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DuPage County Auditor

DuPage County Auditor. Bob Grogan, CPA, CFE Institute of Management Accountants Mid-America Council April 25, 2014. Not-For-Profit Accounting. So, You Volunteered to be Treasurer! (Hope you asked about their insurance!). CAVEAT.

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DuPage County Auditor

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  1. DuPage County Auditor Bob Grogan, CPA, CFE Institute of Management Accountants Mid-America Council April 25, 2014

  2. Not-For-Profit Accounting So, You Volunteered to be Treasurer! (Hope you asked about their insurance!)

  3. CAVEAT There are different guidelines for healthcare not-for-profit organizations.

  4. Some Differences Between For-Profit and Non-Profit Accounting • Contributions • Restrictions and Endowments • Nature of Related Parties • Details of Reporting • IRS Filings • Financial Statements • Unrelated Business Income Taxes

  5. Contributions • Contributions Received are: • Recognized as • revenues (resulting from the NFPs central activities), or • gains (peripheral or incidental to the NFP) in the period received, and • as assets, or as decreases in liabilities or expenses depending on the form of the benefit received.

  6. In-Kind Contributions • Generally, donations of personal services are considered contributions only if they create or enhance non-financial assets or require specialized skill and would otherwise be paid for by the NFP. • Value of architectural services donated = contribution; • Hospital candy-stripers, not contribution.

  7. Not All Receipts are Contributions • Exchange transactions are not contributions – assets given to an NFP for which the resource provider receives value, such as • premiums from a fund-raising drive, • the value of publications received as part of membership dues, or • the value of research performed by an NFP, which is directed by the providing entity.

  8. Not All Receipts are Contributions • Transfers to an NFP that raises or holds contributions for others are not contributions. • If the recipient is an agent, trustee or intermediary who has little or no discretion in how the assets will be used, the NFP records the receipt as a liability to the ultimate beneficiary. • For example, a church soliciting and collecting funds for a drive at a soup kitchen.

  9. Not All Receipts are Contributions • Works of art, historical treasures that are added to a “collection” (held for public exhibition; protected and preserved; organizational policy requires proceeds to be used to acquire other items for collection) are not recognized as contributions if the NFP does not capitalize its collection

  10. Not all Receipts are Contributions Right Away . . . • Donor Imposed Conditions should be substantially met before the receipt of the assets (including contributions receivable) is recognized as a contribution. • Challenge grants are an example. • Not contributions yet, may become contributions on the occurrence of one or more future and uncertain events.

  11. . . . And Sometimes Contributions Have Not Been Received • Promises to Give are Contributions Receivable • A written or oral agreement to contribute cash or other assets to another entity. • Guidance avoids using “Pledge,” which sometimes means intention but not promise.

  12. Contributions Receivable • Promises to Give are only included in the financial statements when there is sufficient evidence in the form of verifiable documentation that a promise was made and received. • Oral Promises can suffice, if there is adequate contemporaneous documentation.

  13. Contributions Receivable • Certain promises become unconditional in stages because they depend on a series of conditions – milestones- rather than on a single future and uncertain event and are recognized in increments as each condition is met.

  14. Value of Contributions Receivable • Present value of future cash flows is one valuation technique for measuring the fair value of contributions arising from unconditional promises to give cash; other valuation techniques are available.

  15. Recording Contributions Receivable • Initial recognition of unconditional promise to give cash: • An NFP receives promises from a group of homogeneous donors to give $100 in five years, • anticipated future cash flows (actual collections) are $70, and • PV of cash flows is $50.

  16. Recording Contributions Receivable Following entry is made: Contributions receivable $70 Contrib Revenue – Temporarily Restricted $50 Discount on Contributions Receivable $20

  17. ENDOWMENTS AND RESTRICTIONS

  18. Restricted Contributions • Donors may restrict the use for which a contributed asset may be used • May be restricted for a period of time, • May be restricted for a particular use.

  19. Endowment Fund An established fund of assets to provide income for the maintenance of an NFP. The use of the assets of the fund may be permanently restricted, temporarily restricted, or unrestricted.

  20. Endowment Fund • Generally established by donor-restricted gifts and bequests to provide either of the following: • Permanent Endowment: permanent source of income; increases permanently restricted net assets. • Term Endowment: income for a specified time; increases temporarily restricted net assets.

  21. Earnings on Endowments • Reflected as temporarily restricted until appropriated, absent other donor restrictions. • Upon appropriation, the time restriction expires; the amount should be reclassified to unrestricted net assets. • If there is a purpose restriction, the expiration would not occur until the intention is met by expenditure of the appropriated amount for the expressed purpose.

  22. Board Restricted Endowment • Amount earmarked by board for a long but unspecified period of time. • Not donor-restricted and is therefore included in unrestricted net assets.

  23. Prudent Spending • Historic Dollar Value (HDV) • Specific expenditure rules or standards in gift instrument control. • Board may appropriate as much of an endowment fund as it deems prudent for uses, benefits, purposes and duration for which the fund was established. Allows spending from an underwater endowment if the board determines it is prudent to do so.

  24. Criteria to Guide Board in Prudent Spending • Duration and preservation of the endowment fund • Purposes of the institution and the endowment fund • General economic conditions • Effect of inflation or deflation • Expected total return from income and the appreciation of investments • Other resources of the institution • Investment policy of the institution

  25. Required Disclosures (FAS117-1) • Governing board’s interpretation of the law(s) • Endowment spending policy • Investing policies • Composition by net asset class • Reconciliation of beginning and ending balances • Nature and types of permanent restrictions or temporary restrictions • Aggregate amount of deficiencies for all donor-restricted endowment funds that are “under water” (SFAS 124)

  26. NATURE OF RELATED PARTIES

  27. Financially Interrelated Entities • A recipient and a specified beneficiary are financially interrelated entities if the relationship between them has both of the following characteristics: • One of the entities has the ability to influence the operating and financial decisions of the other • One of the entities has an ongoing economic interest in the net assets of the other.

  28. Related Parties • An NFP may be related to one or more other NFPs in numerous ways: • Ownership • Control • Economic Interest

  29. Related Parties • Ownership: • Controlling financial interest through direct or indirect ownership of a majority voting interest or sole corporate membership in the other NFP

  30. Related Parties • Control: • The direct or indirect ability to determine the direction of management and policies through ownership, contract, or otherwise.

  31. Related Parties • Economic Interest: • The other entity holds or utilizes significant resources that must be used for the purposes (restricted or unrestricted) of the NFP, or the NFP is responsible for the liabilities of the other entity

  32. The Nature of the Relationship • Determines • If the financial statements of 2 or more NFPs should be consolidated, or • If the other NFP should be reported using a method similar to the equity method, and • The extent of disclosures required, if any

  33. Controlling Financial Interest via Majority Voting Interest or Sole Corporate Ownership • Consolidated financial statements, unless control is not with the majority shareholder (subsidiary in legal reorganization, bankruptcy, or severe contractual limitations), in which case consolidation is prohibited. • NFP has a majority voting interest in the board of another NFP if it has the ability to appoint individuals that together constitute a majority of the votes of the fully constituted board.

  34. Majority Voting Interest in Board • Consolidation required, unless control does not rest with the holder of the majority voting interest, in which case consolidation is prohibited.

  35. Control By Other Means • Control may be through contract or affiliation agreement. Consolidation is permitted but not required. Consolidation is encouraged if both of these are met: • The reporting entity controls a separate NFP in which it has an economic interest, and the control is not through either controlling financial interest or majority voting interest, and • Consolidation would be meaningful.

  36. Control or an Economic Interest, But Not Both • Consolidation is not appropriate.

  37. DETAILS OF REPORTING

  38. Reporting Requirements – Form 990-N • Form 990-N, Electronic Notice for Tax- Exempt Organizations not Required to File Form 990 or Form 990-EZ is submitted if an organization normally has annual gross receipts of $50,000 or less. • Very brief, online-only filing requests very basic information about the organization; is designed to let the IRS know that a small organization is still functioning and in operation. • BE AWARE: If required to file 990-N and do not for 3 years, automatic revocation of exempt status = Severe Consequences!

  39. Reporting Requirements Form 990-EZ • Short Form Return for Organization Exempt From Income Tax • Can be filed by most organizations with gross receipts less than $200,000 and total assets of less than $500,000 at the end of their tax year

  40. Best Practices for Form 990 • Asks about degree of involvement of the board in preparation and review of the Form 990. • Asks about policies on acceptance of gifts and handling of whistleblowers. • Presents an opportunity to showcase NFP to potential donors.

  41. Organizations Not Required to File Form 990 or 990-EZ Regardless of Gross Receipts or Total Assets. These include: • Certain Religious Organizations • Certain Governmental Organizations • Certain political Organizations (But note these are subject to UBIT, discussed below)

  42. Schedules to Form 990 • A: Public Charity Status and Public Support (EZ also) • C: Political Campaign and Lobbying Activities (EZ also) • D: Supplemental Financial Statements • E: Schools (EZ also) • F: Statement of Activities outside the US • G: Fundraising or Gaming Activities (EZ also) • H: Hospitals • I: Grants and other Assistance to Organizations, Governments and Individuals in the US

  43. Schedules to Form 990 • J: Compensation Information • K: Supplemental Information on Tax-Exempt Bonds • L: Transactions with Interested Persons (EZ also) • M: Noncash Contributions • N: Liquidation, Termination, Dissolution, or Significant Disposition of Assets (EZ also) • O: Supplemental Information to Form 990 • R: Related Organizations and Unrelated Partnerships

  44. Tax Exempt Classifications Under IRS 501(c) The following list comes from IRS Publication 557(pdf).

  45. Tax Exempt Classifications Under IRS 501(c) The following list comes from IRS Publication 557(pdf).

  46. Financial Statements Complete set should include • Statement of Assets, Liabilities and Net Assets; • Statement of Revenues, Expenses and other Changes in Net Assets, • Statement of Cash Flows; • Statement of Functional Expenses for Voluntary Health and Welfare Organizations; • Notes to Financial Statements

  47. Functional Expenses • NFPs are required to report expenses by what is known as functional expense classifications • Two primary classifications: • Program Services • Fulfilling mission • Supporting Activities, may include • Management and general activities • Fundraising • Membership Development

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