Pump the Brakes! Did We Really Meet the Restriction of that Donation?

Posted on February 4 2016 by admin

Dual restricted contributions remind me of driving a vehicle with a standard transmission. If you release the clutch but forget to put the car in gear, you probably won’t go anywhere unless your vehicle is on an incline or decline. Even then, you will most likely, eventually roll to a stop. On the other hand, from a complete stop, it would be highly unlikely you would even get your vehicle into gear without first pressing in the clutch. Correctly using the clutch and shifting into gear to put your vehicle in motion is synonymous to releasing dual-restricted contributions.

Prematurely releasing restrictions will result in a misstatement of your net assets and potentially could result in the donor requesting the funds be returned. Properly understanding the donor’s intention and what restrictions must be met is vital to properly accounting for restricted contributions.

For example, if your donor notes their contribution must be utilized for salary expense for the following year, you can only release that restriction when you have incurred salary expense in the proper period. Releasing the restriction for salaries paid in the current year would be a violation of the donor’s intent.

Don’t sit in your driveway with your vehicle in neutral. Make sure all restrictions have been fulfilled when releasing funds to ensure your financial statements are accurate and your donor’s intentions are met.

By Samantha E. Mahlen, CPA

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Potential Nonprofit Accounting Changes?

Posted on January 6 2016 by admin

Approximately 13,340 nonprofits registered with the state Department of Consumer Protection may be impacted by FASB’s proposed changes to financial reporting. In April, they announced the proposal to change the following items:

  • Income Statement
  • Rule: Requires entities to report net income or loss from operating activities, separate from non-operating activities.
  • Impact: Clearly shows income and costs directly related to accomplishing the mission of the organization.
  • Reason for change: Non-operating activities can often times distort the bottom line, making it difficult for an interested party to distinguish the financial performance directly related to the nonprofit’s mission.
  • Net Assets
  • Rule: Requires the reporting of only two classes of net assets: net assets with donor restrictions and net assets without donor restrictions.
  • Impact: It would eliminate having to report the three classes of net assets: unrestricted, temporarily restricted and permanently restricted.
  • Reason for change: FASB hopes to reduce complexity and improve understandability.
  • Cash Flows
  • Rule: Requires the cash flow statement to be presented using the direct method.
  • Impact: It will completely transform the way information is presented and will provide more useful information to stakeholders.
  • Reason for change: To provide better information for decision-makers regarding an entity’s financial performance, service efforts, need for external financing, and stewardship of donor funds.

The FASB anticipates these changes will go into effect for 2017. Until then, they invite professionals to weigh in on the proposed changes by emailing director@fasb.org or by visiting the website at www.fasb.org.

By Kristian Haralson



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Why Shouldn’t We Accept All Donations?

Posted on December 23 2015 by admin

Most of us have heard the quote “one person’s junk is another’s treasure”. What is more problematic for charitable organizations, I find, is that donors give non-cash items that were valuable to them, but are not valuable to the organization or in support of its mission. If you haven’t implemented a gift acceptance policy, you may find yourself with items that cause more expense or liability than value.

So how do you avoid accepting a 100 pound statue of two cats or a time share in Flint, MI from one of your most generous donors with a value to them of $5,000 but a fair market value that is very difficult to determine? Simple – implement a gift acceptance policy.

I would assume if you accepted the aforementioned gifts, your entity could spend more time and incur more expenses trying to sell the items than what you would receive when they’re finally sold. The cost and resources needed to dispose of or sell non-cash donations should be a prime consideration in whether or not to accept the donation.

Other factors to note include review of legal considerations and potential liabilities, restrictions on the gift, gift acceptance approval procedures, necessary IRS filings, and carrying costs.

Implementing a gift acceptance policy will not only provide a clear direction for your employees, but will also be a good reference for your donors if you provide it as a link on your website. Check out these templates for a sample gift acceptance policy and other recommended policies.

By Samantha E. Mahlen, CPA

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Healthy Skepticism: Hiring a Professional Fundraiser

Posted on November 25 2015 by admin

The competition for donor contributions continues to rise as more nonprofit organizations register with the Internal Revenue Service (IRS). With this increase in competition, many nonprofits are choosing to hire a professional fundraiser to help maximize their earnings potential. Before hiring your own, you should consider the following factors:

  1. Is it necessary? Some organizations give up prematurely on raising money themselves when they have plenty of fundraising potential. Are you one of those? If so, consider a few less costly options.
  2. Conduct research and seek advice. Network with other nonprofits in your region and obtain advice on how to successfully raise money. Ask them about any problems they have experienced with fundraising. If they are using a fundraiser, ask them about their experiences with that specific fundraiser.
  3. Does the fundraiser subcontract their fundraising phone calls? It is extremely difficult to monitor how they treat your prospective donors if they subcontract the work.
  4. Is the fundraiser interested in your mission? Have them attend an event to better understand what they are raising money for and have them become involved in the organization.
  5. How is the telemarketing staff hired and trained? If they are working on commission, they are more likely to exaggerate or make untrue claims over the phone. Additionally, if the employees are paid poorly, they are more likely to experience high employee turnover rates.
  6. Have an attorney review the contracts before they are signed. You do not want to become involved with any lengthy lawsuits to invalidate “bad” contracts.
  7. Does the contract give your nonprofit sufficient control over fundraising efforts? Your nonprofit should be able to review phone calls made by fundraisers to potential donors, provide a script for them to follow, and be allowed to visit their office for follow up conferences.

The overall message is to do your homework to be sure you make the right decision for your nonprofit organization.

By Kristian Haralson

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IRS Tax Exempt Priorities for 2016

Posted on November 4 2015 by admin

A few weeks ago the IRS Tax Exempt & Government Entities Commissioner released a Workplan Briefing for the Government’s fiscal year 2016. She listed five strategic issue areas, below, in which they will focus resources in the next year.

  • Exemption: issues include non-exempt purpose activity and private inurement
  • Protection of Assets: issues include self-dealing, excess benefit transactions, and loans to disqualified persons
  • Tax Gap: issues include employment tax and Unrelated Business Income Tax liability
  • International: include oversite on funds spent outside the U.S.
  • Emerging Issues: includes non-exempt charitable trusts and IRC 501(r)

It was also noted that the compliance strategy will include oversite of tax-exempt hospitals and compliance issues with the Patient Protection and Affordable Care Act. As well as a continued review of the 1023-EZ process and post-determination compliance enforcement for those Organizations granted exemption though the 1023-EZ application.

Be aware of the above issues throughout the year and if you are unsure whether your organization is in compliance consult with your non-profit tax preparer or visit the IRS website in the charities and nonprofits section. To read the complete message and work plan, click here.

By Kristin Cullen, CPA

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A Little-Known Element on the Form 990

Posted on October 27 2015 by admin

If your nonprofit organization regularly solicits and receives multi-year promises to give, you most likely occasionally have the situation where a promise that was made in a past year becomes uncollectible. Where does this write-off or loss get reported on the Form 990? As a reduction in contribution income on the Statement of Revenue (Part VIII)? As “bad debt expense” on the Statement of Functional Expenses (Part IX)? The answer to these latter 2 questions is “no”. Any losses from writing off promises to give from prior years, as well as any refunds of contributions from prior years, should be reported only as an “other change” in the Reconciliation of Net Assets (Part XI) of the Form 990. This “other change” in net assets should also be described on Schedule O.

Schedule A is another schedule to consider with this situation. On line 1 of Part II and Part III (depending on which part you are required to complete) of Schedule A, you report the total amount of gifts, grants and contributions for each of the last 5 years. If you had a write-off or loss of a promise to give that had been promised/recorded in a prior year, you should reduce the amount on line 1 in the column that pertains to the year the promise was originally made. By doing this, you are correctly reducing your public support percentage calculation. So for Schedule A, the rules are different – you do actually reduce the revenue reported here, but be sure to do so in the correct column for the correct year. If the promise that you are writing off was promised more than 5 years ago, you would not have an adjustment on Schedule A.

By Colette Kamps, CPA

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How to Account for Donated Auction Items

Posted on October 21 2015 by admin

Believe it or not, it’s already the holiday season where not only do you begin thinking about what your loved ones want as gifts but also how to properly pull off your annual fundraising gala. Many not-for-profit events not only have entertainment, a call to action, and great food, but also have silent or live auctions.

Luckily for most not-for-profit organizations, we have a very generous population in the Phoenix Valley and most items up for auction are donated to the organization. Although this is very beneficial to the organization, it is not always the easiest thing to account for in our general ledger.

So how do we record these donated items? When an item is received to be used in an auction benefitting the organization, it should first be recognized as an asset and contribution revenue. For example, if a company donates a luxury cruise in Alaska valued at $4,000 to be part of the live auction at your event, you should initially recognize the item as follows:

Donated auction items (asset account) $4,000
Contribution revenue ($4,000)

When the item is sold, there are two different ways the transaction may need to be handled. If it is sold at a value higher than originally donated at, the amount of cash above the value is accounted for as additional contribution revenue. If the Alaskan cruise is sold for $5,000, you should recognize the sale as follows:

Cash $5,000
Donated auction items (asset account) ($4,000)
Contribution revenue ($1,000)

However, in the unfortunate event that the buyer gets a “steal” and pays less than the donated value, you would recognize the difference between the asset value and incoming cash as a debit to contribution revenue. If the Alaskan cruise is sold for $3,000, you should recognize the sale as follows:

Cash $3,000
Contribution revenue $1,000
Donated auction items (asset account) ($4,000)

In review of the above entries, notice that the maximum amount of contribution revenue you should report is the cash received for the donated item. Therefore, it may seem easiest to just report the ending revenue and cash. However, if the donation and event don’t occur in the same annual period, entry 1 must be entered. If both occur in the same annual period, you may be able to record the cash and revenue after the event as the only entry.

Unfortunately, even if the donation and sale occur in the same period, you will still need to track the fair market value of all donated items not only for internal purposes, but also for Schedule G of your Form 990. A list of all donated items with their fair market value, amount each sold for, and supporting documentation will make your auditor and tax preparer very happy.

By Samantha E. Mahlen, CPA

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The Burk Donor Survey

Posted on October 7 2015 by admin

The 2014 Burk Donor Survey was released earlier this year. This survey is a study that was done by fundraising expert Penelope Burk, which analyzes the changes in donor giving each year. More importantly, it gives insight to how donors intend to give in the upcoming 12-month period. This survey asked 23,000 donors in the U.S. and Canada about some of the factors that made them decide to start giving and what will cause them to stop their support. Some findings include:

Donors can give more. Donors gave over $335 billion; yet overall, 40% of donors surveyed said they could have given more. Fifty percent of those under the age of 35, which is the youngest age bracket, are the ones who are the most willing to give more.

Donors are donating smarter. Fifty-seven percent of those surveyed are spending more time than they did five years ago researching a nonprofit before they give for the first time or renew their support. Donors are paying attention to how much nonprofits are spending on administrative costs and fundraising. Seventy-five percent are more than likely to stop their support of an organization whose fundraising costs are too high and 81% said they would stop supporting an organization if their general administrative costs are high.

Donors intend to give more. Fifty-five percent of donors expect to give the same amount as they did in the prior year and four times as many donors are expected to give more, not less. This is good news for nonprofit organizations.

Donors don’t want token gifts. Seventy-two percent of the donors who received a plaque or some type of display as an appreciation are either throwing it away or storing it where they are not seen. Most donors who receive this type of appreciation gift often question the cost of the gift, which, in turn, causes them to wonder if their donation is being spent well. Those surveyed noted that they would much rather receive a simple thank you letter or a phone call.

By Sharlynn Garza, CPA

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Involvement of Nonprofit Board of Directors

Posted on October 1 2015 by admin

Recently I came across an article by Accounting Today that discussed a survey of over 100 not-for-profit leaders who were asked to gauge what they felt about their board members and those members’ involvement. Most spoke positively of their board but reported some challenges broken down below:

  • 15% of the leaders felt the board carefully observes their dashboard performance compared to their peers.
  • 28% thought their board members are highly strategic in providing guidance.
  • 29% said the board connects the organization to external sources.
  • 47% said board members provide their professional capabilities.
  • 45% said the board closely monitors investments.
  • 61% believed their boards are engaged but don’t micromanage.
  • 57% said directors closely monitor expenditures.
  • 54% said board members are active in attending board meetings.
  • Roughly half of those surveyed said board members follow the overall performance of the organization but fail to look into specific programs.

On the positive side, 73% of the nonprofit leaders said their board members are passionate about the mission of the organization. It should be an organization’s strategy to work on involving their board or keeping their board involved. I believe board members actively participating in the organization and its strategies benefit the not-for-profit greatly because it generates better accountability and transparency while at the same time motivating the not-for-profit to be innovative in advancing the organization in its charitable interests.

By Rebecca A. Gornto

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Internal Control Policies Reported on the 990

Posted on September 15 2015 by admin

Lately I’ve received several questions about the policies and procedures listed on page 6 Part VI Section B, three of which are a written conflict of interest policy, whistle blower policy, and a document and retention policy. The concern always seems to be, what if the organization doesn’t have these policies in place? The IRS does not require an organization to have any or all of these policies.

However, having these policies is considered a best practice for a non-profit organization. The length and detail for each policy would depend on the size and complexity of the organization.

A written conflict of interest policy should be reviewed and completed by at least the board of directors and key employees, if not all employees to help identify any potential conflicts. Once they have been identified, there should be a process to review the impact of the conflict. You may determine that there is no impact to the organization or, for example, a board member may abstain from voting on a particular topic.

A written whistle blower policy can take several forms. A few examples are to have a compliance officer or a third party hotline to take anonymous calls. It is equally important to ensure employees are aware this policy exists and are reminded on a regular basis.

A written document and retention policy can help ensure that employees and volunteers follow consistent guidelines on any accounting, legal, or internal needs of the organization. There are documents that need to be kept permanently and others that can be disposed of after certain time periods, typically a range of 7-10 years.

If you’re not sure how to start creating these policies, there are several websites (blueavacado.org, councilofnonprofits.org) that have examples to use as a starting point. We also have a few templates on our website at www.hhcpa.com.

By Kristin Cullen, CPA

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