Nonprofit Newsletter - June 2012

June 2012

NONPROFIT HOT TOPICS____________________________________________________________

The Current State of Higher Education, and What to Look Out for in Your Upcoming Higher Education Audits

____________________________________________________________

Uncertainty Surrounding Valuation of “In-Kind” Expenses

____________________________________________________________

Oh the Joy of Having a Foreign Bank Account

From Our PartnersSPRINGING INTO

SUMMER!

NONPROFIT NEWSLETTER

ContentsJune 2012

1 | SingerLewak June 2012

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FROM OUR PARTNERS2 SPRINGING INTO SUMMER!

At about the time you read this latest edition of our Nonprofit newsletter, we will be transitioning from Spring with the Summer solstice. Summer is a great time to catch one’s breath, enjoying the better weather, spending more time outdoors with family and friends, barbequing, and rejuvenating in a more relaxing and, hopefully, refreshing time of the year.

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NONPROFIT HOT TOPICS3 THE CURRENT STATE OF HIGHER EDUCAT ION, AND

WHAT TO LOOK OUT FOR IN YOUR UPCOMING HIGHER EDUCAT ION AUDITSThese days, it seems, higher education is being hit from all sides. From government scrutiny to internal scandals to diminished resources, colleges and universities must work hard to maintain a focus on their academic missions.

5 UNCERTAINT Y SURROUNDING VALUAT ION OF “ IN -K IND” E XPENSESIn recent months, several news articles have appeared that have shined a light on accounting rules for noncash gift-in-kind (“GIK”) donations in nonprofit organizations. These articles have revealed rules that are flexible, confusing, and currently in a flux.

5 OH THE JOY OF HAV ING A FOREIGN BANK ACCOUNTOn January 12, 2012, the IRS announced the 2012 Offshore Voluntary Disclosure Initiative (“2012 OVDI”). The 2012 OVDI is an opportunity for taxpayers with unreported income from undisclosed foreign accounts, foreign assets, or foreign entities to become current with their federal income tax obligations while avoiding potentially substantial civil penalties and generally eliminating the risk of criminal prosecution.

F R O M O U R PA R T N E R S

SPRINGING INTO SUMMER!BY STEVE CARTER | [email protected]

At about the time you read this latest edition of our Nonprofit newsletter, we will be transition-ing from Spring with the Sum-mer solstice. Summer is a great time to catch one’s breath, enjoy-ing the better weather, spending more time outdoors with family and friends, barbequing, and rejuvenating in a more relaxing and, hopefully, refreshing time of the year.

However, there is an area where no Nonprofit can relax. This area deals with the financial health, financial stability, and prognosis of continued sustainability and viability as an organization. We as accountants refer to this as the “going concern” concept.

Many of you are rapidly ap-proaching the end of your fiscal year, and will begin readying yourselves for your annual audit or review. With that, you need to be prepared to answer your accountants on this subject with substantive and well-thought out responses to their inquiries deal-ing with the risks of your organi-zation as a “going concern”.

Hopefully, as a viable and well-managed organization, these risks are constantly addressed in your overall business plan, managing the organization according to its budget, and addressing future

sources of revenue and support to run not only your programs, but identifying funds and reserves necessary to meet your current and future operational needs.

So what are factors and key indi-cators to consider when assessing whether or not your organization has risks that can result in ques-tioning your organization’s con-tinued existence to operate as a “going concern”? Below are some, but certainly not all, key indica-tors that one might address:

• Continued losses from opera-tions?

• Preponderance of restricted revenues received, as com-pared to unrestricted funds necessary for operations?

• Too much dependence on a single source of revenues or support?

• Lack of liquidity in unrestrict-ed net assets?

• Borrowing of temporarily restricted net assets to fund

unrestricted operations• Unrealistic budget assump-

tions• Past due pledges and accounts

receivable• Lack of, or insufficient, bor-

rowing capacity• Debt covenant violationsThis list of considerations can go on. It is important to identify the risks that are pertinent to your organization, its structure, and its mission. From there, address your current status and contin-ued plan of action to mitigate these risks. This approach will help you go a long way in main-taining the health and viability of your organization.

On behalf of my fellow part-ners and our excellent team of managers, all of whom make up our Nonprofit group here at SingerLewak, we wish you a great Summer and a healthy and “risk averse” future to all of you and your organizations! We hope you find this edition of our newsletter useful and informative.

June 2012 SingerLewak | 2

STEVE CARTER CAN BE REACHED AT [email protected]

OR 408.294.3924

THE CURRENT STATE OF HIGHER EDUCATION, AND WHAT TO LOOK OUT FOR IN YOUR UPCOMING HIGHER EDUCATION AUDITSBY JEFF HOLT | [email protected]

These days, it seems, higher edu-cation is being hit from all sides. From government scrutiny to internal scandals to diminished resources, colleges and universi-ties must work hard to maintain a focus on their academic mis-sions. Competition for students, donations, government funding, and other resources is keener than ever, making it imperative that those resources obtained by an institution enhance its reputa-tion. These pressures are likely to create increased risk from an audit perspective.

ENDOWMENT RETURNS AND SPENDING RATES

Endowment returns improved in fiscal year 2011, returning, on average, 19.2 percent, according to the 2011 National Associa-tion of College and University Business Officers (NACUBO) Commonfund Study of Endow-ments (NCSE), but they have not recovered from the losses (-18.7 percent) incurred in 2008—09. In fact, 3 year average returns were just 3.1 percent, and 10 year returns were 5.6 percent. Of particular concerns the fact that

longer-term returns still lag be-hind the amount needed to cover annual spending rates adjusted for inflation and investment management costs. The NCSE reported an average spending rate of 4.6 percent, which, after adding an additional 3 percent to 4 percent for inflation and costs, would require an average return of 7 percent to 8 percent to maintain current endowment balances. Although approximate-ly half (49 percent) of the institu-tions participating in the NCSE reported that they decreased their effective spending rate in fiscal year 2011, 25 percent reported an increase, and 24 percent reported no change to their spending rates.

RATINGS AND TUITION DISCOUNTS

In January, Moody’s gave a mixed outlook for higher educa-tion in 2012. Although market-leading colleges and universities have a stable outlook, the bulk of higher education institutions, es-pecially those heavily dependent on tuition or state appropriations, have a negative outlook. The rating agency noted pressures to improve quality and limit tu-ition increases. That sentiment was echoed by President Obama in his fiscal year 2013 budget request that would tie the distri-bution of federal campus-based aid to three principles: setting re-sponsible tuition policies, provid-ing good value to students, and serving low income students.

The NACUBO Tuition Dis-counting Survey (TDS) measures tuition discount rates and other indicators of institutional grant aid awards provided by four-year private, nonprofit (indepen-dent) colleges and universities to undergraduate students. Prelimi-nary indications from the 2011 TDS revealed one of the lowest

N O N P R O F I T H O T T O P I C S


average tuition increases in over one decade. Although tuition in-creases were modest, fortunately, institutional grants kept pace. In support of Moody’s outlook, the survey also notes a decline in freshman enrollment and some general losses in total undergrad-uate enrollment.

Given these internal and external pressures, management may be inclined to be more aggressive in the recognition of gift and net tu-ition revenue. They may also fail to reasonably assess the long-term rate of return on their endow-ments when determining their current spending rate. Another risk is that management may not have appropriately accounted for endowments whose value has de-creased below the amount of the restricted principle, commonly known as underwater endow-

ments. Auditors should be alert to these issues and should con-sider them when assessing overall engagement risk.

AUDIT RISKS IN HIGHER EDUCATION

As the fiscal year 2012 not-for-profit audit season approaches, there are a few areas to consider when planning audits of higher education institutions, as follows:

An increase in the overall engage-ment risk stemming from increas-ing competition and diminishing resources, Private institutions have seen a decline in enrollment dur-ing the last year as students look to public institutions for more economical options.

As the pressure for revenue growth increases, more and more colleges and universities are expanding their international operations, and although some institutions are doing so as part of a larger strategic initiative, more likely, activities are being addressed on a case-by-case basis. As an institution’s global presence increases, so does its administra-tive burden and the risk that it will run afoul of the laws in a foreign country. Such violations can result in fines, halt operations in a given country, and negatively

affect the institution’s reputa-tion. Auditors should obtain an understanding of the institution’s controls around identifying and overseeing international activi-ties. Depending on the sophisti-cation of the institution’s global activities, additional work may be required to ensure that activity is properly recorded and that no unrecorded liabilities are related to regulatory violations.

Finally, for colleges and univer-sities that do not have publicly traded debt and are, therefore, considered nonpublic by FASB, additional disclosures under Accounting Standards Update (ASU) No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and Allowance for Credit Losses, will be required in fiscal year 2012. Auditors should ensure that their clients are prepared to implement this guidance. For assistance in implementing this new guidance, feel free to contact us here at SingerLewak.


Competition for students, donations, government

funding, and other resources is keener than

ever, making it imperative that those resources

obtained by an institution enhance its reputation

JEFF HOLT CAN BE REACHED AT [email protected] OR

310.477.3924

Information in this article is sourced from the AICPA’s 2012 Nonprofit Audit Risk Alert.


UNCERTAINTY SURROUNDING VALUATION OF “IN-KIND” EXPENSESBY MIKE BARLOEWEN | SENIOR [email protected]

In recent months, several news articles have appeared that have shined a light on accounting rules for noncash gift-in-kind (“GIK”) donations in nonprofit organizations. These articles have revealed rules that are flexible, confusing, and currently in a flux. The issue has recently been most pronounced in organiza-tions that utilize donated phar-maceuticals in its operations and are faced with the challenge of determining how to value the donated drugs. These valuations of the donated goods they receive

(such as medicine, clothing, and other materials) ultimately

flow through an Organization’s financial statements. As a result, organizations that place high values on “GIK” donations can falsely appear to be spending a higher percentage of their funds on programs than other groups that receive mostly cash con-tributions. Donors who rely on these charities’ claimed program percentages when making giving decisions might think they are giving to highly efficient organi-zations when in fact most of their cash donations are being spent on overhead.

A recent story in Forbes maga-zine focused on the case of deworming pills which effectively fight intestinal parasites in hu-mans. These drugs can be bought on the world markets for as little as 2 cents a pill but some inter-national aid charities had valued them on their financial state-ments and tax returns for as high as $16 a pill. (An 81,000% mark up!) The valuation was based on an average wholesale price (“AWP”) listing in a widely used drug-pricing guide known as Red Book, published by Thomson Re-uters. By failing to do a “reality check’ on the valuations provided by the Red Book (whose preface actually disclaims the accuracy of the data provided), charities are sometimes reporting valuations for revenue and service expense that are potentially misleading to users of their financial state-ments.

This past June, it was noted by the American Institute of Phi-lanthropy that the Organization Feed the Children, in its 2010 financial statements, admitted that $544 million in deworming


The issue has recently been most pronounced in organizations that utilize donated pharmaceuticals in its operations and are

faced with the challenge of determining how to value

the donated drugs


pills, which accounted for 45% of its total revenue in 2009, would now be valued at only $21mil-lion based on the new accounting guidance it was using. In another report, a charity Food for the Hungry, received an IRS notice in January of 2012 alleging that the charity had filed incorrect tax returns and that the amounts that it had reported as non-cash donations on its 2008 tax return should be revised downward to $92,633 from $75.7 million dol-lars. Food for the Hungry con-tests the IRS’s claims and con-tends that it accounted for these medications in accordance with prevalent tax law and generally accepted accounting principles.

This IRS letter could signal broader IRS interest in charity drug (and other in-kind) values. In fact, the IRS’s 2011 agenda says that it has an effort under way to examine charities that are involved in “gifts-in-kind,” or noncash, donation programs.

The codification guidance rel-evant to this appears at FASB ASC 958-605 and states the fol-lowing about valuations of “GIK” donations:

• Gifts-in-kind include contri-butions of noncash assets such as inventory, property, and equipment. Gifts-in-kind that can be used or sold should be recognized in accordance with

regular contribution account-ing rules and measured at fair value. The quality and quan-tity of the gift, including ap-plicable discounts, should be considered when determining fair value. Inputs for measur-ing the fair value of contribut-ed inventory may be obtained from— 1) Published catalogs, 2) Vendors, 3) Independent appraisals or other sources.

• Because obtaining a detailed measurement of the fair value of inventory can be difficult or costly, GAAP allows organiza-tions to measure the fair value of contributed inventory using other estimates, averages, or computational approxima-tions such as average value per pound or subsequent sales, provided they are applied con-sistently and are not reason-ably expected to be materially different from a detailed fair value measurement.

This IRS letter could signal broader IRS interest in charity drug (and other in-kind) values. In fact,

the IRS’s 2011 agenda says that it has an effort under way to examine charities

that are involved in “gifts-in-kind,” or noncash, donation programs.


As you can see the guidance leaves a lot up to the interpreta-tion of the Organization itself as to how to determine a reason-able approximation of fair value. The consequence of such “loose” accounting guidance is clear. Charities that are hoping to look growing and efficient as they compete with each other for cash contributions from the pool of would-be donors have an incen-tive to utilize inflated valuations.

These issues have not gone unno-ticed by the accounting profes-sion. In its March 2012 meeting, the Nonprofit Advisory Commit-tee (NAC) debated the issue and noted that the American Institute of Certified Public Accountants’ (AICPA) nonprofit expert panel

has formed a subcommittee to address this problem. Their objective is to ultimately provide

clarifying guidance for applying the U.S. GAAP measurement principles that are included in the Codification.

In the meantime, during this pe-riod of non definitive guidance, Organizations should ensure that its policies on reporting on GIK donations are conservative and transparent. An Organization should ensure there can be no doubt as to their intent in choos-ing one or another valuation methodology. By following these guidelines, Organizations can position themselves should they ever be faced with questions from a regulatory or other institution with regards to GIK valuations.

In the meantime, during this period of

non definitive guidance, Organizations should ensure that its policies on reporting on GIK

donations are conservative and transparent

MIKE BARLOEWEN CAN BE REACHED AT

[email protected] OR 818.999.3924


OH THE JOY OF HAVING A FOREIGN BANK ACCOUNTBY GLORIA SU | [email protected]

2012 OFFSHORE VOLUNTARY DISCLOSURE INITIATIVE

On January 12, 2012, the IRS announced the 2012 Offshore Voluntary Disclosure Initiative (“2012 OVDI”). The 2012 OVDI is an opportunity for taxpayers with unreported income from

undisclosed foreign accounts, foreign assets, or foreign entities to become current with their fed-

eral income tax obligations while avoiding potentially substantial civil penalties and generally eliminating the risk of criminal prosecution. The 2012 OVDI does not currently have a stated expiration date, but can be termi-nated by the IRS at any time.

To participate in the 2012 OVDI, taxpayers must file and/or amend all returns that fall within the eight year look back period (tax years 2003 to 2010), includ-ing international information re-turns and Forms TD F 90-22.1, Report of Foreign Bank and Fi-nancial Accounts (“FBAR”), and

pay all taxes and interest due. Additionally, the IRS will assess accuracy and applicable delin-quency penalties for all years that fall within the look back period. Finally, in lieu of all other penal-ties that may apply, including FBAR penalties and information reporting penalties for non-filing, the IRS will assess a penalty of 27.5% (12.5% in cases in which a taxpayer’s offshore accounts or assets did not surpass $75,000 in any calendar year within the look back period or 5% in very limited circumstances) of the amount in a foreign bank account in the year with the highest aggregate account or asset value.

Taxpayers currently under an IRS examination are ineligible for the 2012 OVDI, regardless of whether the examination related to undisclosed foreign accounts or entities.

FBAR FILING REQUIREMENTS FOR CALENDAR YEAR 2011

On February 24, 2011, the Treasury Financial Crimes En-forcement Network (“FinCEN”) issued final rules amending the


The 2012 OVDI is an opportunity for taxpayers with unreported income from undisclosed foreign

accounts, foreign assets, or foreign entities to become current with their federal

income tax obligations while avoiding potentially substantial civil penalties and generally eliminating

the risk of criminal prosecution


Bank Secrecy Act with respect to Foreign Bank Account Re-porting (“FBAR”) requirements. Each U.S. person with a financial interest in, or signature or other authority over, any foreign finan-cial account is generally required to file Form TD F 90-22.1 if the

aggregate value of all accounts exceeds $10,000 at any time during the calendar year. The final rules apply to 2011 FBARs required to be filed by June 30, 2012, amend certain sections of the rules and offer some clarifica-tion, most notably with respect to reportable accounts and signature authority.

For 2009 and earlier FBAR fil-ings, the IRS issued guidance that i) suspended the requirement to file an FBAR for certain signa-ture authority filers, ii) excepted non-US persons in and doing business in the United States from the filing requirements, and iii) eliminated the need to report commingled funds, except mu-tual funds. Because the previous guidance is not effective for the 2010 and 2011 calendar year, fil-ers should pay close attention to the filing requirements as stated in the TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”) form and instructions and the new rules that differ significantly from some of the current instructions. Calendar year 2011 FBARs are due to be received at the Treasury Department by June 30, 2012 and there is no filing extension for this period.

Treasury Form TD F 90-22.1, Report of Foreign Bank and Fi-

nancial Accounts (FBAR), must receive on or before June 30th, 2012 by the IRS. Postmarking the form on June 30th will cause the filing to be late. There is NO extension of time available for fil-ing this report. The form should be filed with the Department of

the Treasury, Post Office Box 32621, Detroit, MI 48232-0621, or hand delivered to any local IRS office. Please note that the FBAR is NOT to be attached to any tax/informational returns. The form must be filed by each U.S. person, including exempt organizations, if:

Calendar year 2011 FBARs are due to be

received at the Treasury Department by June 30,

2012 and there is no filing extension for this period

Postmarking the form on June 30th will cause

the filing to be late. There is NO extension of time available for filing

this report.


1. The person has a financial interest in, signature author-ity, or other authority over one or more accounts in a foreign country and if the aggregate value of all such accounts exceeds $10,000 at any time during the calendar year;

2. The person has an interest of more than 50% in another U.S. or foreign corporation, partnership, or trust that has such a foreign financial ac-count; or

3. The person is a U.S. officer or employee who has signature or other authority (includes wire transfer and other electronic funds transfer authority but does not include the mere power to make investment decisions) over a financial account in a foreign country held by their employer.

Recent activity has shown that the Internal Revenue Service is increasing its enforcement of

Treasury Form TD F 90-22.1, Report of Foreign Bank and Fi-nancial Accounts (FBAR). Below is some additional information for your reference related to late

filing and penalties assessed. Please be aware that there are significant penalties assessed if the forms are not filed – a mini-mum of $10,000 penalty can be imposed for each bank account that is not reported. As a result, please consult a tax attorney or us to discuss your filing require-

ments and tax ramifications for not filing or late filing.

Should you have any questions regarding your organization’s TDF 90-22.1 filing requirements. Please contact us at your conve-nience.Recent activity has shown

that the Internal Revenue Service is increasing its enforcement of Treasury Form TD F 90-22.1,

Report of Foreign Bank and Financial Accounts

(FBAR)

GLORIA SU CAN BE REACHED AT

[email protected] OR 408.294.3924

W W W.SINGERLE WAK .COM | 877.754.4557

LE WIS SHARPSTONE [email protected] | 310.477.3924

JEFF HOLT [email protected] | 310.477.3924

STE VE CARTER [email protected] | 408.294.3924

ROB SCHLENER [email protected] | 949.261.8600

L IOR TEMKIN [email protected] | 310.477.3924

SingerLewak is a leading regional accounting services firm in California with offices in Los Angeles, Orange County, Woodland Hills, Monterey Park, San Diego, Silicon Valley and San Francisco. Serving California since 1959, SingerLewak has established a reputation for excellence as professionals with unparalleled expertise in the Accounting and Management Consulting industry. Providing the services of a large firm with a blended environment of practices, industry specializations and particular attention to hands-on service, SingerLewak continues to demonstrate leadership and industry growth year-over-year. Our client relationship approach and industry excellence is renowned.

We are nationally recognized as active community and professional services partners, working among many sectors of the business world. Our core services deliver results whether it’s auditing, accounting, entrepreneurial business services, tax preparation, business manage-ment, SEC filings, transactions, enterprise risk manage-ment, forensic accounting, business valuation, litigation support, or consulting.

THE SKILLS YOU NEED. THE SERVICE YOU EXPECT.

OUR FIRM

Nonprofit Newsletter - June 2012

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