Module 12

1. Module 12 Treasury Function: Cash, Investments and Cash Flow Statements Convery 2013

2. Learning Objectives • Distinguish among the types of cash and investment instruments • Identify elements of an Internal Control System over Cash • Understand the differences between cash vs. accrual basis of accounting • Identify what regulations govern investments of a NPO • Describe how investments are reported on a Balance Sheet with related disclosures • Sketch out an Investment Policy • Analyze a cash flows statement Convery 2013

3. Take an inventory of cash and investments • Identify what you have by: • Cash • Cash equivalents • Investments • Compensating Balances • Where is it located? • Who has access to it (and is authorized to deposit and withdraw)? • What is the interest rate (current and trend over time)? • What are the service charges (current and trend over time)? • What is the Balance as of xx-xx-xx? Convery 2013

4. Types of Cash • Coin • Currency • Checking accounts (demand deposits) • Money orders • Certified checks • Cashier’s checks • Bank drafts • Savings accounts (bank has the right to demand notice before withdrawal) Convery 2013

5. Types of Cash Equivalents • Definition: Short-term, highly liquid investments that are readily convertible to known amounts of cash, and so near their maturity that they present insignificant risk of changes in interest rates; generally investments with maturities of 3 months or less. • U.S. Government Treasury Bills (91 to 182 day maturities) sold in $10,000 denominations at weekly government auctions • Commercial paper – short term notes issued by corporations with good credit ratings; issued in $5,000 and $10,000 denominations. • Money Market funds Convery 2013

6. Types of Investments • Commercial paper (investments in corporate debt with maturity of 3 to 12 months) • Certificates of Deposit (CDs) – formal evidence of indebtedness, issued by a bank, subject to withdrawal under specific terms; issues in $10,000 and $100,000 denominations, maturing in 30 to 360 days • Money market savings certificates issued by banks and savings and loan associations in denominations of $10,000 or more for 6 month periods (6 to 48 months); interest rate is tied to the 26-week Treasury bill rate • U.S. Treasury Bonds • U.S.Treasury Notes Convery 2013

7. Types of Investments, cont’d. • Equity securities – common stock • Equity securities – preferred stock • Corporate bonds • Municipal debt securities • Convertible debt • Land contracts held as an investment • Mortgages held as an investment • Derivatives – financial instruments whose value is derived from the value of some underlying assets, such as stock, bonds, or commodities – or is tied to a basic indicator, such as interest rates or the Dow Jones averages. Convery 2013

8. Compensating Balance Accounts • Cash that is legally restricted – so separately classed as a deposit • Cash under an arrangement that is without legal restriction – so it is shown as cash but with note disclosure Convery 2013

9. Sources of Cash • Operating Revenue • Providing services or selling goods • Could be paid when revenue is earned or a collection of accounts receivable from revenue provided in past periods. • Membership dues • Contributions or grants • Nonoperating Revenue • Gain on sale of long-term assets (capital assets or investments) • Investment income (interest and dividends) • Borrowing • Short term loans from Bank (notes or line of credit) • Long-term debt (notes payable or bonds) Convery 2013

10. Internal Controls over Cash • Is your cash safe? • Lock up petty cash • Two signatures on checking accounts • Budget for cash needs (daily or monthly) • Use Bank “sweep” accounts to earn interest on excess cash and borrow to meet short-term needs Convery 2013

11. Internal Controls over Cash • Are the accounting records over cash and investments reliable? • Reconcile the bank statements monthly – by someone other than the person responsible for writing checks (in a small organization, the Board Treasurer can receive the bank statements directly rather than the Executive Director). Convery 2013

12. Cash vs. Accrual issues • Both provide important information • Balance Sheet shows the balance in the cash, investments, receivables, other current assets, payables, other current liabilities at the end of each year. • Statement of Activities shows the change in revenues earned and expenses incurred without regard to whether cash was received or paid • Statement of Cash Flows reports on the reasons that cash changed during the period. Convery 2013

13. Reporting to the Board • Consider a one-page spreadsheet that shows Cash Basis Budget for each month of the year, with a section for Accrual Adjustments at the bottom of the page • Show each month of the year as a column • Start with beginning cash balance • Show enough detail of Cash Receipts and Disbursements as necessary as rows • Draw totals to ending cash balance for each month • Then show those cash receipts and disbursements that affected receivables and payables at the bottom of the page. Convery 2013

14. Required Note Disclosures • Valuation and Nature of Investments • Investment risks and derivatives • Details of Mortgages, Other Loans, and Lease Commitments • Amount of Unconditional Pledges Due in 1 year, 1 to 5 years, and > 5 years (SFAS No. 117) Convery 2013

15. Resources • Uniform Prudent Investor Act of 1994 (see update) • Sample Investment Policy • Boardsource books and training seminars www.boardsource.org Convery 2013

16. Reporting Investments SFAS No. 124 • Mark equity investments that have readily determinable values and all debt securities to fair value. • Report realized and unrealized gains and losses and investment income in the Statement of Activities. • Report income and gains and losses as changes in unrestricted net assets, unless their use is restricted by the donor or legally restricted by state law. • Similar to SFAS No. 115 for businesses and GASB Statement No. 31 for governments, but simpler. Convery 2013

17. Determining “Fair Value” of Investments • Newspaper or trade journal • Quotes from recognized exchanges (NYSE, AMEX, NASDAQ) • Pricing services • Broker quotes • Custodian or investment advisor • Pricing matrices Convery 2013

18. Investments • Donors may stipulate that a portion of appreciation is to be permanently restricted to maintain the purchasing power of the endowment. • If a donor is silent as to losses, losses reduce unrestricted net assets if the net appreciation requirement has been reached, otherwise temporarily restricted net assets. • SFAS No. 124 requires extensive disclosures regarding investments and related income. Convery 2013

19. Investment Regulation • Most states have adopted some version of the • Uniform Management of Institutional Funds Act (Act 157 of 1976) • Uniform Prudent Investors’ Act (1994) which describe standards of care, portfolio theory, and delegation of investment authority. • For governmental entities, Michigan has • Investment of Surplus Funds of Political Subdivisions (Act 196 of 1997 – Amendment to Public Act 20 of 1943 – Basic Investment Policy Convery 2013

20. Investment Policies Example: “Goal is to optimize invested funds while maintaining a safe amount of risk and meeting the fiduciary responsibility assumed by the organization.” Convery 2013

21. Investment information in Financial Statements • Display • Realized Gains and Losses (from sales of assets) • Unrealized Gains and Losses from changes in fair value) • Disclosures • Methods and assumptions used to estimate fair value • Policy to determine investments carried at amortized cost • Involuntary participation in an external pool Convery 2013

22. Elements of the Statement of Cash Flows Cash flows from • Operations (look on statement of activities) • Investing Activities (changes in long-term assets on the statement of net assets) • Financing Activities (changes in long-term liabilities on the statement of net assets) Net Increase (Decrease) in Cash Convery 2013

23. Statement of Cash Flows • SFAS No. 95 was amended to extend coverage to not-for-profit organizations as well as for-profit businesses. • The indirect method or direct methods (with a reconciliation) may be used. This method refers only to the “Operating Section” • Unrestricted gifts are included with operating activities. • Restricted contributions given for long-term purposes are included with financing activities along with the related income. • Noncash gifts or in-kind contributions are disclosed as noncash investing and financing activities in a separate section. Convery 2013