Sequestration and Nonprofits

budget-cuts1-jpgThe sequester had visible and painful effects on the FAA, resulting in flight delays and an outcry from travelers and airlines. So Congress acted quickly to allow flexibility to the FAA to set its own budget priorities and to keep air traffic controllers on the job.

So what about other organizations feeling the effects of the sequester? Will there be fixes for programs facing budget cuts? Will there be allowances for Head Start, Meals on Wheels, food safety, medical research? The list continues. Budget cuts will soon be felt by many more. What can be done to create a sense of urgency to get this fixed?

Nonprofit Quarterly addresses the issue in this article – Sequestration Cuts Taking Their Toll.

Global NGOs Spend More on Accounting Than Multinationals

accountingThe Harvard Business Review’s HBR Blog Network posted an interesting article about spending on accounting for organizations. It noted that NGOs with global operations spend significantly more on tracking finances than for-profit multinational companies. The restrictions placed on the use of funds by contributors and the resulting lack of general operating support cause many organizations to struggle to grow the necessary management capabilities and systems to effectively manage operations and growth.

Read the article here – Global NGOs Spend More on Accounting Than Multinationals  – and let us know your thoughts.

Q&A with an Author of Not-for-Profit Entities Audit and Accounting Guide

Non-Profits Talk co-author Tim McCutcheon spent four years serving on the revision team as part of AICPA’s National NPO Expert Panel and Audit Guide Task Force. The Guide is available today in hard copy format. Following is a brief Q&A with Tim on the new edition.TimMccutcheon

Why did the Guide need a major overhaul? The Not-for-Profit Entities Audit and Accounting Guide was first published following sweeping changes to the accounting standards for not-for-profit entities made by the Financial Accounting Standards Board (FASB) in 1995. Although it has been regularly updated, the industry has continued to evolve; diversity in practice, confusion over the application of standards to new kinds of transactions and structures, and certain gaps in the subject material made it a good idea to take a fresh look.

What are the most important changes to the Guide? The Guide has been expanded and enhanced significantly.

Expanded sections include:

  • Guidance and examples for reporting relationships with other not-for-profits, for-profits, partnerships, and financially interrelated entities.
  • Municipal bond debt, third-party credit enhancements, capitalization of interest, extinguishments and debt modifications, and the effects of terms (such as subjective acceleration clauses) on the classification of debt.
  • The legal and regulatory environment.

Entirely new content includes:

  • Reporting and measuring noncash gifts, including gifts in kind such as contributions of fundraising or informational materials, advertising, below-market interest rate loans, and bargain purchases.
  • A chapter on program-related investments and microfinance loans.
  • Guidance on fiduciary responsibilities to meet donor restrictions and for reporting the expiration of donor-imposed restrictions.

Other important changes are:

  • Updates to auditing content to conform to the results of the ASB clarity project, including coverage of audit planning, risk assessment and design of testing, evaluation of misstatements, auditor communications, going-concern considerations, and an overview of group audits.
  • Suggestions for audit procedures an auditor might consider as a supplement to the risk assessment procedures.

Is the Guide intended for auditors only? Non-profit managers, board members, auditors, and others interested in accounting and financial reporting considerations will find the guide useful. Chapters 2 and 15, in particular, will be of interest to a broad audience and are “must-reads.”

Are there any big surprises in the Guide, or anything likely to be controversial? That’s difficult to gauge. The sheer size of the Guide will surprise some. Others will be surprised at the technical complexities inherent in the proper accounting and financial reporting of not-for-profit entities, and the intersection of the legal aspects of transactions with the underlying financial reporting.

How can new users, or users not very familiar with the old Guide “get into” the Guide? First, don’t try to read it cover-to-cover! Do read Chapters 2 and 15 for general background. Then, as curiosity, issues or questions arise, scan the Table of Contents, and if you can’t find your issue there, try the Subject Index, which is much more detailed. If you are looking for a particular source of guidance, scan the Index of Pronouncements and Other Technical Guidance. For definitions of terms, check the Glossary.

In the coming weeks and months, this blog will feature chapter-by-chapter overviews of the Guide.

New Guidance on Recording Services Received from Affiliated Entities

Yesterday, the Emerging Issues Task Force (EITF) reached a final consensus on EITF Issue 12-B, ReachNot-for-Profit Entities: Services Received from Personnel of an Affiliate for Which the Affiliate Does Not Charge the Recipient NFP. Industry practices around this issue have been diverse, with NFPs recording some, all, or none of the services received from an affiliate. One sticking point giving NFPs pause in their determination of which, if any, services to record has been the language in the Accounting Standards Codification itself.

Paragraph 958-605-25-17 states that contributed services (and the related expenses and/or assets created by those services) should be recognized if employees of separately governed affiliated entities regularly perform services (in other than an advisory capacity) for and under the direction of the donee and the recognition criteria for contributed services as defined by 958-605-25-16 are met. That paragraph states that contributions of services are recognized if they either: (a) create or enhance nonfinancial assets; or (b) require specialized skills, are provided by individuals possessing the skills, and would typically need to be purchased if not provided by donation. Oft-quoted services requiring specialized skills are those provided by accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers, and other professionals and craftsmen. Services not requiring specialized skills should not be recognized. Paragraph 958-605-30-2 states that contributed services recorded should be measured at fair value.

In order to resolve the diversity in practice in the interpretation and application of the above, a final consensus was reached yesterday, as follows:
• The issue applies to services received from personnel of any affiliate that directly benefit the recipient NFP
• The recipient NFP should recognize all services received from personnel of an affiliate that directly benefit the recipient NFP and for which the affiliate does not charge the recipient NFP
• The services should be measured at cost; however, fair value can be elected if cost significantly overstates or understates fair value (election may be made on a service-by-service basis
• A recipient that is a Health Care (as defined under Topic 954, Health Care Entities) that provides a performance indicator analogous to income from continuing operations of a for-profit entity should report the increase in net assets associated with the services received as an equity transfer
• No additional recurring disclosures are required

This final consensus will be considered for ratification by FASB at its March 29 meeting. If ratified, the guidance will be released in a future Accounting Standards Update and will be effective for fiscal years beginning after June 15, 2014, with early adoption permitted. The guidance is to be applied prospectively, with an option to apply it using a modified retrospective approach wherein all prior periods presented would be restated, but not the beginning net asset balances of the earliest period presented.

Administrative and Fundraising Expenditures

pie chartNonprofit organizations are generally very aware of their percentage of program expenditures to total expenditures. This program efficiency ratio is often used as an indicator of the organization’s effectiveness in its delivery of services, resulting in an assumption that the greater the allocation to program, the better.

This logic doesn’t really work. An organization devoting an extremely high percentage of its resources to program is likely not spending an appropriate amount of time and resources on the activities necessary to keep the nonprofit sustainable. Without fundraising, how will the community and new donors learn about the organization and the work it is doing?

Administrative expenditures provide significant benefit to a nonprofit organization. A minimum level of administrative activity is necessary to keep the nonprofit running, but a healthy sustainable organization invests in its internal controls, its employees, and its future.

Nonprofits can assist donors when making contribution decisions. Describe the mission, relationships, and organizational strength of the enity and how the program efficiency ratio supports operations, growth and sustainability.