets

• Material = Amount exceeds lesser of • $250K or

• 5% of gross receipts for the tax year or

• 5% of total year end assets

Policies which may be addressed in management letter• Whistleblower Form 990 review process• Compensation review Conflict of interest policy• Document retention Joint venture policy• Public disclosure

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Other Policies to ConsiderPart XI – Audit CommitteeSch D – Conservation easement policies and

proceduresSch F – Foreign grant monitoring and oversightSch H – Hospitals

• Charity care policy• Community benefit• Debt collection policy

Sch I – Domestic grant monitoring and oversight

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Other Policies to ConsiderSch J – Payment or reimbursement of

specific expenses for individuals listed on Part VII

Sch K – Tax exempt bond policies and procedures to ensure post issuance compliance

Sch M – Gift acceptance policy

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SummaryBe aware of the which form is applicable

Evaluate benefits of EZ in transition

Track what is new information required

Pay attention to increased thresholds

Reasonable Efforts Standard

Coordinate related party disclosures

Action Items – policies and procedures

Board education a MUST

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Thank YouJane M. Searing, CPA

Clark Nuber P.S.

10900 NE 4th Street, Suite 1700

Bellevue, WA 98004

JSearing@ClarkNuber.com

Vincent J. Stevens, CPA

Clark Nuber P.S.

10900 NE 4th Street, Suite 1700

Bellevue, WA 98004

VStevens@ClarkNuber.com

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Questions ?????