“How to Use a CPA”

1. “How to Use a CPA” Presented by: Julie Floch Partner and Director of Not-for-Profit Services EisnerAmper LLP (212) 891-4109 julie.floch@eisneramper.com

2. Topics • Accounting 101 Terms • Non-Cash Donations • Endowment Accounting • GAAP vs Tax • What Exactly is an Audit? • Resources

3. Accounting 101 Terms

4. Basic Terms to Know: Authoritative Guidance: • Financial Accounting Standard Board (“FASB”) • Generally Accepted Accounting Principles (“GAAP”) • Accounting Standards Codification (“ASC”) • International Accounting Standards Board (“IASB”) • Generally Accepted Auditing Standards (“GAAS”) • Public Company Accounting Oversight Board (“PCAOB”) • Committee of Sponsoring Organizations (“COSO”)

5. Basic Terms to Know: • Investment vs Endowment • Fair market value (“FMV”) • Fair value hierarchy • Net asset value (“NAV”) • Investment income • Unrealized gains & losses • Realized gains & losses • Dividend and interest income • Release of restrictions • Programmatic • Time • Board appropriations • Functional expenses • Programmatic • Ratios Not-for-Profit Industry terms: • Contributions vs Exchange Transactions • Restrictions • Conditions • Variance power • Non-cash activities • Governmental grants • Deferred revenue • Net Assets • Unrestricted • Temporarily restricted • Permanently restricted • Endowment • UPMIFA vsUMIFA • Board actions • State distinctions

6. Statements of Financial Position: Assets

7. Statements of Financial Position: Liabilities

8. Statements of Financial Position: Net Assets

9. Statements of Activities: Support and Revenue

10. Statements of Activities: Expenses

11. Statements of Activities: Statement of Functional Expenses

12. Non-Cash Donations

13. Non-Cash Donations: The Importance of a Gift Acceptance Agreement • May outline the terms of a contribution so that the donor and charity agree on how the contribution will be used • Have a clear understanding of the donor’s purpose and the charitable organization’s requirements • Important to understand ultimate beneficiary of gift • Common problem gifts: • Ambiguous Gifts • Overly Restrictive Gifts • Naming Rights Gifts • Large Gifts • Hard to Value Gifts • Split Interest Agreements

14. Non-Cash Donations: • Art, Antiques and Collectibles • Securities and Business Interests • Split Interest Agreements • Real Estate • Life Insurance • Medical Supplies • Clothing

15. Non-Cash Donations: Art, Antiques and Collectibles FASB ASC 958-360-25-3 states that an NFP that holds works of art, historical treasures, and similar items that meet the definition of a collection has the following three alternative policies for reporting that collection: (a) capitalization of all collection items, (b) capitalization of all collection items on a prospective basis (that is, all items acquired after a stated date), or (c) no capitalization. Capitalization of selected collections or items is precluded.

16. Non-Cash Donations: Securities and Business Interests • Publicly Traded Securities • May include stocks, bonds or mutual funds • Great incentive to contribute rather than sell on the part of the donor • Avoid Federal and state income taxes on gain • But not securities held at a loss • Recorded at FMV at the date of the gift • C-Corporation Stock • Deduction generally equal to fair market value of stock • No tax on gain • Charity will want an exit strategy • Recorded at FMV at the date of the gift

17. Non-Cash Donations: Securities and Business Interests • S-Corporation Stock • Ensure charity is permitted S Corp shareholder • Alternative: Have S Corp gift assets to charity • Recorded at FMV at the date of the gift (hard to value) • LLC and Partnership Interests • Deduction generally equal FMV less any ordinary income gain • Charity subject to UBTI on trade or business income • Recorded at FMV at the date of the gift

18. Non-Cash Donations: Split Interest Agreements • Charitable Remainder Trusts (CRT) • Pays an annual stream of income to a non-charitable beneficiary for one life, two lives or a term of years • Assets remain in the CRT at the end of the trust term and pass to charity • Recorded at present value of the trust at the date of the gift (third party trustee) • Record the present value of the assets at the date of the gift along with the present value of the annual income stream payable to the beneficiary (npo trustee) • Charitable Gift Annuities (CGA) • Donor may transfer assets to a charity and in return the charity will make the annuity payment to one or more individuals for their lifetimes • Allows donor to retain income interests and deduct the fair market value for the contribution • Record the FMV of the assets at the date of the gift and the present value of the annual income stream payable to the beneficiary

19. Non-Cash Donations: Real Estate • Gift of unencumbered real estate to public charity • Charitable deduction equal to the fair market value of the real estate • If private foundation, donor may deduct his or her basis • Qualified appraisal required • Recorded at FMV at the date of the gift • Real estate encumbered by a mortgage • Must reduce contribution deduction by the mortgage • Unrelated Business Taxable Income (“UBTI”) • Debt-financed property will often result in UBTI (gross income from an unrelated trade or business) • Recorded at FMV at the date of the gift less the amount of the mortgage

20. Non-Cash Donations: Life Insurance • Must contribute the entire policy to receive maximum tax benefits • No immediate income tax deduction for the mere payment of premiums for a policy with a charity named as beneficiary where the donor still maintains the ability to change the beneficiary • Recorded at the estimated present value at the date of the gift In order to donate an existing life insurance policy to charity, you must assign all rights in the policy to the charity. You must also deliver the policy itself to the charity. By doing this, you give up all control of the life insurance policy forever. This strategy provides the full tax advantages of charitable giving because the transfer of ownership is irrevocable. You may be able to take an income tax deduction equal to your basis or its fair market value. The policy is not included in your gross estate when you die, unless you die within three years of the transfer. In this case, your estate would get an offsetting charitable deduction.

21. Non-Cash Donations: Medical Supplies The estimated fair value of the donations of medical supplies and equipment should be recorded at fair-value based upon the wholesale list value for new items and resale values listed by local and national dealers. The estimated fair value of these contributions is recorded in the financial statements as inventory and contribution revenue. As the medical supplies and equipment are distributed, program expenses are recorded. Clothing • Thrift stores • Goodwill • Recorded at FMV at the date of the gift • Could be poundage • Could be by appraisal • Hard to measure

22. Endowment Accounting

23. Endowment Accounting: What is an endowment? • To a donor, an endowment is a sum of money given to a charity for charitable purposes, with only the “income” being spent and “principal” being preserved. • To an accountant, it is a fund which is “permanently restricted”, or if board restricted then clearly labeled as such in unrestricted net assets. • To a lawyer, it is an institutional fund not wholly expendable on a current basis under the terms of the gift instrument. • Thus, a “true” endowment is one established or created by the donor.

24. Endowment Accounting: What is the endowment balance? • A simple question that does not have a simple answer • Each endowment has at least three answers to this question: • The book value • The market value • The amount available for appropriation

25. Endowment Accounting: The book Value • Also referred to as corpus or principal • Equal to the original gift amount • Only changes if additional gifts are made, spending occurs from corpus (not income), or in some cases, if payout is re-invested • Has important legal and accounting implications under Uniform Prudent Management of Institutional Funds Act (UPMIFA)

26. Endowment Accounting: The Market Value • What the corpus is worth today • Includes both the book (corpus) value and all accumulated income and/or losses • Payout reduces the market value, not the corpus

27. Endowment Accounting: Amount Available for Appropriation • Board of Trustees authorizes a payout rate annually for the following year • Once distributed, the payout no longer participates in earnings, even if it is not spent

28. Endowment Accounting: • Donor directed/permanently restricted net assets • Quasi endowment/board designated unrestricted net assets • Uniform Management of Institutional Funds Act (“UMIFA”) • Uniform Prudent Management of Institutional Funds Act (“UPMIFA”)

29. Endowment Accounting: • Donor directed/permanently restricted net assets • The part of the net assets of a not-for-profit organization resulting (a) from contributions and other inflows of assets whose use by the organization is limited by donor imposed stipulations that neither expire by passage of time nor can be fulfilled or otherwise removed by actions of the organization, (b) from other asset enhancements and diminishments subject to the same kinds of stipulations, and (c) from reclassification from (or to) other classes of net assets as a consequence of donor imposed stipulations. • Quasi endowment/Board designated net assets • An action by a not-for-profit organization's board of directors to earmark an asset for a specified purpose. Since this is not a donor imposed restriction, the designated asset is classified and reported as part of unrestricted net assets.

30. Endowment Accounting: • Uniform Management of Institutional Funds Act (“UMIFA”) • Is a uniform law which provides rules regarding how much of an endowment a charity can spend, for what purpose, and how the charity should invest the endowment funds. The drafters of UMIFA thought charities should be able to spend a prudent portion of the gains earned by an endowment. • Uniform Prudent Management of Institutional Funds Act (“UPMIFA”) • The most significant change made by UPMIFA is its elimination of the “historic dollar value” limitation on expenditures from endowment funds. Under UMIFA, while net appreciation could be spent, the “historic dollar value” of an endowment had to be preserved. Institutions are no longer limited in their ability to spend from “underwater” endowment funds (i.e., those with assets having current values less than when they were given). Under UPMIFA, an institution may spend as much as it deems “prudent” (subject to donor intent), depending on its particular state law.

31. Endowment Accounting: Endowment net asset composition by type of fund Changes in endowment net assets

32. GAAP vs. Tax

33. GAAP vs Tax: • GAAP • Donated services • Unrealized gains and losses • Variance power • Special events revenue and expense • Materiality • Tax • Investment expenses • Entity level reporting vs consolidation • Related party transactions

34. GAAP vs Tax: Donated Services • Tax Treatment • Record gifts of property at fair market value • Do NOT record use of facilities or gifts of donated services • Form 990 provides for a reconciliation to audited GAAP financial statements • GAAP Treatment • Record gifts of property at fair market value • Record gifts of use of facilities if otherwise needed to be paid • Recognize contributions of services if: • Create or enhance nonfinancial assets or • Require specialized skills and would typically need to be purchased if not provided by donation • Disclose in footnotes the extent of donated services even if not at a level that leads to recognition

35. GAAP vs Tax: Investments • Tax Treatment • Unrealized gains and losses are not reported • Investment expenses are detailed on the schedule of functional expenses • Form 990 provides for a reconciliation to audited GAAP financial statements • GAAP Treatment • Show most investments at fair market value • Investment expenses are generally netted against investment earnings

36. GAAP vs Tax: Other examples • Tax Treatment • Consolidated filings may not be filed, except under a group exemption • Functional expenses required for all 501 (c)(3) and (4) organizations • Related party transactions are required to be disclosed under various circumstances and thresholds on Schedules L and R • Audit not required by IRS • GAAP Treatment • Consolidated financial statements must be prepared if certain criteria are met • Functional expenses not required for all organizations • Related party transactions are required to be disclosed for material items • Audit although not a matter of GAAP may be required by some states, funders and watchdog agencies

37. What Exactly is an Audit?

38. The Objective of an Audit • The objective of an audit is for a professional auditor to evaluate or measure a subject matter that is the responsibility of another party against identified suitable criteria, and to express a conclusion (opinion) with a level of assurance about the subject matter for the intended user.

39. The elements of an audit: • Kind of audit / assurance engagements • A three party relationship • The subject matter • The scope of the audit • Suitable criteria • The audit process • The report

40. The auditor: • The auditor has to observe: • Integrity • Objectivity • Independence • Professional competence and due care • Confidentiality • Professional behavior • Application of technical standards • The auditor should be: • A member of a respected institute or organization with: • quality control policies and procedures • disciplinary rules • a code of ethics • auditing standards

41. The audit process: • Pre-audit • Preliminary investigation • Assignment process • Performing the audit • Initial investigation • Evaluating and forming an opinion • Completion • Reporting • Evaluating the audit

42. Audit Terminology: • GAAS • Internal Control • Management letter • Material weakness • A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. • Significant deficiency • A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

43. Resources

44. Resources: • American Institute of Certified Public Accountants (“AICPA”) • Audit & Accounting Guide: Not-for-Profit Entities • Audit Risk Alerts: Not-for-Profit Entities Industry Developments • NPO Audit Committee Toolkit • Financial Accounting Standards Board (“FASB”) • FASB Codification • Emerging Issues Task Force (“EITF”)

45. Resources: • Watchdog Agencies • Charity Navigator • Better Business Bureau Wise Giving Alliance • GuideStar