Nonprofit

For-profit vs. not-for-profit: Compare and contrast financial reporting goals

As the term suggests, for-profit companies are driven primarily by one goal — to maximize profits for their owners. Nonprofits, on the other hand, are generally motivated by a charitable purpose. Here’s how their respective financial statements reflect this difference.

Reporting revenues and expenses

For-profits produce an income statement (also known as a profit and loss statement), listing their revenues, gains, expenses and losses to evaluate financial performance. They report mainly on profitability and increasing assets, which correlate with future dividends and return on investment to owners and shareholders.

By comparison, not-for-profit entities just want revenue to cover the costs of fulfilling their mission now and in the future. They often rely on grants and donations in addition to fees for service income. So they prepare a statement of activities, which lists all revenue less expenses, and classifies the impact on each net asset class.

Many nonprofits currently produce a statement of functional expenses. But a new accounting standard kicks in this year — Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. It will require organizations to classify expenses by nature (meaning categories such as salaries and wages, rent, employee benefits and utilities) and function (mainly program services and supporting activities). This information will need to be expressed in a grid format that shows the amount of each natural category spent on each function.

Balance sheet considerations

For-profit companies prepare a balance sheet that lists the owner’s or shareholders’ equity, which is based on the company’s assets, liabilities and prior profits. The equity determines the value of a company’s common and preferred stock.

Nonprofits, which have no owners, prepare a statement of financial position. It also looks at assets, liabilities and prior earnings. The resulting net assets historically have been classified as 1) unrestricted, 2) temporarily restricted, or 3) permanently restricted, based on the presence of donor restrictions. Starting in 2018 for most not-for-profits, the new accounting standard will reduce these classes to two: 1) net assets without donor restrictions and 2) net assets with donor restrictions.

Footnote disclosures

Another key difference: Nonprofits tend to focus more on transparency than for-profit businesses do. Thus, their financial statements and footnotes include a lot of disclosures, such as about the nature and amount of donor-imposed restrictions on net assets. Starting in 2018, ASU No. 2016-14 will require more disclosures on the amount, purpose and type of board designations of net assets. Additional disclosures will be required to outline the availability and liquidity of assets to cover operations in the coming year.

Common denominator

Whether operating for a profit or not, all entities have a common need to produce timely financial statements that stakeholders can trust. Contact us for help reporting accurate financial results for your organization.

© 2018

Tax Exempt Organizations Disaster Relief Written Acknowledgements

by Karen Atchley, CPA

Partner at Atchley & Associates, LLP

The Disaster Tax Relief and Airport and Airway Extension Act of 2017 was signed into law on September 28, 2017 (hereafter referred to as The Disaster Tax Relief Act).  The legislation provides tax relief to the victims of Hurricanes Harvey, Irma and Maria and funds the Federal Aviation Administration through March 2018.

Although this new law affects individuals and employers, the purpose of this paper is to advise tax exempt organizations concerning one specific area of the new law relating to issuance of charitable contribution acknowledgement letters.  The law added a temporary suspension of the adjusted gross income (AGI) limitations that are imposed on qualified charitable contributions. The taxpayer must make an election for the temporary suspension of the AGI limitations to apply.

 In general, the law prior to the September 28, 2017 legislation provides that individual’s cash contributions are deductible in any one year up to 50% of AGI and noncash contributions are deductible in any one year up to either 20% or 30% of AGI.  Contributions limited by AGI are carried forward to subsequent years for up to five years.

A qualified charitable contribution under the new law is a contribution that was paid during the period beginning August 23, 2017 and ending on December 31, 2017, in cash to an organization described in section 170(b)(1)(A), for relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas.  The contribution must be substantiated with a contemporaneous written acknowledgement from the charitable organization that states that the contribution was or is to be used for relief efforts.

Most charitable organizations are aware of Internal Revenue Code (IRC) Section 170(f)(8)(A), which requires that the organization must provide the donor with a written acknowledgement of the donor contribution if the contribution was for $250 or more.  IRC Section 6115 requires the charitable organization to provide the donor with a written statement if a contribution is made for $75 or more if part of the contribution is for goods or services (quid pro quo) and the statement must contain a good-faith estimate of the value of goods and services that the charity has provided to the donor.  What charitable organizations may not know is that The Disaster Tax Relief Act requires written acknowledgement that not only states that the contribution was or is to be used for relief efforts but also requires a letter to the donor regardless of the size of the contribution.

In summary, charitable organizations that collected funds that were collected during 2017 and used in the relief efforts in the Hurricane Harvey, Irma or Maria disaster areas will want to start working on their acknowledgement letters for 2017 early in 2018 since all qualified relief contributions require an acknowledgement letter.

Note: Regulations may subsequently be issued that affect this provision of the tax law.  Check with your tax advisor to determine whether any subsequent tax law changes are made.  This paper is not intended to address all the provisions of The Disaster Relief Act but only the provision relating to the issuance of written acknowledgements.

Grant Funding and the Benefit of Single Audits

by Jeremy Myers, CPA

Audit Senior Manager at Atchley & Associates, LLP

 

Austin has a growing population of non-profit organizations who receive grant funds, which can be federal or state sourced and can come in many different sources: Grants, Loans, usages of land, and food / other commodities.  While the receipt of these funds helps organizations meet the needs of the community and reach their missions/goals, there are a number of other requirements that organizations may face.

Grant Monitoring and Reporting

Once an organization receives grant funds, they are typically subject to monitoring from the grantor.  Most grant contracts include either optional or required monitoring.  This monitoring can be performed by the granting agency or by a third party that the granting agency hires to perform monitoring.  This would be in addition to any reports required by the grantors to fill out.  Grant Reporting can range from monthly reimbursement requests, quarterly or annual performance reporting, or cost reports.

Necessary Non-Grant Funding

Many of the non-profit organizations in Austin have to review the requirements of the grant funds they receive and their own ability to meet those requirements.  These requirements may have limitations on both on a time and financial basis.  While organizations will want to receive grant funding, they have to look at the time required to fill out any reporting, keeping records of how the funds were spent, detailed records of those helped, and any necessary hiring and training of the staff to fulfill the grant’s purpose.  Also many grants do not cover some of these necessary items and the organization may not have the resources on its own to cover the costs of running programs in which the grant does not specifically allow.  Non-profits typically have to depend on public support to fill in the gaps the grants do not cover.

Requirements for Uniform Guidance Audit

If an organization who receives federal or state grant funding and expends $750,000 or more, in one year, of federal or state funding (looking at just federal or just state funds, not combined) is required to have an audit under Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements of Federal Awards, also known as Uniform Guidance.  For example, if an organization receives a $1,000,000 grant from the Department of Health and Human Services and spends $600,000 in year 1 and $400,000 in year 2 – this organization would not be required to have an audit under Uniform Guidance.  But if that same organization spends $800,000 in year 1 and $200,000 in year 2, they would meet the requirements to have an audit performed under Uniform Guidance.  The main trigger is spending the funds, not receiving the funds, which under the accrual method of accounting means that you will need to account for those expense incurred but not reimbursed during the organization’s fiscal year.  If you are unsure if the funds you have received are subject to Uniform Guidance, you should inquire to the granting agency and look for Catalog Of Federal Domestic Assistance (CFDA) numbers associated with the grant you have received.  Each grant should be tracked by their CFDA numbers as that number will be how the grant funds are presented on the Schedule of Expenditures of Federal or State Awards (SEFA or SESA).

Benefits of a Single Audit

If an organization is subject to a Uniform Guidance audit, then it would be required to go under a full financial and Uniform Guidance audit, also known as a Single Audit.  The term “Single Audit” is used to refer to the idea that an organization would only have to go through one audit versus multiple monitoring by different grantors and could meet any requirements from outside lenders.  The benefits of having a Single Audit performed are:

  • Your organization will have met the requirements of receiving federal or state funding
  • Having an objective view of your organization’s internal controls over both financial and grant programs,
  • Your organization will have audited financial statements that they can use to obtain future funding from both public sources and if necessary from financial institutions.
  • Making sure that your organization is using industry best practices across all aspects of the organization, not just grant or financial reporting
  • Grantors may choose to rely on the results of the Single Audit, the organization may save time from going through additional monitoring.
  • Since one firm can perform a Single Audit, it can be performed in conjunction with your financial audit, there is some dual purpose testing that can be performed that would bring efficiency to the entire Single Audit process.
  • Finally, all Single Audits are uploaded to the Federal Audit Clearinghouse (https://harvester.census.gov/facweb/) and organizations fulfill the requirements of making their financial statements available to the public and to their current and future grantors.

 

If you have any additional questions about Single Audits or requirements under Uniform Guidance, please feel free to reach out to Jeremy Myers (JMyers@atchleycpas.com).

Flexible Budgets for Not-For-Profits

by Tyler Mosley

Audit Manager at Atchley & Associates, LLP

Many of the not-for-profit organizations we provide services for use budgets. For the most part, those budgets are static budgets that are set and approved by the board of directors at the beginning of the year and only modified if a significant event occurs during the year. I have seen a growing trend of companies moving towards flexible budgets which can be modified throughout the year based on updated information and current organizational conditions.

While static budgets are usually set at the beginning of a fiscal year and rarely modified, flexible budgets can be modified weekly, monthly or quarterly based on changing conditions. Most of the not-for-profit organizations that use a budget base their budget on projected cash inflows. While some not-for-profit organizations may have steady cash inflows and can reasonably project the fiscal year’s total revenues, many do not. Many not-for-profit organizations rely on donations from businesses and individuals which can vary in timing and magnitude. For these organizations a flexible budget would provide a more useful benchmark with which to manage program expenses. Program expenses could be budgeted for at the beginning of the year based on projected total cash inflow and then increased or decreased each month or quarter based on updated cash inflow information.

Updating the budget throughout the year will prevent surprises each period in which expenses may be under budget but exceed cash inflows. Alternatively, it would also prevent program expenses coming in well below cash inflows when the organization has a great fundraising year. When it is time for your organization to establish a budget, consider setting up so that it can be updated periodically throughout the year as you get more accurate information about your current cash flow situation.

Preventing Fraud in Nonprofit Organizations

By Robert Marchbanks, CPA/CGMA

Audit Manager at Atchley & Associates, LLP

Most nonprofit organizations operate with limited staff and in a manner that assumes all employees are trustworthy. While the majority of employees are honest and believe in the organization’s mission, there are employees that may face financial hardship from a spouse losing a job, incurring medical bills, or sending a child to college. Other employees believe they are entitled to higher pay and will “justify” embezzling from the organization.

Donald Cressey’s hypothesis on why people commit fraud is referred to as the fraud triangle: Motivation, Rationalization, and Opportunity.

  • Motivation or pressure may include financial problems, addictions like gambling, shopping or drugs, pressure to show good performance or results, or just the thrill of being able to get away with something.
  • Rationalization is when individuals think they are justified because they are underpaid, or it’s for their family, or they need it now but they’ll pay it back before anyone notices.
  • Opportunity is created when there are weaknesses in controls. Individuals think they won’t get caught because nobody is looking, or reviewing, or performing reconciliations and reviews.

While an organization may not be able to prevent motivation or rationalization, there are certain steps the organization can take to minimize the opportunity and the risk of an employee committing fraud. These include:

  1. Set the tone at the top – Management should set the tone at the top for ethical behavior in the organization.
  2. Segregation of duties – No single person should be responsible for receiving, depositing, recording, and reconciling receipt of funds. No single person should be responsible for approving payments, disbursing funds, recording the disbursement transaction, and reconciling the bank statement.
  3. Reconcile accounts in a timely manner – Bank accounts should be reconciled timely by an individual not responsible for recording cash receipts and disbursements.
  4. Documentation and Authorization – You should have invoices to support cash disbursements and the expenditures should be approved by someone outside of accounting. The approval should be in the form of a signed purchase order or signed approval on the invoice. Maintain proper accounting records for all transactions.
  5. Written whistleblower and conflict of interest policies – The whistleblower policy should provide a phone number for the employee to call to report the fraud and remain anonymous. The conflict of interest policy should prevent private inurement.
  6. Look for employees living beyond their means – Be aware of the type of car the employee drives, the vacation destinations they travel to, and the jewelry that they wear.
  7. Carry insurance for employee theft – Even with the fraud policies and procedures in place, you should carry insurance to cover employee theft. This will minimize the risk of the financial hardship of the nonprofit organization.
  8. Keep check stock in a secure location accessed only by authorized personnel.

While the above list is not all-inclusive, hopefully it will encourage you to review your current policies and procedures at your nonprofit organization and implement procedures to deter and detect employee fraud. Please let us know if we can help in reviewing your risk assessment of your policies and procedures.