DuPage County Auditor Bob Grogan, CPA, CFE Institute of Management Accountants Mid-America...

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

Transcript of DuPage County Auditor Bob Grogan, CPA, CFE Institute of Management Accountants Mid-America...

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

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

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

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.

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.

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.

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.

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

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.

. . . 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.

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.

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.

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.

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.

Recording Contributions Receivable

Following entry is made:

Contributions receivable $70

Contrib Revenue – Temporarily Restricted $50

Discount on Contributions Receivable $20

ENDOWMENTS

AND

RESTRICTIONS

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.

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.

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.

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.

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.

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.

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

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)

NATURE OF RELATED

PARTIES

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.

Related Parties

An NFP may be related to one or more other NFPs in numerous ways: – Ownership – Control – Economic Interest

Related Parties

Ownership:– Controlling financial interest through direct

or indirect ownership of a majority voting interest or sole corporate membership in the other NFP

Related Parties

Control: – The direct or indirect ability to determine

the direction of management and policies through ownership, contract, or otherwise.

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

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

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.

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.

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.

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

DETAILS OF REPORTING

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!

Reporting Requirements Form 990-EZo Short Form Return for Organization

Exempt From Income Tax

o 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

Best Practices for Form 990

o Asks about degree of involvement of the board in preparation and review of the Form 990.

o Asks about policies on acceptance of gifts and handling of whistleblowers.

o Presents an opportunity to showcase NFP to potential donors.

Organizations Not Required to File Form 990 or 990-EZ

Regardless of Gross Receipts or Total Assets. These include:o Certain Religious Organizationso Certain Governmental Organizationso Certain political Organizations

(But note these are subject to UBIT, discussed below)

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

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

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

Section of 1986 Tax

Code Description of Organization

501(c)(1) Corporations Organized Under Act of Congress (including Federal Credit Unions)

501(c)(2) Title Holding Corporation For Exempt Organization

501(c)(3) Public Charities and Private Foundations

501(c)(4) Civic Leagues, Social Welfare Organizations, and Local Associations of Employees

501(c)(5) Labor, Agricultural, and Horticultural Organizations

501(c)(6) Business Leagues, Chambers of Commerce, Real Estate Boards, Etc.

501(c)(7) Social and Recreation Clubs

501(c)(8) Fraternal Beneficiary Societies and Associations

501(c)(9) Voluntary Employees’ Beneficiary Associations

501(c)(10) Domestic Fraternal Societies and Associations

501(c)(11) Teachers’ Retirement Fund Associations

501(c)(12) Benevolent Life Insurance Associations, Mutual Ditch or Irrigation Companies, Mutual or Cooperative Telephone Companies, Etc.

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

Section of 1986 Tax

Code Description of Organization

501(c)(13) Cemetery Companies

501(c)(14) State Chartered Credit Unions, Mutual Reserve Funds

501(c)(15) Mutual Insurance Companies or Associations

501(c)(16) Cooperative Organizations to Finance Crop Operations

501(c)(17) Supplemental Unemployment Benefit Trusts

501(c)(18) Employee Funded Pension Trust (created before June 25, 1959)

501(c)(19) Post or Organization of Past or Present Members of the Armed Forces

501(c)(20) Group Legal Services Plan Organizations

501(c)(21) Black Lung Benefit Trusts

501(c)(22) Withdrawal Liability Payment Fund

501(c)(23) Veterans Organization (created before 1880)

501(c)(25) Title Holding Corporations or Trusts with Multiple Parents

501(c)(26) State-Sponsored Organization Providing Health Coverage for High-Risk Individuals

501(c)(27) State-Sponsored Workers’ Compensation Reinsurance Organization

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

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

UNRELATED BUSINESS

INCOME TAX

(UBIT)

How do NFP’s have Taxable Income? Profit derived from any trade or business

activity that is performed on a regular basis by an exempt entity that is not substantially related to the exempt purpose of the organization.

Excluded from UBIT

One-time profitable, unrelated activities Activities performed by unpaid volunteers Activities for convenience of members Sales of donated merchandise Dividend and interest income Royalties Rents from real property

How do you calculate UBIT? Form 990-T required if NFP has Unrelated

Business Income (after applicable deductions) of $1,000 or more.

UBIT is calculated using corporate tax rates; many of corporate tax credits are available.

Estimated tax payments required if anticipated tax is $500 or more (Form 990-W)

Special Rules – Advertising

Advertising Revenues- Exempt if:– Ad activity regularly carried on,– Conducted mainly by volunteers, and– Significantly related to exempt purpose.

If not exempt, taxable gross advertising revenue is reduced by direct advertising costs and any readership costs in excess of circulation income.

Special Rules – Debt-Financed Property

Any property which is held to produce income and with respect to which there is an acquisition indebtedness at any time during the taxable year.

If “substantially all” (85% in Reg 1.514(b)-1)of the property is used to support the exempt purpose, the income is not required to be included in UBTI.