Executive Perspective on Top Risks for 2014 – Comparison of for-profit concerns with those of tax-exempt organizations

Protiviti reported their survey results from executives in the for-profit sector regarding their Top Ten Risks for 2014:

  • Regulatory changes and scrutiny
  • Economic conditions
  • Uncertainty surrounding political leadership
  • Succession planning for key employees and board
  • Organic growth
  • Cyber threats
  • Organizational resistance to change
  • Privacy and identity security system protection
  • Compliance with healthcare reform legislation
  • Volatility in financial markets

Other concerns include setting appropriate executive compensation and addressing the growing demands of compliance oversight.

Not surprising, the risk concerns stated above are very similar to those experienced by executives in the tax-exempt sector. Why is that? To remain viable within a commercial setting, a for-profit business must remain healthy, relevant and profitable. To compare, a tax-exempt organization must also remain healthy and relevant in order to meet its mission statement into the future.  The similarity is the need for relevance and strong financial health.  The contrast is that the goal of a for-profit enterprise is solely profitability, not the specific product or service it provides. This differs fundamentally from a tax-exempt organization that exists to accomplish its mission. In other words, for the tax-exempt organization, financial health is a means to accomplish its goal, not the goal itself.

Accounting Standards You Should Consider When Closing Your Books for the Fiscal Year

As non-profits with June fiscal year ends start the process of closing their books for the year and begin the financial reporting process, there are new accounting standards that should be considered.  There is one new accounting standard in 2014 financial statements, and some that will affect 2015 financial statements, but should be applied to operations beginning in July of 2014. A summary of these accounting standards follows.

Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows
In October 2012, the FASB issued an accounting standard that requires a non-profit to consistently classify, within a statement of cash flows, cash receipts from the sale of donated financial assets with cash donations received for similar purposes. The cash receipts from the sale of donated financial assets must, upon receipt, have been directed without any non-profit imposed limitations for sale and converted nearly immediately into cash. Accordingly, the cash receipts from the sale of those financial assets should be classified as cash inflows from operating activities, unless the donor restricted the use of the contributed resources to long-term purposes, in which case, those cash receipts should be classified as cash flows from financing activities. Otherwise, cash receipts from the sale of donated financial assets should be classified as cash flows from investing activities by the non-profit.

The accounting standard provided a decision tree to illustrate the process that can be used to help determine the appropriate presentation of the cash receipts in the cash flow statement. This accounting guidance is effective prospectively for June 30, 2014 fiscal year ends. Retrospective application to prior periods is permitted but not required in the case where comparative financial statements are presented.

Obligations Resulting from Joint and Several Liability Arrangements
In February 2013, the FASB issued an accounting standard to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date. Examples of obligations within the scope of this accounting guidance include debt arrangements, other contractual obligations, and settled litigation and judicial rulings.

This accounting guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors, and any additional amount the reporting entity expects to pay on behalf of its co-obligors.

Entities are also required to disclose the nature and amount of the obligation as well as other information about those obligations.

This accounting guidance is effective for December 31, 2014 fiscal year ends. The changes required by this accounting guidance should be applied retrospectively to all prior periods presented if comparative financial statements are presented, so non-profits that present comparative financial statements should determine the applicability of this accounting guidance to determine what effects it may have on the current year financial statements when it is required to be adopted in the upcoming fiscal year.

Recognizing Services Received from Personnel of an Affiliate
In April 2013, the FASB issued accounting guidance which addresses the situation in which employees of a separately governed affiliated entity regularly perform services (in other than an advisory capacity) for, and under the direction of, the recipient entity. This new accounting guidance requires a recipient non-profit to recognize all services received from personnel of an affiliate that directly benefit the recipient non-profit. Generally, those services should be measured at the cost recognized by the affiliate for the personnel providing those services. However, if measuring a service received from personnel of an affiliate at cost will significantly overstate or understate the value of the service received, the recipient non-profit may elect to recognize that service received at either the cost recognized by the affiliate for the personnel providing that service, or the fair value of that service.

This accounting guidance is effective for fiscal years ending June 30, 2015, so non-profits that receive services from personnel of an affiliate will need to consider how the services are being recorded beginning this July.

Service Concession Arrangements
In January 2014, the FASB issued an accounting standard which provides specific accounting guidance related to service concession agreements. This accounting guidance clarifies that an arrangement should not be accounted for as a lease when it contains both of the following conditions:

  • The grantor controls, or has the ability to modify or approve, the services that the operating entity must provide with the infrastructure, to whom it must provide them, and at what price.
  • The grantor controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement.

This accounting guidance is effective beginning with December 2015 fiscal year-end entities, so December year-end non-profits will need to begin following this accounting guidance January 1, 2015.

If you have questions about any of these new accounting standards, please contact an Eide Bailly professional. They will be happy to answer your questions.

Reducing Fraud Risk for Nonprofit Organizations

Nonprofit organizations can be more susceptible to fraud than other organizations as a significant portion of their revenue stream may come from donations and fundraising for which there is no accounts receivable on the books.

A recent article in the June 2014 issue of the Journal of Accountancy titled “How Not-for-Profits Can Reduce Fraud Risk” highlights the following areas in which management can ensure proper controls are in place to prevent and detect possible fraud:

  1. Protect Donations at Fundraisers
  • Payments received at a silent auction should be received in dual custody, with one person receiving the bidding documentation and the other person receiving the physical payments. A third person should prepare the deposit and another individual should reconcile the bid documentation, the payment received and the deposit to ensure all funds received were deposited.
  • If payment is to be made at a later date, the winning bidder should be informed of where the payment should be sent. Subsequent write-offs of receivable balances should be approved by someone other than the individual responsible for receivable activity.
  • Payments for attending the event which are received at the event should be placed in an envelope and all envelopes should be collected and opened in dual custody. Receipts should be sent to the donor and any complaints by donors should be received by an individual other than the one responsible for collecting and depositing the funds.
  1. Secure Donated Merchandise
  • An organization should have policies and procedures for handling the receipt and disposition of donated merchandise. The policies should address how and by whom the merchandise will be used and how it will be disposed of at the end of its life. Periodic inventories should be performed and records should be maintained of such merchandise.
  1. Strong Hiring Practices
  • Organizations should ensure they have good hiring practices. References should be checked and criminal background checks should be performed. In addition, when hiring a person in a fiscally responsible position, the individual’s credit should be checked. Oftentimes, nonprofit organizations have difficulty finding well-qualified personnel as they may offer lower pay than for-profit organizations. This creates the potential for “rationalization” that they deserve higher pay, which can lead to fraud. In addition, many nonprofits place a lot of trust in their personnel which creates the opportunity for fraud.
  1. Segregation of Duties
  • No single person should have complete control over a single transaction. The same person should not be able to set up new vendors, enter invoices, print and mail checks, and reconcile bank accounts. By involving a second person in the process, an organization reduces the opportunity for fraud as now collusion may be necessary to commit the fraudulent act.
  • Bank reconciliations should be performed by someone other than the individual involved in recording of the day-to-day transactions.

Nonprofit organizations need to understand the risks affecting their organization and ensure they have appropriate controls in place to secure their resources.

FASB Board Meeting Tentative Decisions on Financial Statements of Not-for-Profit Entities

FASB

FASB

On May 28, FASB continued its discussions on changes to the financial statements of not-for-profit organizations, focusing on the presentation and disclosure of information useful in assessing liquidity. The Board decided that an entity should define the time horizon it uses to manage its liquidity (for example, 30, 60, or 90 days) and disclose the following information:

  1. Quantitative information about:
    1. The total amount of financial assets
    2. Amounts that are not available to meet cash needs within the time horizon because of restrictions (limits) imposed by contract (or law), donors, or actions of its governing board
    3. The total amount of financial liabilities that are due within that time horizon.
  2. Qualitative information about how the entity manages its liquidity. For example, an entity might disclose:
    1. Its strategy for addressing entity-wide risks that may affect liquidity, including its use of lines of credit
    2. Its policy for establishing liquidity reserves
    3. Its basis for determining the time horizon used for managing liquidity.

The decisions are tentative and may be changed at future Board Meetings.

FASB Continues Deliberations On Not-for-Profit Financial Statements

May 14, 2014 FASB Board Meeting

FASB

FASB

Financial Statements of Not-for-Profit Entities. The Board continued its deliberations about the presentation and disclosure of investment expenses and an intermediate measure of operations in light of the results of staff outreach with stakeholders of foundations and health care entities. The Board decided that:

  1. All not-for-profit (NFP) entities would be required to disclose identifiable, direct external investment expenses and the amount of direct internal investment expenses incurred during the period.
  2. An NFP business-oriented health care entity would be required to present an intermediate measure of operations as previously defined by the Board in this project. Those entities would have the option of also presenting the performance indicator that is currently required by paragraph 954-225-45-4. As a result of this decision, all NFP entities including health care entities would be required to present the same intermediate measure of operations.