Now what? FASB issues new reporting standard for nonprofits What to consider when forming an investment policy Youth sports leagues vulnerable to fraud News for Nonprofits
NONPROFIT AGENDAS YEAR END 2016
Sechler CPA, P.C. Carolyn Sechler
email@example.com 921 East Orange Drive, Phoenix, AZ 85014 Tel: 602.230.2700/Fax: 602.230.2705 www.azcpa.com
Now what? FASB issues new reporting standard for nonprofits
he Financial Accounting Standards Board (FASB) has issued the first update to U.S. Generally Accepted Accounting Principles (GAAP) for nonprofits’ financial statement presentation in more than two decades. The main goal of Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, is to increase transparency so users of nonprofits’ financial statements — whether the board of directors, lenders, grantors, donors or others — aren’t caught unaware of organizations’ means, as some were during the 2008 economic downturn. It contains several significant revisions of the initial exposure draft the FASB had released in April 2015.
Liquidity and availability of resources The new requirements for the reporting of liquidity and available resources reflect this focus on transparency. ASU 2016-14 requires your organization to include certain qualitative and quantitative
disclosures to help financial statement users better assess your nonprofit’s available financial resources. The most difficult aspect of these disclosures may be the frank discussions the standard requires about liquidity to cover general expenses in the coming year. Disclosures will need to address cash on hand, cash forecasts, and reserves. For example, if your organization has little cash on hand and a lot of reimbursement contracts, you’ll need to think about how best to manage your day-to-day cash flows. You may determine that this is a good time to secure a line of credit that can act as a bridge in the event of late reimbursements. But you must include that line of credit in the disclosures.
Net asset classes The new standard pares the net asset classes to two: net assets with donor restrictions and net assets without donor restrictions. And it requires additional disclosures related to board designations of net assets.
FASB moves on to Phase 2 of its nonprofit project ASU No. 2016-14 was preceded by an Exposure Draft, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities, which the FASB published for public comment in April 2015. It generated an unusually high number of comments, and, in response, the FASB decided to split its deliberations of the draft into two phases. The release of ASU 2016-14 marked the conclusion of the first phase. Phase 2 will revolve around certain issues considered more controversial, such as defining “operations” and aligning measures of operations between the statements of activities and cash flows. Consideration may be coordinated with the FASB project related to financial performance reporting by for-profit organizations. As of this writing, no timetable had yet been established for Phase 2.
The ASU also changes the reporting of endowments that are underwater (meaning their fair value has fallen below the original endowed gift amount). It now requires the underwater portion to be classified as net assets with donor restrictions rather than unrestricted net assets and adds disclosures, including the aggregate of original gift amounts and fair value.
You also must present any investment return net of all related external expenses (expenses paid to third parties such as investment managers) and direct internal expenses. This change will make it easier for financial statement users to make apples-to-apples comparisons of different nonprofits’ investment returns. The new standard eliminates the requirement to disclose the netted expenses, though.
You’ll be required to classify expenses by both nature and function in one location and present an analysis of expenses by nature and function.
Presentation of operating cash flows In an earlier draft, the FASB proposed requiring nonprofits to use the direct method — which provides financial statement users with more information — to present the net amount of operating cash flows. The new standard lets you choose the direct or indirect method.
The new standard also generally mandates the use of the placed-in-service approach when you’re reporting the expiration of restrictions on capital gifts used to purchase or build long-lived assets such as buildings. In other words, nonprofits must reclassify these gifts as net assets without donor restrictions when the asset is placed in service. If you’ve been using the over-time approach (which spreads out the expiration of restrictions on gifts by recognizing them over the asset’s useful life), you should talk to your lenders about how this change could affect debt service ratios or liquidity covenants.
Expenses and investment return Under the ASU, you’ll be required to classify expenses by both nature and function in one location (function was already required) and present an analysis of expenses by nature and function. “Nature” refers to expense categories such as salaries and wages, rent and utilities, and “function” primarily refers to program services and supporting activities. Your organization probably will be relatively unaffected by this new requirement, as you likely already collect and report the information.
Effective date The new standard takes effect for annual financial statements issued for fiscal years starting after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early application is allowed. Your CPA can help you determine the best time for your organization to adopt the standard. n
What to consider when forming an investment policy
oes your nonprofit have a formal investment policy? If not, your organization’s investment committee might want to take a look at the following suggested outline adopted from the Statement of Investment Policy of the Texas State University Development Foundation.
State investment objectives and constraints First, ask: What do we hope to accomplish with our investment policy? General objectives stated in your policy should address return, spending rate and risk. Consider including details such as assumed rate of inflation, investment management fees, and any desired real portfolio growth to reach long-term goals. Most important, how much risk is your nonprofit willing to experience? Your policy also should address investment constraints, such as liquidity and time horizon. Does your organization, for instance, rely on investments to “throw off ” a certain percentage of income each year to meet spending needs for operations? What’s the time horizon of your investments? Is their purpose largely to support current programming or endowments?
Describe performance measures Additionally, your policy should state how you’ll measure performance. Outline how benchmarks will be developed and compared to actual performance, both in the areas of risk and return. An annualized nominal rate of return should be stated as a goal as well as how market, inflation and interest-rate risk play into investment decision-making.
Specify spending rate and asset allocation Your spending rate will likely be a percentage of total return. But how do you define “total return”? Does this include unrealized or market gains as well as current dividends? And how is the amount calculated? Many organizations adopt an average of the trailing 36 months’ results. Give asset allocation special attention, because it’s one of the most important decisions your investment committee can make. Base the allocation on the factors discussed above — it should be commensurate with your acceptable amount of risk and most likely to generate your expected return. Your investment policy might detail asset allocation, in general, as follows: Total equities 50% Total fixed income 36% Total alternatives 14% Total 100%
Be sure to review and revise your allocation strategies regularly. Given U.S. market volatility, diversifying across industries, geographic areas and types of assets reduces risk. Certain types of assets, such as fixed-income securities (for example, Treasury bills) are less volatile, while others such as equities are considered a source of long-term growth.
Define prohibited investments and portfolio rebalancing Your policy should detail permissible and prohibited investments. Permitted ones might include real estate investment trusts, domestic large-capitalization equity securities, and cash equivalents. Investments inconsistent with your mission or considered outside an acceptable range of risk may be prohibited. Include in your policy how frequently your investment team should rebalance the portfolio to realign with your investment allocation. Some policies state that rebalancing must occur every quarter. Others state that rebalancing will take place when thereâ€™s a certain percentage deviation from the desired asset allocation.
Other considerations You may want to incorporate the following components into your investment policy for a more complete depiction of your objectives: A delegation of responsibilities and authority. Detail the expectations for, and functions of, the general board, investment committee, investment advisors, managers and custodians, and specify how brokers and advisors will be selected. A conflict of interest statement. Written disclosure of any conflicts should be required. The investment committee can ask those with a conflict to excuse themselves from voting on investment decisions. The investment process. Outline how investment information will be monitored and communicated. A formal procedure for revising the policy. State how often the policy will be reviewed and amended. What changes will require board approval?
A matter of support Your formal investment policy should be designed to support your organization as it moves forward. Be sure to review it with your CPA and your attorney to ensure your policy meets all legal and reporting requirements. n
Youth sports leagues vulnerable to fraud
he National Center for Charitable Statistics estimates that the approximately 14,000 youth sports groups in the United States generate annual revenues of about $9 million, much of it cash. A few simple controls could make them less susceptible to fraud, which has been widely reported among sports leagues in recent months.
Bolstering weak defenses Youth sports leagues are usually run by small groups of unpaid volunteers, with little accountability or oversight. Leagues can find it challenging to find volunteers at all, let alone volunteers with the qualifications to manage financial matters. Those
person should monitor the budget, and every payment (or at least over a certain threshold) should require two signatures. If the league has credit or debit cards, the statements should be reviewed by someone who isn’t an authorized user.
who do volunteer are usually friends or neighbors, and this gives them a certain level of trust that’s easy to manipulate. In fact, sports league fraud is usually committed by board members or officers (particularly the treasurer, not surprisingly) who’re widely respected in their communities. Sports leagues also frequently lack formal checks and balances. They may have a board of directors, but do those boards regularly review financial reports to spot red flags? Do they have a formal budgeting process, where projected figures are compared with actual numbers? In short, leagues that aren’t treated as businesses are susceptible to fraud. Similar types of organizations, where cash is handled and controls may be loose, such as parent-teacher organizations or “friends” of a library, also are vulnerable.
Launching protective measures Sports leagues (and similar organizations) can take some steps to reduce the risk of falling victim to fraud, such as: Segregating duties. This is by far the most important step (and one of the easiest) a league can take. A single individual shouldn’t receive, record and deposit funds coming in, pay bills and reconcile bank statements. Assign someone uninvolved in handling deposits and payments to receive and reconcile the bank statement. Another
Requiring board review. The board should receive and review financial reports on a quarterly or monthly basis (including when the league isn’t in season). The treasurer should submit a report for every board meeting, with bank statements attached. Implementing online registration and payment. A lot of leagues still use paper registrations, which come with cash or checks for fees. Cash can be pocketed in the blink of an eye, and checks can be diverted to fraudsters’ own accounts. But with online registration, payments are deposited directly into the league’s account. Rotating treasurers. In some leagues, the treasurer has seemingly been around forever, which makes it possible to engage in long-running, costly schemes. Rotating volunteers through the position every few years is the safer practice. If funds are available, consider hiring a part-time bookkeeper, responsible for reporting to the board. You also should consider setting up an anonymous tip line. Most frauds are uncovered as a result of tips, and organizations with reporting hotlines are much more likely to detect fraud than those without. And when you’re talking about a close-knit community where everyone knows each other, anonymity is essential.
Not all fun and games Sadly, many youth sports leagues are ripe for fraud, in large part because of their lack of formality. Structure may be counter to the spirit of sports leagues, but groups that don’t operate like a business could end up out of business. n
NEWS FOR NONPROFITS Nonprofit using mobile app for life-saving work “Be the Match,” run by the National Marrow Donor Program, recently launched a campaign on the popular mobile app Snapchat that targets young men via video ads. The campaign demonstrates how nonprofits can take advantage of social media to advance their causes, often in a cost-effective — or even free — way. The organization’s “Be the Guy” initiative is aimed at 18- to 24-year-old males, because younger donors tend to be in better health and men tend to have more bone marrow than women due to their higher body mass. The video ads remind viewers that anyone could save a life by being a marrow donor and prompt users to swipe up on their phone screens to access registry forms. Be the Match is running similar ads on Facebook, Instagram, Reddit and Twitch (a live streaming platform for video gamers). n
Concern over new overtime rules Nonprofits across the nation have been working to prepare for the new federal overtime rules that were scheduled to take effect December 1, 2016. A survey conducted by the National Council of Nonprofits earlier this year found, among other things, that while nonprofits have expressed moral support for the policy of raising the minimum salary level of white-collar employees, they’re also experiencing operational anxiety over how to pay the additional costs in tight — or even declining — revenue environments. Of the 1,094 respondents, 34% predict their organizations will reduce staff. And 33% expect their organizations will be forced to reduce the level of services. n
Ministers’ housing allowance faces challenge
Researchers find friendly-looking CEOs fare better It’s time to put on a happy face, nonprofit CEOs! A study published in the journal Perception looked at the relationship between the facial appearance of nonprofit leaders and leadership success. Those who looked more likable or trustworthy led organizations that performed better on nonprofit metrics such as fundraising efficiency (the amount spent to raise $1 in contributions) and charitable commitment (percent of total expenses going to program services). The nonprofit leaders who looked the most dominant, with the highest power ratings, were less successful. n
The Freedom From Religion Foundation (FFRF), a group supporting separation of church and state, has filed a lawsuit in federal court challenging the constitutionality of the ministers’ housing exclusion. The exclusion allows qualified ministers to exclude from income tax, within certain limits, the rental value of church-provided housing or housing allowances for ministers owning or renting their homes. The group contends that the exclusion is discriminatory because it’s available only to religious clergy. A previous challenge by FFRF was dismissed. n
This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. ©2016 NPAye16
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