Nonprofit Update

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RIVERO, GORDIMER & COMPANY, P.ANOT-FOR-PROFIT APPRECIATION DAYNOVEMBER 2, 2018

MAUREEN G. BUTLER, PHD, CPAASSOCIATE PROFESSOR OF ACCOUNTING

THE UNIVERSITY OF TAMPA

Objectives Recognize changes in nonprofit financial reporting

Appreciate additional information required during audits

Know when to call Rivero, Gordimer & Co.

Ask good questions

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Financial Accounting Standards Board (FASB)THE STANDARD SETTERS – RULES WE MUST FOLLOW

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Accounting Standards Update 2017-02Not-for-Profit Entities – Consolidation (Subtopic 958-810) –January 2017

Clarifying When a Not-for-Profit Entity That Is a General Partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity

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Accounting Standards Update 2016-18Statement of Cash Flows (Topic 230) – November 2016

Restricted Cash

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Accounting Standards Update 2016-14Not-for-Profit Entities (Topic 958) – August 2016

Presentation of Financial Statements of Not-for-Profit Entities

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Board of Directors & Managers

Financial Management

Strategy Policies

Availability of Funds

Disclosure

Availability of Funds

•Cash management policies

•Reserve fund policies

•Quasi-endowments

•Endowment spending policies

•Lines of credit

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Permanently Restricted

Temporarily Restricted

Unrestricted

With Donor Restrictions

Without Donor Restrictions

Board Designated Restrictions

Net Asset Classes –Statement of Financial PositionEXAMPLE 1 EXAMPLE 2

Net Assets

Without donor restrictions

Undesignated $90,000

Board designated (purpose) 80,000

170,000

With donor restrictions

Time restricted for 20x9 30,000

Purpose restricted 50,000

Permanently restricted 50,000

130,000

Total net assets $300,000

Net Assets

Without donor restrictions $170,000

With donor restrictions 130,000

Total net assets $300,000

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Net Asset Classes – Statement of ActivitiesWithout Donor

RestrictionsWith Donor Restrictions Total

Revenues and other support

Contributions $5,000 $23,000 $28,000

Fees 4,000 4,000

Net assets released from restriction 20,000 (20,000) -

Total revenues and other support 29,000 3,000 32,000

Expenses:

Programs 16,000 16,000

Management and general 3,000 3,000

Fundraising 2,000 2,000

Total expenses 21,000 21,000

Change in net assets 8,000 3,000 11,000

Net assets at beginning of year 60,000 100,000 160,000

Net assets at end of year $68,000 $103,000 $171,000

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Net Asset Classes – Form 990

Permanently Restricted

Temporarily Restricted

Unrestricted

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(Click on letter excerpt to access complete letter)

Liquidity Disclosure Requirements

QUANTITATIVE

•What

•Availability for General Expenditures

•1 Year

QUALITATIVE

•How

•Management Policies

•Liquidity Risk

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Liquidity – Quantitative Examples Save our Charities

EXAMPLE 1

Description Amount

Financial assets, at year end $100,000

Less:

Donor-imposed restrictions (25,000)

Quasi-endowment, long-term investing (25,000)

Reserves (10,000)

Financial assets available within one year $ 40,000

EXAMPLE 2

Description Amount

Financial assets available for general expenditure,without donor restriction limiting use within one year of balance sheet date

Cash and cash equivalents 20,000

Accounts receivable 2,000

Promises to give 8,000

Endowment spending-rate distributions 10,000

Total $ 40,000

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Liquidity – Quantitative Example Humanitarian Aid Charity

Description Amount

Total financial assets $100,000

Donor imposed restrictions:

Restricted funds (15,000)

Endowments (25,000)

Net financial assets after donor-imposed restrictions 60,000

Internal designations:

Board advised funds (10,000)

Quasi-endowments (10,000)

Financial assets available to meet cash needs for general expenditures within one year $40,000

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Liquidity – Qualitative Example My Favorite CharityMy Favorite Charity’s goal is to maintain cash and short-term investments on hand to meet 90 days of normal operating expenses. As part of its liquidity management, My Favorite Charity maintains a reserve fund of 10% of its annual budget, $50,000 as of 12/31/20X7, and invests cash in excess of the reserve fund and daily requirements in certificates of deposit. My Favorite Charity also has a line of credit in the amount of $50,000 available to meet unanticipated liquidity needs.

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Liquidity – Qualitative ExampleSave Our CharitiesOur endowment funds consist of donor-restricted endowments and funds designated by the board as endowments. Income from donor-restricted endowments is restricted for specific purposes, with the exception of the amounts available for general use. Donor-restricted endowment funds are not available for general expenditure.

Our board-designated endowment of $15,511,186 is subject to an annual spending rate of 4.5 percent as described in Note 9. Although we do not intend to spend from this board-designated endowment (other than amounts appropriated for general expenditure as part of our Board’s annual budget approval and appropriation), these amounts could be made available if necessary.

As part of our liquidity management plan, we invest cash in excess of daily requirements in short-term investments, CDs, and money market funds. Occasionally, the Board designates a portion of any operating surplus to its operating reserve, which was $300,000 as of December 31, 201X.

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Liquidity – Qualitative ExampleHumanitarian Aid Charity

The organization receives significant contributions restricted by donors, and considers contributions restricted for programs which are ongoing, major, and central to its annual operations to be available to meet cash needs for general expenditures. For the years ended June 30, 20X1, restricted contributions of $5,000 were included in financial assets available to meet cash needs for general expenditures within one year.

The organization manages its liquidity and reserves following three guiding principles: Operating within a prudent range of financial soundness and stability, maintaining adequate liquid assets to fund near-term operating needs, and maintaining sufficient reserves to provide reasonable assurance that long-term obligations will be discharged.

The organization has a liquidity policy to maintain current financial assets less current liabilities at a minimum of 30 days operating expenses. The organization has a policy to target a year-end balance of reserves of unrestricted, undesignated net assets at 15 to 30 days of expected expenditures. To achieve these targets, the entity forecasts its future cash flows and monitors its liquidity quarterly, and monitors its reserves annually. During the years ended June 30, 20X1 and 20X0, the level of liquidity and reserves was managed within the policy requirements.

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Expense Reporting

• Required for All

• Function – Program & Support

• Natural Classification

• Presentation

• Allocation Method

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Functional Expenses

Program

• Goods or Services

• Beneficiaries, customers, members

Management

• Not directly identifiable with one or more program, fundraising or membership-development activities

• Indispensable to those activities & entity’s existence

Fundraising

• Induce potential donors to contribute

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Management and General Activitiesa. Oversight

b. Business management

c. General recordkeeping and payroll

d. Budgeting

e. Financing, including unallocated interest costs pursuant to paragraph 958-720-45-24

f. Soliciting funds other than contributions and membership dues, for example, the costs associated with:

1. Promoting the sale of goods or services to customers, including advertising costs2. Responding to government, foundation, and other requests for proposals for customer-sponsored contracts for goods and services

ff. Administering government, foundation, and similar customer-sponsored contracts, including billing and collecting fees and grant and contract financial reporting

g. Disseminating information to inform the public of the NFP's stewardship of contributed funds

h. Making announcements concerning appointments

i. Producing and disseminating the annual report

j. Subparagraph superseded by Accounting Standards Update No. 2012-04.

jj. Employee benefits management and oversight (human resources)

k. All other management and administration except for direct conduct of program services (see paragraphs 958-720-45-3 through 45-5), fundraising activities (see paragraphs 958-720-45-9 through 45-10), or membership development activities (see paragraphs 958-720-45-11 through 45-14). See paragraphs 958-720-55-171 through 55-176 for examples on which activities would constitute direct conduct or supervision of program or support functions and an example footnote disclosure on the cost allocation method used to allocate costs among functions.

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Fundraising Activities

a. Publicizing and conducting fundraising campaigns

b. Maintaining donor mailing lists

c. Conducting special fundraising events

d. Preparing and distributing fundraising manuals, instructions, and other materials

e. Conducting other activities involved with soliciting contributions from individuals, foundations, government agencies, and others.

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Expense Reporting - Allocating (958-720-45-2A)

Allocate costs that benefitmore than one function

•Rational

•Systematic

•Consistent

Information Technology

Accounting

Fundraising

Program Delivery

Human Resources

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Expense Allocation Example 1

The CEO of My Favorite Charity spends her time as follows:

•20% overseeing the research program

•20% on fundraising cultivation activities

•60% indirectly supervising the other areas of the NFP including administrative areas

How should her compensation be allocated?

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Expense Allocation Example 1 –CEO Compensation

Program20%

Fundraising20%

Management &

General60%

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Expense Allocation Example 2SCENARIO

The human resources department at My Favorite Charity is involved in the benefits administration for all personnel of the organization.

How should the costs of the HR department be allocated?

SOLUTION

The HR department costs would not be allocated to any specific program, but would be reported as management and general expenses because benefits administration is a supporting activity for the entire entity.

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Expense Allocation Example 3SCENARIO

My Favorite Charity receives a federal research grant.

Under the terms of the grant agreement, the accountant prepares a fiscal report detailing expenses incurred and charged against the grant.

The principal investigator responsible for the research activity prepares a scientific report.

Is either a program expense?

SOLUTION

Accountant’s compensation and benefits

NO - the fiscal report is not part of the direct conduct or direct supervision of the grant.

Principal Investigator’s compensation and benefits

YES – the scientific report is direct conduct and/or direct supervision of the grant activity

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Expenses – Statement of Functional Expenses or Notes to the Financial Statements

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FUNCTION – Program Services | Support Activities

NATURAL CLASSIFICATION

Expenses –Statement of Activities

Expenses

Program

Salaries $12,000

Occupancy 6,000

Supplies 1,000

19,000

Management and general

Salaries 2,000

Occupancy 600

Supplies 1,500

4,100

Fundraising

Salaries 1,500

Occupancy 100

Supplies 2,000

$3,600

Total expenses $26,70029

Expense Reporting – Disclosure Example“The financial statements report certain categories of expenses that are attributed to more than one program or supporting function. Therefore, expenses require allocation on a reasonable basis that is consistently applied. The expenses that are allocated include occupancy, depreciation, and amortization, which are allocated on a square footage basis, as well as salaries and wages, benefits, payroll taxes, professional services, office expenses, information technology, interest, insurance, and other, which are allocated on the basis of estimates of time and effort.”

(AICPA Illustrative Financial Statements ASU 2016-14)

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Revenue Recognition –NFP Contracts and Grants

Contribution (Nonexchange)

(Nonreciprocal)

or

Exchange Transaction

(Reciprocal)

Contribution

Conditional

or

Unconditional

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Example 1 – Local Government GrantMy Favorite Charity receives funding from the local school district to perform a research study on the benefits of a longer school year.

Agreement Requirements

1. Plan the study

2. Perform the research

3. Summarize results and submit research to the school board

The school district retains all rights to the study.• Exchange or Nonexchange?

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Solution Example 1 – Local Government Grant

Exchange or Nonexchange?

• Commensurate value is exchanged between the two parties.

• The school district retains the rights to the study.

• Revenue

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Example 2 – Private Foundation GrantMy Second Favorite Charity receives a grant from My Favorite Foundation for funding in the amount of $400,000 to provide specific career training to disabled veterans.

Agreement Requirements - Provide training to at least 8,000 disabled veterans during the next fiscal year, with specific minimum targets that must be met each quarter.

There is a right of release from the obligation in the agreement.• Exchange or Nonexchange?

• Conditional or Unconditional?

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Solution Example 2 – Private Foundation Grant• Exchange or Nonexchange?

The foundation does not receive commensurate value in return

• Conditional or Unconditional?

oThe agreement contains a right of release from obligation

oThe foundation requires a specific level of service that would be considered a measurable performance-related barrier.

• Contribution

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Underwater Endowment•Donor-restricted endowment funds

Fair Value < Original Gift or Minimum Required Amount

(by donor or law)

•Report entire balance of endowment fund within “with donor restrictions” class of net assets

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Underwater Endowment – Disclosure ExampleFrom time to time, certain donor-restricted endowment funds may have fair values less than the amount required to be maintained by donors or by law (underwater endowments). We have interpreted UPMIFA to permit spending from underwater endowments in accordance with prudent measures required under law. At December 31, 20X0, funds with original gift values of $19,883,738, fair values of $19,841,061, and deficiencies of $42,677 were reported in net assets with donor restrictions. These amounts were fully recovered during 20X1 due to favorable market fluctuations.

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Questions/CommentsMBUTLER@UT.EDU

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SourcesAICPA ASU No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, Illustrative Financial Statements, Save Our Charities

Applying FASB’s New NFP Financial Statement Standard, AICPA Not-for-Profit Section

ASC 958 Not-for-Profit Entities, FASB.org

Creative Commons, Microsoft PowerPoint

FASB ASU No. 2016-14, August 2016

FASB In Focus, Proposed Accounting Standards Update – Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, FASB.org

FASB Update, FASB Not-for-Profit Conference, Jeff Mechanick, 5/17 & 18/18

National Council of Nonprofits, Sample Nonprofit Investment Policy Guidelines, https://www.councilofnonprofits.org

Propel Nonprofits, Nonprofit Operating Reserves and Policy Examples, https://www.propelnonprofits.org

• Sample Policies✓ National Council of Nonprofits Sample Investment Policy

✓ Propel Nonprofits Sample Reserves Policy

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