SAS No 112

Statement of Accounting Standards 112 goes into effect / becomes effective for periods ending on or after 12-15-06. I have mentioned in recent boot camps that auditors will soon be looking more closely at your internal controls. With this new standard they are now obliged to report any deficiencies to your board and in the auditor's report. From the linked document:

Requires the auditor to communicate control deficiencies that are significant deficiencies or material weaknesses in internal control.

A significant deficiency is a control, or combination of control deficiencies, that adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected.

A material weakness is a significant deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.

Here is a PDP of that tells more about it.

Recently_Issued_Standards_SAS_No_112.pdf (application/pdf Object)

Alan

Giving Forum—Administrative Expenses

More late notices of events - Any foundation folks out there? You might be interested in this upcoming teleconference call put on by The Forum of Regional Associations of Grantmakers.
Giving Forum—Administrative Expenses

Tired of Spam?

Now I know this isn't directly related to nonprofit finance, but is you were to reduce the amount of spam you get, you will have more time to do finance!

If any of you have been to the Boot Camps you know I have mentioned TechSoup before as THE place to go to get software and tech advice. Click the link and you will find out how to get free anti-spam software. Here is a bit of the press release:

TechSoup and Mailshell today announced the fourth annual “Stop Spam Today!” campaign (www.stopspamtoday.org), a nationwide effort to help nonprofits and public libraries fight spam by providing free information, resources, and tools. The campaign culminates on December 6 in a one-day giveaway, during which nonprofits and libraries can visit www.stopspamtoday.org to order free copies of Mailshell’s Anti-Spam Desktop software. More than 275,000 copies of free anti-spam software were distributed during the previous “Stop Spam Today!” events, a testimonial to the ever-increasing need of nonprofits to protect themselves from unwanted software and its associated threats.

Qualified public libraries, nonprofits, and charitable organizations in the U.S. and in Canada that are registered with TechSoup’s product philanthropy service TechSoup Stock are eligible for the give-away. Organizations that are not already registered are strongly encouraged to pre-register at TechSoup Stock (www.techsoup.org/stock) before December 6, 2006. There is no cost to register or to participate in the program. Pre-registration will start the qualification process and will expedite order processing and delivery. On December 6, all registered organizations need to place their software order within 24 hours through www.stopspamtoday.org.

Short notice, sorry about that but go and get it.
Alan

A Recent Question: Fiscal Years

I was emailed this question a while back, "Among nonprofits, is there a preference for using a calendar year over non-calendar fiscal year. If yes, why?" I wrote back that I have asked other about this and I was told no, there is no real preference in general.

Some groups may have their own reasons for wanting a particular fiscal year based on their own operations, maybe they want their year to end shortly after a big event. Anybody ever heard anything else?

Nonprofit Times / Sarbanes Oxley

The NP Times has a free eNewsletter that almost always has something interesting and pertinent to financial management. Below is an excerpt from the latest issue that deals with SOX issues. Below that is the link to take you to sign up for the newsletter.

Tips of the Week

Boards ... 5 Sox-related issues you need to analyze

Very little of the Sarbanes-Oxley Act of 2002 (SOX) applies to nonprofits, but it would be wise for organizations to follow many of the best practices that have emerged from the legislation.

The portions of SOX that affect nonprofits deal with policies about document retention and whistleblower protection. But the sweeping reform that aimed for greater accountability and transparency also offers best practices that can benefit any nonprofit organization.

Peggy M. Jackson and Toni E. Fogarty, in their book "Sarbanes-Oxley and Nonprofit Management," outline some of the initiatives that can improve the performance of a nonprofit board and its staff:

1. Board recruitment and retention. Sitting on a board is no longer a hobby. It's serious work and demands complete attention to the task. Boards shouldn't be rubber stamps for executive directors, and they can't have passive people or those who lack the requisite skills to provide appropriate governance and oversight, according to the authors.
   
2. Audit committee. Nonprofit boards need to have a separate audit committee that includes at least one board member who is a financial expert. The committee must ensure that auditors are not also engaging in additional services, such as consulting, for the nonprofit, and that either the auditing firm, or at least the lead auditor, is rotated every three to five years.
   
3. Financial literacy. A nonprofit might have to create a training program so all board members know how to read financial reports accurately.
   
4. Code of ethics for board and senior management. Boards should adopt a strict policy prohibiting personal loans to any director or officer and a human resources policy that prohibits lending money to the chief executive officer, executive director, chief financial officer or other staff.
   
5. Conflict of interest policy. Any conflict of interest between a board member and a nonprofit should be documented through a conflict of interest statement and process.

Alan
http://ga0.org/nptimes/join.html?r=n7AhNL11eSlCE

What is a Single Audit?

Do you need to do one? You might if you get federal $.

A link straight from the source.

OFFM Single Audits

National Economic Developement & Law Center

Great great resource, lots of PDF's on this page including information on:

• Highlights of law changes that affect community development agencies
• Sources of law that affect nonprofits
• Model incorporation documents!
• Sample MOU and collaboration agreements
• Sample employment agreements

Plus lots more. I'm going to list them on the side as a resource as well so this info won't get buried.

Q: Who regulates Nonprofits

A: LOTS of folks. The above link offers some info on who those regulator are, what part they regulate and also where to go for help for any number of things.

2007 Mileage Rates

2007 mileage rates have been posted by the IRS. The above link has the full text but the highlights are as follows:

• Business -- 48.5 cents per mile
• Charitable -- 14 cents per mile
• Medical & Moving -- 20 cents per mile

Thanks Steve!

Joint Costs - SOP 98-2

Per the workshops at CAN's annual conference, here is the link to the info on joint costs. What are joint costs you ask? When you send out something that is both educational AND a solicitation for funds you run the risk of having the total cost of the activity listed as fundraising and not program unless you meet certain criteria. The above article will help guide you through the process. The link is also here: http://www.aicpa.org/PUBS/JOFA/aug98/capin.htm

Alan

Proposed New FASB Regs

Nonprofit mergers are increasing and the Financial Accounting Standards Board is proposing new regulations on how they may be handled in the future. If interested there is still time to comment on them.

Volunteer Executive Director

Question from a recent Boot Camp attendee:
For a volunteer Executive Director, can the value of the salary they could be earning be included as in-kind professional service?

And the answer is: Not according to GAAP and IRS rules, it does not meet the characteristics of a donated professional service. BUT you could list this time on a proposal or funding request as an in-kind service, something to show them the value of the organization. It just is not an official contribution to the organization.

Donation Transactions

There were some questions at the latest boot camp on the specific journal entries for donations to be auctioned off or re-sold. From the great PPC Guides, I recommend them to any nonprofit finance professional, an excerpt:

"Organizations may receive contributions of gifts-in-kind to be used for fund-raising purposes. A common example is where an organization receives tickets, gift certificates, or merchandise from donors to be sold to others during an auction. An organization should recognize the donated item to be used for fund-raising purposes as a contribution and record it at its estimated fair value. When the item is subsequently sold (such as at auction), any difference between the item'’s initially estimated fair value and the amount ultimately received should be recognized as an adjustment to the original contribution amount.

For all practical purposes, the initial estimation may not be that important - the eventual contribution amount that is recognized will be what someone was willing to pay for the donated item. Organizations should use their best estimates when initially valuing the donated items and adjust the amounts later when the actual auction takes place. As a practical matter, the time period between the donation of items for an auction and the actual auction may be short. Accordingly, some organizations may wait to record the items until they are actually sold. That would not be appropriate, however, if the items were received before year-end and the auction was held after year-end.

Example: An organization is given a piece of jewelry valued at $3,000 to be auctioned off to the highest bidder at the organization's annual fund-raiser. The journal entry to record the initial gift-in-kind contribution is as follows:
Debit - Asset $ 3,000
Credit - Contribution revenue $ 3,000

At the fund-raiser, an individual purchases the jewelry for $5,000. The journal entry to adjust for the sale is as follows:
Debit - Cash $ 5,000
Credit - Asset $ 3,000
Credit - Contribution revenue $2,000

If the jewelry sold at auction for only $1,000, the journal entry to record the sale would then be as follows:
Debit - Cash $ 1,000
Debit - Contribution revenue $2,000
Credit - Asset $ 3,000"

Hope that helps! And you should check out PPC's guide to Expenses as well.

Multi State Solicitation Rules

Thaks to Shannon at Public Law Center for the information and link to filing for charitable solicitation in multiple states. Unified Registration Statement Kit

www.360financialliteracy.org

The AICPA's 360 Degrees of Financial Literacy can help you nonprofit accounting professionals talk about money with your family, help you plan your life's finances. Good stuff!

Something light...

Granted this really has nothing to do with nonprofit accounting but when I find a comic that mentions financial services I want to remember it!
qwantz.com - dinosaur comics - September 15th 2006

What resources do you use?

What blogs do you read, what websites do you visit that have resources for nonprofit accounting and finance?

CAN in the news

MercuryNews.com | 09/12/2006 | Local non-profits need fiscal oversight after peers' crises

An op-ed piece promoting and encouraging adequate fiscal oversite by nonprofit boards.

Fun Facts!

According to May 2006 data from the National Center for Charitable Statistics :

1. California has almost 11% of filing nonprofit organizations in the country (organizations who are required to file a form 990 tax return), 60,729, more than any other state.
2. CA nonprofits are third highest in gross receipts ($233,990,322,869) reported on the 990, just behind New York and Michigan.
3. CA nonprofits are first in total assets ($335,975,355,076) reported on the 990.

With numbers this big it really shows how valuable good financial tracking and reporting is.

Orange County Boot Camp

The event location has just been confirmed. Thanks to the nice folks at Citigroup who have funded this particular event for us for two years now!

Question for all you readers out there

From an email that was forwarded to me:

We are paying for a former employee's COBRA coverage. Normally, the carrier would bill us, and a third party associated with the carrier would bill the former employee and that third party would reimburse us.

All that is occuring in this case, but in addition, we are reimbursing the employee for the amount the third party is billing. This employee is also receiving severance checks through our payroll.

Would the COBRA reimbursements be subject to payroll taxes, workers comp, etc.? Currently, we are paying the COBRA out of A/P as a separate check from the severance payroll.

Any ideas?

More Q&A

Questions we have received recently...

Question:
Executive Director salary justification - who do we submit this report to? What are examples of how to justify the salary and is it only for the Executive Director?

Answer:
The intermediate sanctions requires that the board be able to show that they did proper research to determine that the salary of the exec is not excessive. The minutes should verify that some kind of salary survey was conducted that compared the salary being offered with organizations of similar size and type. The board needs to justify to itself that the salaries it offers top level staff, board members, contractors, etc. are not excessive.

The regulation applies to all salaries (mostly top level salaries), contracts, income paid to board members, any "insiders". More information on Intermediate Sanctions can be found here.

Question:
What is the deal with UBIT?

Answer:
From the Nonprofit Times enewsletter:

Finance...

Getting hammered with UBIT

Many nonprofit organizations embark on ventures that cross over into the for-profit world, sometimes by design and sometimes by accident.

The Internal Revenue Service (IRS) has strict regulations governing Unrelated Business Income Tax (UBIT), which can be regarded as money a nonprofit makes that is not part of its nonprofit operations.

In her book Something Ventured, Something Gained, Laura Landy offers several options for a nonprofit that has 15 percent or more of its total income that is unrelated income.

Those options are:

-- Revise the charter of the organization. Depending on the nature of the business, the nonprofit can file with the IRS to amend its charter.

-- Alter the business to make it related. Although possible, this course of action is not recommended.

-- Stabilize or reduce the income to below 15 percent. This may be counterproductive, since the point of a nonprofit and a for-profit is to raise as much money as possible.

-- Sell the business. Caution is needed here, because the income from the sale may be unrelated and thus taxable.

-- Establish another nonprofit organization in which the business activity is related. A cooperative partnership can be established under which the second nonprofit donates its profits to the parent nonprofit.

-- Establish a separate profit-making corporation. This can be complicated, but often it is the best course of action.

Also check the links to the right for more info on UBIT.

Latest Boot Camp Event Info

The latest info is on the CAN website, click the title of this post to get there.

Latest questions from a Boot Camp

Can a 501 (c) 3 donate to a 501 (c) 6?
If the missions are similar then we think yes, it should not be an issues. You said if I remember rightly that it was some old office equipment. If all the items to be passed on are fully depreciated then it really wonÂ't be a problem either way since there is technically no book value moving between the organizations.

Is a home office deductible if used for a charity?
Unfortunately no, just the cost of materials used (paper, ink, staples and such).

Have there been any changes to SFAS 116?
No new changes, it is still in effect.

Anybody have different answers?

Does the hiring of undocumented workers pose an exemption threat?

From what I have been able to find I would still say no. I have emailed others more knowledgeable than I and will let you know if they say different.

UPDATE - what they have said:
In theory, it should not be a threat to the exemption. However, this will depend on several factors, namely,

1. The type of exemption. A church will have a better stance than say a hospital.
2. The facts. Did the organization know they were employing an undocumented individual? What did they do about it when they found out?
3. How was it discovered? By the IRS, the organization, who?
4. Do they continue to break the law? Continued disregard for the law may jeopardize the exemption.
   

Contributions that are conditional

A questions was asked at a recent Boot Camp about conditional contributions. A condition is effectively a barrier that must be overcome before a promised gift becomes a contribution. A part of the definition of a contribution is that it is an unconditional promise to transfer assets to a nonprofit.

The question went along the lines of "is a contribution conditional if the promised contribution is not paid until the end of the year and the work is completed." - If I got this wrong please let me know. What you could have here is an exchange transaction, and not technically a contribution.

But assuming it is a contribution you can recognize the revenue in two ways depending on the donor/grantor's instructions. The first would be piecemeal. As you do a portion of the work a portion of the condition of the contribution is met and therefore you can count it as revenue and a receivable. So as you do the work, you recognize a bit of the grant at a time. The second would be to recognize it all at once after the work is done. Once the work is done (the condition is met) then you have a contribution and book the receivable.

When you get the actual cash does not factor into the discussion in any case, just when you get conformation from the donor that at some point you will be getting the cash.

Hope that helps

CA Attorney General

Who regulates charities in California? The state AG's office. Click the above link to find out all the resources they have to help you stay compliant. If someone wants to complain about your charity, this is where they will go.

"Publicly Supported"

"Publicly Supported"
Definition of what the IRS calls public support, important for maintaining your 501c3 status. Publication 557 (link in the article here and over to the right in the IRS section) goes into more details about this.

Some answers to questions posed at the Eureka boot camp

Q: Why is the Chart of Accounts numbered?

A: To make it easier to index and catalogue your chart items and when you had to do accounting on ledger sheets by hand it was easier to write 2010 that “accounts receivable – grants receivable” in the little green spaces.

Q: Is a PSA donated air time or contractual obligation?

A: From what I have been able to dig up it is a donation even though they are required to make the time available.

Q: Specifics for letter to a donor, what the nonprofit gives them.

A: See the link in the IRS section to the right labeled, “Contributions Guidelines for Donors.”

Q: A nonprofit gives money to a community foundation to create an endowment. Is that money permanently restricted?

A: From what I have found it all depends on how you create it. Can you revoke the “gift” to yourself? I would guess that the money would be treated as permanently restricted until the nonprofit changes the status. It is different to me than a board designated fund always being considered unrestricted because in the above question you are giving control of the money to another organization.

Q: How to book membership income when the “membership” is actually a donation?

A: If your group solicits membership as a way of soliciting donations but no real value is exchanged for the membership, that membership is considered a donation and entered on your books as such. If the “member” gets a tote bag or equivalent item with their membership the value of that is deducted from the contribution and put into the earned income section.

Q: Are volunteers reported under a nonprofit’s worker compensation insurance?

A: By law, workers' compensation benefits for volunteers are not required. A volunteer who does not receive compensation for his or her work is not entitled to workers' compensation benefits, unless the agency for which the volunteer works chooses to provide these benefits (See Labor Code Section 3363.5).

I don’t claim to have all the right answers listed, just what I have been able to find through my research. Anyone have any different ones? Post them in the comments please!

Life Cycle of a Public Charity

The IRS has a nice section on its site that details what most charities will go through and what they will have to do. Compensation issues, records retention, what does a donor get, a lot of good information can be found here.

Intermediate Sanctions

A PDF that talks about them and what constitutes excess benefits and compensation.

New link

I added a new link in the IRS section that tells almost all one needs to know about how to value a donated item, lots of questions came up about that and who should do what. I hope it helps.

Valuation of Professional Services

A recent email from a Eureka attendee asked if there was any government publication that lists what you would value donated professional services. The link to Independent Sector's site shows a general value for volunteer time and also links back to the Bureau of Labor Statistics that lists hourly rates for various occupations.

The best way to value any donated service though is to get an invoice from the donor stating their hourly rate and the value of the service given to you.

CAN's Accounting Boot Camps

This blog is for those who have attended our boot camps and those who are interested in attending, or anyone interested in learning more about nonprofit accounting.

There is a link to the right to a discussion forum for you post questions and answer others. There are links below that to various resources including many IRS resources with specific details on items covered in the boot camp but not presented in your workbooks, we wanted to save a few trees!

You can also post questions here in the comments section of each post.

I will be adding to the links and creating new posts as I research and learn more, so check back every once in a while or subscribe to this blog using a system such as Bloglines.

Thanks to everyone who has made these events such a success.