Category

Audit

Are You Ready for the FASB Accounting Standards Update (ASU) No. 2014-09?

By | Abila, Accounting, Audit, CPA, FASB, Nonprofit | No Comments

By now you’ve probably heard of FASB Topic 606. This is an accounting standards update that seeks to provide greater clarity to organizations on how to report revenue. After the initial release of the update, several clarification statements have been issued to help organizations and companies prepare for the new guidelines. As you’re getting ready to implement the new standards (they go into effect for certain not for profits starting December 15, 2017, and for most others December 15, 2018), it’s important to understand both the gist of the update as well as the clarifying statements that have been issued.

What Is FASB Topic 606?

FASB 606 deals with revenue from contracts with customers. FASB Accounting Standards Update No. 2014-09 seeks to streamline statement preparation, as well as provide better disclosure to the public and to others. Clear, transparent reporting is essential for nonprofits; it helps build trust between nonprofits and their constituents. With FASB Topic 606 and Accounting Standards Update No. 2014-09, the revised guidelines are intended to help nonprofits clearly disclose their relationship with their customers and the revenues such relationships and contracts provide.

Another reporting area that FASB No. 2014-09 seeks to improve is the ability for people to compare financial statements. If revenue is reported differently, it makes it harder to compare them across entities. If revenues follow a consistent reporting pattern, they can be compared more easily.

Clarifications on the Original Statement

Accounting professionals charged with the implementation of this revised standard have asked for, and received, clarification on several items. First, intellectual property issues required several clarifying statements. Organizations who license their IP needed information on how to record revenues. A nonprofit health association, for example, who licenses a special ‘badge’ that packaged food companies can put on their products to indicate they meet specific dietary guidelines needs to understand whether they should record revenues at once or over time as they occur.

So far, FASB has issued four clarifications:

  1. ASU No. 2016-08, which addressed principal versus agent considerations.
  2. ASU No. 2016-10 identified performance obligations and licensing
  3. ASU No. 2016-12, clarified a narrow scope improvements and practical expedients directed at items such as the reporting of noncash consideration, contract modification and completed contracts at transition, collectability matters, and similar matters.
  4. ASU No. 2016-20 which correct loan guarantees, contract costs—impairment testing, and provision for losses on construction-type and production-type contracts. Because this area is so complex, interested people should keep up to date with any further changes on 2016-20.

Caution: Implementation Ahead

With all of the clarifications and updates, it’s difficult to say whether or not organizations are truly ready to implement the new rule. Although many indicate that they are, it may be wishful thinking.

A few other cautions have come above. The new rule indicates that transaction prices should be allocated to each performance obligation based on the stand-alone price. Software companies are paying particular note of this requirement since it may accelerate revenue recognition for their products.

Another area where this may impact revenue recognition is on bundled items. Revenue recognition for bundled, package items may now be considered one item instead of many.

Lastly, revenues must be recorded when it appears probable that they can be collected. For nonprofits, this means that they cannot record as donations or revenues money left to them with conditions attached unless it becomes very clear that those conditions will be met.

Confused? Let Welter Consulting Help

If you’re confused about all the FASB changes and the implementation of these new guidelines, Welter Consulting can help. Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.

Challenges and Solutions for Allocating Indirect Costs

By | Abila, Accounting, Audit, Grant Management, MIP Fund Accounting, Nonprofit | No Comments

Accurate nonprofit financial reporting relies upon proper allocation of indirect costs. Indirect costs can be challenging to place properly, but once they are, they can make a significant impact on your overall budget. More importantly, they add an extra dimension to all reports reviewed by your Board and executive team and can help with budgeting, staffing, and other critical decisions.

Classifying Expenses

Although nonprofits may have multiple expense categories, many expenses actually fall into one of three simple classifications. These include:

  1. Administration: Management and General Administration
  2. Programs: Any programs that support the organization’s mission
  3. Fundraising: The cost of raising funds

Your organization may call them by different names, but upon closer examination, the major expense categories should fit into these areas. Those expenses which can be identified as belonging to one of these three categories can be quickly allocated. Others, however, fall into more of a gray area which cannot be identified with a specific program or budgeting category.

Indirect Cost Allocation and Its Effects

Indirect cost allocation impacts many areas of your organization. It impacts how donors view your organization, for example, by changing the way in which expenses are laid out in your financials. High administrative fees may be unacceptable to some donors.

Indirect costs also impact the budget for programs. If costs seem to be weighing heavily towards one area, that area may get more or less budget for upcoming years.

The allocation also impacts the final percentages that appear on Form 990 for each tax year. These are the numbers that are listed publicly and can impact the public’s view of your organization. Think carefully about how you apportion indirect costs as their ramifications can be long-lasting.

Coming Up with an Indirect Cost Allocation Method

Determining a fair and equitable indirect cost allocation method is a good solution to the problem of items that do not have an easy ‘home’ in your budget line. By examining the methods you have on file to share expenses, you can plan and allocate accordingly.

One method by which you can allocate indirect costs is to estimate what percentage belongs in each major budget line. Let’s assume that an administrative assistant works for both the donor relations and the program area. Which budget should contain his salary? If the assistant supports three people in donor relations and one in programs, then 75% of his salary budget can be allocated to donor relations and 25% to program areas.

Obviously, not every allocation will be this clean and easy. Square footage is one area that can get tricky. For instance, if you rent office space shared by multiple program and departmental areas, determining the percent of costs to be borne by each department can get complicated if many departments share the space. Sometimes, you just have to give it your best guess.

Consistency Is Key

The big thing to remember about allocation is that consistency is the key to successful indirect allocation. Whatever method you choose, put it in writing and file it in accounting and financial documents, plans, and budgets so that it is common knowledge. Then, apply the rules fairly and consistently to the budgeting process. It is this consistency of application that auditors look for to determine if an indirect allocation method is acceptable.

Indirect allocation is a common challenge in the world of nonprofit financial management. Fortunately, it’s one with a solution that makes sense and that can be rolled out fairly easily throughout your organization.

 

 

What You Need to Know About Nonprofit Payroll Taxes

By | Accounting, Audit, CPA, MIP Fund Accounting, Nonprofit | No Comments

Keeping abreast of payroll taxes can be difficult, but nonprofit payroll taxes can be especially challenging. Some nonprofit organizations mistakenly think that obtaining the tax-exempt status exempts them from recording and paying all payroll taxes. The truth may be more nuanced and complicated than that, with variances according to worker status and more. Get the facts about nonprofit payroll taxes in order to maintain compliance with local, state, and federal law.

Need help setting up or processing payroll in your Abila MIP Fund Accounting™ system? Join us for our hands on training event, Payroll in MIP.”

Nonprofit Payroll Taxes: Tax Status

Tax exempt status is obtained by completing the appropriate forms and receiving notification from the IRS that it has been granted to a nonprofit organization. This is a federal tax exemption and not a blanket exemption from paying all taxes. That’s an important distinction.

You may be exempt from paying federal corporate income taxes, but your employees must still pay their payroll taxes. Social Security and Medicare taxes are also not exempt and are important contributions that must be made and recorded to remain compliant with the law.

FUTA Taxes

The IRS states that “Religious, educational, scientific, charitable and other organizations described in section 501(c)(3) and exempt from tax under section 501(a) are not subject to FUTA tax and do not have to file form 940.” You must receive and keep on file a designation from the IRS.

States, however, can have different rules from the federal ones, so you may be required to pay taxes on the state level. Check with your state taxation department or your accounting firm to determine state taxation requirements.

FICA Taxes

Like for-profit corporations, nonprofits are required to pay employment taxes on compensation to employees. There are a few exceptions to this which include:

  • Churches and some religious organizations can elect an exemption from FICA (Social Security and Medicare).
  • Ministers and other members of the clergy or religious organizations can exempt certain services from FICA taxes.
  • FICA compensation paid to students may be excluded.

 

Volunteer Compensation

By the nature of volunteer work, it is usually uncompensated time. However, many nonprofits give gifts to volunteers. Small gifts of appreciation such as an award plaque are usually untaxed, but major gifts such as gift cards, gift certificates and any gifts of significant value may be subject to taxes. Generally speaking, non-cash gift items with token value only or sentimental value aren’t taxed, but anything that can be construed as cash or the equivalent of, like a gift certificate, may be taxed.

Who Is In Charge?

Who is on the hook if mistakes are made on taxation? You may be surprised to learn that it is the Board of Directors. The Board has ultimate oversight on all financial matters, and that includes taxes paid. If mistakes are made, the responsibility lies with the Board.

Board members should be aware of this requirement and take precautions to ensure that all employment taxes are paid accordingly. Reviewing this information with your nonprofit’s accounting and financial management staff is vital to ensure compliance.

Although it may seem, by virtue of being a nonprofit organization, you should not have to pay any taxes, there are still some which might need to be paid. A bit of research now and prudent oversight from your Board can ensure that you are in good standing with federal and state taxation laws.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.

Financial Transparency

By | Accounting, Audit, Budget, FASB, Grant Management, MIP Fund Accounting, Nonprofit, Uncategorized | No Comments

According to the Merriam-Webster Dictionary, one of the definitions of “transparency” is “characterized by visibility or accessibility of information especially concerning business practices”.  Transparency in your financial statement means it should be user friendly, clear, easily understandable and everything should be properly disclosed.

Importance of transparent financial statements

  • Proactive transparency and communication are essential to organizational success. Stakeholder understanding and support  is a direct result of transparency and open communication.
  • A practice of continuous, transparent communication enables an organization to better respond to crises – such as physical disaster, fraud, or the sudden loss of a leader – and execute more robust crisis communication strategies.
  • Establishing a culture of transparency is critical for effective governance, constituent engagement, and responsive management.
  • Opening communication channels can help to establish meaningful and productive relationships with constituents. These relationships can have a significant impact on long-term performance.

Start with the Stakeholders

Know both internal stakeholders (board, committees, senior management, management team, staff, volunteer workers) and external stakeholders (customers, donors, funders, grantors, creditors, partners, government, public). It is imperative that you understand their needs and expectations. Information needs, communication methods, and information consumption patterns vary substantially from segment to segment. Meeting and exceeding the information needs for each of these groups is critical to delivering satisfaction. 

If that’s too overwhelming, start by identifying your top two to three stakeholders. Determine what they need/want and go from there.

Strategic messages with financial statements

Make the data you have today more understandable and relatable; enhance the story and improve disclosure. When we think about financial statements we think revenue inputs and expense outputs but we need to be thinking more about outcomes.

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.