Nonprofit Forum

Are you in Compliance with ASU 2016-4? Financial Statement Presentation of Not-for-Profit Entities

Update:

White Paper Available: “Understanding. Preparing. Implementing.  FASB ASU 2016-14 reporting requirements for Not-for-Profit Organizations

Overview

In November 2011, the Financial Accounting Standards Board (FASB) added a project to its agenda focusing on the financial reporting of not-for-profit (NFP) entities. The project has resulted in the issuance of Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The update strives to improve how a NFP organization classifies its net assets and provides information in its financial statements and notes about its financial performance, cash flows and liquidity.  We have summarized the full 270-page standard into this brief guide which outlines the primary changes to the financial statements of not-for-profit organizations.

Net Asset Classes

  • Replaces the current three net asset classes with the following two:
    • Net assets with donor restrictions
    • Net assets without donor restrictions
  • Removes hardline distinction between temporary and permanent restrictions
  • Enhances disclosure requirements:
    • Amounts and purposes of board-designated net assets
    • How restrictions affect the use of resources

In order to implement the new changes, you will need to modify your financial report formats and chart of accounts to insure your internal financial reports are modified for the new financial reporting requirements.  You will need to determine appropriate level of disaggregation of the net assets for Statement of Financial Position, Statement of Activities, and footnote disclosures.

Underwater Endowments

  • Presents deficits relative to original gift amounts of donor-restricted within the donor-imposed restrictions class of net assets
  • Enhances disclosure requirements:
    • Governing board’s policy related to appropriations from such funds
    • Any action taken during the period related to such funds
    • Original gift amount or level otherwise required to be maintained by the donor or law
    • Amount of the underwater endowments in the aggregate

In order to implement the changes, you will need to recast your note to conform to the new two net asset categories.  Remember that the underwater portion of endowments is now presented entirely in net assets with donor restrictions.  The investment return is now presented net of external and direct internal investment expenses, and does not require a separate break-out of the components of investment return.

Expiration of Restrictions – Long-lived Assets

  • Requires use of the “placed-in-service approach” for determination of when restrictions expire
  • No longer allows the recognition of the expiration of restrictions over the asset’s useful life

Statement of Cash Flows

  • May continue to elect either the direct or indirect method
  • When using the direct method, no longer requires the reconciliation of changes in net assets to cash flows from operating activities

Liquidity and Availability of Resources

  • Requires disclosure of qualitative information about how liquid resources are managed
  • Requires disclosure of quantitative information related to availability of financial assets to meet cash needs for general expenditures within one year, including impact of the following on financial assets:
    • Nature of the financial assets
    • External limits by donors, grantors, laws and contracts
    • Internal limits by the governing board

In order to implement the changes, you will need identify all financial assets, and any limitations on availability for expenditure in the next 12 months.   You will need to determine the format to present the required quantitative disclosure.   You can either display amounts of financial assets then adjustments to arrive at an available for expenditures amount or you can display only the net amounts available for expenditure.  You could determine whether presenting a classified statement of financial position could enhance or simplify the quantitative disclosure requirements considering other effects elsewhere in the financial statements and related notes.  You might want to develop a formal policy for managing the organization’s liquidity needs which might be disclosed in the qualitative portion of the note disclosure.

Investment Return

  • Requires external and direct internal investment expenses to be net against investment returns
  • Removes requirement to disclose amount of investment expenses net against investment returns
  • Clarifies what activities constitute direct internal investing activities:
    • Salaries and related expenses of staff responsible for the development and execution of investment strategy
    • Allocable costs associated with internal investment management and supervising, selecting, and monitoring of external investment management firms
  • Permits separate, appropriately labeled line items on the statement of activities for net investment return managed differently or derived from different sources
  • Eliminates the requirement to present investment return components for changes in endowment net assets

Reporting of Expenses

  • Requires all NFPs to report expenses by nature
  • Retains requirement to report expenses by function
  • Requires expense analysis by nature and function to be presented in one location, in either:
    • The statement of activities
    • A separate statement of expenses (similar to the statement of functional expenses)
    • A schedule in the notes
  • Enhances disclosures related to methods used to allocate costs among functions
  • Updates descriptions of management and general activities

In order to implement the changes, you will need to determine where and how to present all expenses by nature and function in one place which might a in the statement of functional expense, statement of activities, or a note to the financial statements.  You will need to evaluate whether your current accounting system will support preparation of this required information.  You will need to develop formal allocation methodologies to be used to allocate expenses among program and supporting services categories.  You will need to draft note disclosure of the methods utilized in the expense allocation process.  It might be time to put together a formal cost allocation plan.

Effective Date and Transition

  • Annual financial statements issued for fiscal years beginning after Dec. 15, 2017
  • Early application is permitted
  • Requires adoption on retrospective basis for all years presented, except for:
    • Analysis of expenses by nature and function
    • Disclosures related to liquidity and availability of resources

Don’t forget to take advantage of our free resource.   “Understanding. Preparing. Implementing.  FASB ASU 2016-14 reporting requirements for Not-for-Profit Organizations

What is the best way to segregate financial duties in a small to medium sized Nonprofit?

Small to medium sized NPF’s struggle with segregating financial duties. Volunteers and Outside experts may play key roles in ensuring the proper segregation of duties. The best course is to segregrate duties to minimize risks and prevent fraud. The following reference charts are available for organizations with two, three, or four employees involved in the outsource function. If you only have one employee, we would recommend including our firm or another outside expert or volunteer to help with segregation of duties.

The following reference charts are provided to provide examples of segregation of duties.  Please contact us before you implement any of these suggestions.

Sample Organization with two employees

Sample Organization with three employees

Sample Organization with four employees

This would allow be good time to evaluate your financial department including updating your financial policies and procedures manual for the finance departments responsibilities.

Assess Your Organization’s Vulnerability to Fraud

It’s a people problem, so combat it with governance.   

Purchasing schemes, cash skimming, and financial statement fraud are three very different types of fraud that nonprofits must prevent, detect, and insure against. Still, behind each of them – and every variety of deliberate, deceptive act against nonprofits – there’s a fundamental and shared dynamic at play.

Fraud isn’t just an operational or financial risk. It’s inherently a human risk, meaning it often crosscuts numerous functions and departments within a nonprofit organization. Not only that, but the people behind these acts are complex. They’re pressured by varying circumstances, motivated by different opportunities, and self-assured by their own unique rationales. Making matters more complicated, fraud isn’t always a solo act. In fact, a report by the Association of Certified Fraud Examiners (ACFE) found that 46% of fraud cases involve multiple perpetrators. When fraud occurs, the web of nefarious activity often extends to surprising depths within an organization.

To combat this threat, nonprofits face a critical need to address fraud, starting with more guidance and engagement from leaders and boards to create an anti-fraud environment and oversee a fraud risk management function. One of the most important deterrents of fraud is knowing that the organization’s leaders have no tolerance for it, will act accordingly to detect it, and will take appropriate action if they find it. Begin by focusing on these four steps:

1. Find a Catalyst

You need a high-ranking sponsor to get fraud risk management off the ground. This leader’s first order of business should be deciding whether the organization’s fraud risk management will be integrated into the existing risk management function (which typically focuses on strategic, operational, reporting, and compliance risks) – or whether it will be separate. Either way, the goal is the same: Embed a risk management element into the daily activities of all your personnel.

2. Create Responsibilities & Structures

With your management process in place, establish a governance structure for it, including designated oversight responsibilities at the board level, such as an audit committee. Keep in mind, this framework and the tools your organization uses should be scaled to fit both your size and your available resources. It’s impossible to completely “fraud-proof” any organization, so understand the weak points in your infrastructure and organization, and then work backwards to execute your anti-fraud processes. Also, while fraud prevention is ideal, many nonprofits have to weigh the costs and practicality of preventive processes versus detective measures.

3. Engage & Educate

Especially when faced with resource constraints, nonprofits should engage all their staff in an ongoing system of fraud deterrence. Above all, provide your employees with workshops and trainings in which you educate them on why people perpetrate fraud, which red f lags to watch for, and what resources – such as whistleblower policies, reporting systems, and hotlines – are available to them. Awareness throughout your organization can be the single most effective fraud deterrent and vehicle for detection, but it has to start from the top.

4. Craft Dynamic Risk Assessments

People are dynamic, so your risk assessments must keep pace. With roles and responsibilities identified, use your team to pinpoint which inherent risks exist. Then prioritize these risky situations based on their impact, likelihood, and the speed at which they’re apt to occur. Finally, use those priority rankings to map the best preventive and detective controls.

Source: “Assess Your Organization’s Vulnerability to Fraud”. Nonprofit World. October/November/December 2017. Vol. 35, No. 4: 20 – 21. Print.

Effective Grants Management

In order to provide effective grants management, we need to make sure that we are performing bookkeeping at the grant level.  Our grant accounting needs to properly allocate costs to the grants while maximizing our grant reimbursement and avoiding any cost disallowance.

Our board members and related governance should be knowledgeable and informed about grant budgets and compliance requirements.  The board should stay knowledgeable of grant administration trends, developments, and regulations.  The board should understand what the organization is committed to and are Its programs delivering what is required.

The program staff needs to be involved in the data collection and reporting responsibilities including the proper reporting to the correct grant budget categories.  We need to establish and schedule future grant deadlines to insure timely grant report submission.  We would suggest sharing the grant agreement with the program staff to insure all grant requirements and deadlines are met.

Federal grants are governed by the super circular which is also referred to as the uniform grant guidance.   Auditors audit based on these requirements with the assumption that the nonprofit is knowledgeable and informed about this grant guidance.  Federal grants and awards are specifically identified and require a financial management system that identifies the source and application of federal funded activities.  Federal grants typically require written procedures around payment requirements, allowability of costs, procurement procedures, and standards of conduct.  For example, procurement procedures need to be written with good procurement records and follow the guidelines.

The grant audit requirements include the ability for management to prepare the Schedule of Federal Awards (SEFA) and it should be reconciled to the accounting records.  If the SEFA is a required part of the audited financial statements, the auditor will issue an opinion if the SEFA is fairly stated as a part of the audited financial statements.

Cost allocations are an integral part of effective grants management.  Effective cost allocations will allow to report and recover the fully loaded program costs to facilities and administrative costs.  Some organizations could benefit from documenting their cost allocation and federal programs may require a formal cost allocation plan.  Some acceptable methods of cost allocation would include hours worked for variable costs, and square footage for fixed costs like facilities.

Grant advance would be for grants that provide advanced funding.  It is important that you don’t spend these restricted funds on other activities and you can keep track of restricted expenditures and restricted grant cash balance.  You may want to track these advances by grant and as deferred revenue to show how much of the cash or accounts receivable balance is restricted.

Cost reimbursement for grants require you to submit reimbursement request timely to minimize cash flow delays.   Your grantors typically believe you have already paid these costs when you submit your reimbursement request.  You may want to obtain a line of credit for reimbursement delays and disclose the possible longer payment terms with your contractors and vendors.

The grant reporting needs include grant budgets which match grant budget line items with financial reporting.  Grant reporting should be able to report total grant spending including direct and indirect cost allocation.   Proper grant reporting requires a grant reconciliation to insure internal and external reports agree and that you are maximizing the reimbursement along with minimizing over and under grant spending.

Grant close out requires you met the compliance requirements and make any final grant budget revisions.  You will want to make sure you make any budget revisions in a timely manner to make sure you have time for any grant budget revision approval that is required.

Your accounting system should be able to meet your grantor reporting needs including their budget line items.   This typically requires segment tracking to track your grant as a separate fund including tracking by program.

Some examples of lack of effective grants management would include grant findings, monitoring visits, spending issues, and lack of a grant budget and related projections.

It is important that you continue to strive for effective grants management within your organization.  Our firm is here to help your organization perform more effective grants management so please let us know if we can be of assistance.

Common Audit Pitfalls and Misperceptions

Common Audit Pitfalls and Misperceptions – FTM Nonprofit Forum for September 26, 2018

Nonprofit Forum Agenda for September 26, 2018

11:30 to 12:30-Financial Management Topic
Common Audit Pitfalls and Misperceptions

Click here to register

While not required by law, one reason a nonprofit might conduct an audit is to demonstrate the organization’s commitment to financial transparency and accountability.

And while a nonprofit can spend considerable resources for its annual audit, it is important that it consider the following to ensure the audit is a success:

  • No delays: An audit needs to avoid any major delays.
  • Minimal accrual and year-end adjustments: The nonprofit needs to ensure that all accrual and year-end adjustments are completed prior to the start of the audit.
  • Minor board and management comments: It is a good idea to have an exit interview after the fieldwork to review the audit’s results.
  • No material weakness or significant deficiency: This is a deficiency in internal controls that could negatively impact financial integrity.
  • Nonprofit should prepare audited financial statements and related disclosures: The organization should have the ability and accounting systems to prepare the audited financial statements and related footnotes and disclosures.
  • Fraud detection is not purpose of audit: While nonprofit leaders may believe the annual audit will uncover fraud, it is very unlikely this will occur.
  • Auditor does not guarantee financial statement accuracy: While auditor does issue an opinion on the nonprofit’s financial statements, the auditor does not certify or guarantee its accuracy.
  • If your nonprofit has one of these audit pitfalls or misperceptions, you should take action to bring expertise and capacity to your organization to remedy it.

This webinar will help Executive Directors, Finance Directors, and finance staff to develop and use a financial policies and procedures manual. Savvy nonprofit leaders know that effective financial audits can be the difference between good and great performance.

Those attending the forum will receive handouts.

Click here to register

Why Your Nonprofit Should Consider Using Nonprofit Accounting Software?

Why Your Nonprofit Should Consider Using Nonprofit Accounting Software?

Why Your Nonprofit Should Consider Using Nonprofit Accounting Software? – Your organization like every other nonprofit is feeling the pressure to deliver more transparency. The demand for more timely information is coming from a multitude of interested parties: board members, major donors, potential funders, and watch dog organizations.

Join us online Wednesday, August 29 11:30 – 1:00e
Click here to register

Why Your Nonprofit Should Consider Using Nonprofit Accounting Software?

The goal of transparency can’t be easily accomplished without sound nonprofit accounting software-financial reporting is the foundation upon which transparency is achieved.

As the number of nonprofits have proliferated, accounting software is more tailored and can help manage these complexities. But taking the time to select the right software for your nonprofit is critical.

Before your purchase, start with a software evaluation and assessment to see if you’re a good candidate for nonprofit accounting software. The software evaluation and assessment will review your current system to determine its level or utilization and functionality. It is probably a good idea to perform a software evaluation any time there is a major change within the organization either positive or negative.

We will review at least seven reasons Nonprofit’s should consider Nonprofit Accounting Software.

This webinar will help Executive Directors, Finance Directors, and finance staff to use and select the proper software for their organization.

Overlooked Benefits of Outsourcing Nonprofit Accounting

Overlooked Benefits of Outsourcing Nonprofit Accounting

Overlooked Benefits of Outsourcing Nonprofit Accounting

Has your organization ever looked at outsourcing all or a portion of its accounting? If not, it is because you’re not sure how the organization would benefit from this decision?

Since it is not a common practice for nonprofits to outsource its accounting, we will discuss the process and discuss the overlooked benefits of outsourcing your Nonprofit Accounting.

Join us online Wednesday, July 25 11:30 – 1:00e
Click here to register

In the nonprofit community, outsourcing typically means long-term delegation of key operation to outside experts. The accompanying expectation is improvement of the quality, strengthening effectiveness, and lowering or controlling costs.

A key difference in the nonprofit sector is not only controlling costs, but becoming a more effective organization.

Outsourcing accounting provides nonprofit organizations with a team of experts who have multiple client experiences which benefits its clients and the nonprofit organization’s it serves.

We will review six overlooked, and sometimes unknown, benefits of outsourcing nonprofit accounting.

We will answer this and more. We will review and provide you with a candid conversation of the benefits and disadvantages of outsourcing nonprofit accounting.

Immediately following the presentation on benefits of outsourcing nonprofit accounting, we will host a discussion on how to have the best possible accounting system.

Developing Effective Dashboards and Key Performance Indicators June Nonprofit Forum

We hope you’ll join us for what has become one of the hottest nonprofit accounting topics: Dashboards and KPIs.

It’s more than measuring – though that is necessary.  It’s more than powerful displays – though they are so cool to work with.  It’s about choosing the right things to measure and monitor with your mission in mind.

Join us online for the Nonprofit Forum June 27, 2018

11:30 to 12:30-Financial Management Topic
Developing Effective Dashboards and Key Performance Indicators

Simply click on the link to register for Developing Effective Dashboards and Key Performance Indicators.

Do you have a dashboard and know what your key performance indicators (KPI’s) are for your organization? Please bring your questions so we can have a candid conversation regarding dashboards and KPI’s.

We’re happy to share what we’ve seen in the field, but it will be a more valuable use of your time to talk about what matters for your organization.

Nonprofits are complex organizations that are built around mission and outcomes, which must be supported by the right revenue and expense models. We will cover the critical aspects of Effective Dashboards and Key Performance Indicators including:

  • How dashboards allow decision-makers to see where and whether the organization is on the planned financial path
  • Using dashboard with funders and stakeholders to illustration real-time progress towards desired goals.
  • How to develop the associated metrics and constantly review to ensure you are measuring success for the organization.

A properly designed dashboard allows a nonprofit to monitor its effectiveness as evidenced by the financial health along with the impact of the programs and services provided. Board and staff should develop strategy and goals to create dashboards with focused conversation and collaboration.

When you select the dashboard elements, you should understand the data you will track and how that data will influence decision making. Questions to ask include: Are the metrics for the organization or function? Is the tool for the board, staff, or funders?

Please join us – the Nonprofit Forum is free to nonprofit organizations, but registration is required. Simply click on the link to register for Developing Effective Dashboards and Key Performance Indicators.

For a listing of future Nonprofit Forum dates and topics, please visit our Events page.

Building a Superior Budget - May Nonprofit Forum

Building a Superior Budget – May Nonprofit Forum

Nonprofit Forum Agenda for May 30, 2018

11:30 to 12:30-Financial Management Topic
Building a Superior Budget
Please join us online, Wednesday, May 30; simply register using the link below.

Click here to register for Building a Superior Budget – May Nonprofit Forum

This session is free to nonprofit organizations.

The May Nonprofit Forum continues with Building a Superior Budget.

Those attending the May Nonprofit Forum – Building a Superior Budget will learn:

  • How to transform a strong budget into a superior budget
  • What most nonprofit leaders focus on and what they should focus on
  • How to use a rolling forecast to better anticipate results
  • Where cash flow projections could impact adjustments
  • And more

Click here to register for Building a Superior Budget – May Nonprofit Forum

A strong budget is an essential element for any nonprofit organization to achieve financial leadership. Superior budgets, though, have written plans about the core activities to include strategic, organizational, and program goals and how they will be financed.

Most financial leaders focus too much time on budget variance analysis and not enough time to anticipating or planning for the future. By anticipating or planning, organizations can focus on what’s upcoming regardless of its budget cycle or fiscal year end. A budget can be complemented with rolling forecasts to better anticipate upcoming financial results.

Budgets also need to include cash flow projections, which maybe outside of the finance department’s capacity or capabilities. Financial leaders must have a direct role in developing useful cash flow projections and assumptions with frequent, detailed analysis.

Any cash flow shortage needs to be further evaluated to determine if it is just a timing difference or an actual cash deficit. Shortfalls created by deficits need to be solved by budget adjustments or strategic choices to absorb a shortfall. An organization can determine timing or actual deficits by reviewing the budget to see if it had planned for or not.

Financial sustainability can only be achieved with a well-prepared and continuously monitored budget. Conversely, a poorly developed budget can diminish mission focused activities opportunities and threaten long-term success.

Click here to register for Building a Superior Budget – May Nonprofit Forum

Those attending the forum will receive handouts.

12:30 to 12:50-MIP User Group-Budget Refresher

12:50 to 1:00-FTM Updates and Closing

Click here to see a listing of future Nonprofit Forum topics.

Boards can provide effective financial governance for your nonprofit

Boards can provide effective financial governance for your nonprofit

By Jim Simpson, CPA and director, Financial Technologies & Management

In the nonprofit community, board members don’t always provide effective financial governance. One key difference in the nonprofit sector is that the board focuses on the nonprofit’s mission and not the finances or profits. But all are necessary.

Nonprofits would have more public trust if all board members performed their financial governance at a high level and challenged one another and executive management for excellent financial performance.

There may, however, be some roadblocks. As a board member, are you unsure or scared of your financial governance role with the nonprofits you serve?

If the desire is to have a more effective board, there are some essential financial governance responsibilities that a board should be performing for a nonprofit.

Here are eight effective financial governance responsibilities to look for in your nonprofit.

  1. Financial tracking by funds and program. It is not good enough just to know if your organization has a surplus or a deficit for the organization. You should know if your individual funds and programs are generating a surplus or deficit. It is impossible to be a financial steward if you don’t know which funds or programs are overspent or underspent.
  2. Financial reports need to be produced monthly. It is imperative that board members receive financial reports at least monthly. A board member can only perform his or her financial governance role if he or she can help the organization to anticipate and plan for changes based on financial results. It is important that these financial reports are timely and accurate to avoid making the wrong financial decisions. The financial reports should be goal oriented to allow the financial governance to focus on its accomplishments. Best practices financial reporting would include both budget and historical variance financial analysis. A goal oriented report would focus on the budget priorities and key financial areas of the nonprofit.
  3. Financial health is priority. Poor financial health usually results when no one knows the financial condition and when one person controls all financial information. Significant comments from the annual audit and staff turnover are also indicators of poor financial health. It is important that the board pays attention when these conditions exist and work towards increasing financial expertise and capacity. Financially healthy organizations hold themselves accountable, understand roles, and maintain compliance with adequate and qualified staff. Effective board and management practices are essential for segregation of duties and internal controls. These board financial practices should promote communication, expectations, and operating efficiencies so the organization can be monitored efficiently and effectively.
  4. Proper accounting software. Many nonprofits use manual or commercial applications to perform nonprofit accounting. It is important that you provide the finance staff with the right tools and accounting software to do the job properly.  It is important that board members ask questions regarding how the organization tracks financial information. One financial question to ask might be: Does the organization track financial information by funding source, by program and by accounts?  An annual review of accounting software and tools can uncover what additional software modules are needed including whether you have outgrown your current software.  It is important that organizations review software that is designed for nonprofit organizations. Nonprofit accounting software typically allows integration of third party systems like fundraising and payroll to increase efficiencies of various systems.
  5. Financial stewardship. All board members need to act as financial stewards not just the treasurer for the nonprofit’s that they govern. Unfortunately, board members don’t take this role seriously enough and thus organization’s fail financially which significantly reduces public trust.  Board members must understand financial stewardship and make it a priority for the organization that they govern. Board financial practices should include financial policies and procedures that promote stewardship and accountability.
  6. Budget management. Board members need to work to enable management to know when to modify programs and operations. It is important the budgets be realistic and revenue based to anticipate any shortfalls. Budget management should include budget projections and cash flow management to insure stable nonprofit operations and programming.
  7. Financial reserves. Board member financial stewardship roles should include establishing financial reserves for the organization. Financial supporters would rather support well established and financial stable organizations. It is important board and management are committed to generating an operating surplus and positive cash balances. It takes a lot of financial discipline to establish financial reserves.  A nonprofit is typically financially stable once it can generate financial reserves of several months of operating reserves. The financial reserves are essential to shield the organization from reductions or delays in funding
  8. Financial plans. Board members need to have financial plans for the organization. Just as an individual has a financial plan that changes as the individuals needs changes, the nonprofit needs financial plans that are reviewed and modified as needed. Financial goals and strategies should change and anticipate the future.

As a board member, I challenge you to review these financial governance areas of your organization to see how you are performing your financial governance role. It is important that you help the organization perform its financial role and not just rely on the treasurer or executive director to perform this role. It is important that you don’t just assume financial governance is occurring, but verify that it is actually taking place.

Board members need to be equipped board members with the tools and abilities to perform the financial governance roles. Board members need to verify that management and staff has the proper capacity and expertise to perform the finance function for the organization. If the organization does not have the proper internal resources, then they may need to look for outside expertise.