nonprofit

ASU 2016-14: Information about Liquidity

by Colleen Trombetta

Audit Senior at Atchley & Associates, LLP

 

Do you ever find yourself reading a set of financials statements and asking, “So how are we doing cash-wise?” or “Do we have enough cash to pay all our expenses this month… how about the next six months?” It’s clear that the readers of financial statements are concerned with cash. The FASB Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, is going to address this concern of cash and take it one step further by addressing liquidity, which is more complex than just cash-on-hand.

The financial assets that an organization has available to cover operating expenses consist not only of cash, but also of assets that will turn into cash within the coming year, such as accounts receivable, contributions and grants receivable and short-term investments. On the balance sheet, these assets are presented as “Current Assets.” If there are no donor restrictions or board designations, the current assets would be disclosed in the financial statements notes as assets available to cover operating expenses within one year of the balance sheet date.

ASU 2016-14 will require disclosure of the organization’s policies for managing liquidity. The policies should cover areas such as cash reserves, available lines of credit, and investment of cash in excess of current operating needs.

ASU 2016-14 will also require nonprofits to present, on the face of the financial position, the amount for each of two classes of net assets— net assets with donor restrictions and net assets without donor restrictions— as opposed to three.

ASU 2016-14 is effective for fiscal years beginning after December 15, 2017, with early application permitted.

 

 

References.

https://www.aicpa.org/interestareas/centerforplainenglishaccounting/resources/2016/asu-2016-14.html

https://www.nonprofitaccountingacademy.com/asu-2016-14-nonprofit-liquidity/

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

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.