End-of-Year Donation Considerations

By Kyle Fritch  KyleFritch

As the end of the year approaches, many individuals and businesses will be planning their holiday and year-end giving. Charitable donations are an excellent way for donors to reduce their tax burdens while also supporting their communities and nonprofit organizations. Donors commonly have questions about the timing of contributions to ensure they receive a deduction for their charitable donation in the appropriate year. In addition, charities must provide the date that a contribution was received when providing acknowledgements to their donors. These rules are complicated, so care needs to be taken in evaluating these year-end donations.

Charitable contributions are deductible in the year the donation is made. A contribution is considered to be made on the date of delivery to the charity if the donor has irrevocably parted with ownership (possession and control) of the property. The date of delivery rules vary depending on the type of property contributed and how it is transmitted to the charity. Click here for some of the most common donation scenarios, along with the rules pertaining to each type of donation.

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.

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.

How Much Profit Do You Really Need?

profitHow Much Profit Does a Nonprofit Need?  This is the question addressed in an article published in the NonProfit Quarterly.  Woods Bowman, author of Finance Fundamentals for Nonprofits: Building Capacity and Sustainability, provides some general guidance on how to calculate the profit rate your organization needs to maintain “status quo.”  Bowman notes, “Some organizations try to avoid steady erosion of quality by investing an amount equal to depreciation, but this is not enough. This tactic only maintains the value of assets at their original cost, which is insufficient, because inflation constantly pushes up replacement cost.”

Therefore, Bowman advises that a rate of inflation be part of the equation.  Here is the formula he gives:

Status quo profit rate = (A / S) * r

A = Assets

S = Spending on Operations

r = rate of inflation

Note that this is for those who use accrual accounting; cash accounting organizations and endowed organizations should check out the article for Bowman’s application to the formula.

The resulting number, Bowman says, is the percentage of an operating budget that managers should set aside for investment.  He is also quick to point out that this number is for status quo and that those organizations with growth goals in mind will need more profit and larger investments.

Bowman also notes this about non-profits looking for more profit: “They can reduce their need for profit by squeezing more productivity out of their assets.”

Check out the article for additional information about capital campaigns and investments, as well as how to determine inflation rates.

 

 

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.