EisnerAmper Blog

Not-for-Profit Trends and Tips Blog

Shared Services

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September 1, 2015

By Craig Maurer, CPA, CGMA

A few neighbors have donated storage space in their garages for their local church as it relocates to a smaller facility.  For my neighbors, it’s a way for them to give without donating time or money, and for the organization, it’s a free place to store tables, chairs, and holiday ornaments.  This is nothing new to not-for-profit organizations, but perhaps sharing can be taken to the next level. The key would be to have agreements in place that are mutually beneficial relationships and arm’s length transactions.

What about ways that not-for-profit organizations can share without stepping on each other’s toes? Two immediate ways that come to mind are administrative functions and physical space.  A not-for-profit could share with a for-profit, with private individuals, or with other not-for-profits that, on the surface, seem very different.  For example, a human rights advocacy organization and a 24-hour drug abuse crisis hotline can work together.  Their program goals and tax-exempt purposes are different, but their means to those goals might include share office space, equipment and supplies, telephones, utilities, and janitorial services.  Furthermore, when not-for-profits share space, it creates opportunities for collaboration of ideas and increased visibility.

Sharing doesn’t always involve working out of the same space. In the case of equipment-sharing, it may require working out logistical questions.  For example, a community garden could share equipment with a landscaping company.  While the landscaper shuts down over the weekend, the gardening group can use the landscaper’s shovels, clippers, and rakes for Saturday gardening.

The accounting concepts involved with shared services are easy as long as the sharing agreement is straight forward; for example - head count, hours of usage, and/or square footage used. It’s a concept worth thinking about.

The 5% Distribution Requirement

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August 19, 2015

Non-operating private foundations are required to follow a number of mandates, none more important the 5% distribution requirement, which states that the foundation must annually spend or pay out a minimum amount for charitable purposes. This keeps a foundation from simply raising money, investing assets, and then not disbursing funds in a way that would enable them to further their charitable mission.
IRC Section 4942 imposes a significant tax on “the undistributed income of a private foundation for any taxable year, which has not been distributed before the first day of the second (or any succeeding) taxable year following such taxable year (if such first day falls within the taxable period)….”

Bill Epstein, CPA, a director in our Not-for-Profit Services Group, has written an article developed to help the reader stay in compliance with this requirement. For more information, please read “Private Foundations – Understanding the 5% Distribution Requirement”. 

FASB’s Exposure Draft on Financial Statements of Not-for-Profit Entities

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August 5, 2015

By Candice Meth, CPA and William Epstein, CPA

In our previous blog relating to the Proposed Accounting Standards Update Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities we discussed some of the broad sweeping changes included in the FASB’s exposure draft, which was released on April 22, 2015. The exposure draft can be accessed here.
The last time the not-for-profit community was asked to comment on significant changes to not-for-profit financial statements was 1993, and that pronouncement was much more focused in scope. Given the breadth of changes being suggested in the current exposure draft, respondents have been given a comment period of 120 days, ending August 20, 2015. Anyone who is interested in weighing in on the proposed changes is allowed to submit comments; there are several ways in which to do so such as through the FASB website or by mailing in a formal letter. Input is being sought from all stakeholders including not-for-profits, donors, board members and accountants. It is important that representatives from each of these groups share feedback so that the FASB has a broad range of opinions to help shape the final version of the draft. 

The exposure draft directs those who wish to comment to 22 specific questions relating to the proposed changes. In addition, open feedback is encouraged as well. To assist the community with their responses, the FASB has published three sets of frequently asked questions, the third of which was released July 27, 2015, which can be accessed here. The documents clarify areas such as: (i) taking materiality into account prior to enacting certain areas of the exposure draft; (ii) the types of direct internal expenses that should be netted against investment income; (iii) limiting liquidity disclosures to the reporting period (and known contractual obligations) rather than asking not-for-profits to forecast into the future, (iv) clarity on applying the direct method of cash flows, and many more.

Currently the FASB has received approximately 30 responses, which can be accessed here, with many more sure come by the due date. Additionally, the FASB has announced that it plans to hold roundtable discussions on the east coast in September 2015 and on the west coast in October 2015.
Other helpful links:

To stay current on this topic, follow EisnerAmper’s Not-for-Profit Trends and Tips blog and also sign up for FASB’s electronic Action Alert

Overhead: Good vs. Evil

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July 28, 2015

Every organization in the world has overhead. It is a fact of life. Expecting an organization to not have overhead is like asking someone to stop breathing for a couple of hours each day to conserve oxygen for the rest of the world. There are watch dogs agencies that have put out edicts on the level of overhead that not-for-profit organizations should have. However, have you ever heard of someone criticizing a for-profit company for incurring overhead? Ever hear the saying “Gotta spend money to make money?” We generally support for-profit organizations in spending money to make money, yet we handicap not-for-profit organizations by encouraging them to keep their overhead ratios as low as possible. There is a movement currently happening against this “overhead myth”.

A not-for-profit should not be locked into the  concept that overhead is bad when it expects  to continue to survive, let alone grow, in this economy. Because not-for-profits are cautious about increasing their overhead, they often have issues attracting talented individuals as well as retaining the talent they might have been lucky enough to get because they can’t meet their compensation requests. Not-for-profits might not invest in their infrastructure or take the time to plan strategically because those would be considered overhead costs. Without a competitive infrastructure or a clear strategic plan, how does a not-for-profit continue to grow its footprint?

I don’t have an answer for your organization on how to overcome this “overhead myth” right now. It is something that has to happen nationally in the minds of millions of individuals but here are some ideas that might help the not-for-profit survive in this world when it has to incur more overhead than society might want to see.

#1 – Add a Management’s Discussion & Analysis to your financial statements. For-profit companies do this frequently – whether they are required to do it or not. In this MD&A (as we accountants affectionately call it), you can address all of the questions readers are going to have before they even see the financial statements. If you had a rough year because the organization decided to invest in a new program, this would be the place to explain that – before the readers even see the loss on the statement of activities. Knowing the reason behind some of the results before seeing them eases the surprise and helps them really understand the organization.

#2 – Consider revising/expanding/enhancing the “Nature of the Organization” footnote within the financial statements. Did you enter a new market? Start a new program? Get a new major funding source? Some of those types of qualitative updates can be included in this footnote – the FIRST footnote that the readers see.

#3 – Write a cover letter for your financial statements and include in all packages sent to funders, potential donors, banks, etc. Similar to the MD&A, yet a little less formal (and the auditor really isn’t involved in this process at all since it is not included in the audit package).

#4 – Add a “Cost of Programs” report or schedule to the supplementary information at the back of the financial statements. We all have seen the functional expense statement with just the three columns – Program, Management & General, and Fundraising. Why not break down the program column into the specific programs your organization has? Let the readers see where the money is being spent within the programs so they understand why there is so much allocated to salaries, subcontracts, etc. This report together with an expanded Nature of the Organization footnote (which could describe each program) would be a good combination to consider.

#5 – Change the presentation of your financial statements to disclose operating vs. non-operating items or the availability and use of certain assets. This would require a little bit of footnote disclosure to explain the two categories, but would give the readers a better sense of what is “real” and what is ingrained in the organization and not really a part of the mission. 

What Is an Indirect Cost Rate? How Does My Organization Get One?

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July 21, 2015

An indirect cost rate is a ratio of indirect and direct costs that is approved by your cognizant federal agency which you are allowed to use in budgets in future governmental contracts. There are several words in that sentence that I think we need to define before discussing anything else.

#1 – Your organization’s cognizant agency is the federal department with the largest dollar amount of direct federal awards. Federal funding received through another agency, such as a state or city government agency, does not count towards this determination.

#2 – Indirect costs are expenses your organization incurs for activities that cannot be specifically identified with a project or program. Examples of these expenses are operations, maintenance, depreciation, legal, IT, accounting, auditing, etc. Other terms that you might recognize as indirect costs are overhead costs, administration costs, and facilities costs.

Your organization is eligible to apply for an indirect cost rate if you have a direct federal award (already issued and final – not pending) and the award’s budget allows for indirect costs. To receive an indirect cost rate, the organization submits a proposal to its cognizant agency. Some agencies provide examples of such proposals; DHHS Division of Cost Allocation handles a lot of proposals and has examples as well as the checklists that its people use to approve the proposals on its website.

The proposal will need to include your organization’s allocation method for indirect costs. There are three methods that you can use. The important thing to remember is to keep it as simple as possible and to not go outside of your organization’s comfort zone in developing the allocation method. You will need to be able to explain and possibly defend your method; and if it is too complicated, you might not be successful in obtaining the rate.

The simple method is used when significant functions benefit from the indirect costs in the same degree. Using this method there is only one pool of costs you have to allocate according to one base which results in only one rate. Your base should be appropriate for your organization and should be adjusted for any costs that your funding sources do not allow under their contracts.

The multiple allocation base method is used when the functions benefit in varying degrees. The best way to explain this is with an example: If your organization conducts research in 2 labs but one of the labs requires complete darkness and the other requires lights on 24 hours a day, then those two functions use electricity differently but utilize rental space the same way. This results in two different allocation bases for rent and electricity.

The last method is the direct allocation method which involves the organization allocating as much as reasonably possible directly to the programs, leaving only the bare bones administrative expenses that cannot be feasibly allocated directly. Under the other two methods, the indirect cost pool would include things like rent, IT, telephone, etc. Under the direct allocation method, these expenses would be allocated directly to the functions using square footage, number of employees or number of telephones. Then the remaining indirect costs are allocated based on the rate calculated.

Having an indirect cost rate is beneficial for an organization because it can use the cost rate in proposals for all types of grants and contracts funded by governmental agencies. Under the new OMB Uniform Guidance, all sources awarding federal monies (directly or indirectly) to your organization must accept your indirect cost rate if you have one approved. It is also beneficial to have an indirect cost rate that is in line with the actual indirect costs that the organization incurs (and not an arbitrary number inserted into a budget), so that the organization can recover as much as possible.

Webinar: “Understanding the Principles of the FASB’s Anticipated Exposure Draft”

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July 10, 2015
By Morgan Piscitelli

In an earlier post, Brian Collins discussed an important webinar topic presented by EisnerAmper and the Better Business Bureau, geared towards all not-for-profit leaders.  The webinar, presented by partners Candice Meth and Julie Floch on March 31, was titled “Understanding the Principles of the FASB’s Anticipated Exposure Draft on Changing the Not-For-Profit Financial Statement Model.” In their presentation, which can be viewed in full here, the partners discussed the basic features of the draft, as well as how the changes will affect the not-for-profit sector. They also walked listeners through the new principles added to the exposure draft while highlighting the changes from existing GAAP financial reporting.  

This informative webinar was created to focus on key elements of the new draft which are of critical importance to not-for-profit leaders.  Webinar attendees ranged from not-for-profit CEOs, executive directors, COOs, CFOs, board members, development officers, program officers and other individuals who work directly with not-for-profit financial statements.  Feedback on the presentation was very positive, with many eagerly awaiting the availability of a link to the recording, featured above.  Julie and Candice encourage all not-for-profit leaders to consider the potential effects of these proposed changes on their organization and offer comment directly to FASB. To stay current on this topic, follow EisnerAmper’s Not-for-Profit Trends and Tips blog and also sign up for FASB’s electronic Action Alert.

EMV Technology and Credit Card Donations

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July 1, 2015

By: Jeff Holt, CPA

There is now a new cost element for nonprofits who accept donations in person via credit card, and it relates to a credit card chip technology called EMV. EMV is an acronym for Europay, MasterCard, and Visa; the U.S. will be migrating to this credit card standard in October 2015. EMV is the global base standard for credit and debit card chip technology, in which a tiny chip on the actual card stores personal data as opposed to a magnetic stripe. So instead of being ‘swiped,’ the card is inserted and the chip is read. 

Not-for-profits need to understand how this change in technology will affect the way they accept and process credit card payments, as this may open themselves up to liability for fraud.

While the October date isn’t a hard date for implementation, the date is firm for a shift of liability from the issuer (MasterCard, Visa, and American Express) to the not-for-profit for non-EMV credit card-present transactions. When an EMV enabled card is presented to a not-for-profit that only has the old “swiping” technology instead of EMV technology, the not-for-profit is likely to be responsible to cover the cost of a fraudulent transaction if they used the old technology to read the card.

By the way, this doesn’t apply to online transactions as there is no terminal to read the chip when making a donation online. This is termed a “card-not-present” type of transaction.

The impact is that the not-for-profit, who receives significant donations via card-present transactions, may need to evaluate whether it is worthwhile to invest the time and dollars to upgrade its equipment to implement the EMV technology.  With regard to the potential for prevention of fraudulent transactions in online transactions, the not-for-profit may want to look into an address verification system or other authentication methods.

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