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Financial Reporting Reminders for Nonprofits During the COVID-19 Pandemic

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Companies worldwide continue to feel the ripple effects of the novel coronavirus (COVID-19) outbreak. For-profits such as retailers closed their doors due to statewide “stay at home” orders that keep shoppers from the malls and stores. Nonprofits such as food banks feel increased demands on their services while others face unprecedented challenges to keep their doors open. Everywhere, everything we once knew as certainty is changing, and changing rapidly, with no end date in sight.

In addition to the legal and insurance impacts of the COVID-19 pandemic are the economic, financial, and accounting ramifications of the stay-at-home order. Several FASB guidelines can be applied to the current situation and used to inform investors, donors, and the public about the impacts upon a nonprofit’s financial reporting statements.

FASB Accounting Standards Codification (FASB ASC) 855: Subsequent Events

FASB Accounting Standards Codification (FASB ASC) 855, Subsequent Events, defines the topic as “events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.” There are two types of Subsequent Events: recognized and nonrecognized. COVID-19 likely falls into the nonrecognized category, which is defined as “events that provide evidence about conditions that did not exist at the date of the balance sheet but arose subsequent to that date (that is, nonrecognized subsequent events). If the balance sheet was prepared before March 1, 2020, when COVID-19 first came to attention in the United States, it is likely a nonrecognized event.

FASB ASC 855 provides more details.

Organizations should reassess now when and if they will be able to meet the objectives outlined in their 2019 reports or the previous quarter’s reports. Many nonprofits face unprecedented changes, shifts, and disruptions; plans that sounded reasonable a few weeks ago might be unreasonable now.

How you disclose such changes are up to you, but some are including disclosures in their updated reports. Nonprofits must watch their portfolios, including equity stakes in bonds and other investments, and determine if they should disclose how the pandemic is affecting them.

Accounting Estimates May Be Off

Just as plans that looked reasonable a few weeks ago might be unattainable now, so too accounting estimates may be very far off.  Nonprofit accounts must make prudent judgments now about the accounting estimates. AU-C 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, can be of help when making decisions about estimates.

Loss Contingencies

If information becomes available after the date of financial reporting (but before they are issued) about losses due to COVID-19 that an asset is impaired or is likely to be impaired, you may need to disclose it. If the event occurred before the balance sheet date, an accrual should not be made. Disclosure, however, might be required. See FASB ASC 450-20-50-9 for disclosure details. Most disclosures should include the nature of the contingency and an estimate of the possible losses.

What About Leases?

Many landlords are changing the terms of leases to help their tenants during the COVID-19 crisis. If you’re fortunate to have such a landlord, you may need to determine if the modifications change the lease classification.  In other words, according to FASB ASC 840, Leases, specifically 840-10-35-4, if the substitution of the modified provision changes the lease and pushes it into a new category.

Where the new lease standard (FASB ASC 842, Leases) has been adopted, when a lease modification occurs, the lessee has to determine whether the lease modification will be accounted for as a separate contract or as a change to the existing agreement. There’s no one best way; each organization must choose its path based on its current financial information.

Auditor’s Reports: Emphasis of Matter (EOM)

Some auditors may choose to include an Emphasis of Matter (EOM) statement in their reports if they deem the impact of COVID-19 significant enough to warrant bringing it to the reader’s attention. Each auditor must use prudent professional judgment to determine whether adding an EOM statement is necessary.

COVID-19 is exacting an enormous toll on the world. The loss of life is irreplaceable—the shock to the economy, unforeseen. Nonprofits, like all companies facing this unique situation, must use their best judgment during the preparation and reporting of financial statements to remain compliant with GAAP standards.

If you need any assistance during these times, Welter Consulting is here for you. We can be reached by phone (206-605-3113) or online.

 

 

 

Legal and Insurance Challenges for Nonprofits During the COVID-19 Crisis

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During these unprecedented times, with most of the nation avoiding gatherings and crowds and staying home to prevent spreading the novel coronavirus (COVID-19), nonprofits face increasing challenges. Among these challenges are the legal and insurance ramifications of shutting down offices, providing resources for those directly affected by the virus, and ensuring that your volunteers and employees are covered as much as possible when resources are strained.

Nonprofit Leaders Must Rise to the Challenge

Nonprofit leaders must rise to these challenges and lead by example. Remain hopeful, positive, and cautiously optimistic without promising anything. No one can predict, for example, when the restrictions on gatherings will be removed; for now, we must live one day at a time, dealing with what is before us.

Accounting and Financial Issues to Consider Accruals &/or Notes in F/S

Right now, with so many families facing the loss of income created by businesses shuttering and events canceled, donations are likely to slow to a trickle. Consider what your organization may need to accrue or disclose concerning losses/additional expenses or expectations about future revenue streams.

  • Stay on top of employee vacation time as well as sick day accrual (or PTO balance if combined). You’ll need to track these hours/days carefully to know what employees can and cannot use. Sick days may need to be used in a short period if someone becomes ill with COVID-19. Prepare for lengthy absences in the event staff come down with the virus or must quarantine due to contact with someone who has the virus.  Make sure your financial statements to management, board, funders, monitors and auditors reflect the correct liability for this instead of waiting until the end of the fiscal year, as you may have to pay this out sooner rather than later.
  • The Family Medical Leave Act (FMLA) may provide relief for some employees as additional paid time off after they run out of vacation and sick time (PTO). According to Time Magazine, an expanded Family and Medical Leave Act passed allowing for government employees with less than 500 employees who have worked for these companies for at least 30 days an additional 10 weeks of emergency paid leave to care for children whose schools or daycare facilities were closed.
  • A new congressional law passed yesterday for additional paid leave for employers/employees affected by COVID-19 for companies with fewer than 500 employees. This law will grant employees up to 14 days of sick leave at a normal pay rate to either quarantine or to seek a COVID-19 diagnosis or preventive care for themselves. If an employee is caring for a family member that has to quarantine, seek diagnosis or preventative care for COVID-19 the employee will be granted up to 14 days of paid leave after taking 10 days of unpaid leave, at no less than two-thirds of their normal pay rate (up to $200 per day, and $10,000 in total).
    • Full-time employees will be entitled to 80 hours of paid sick time. Part-time employees will be entitled to the number of hours they normally work in a two-week period.
    • Health care workers, first responders, quarantined workers, or those who were caring for afflicted family members, will not be Employers with less than 50 employees or more than 500 employees are also excluded.
    • Companies will have to front the costs for paid sick leave wages provided to employees who must quarantine because they are sick with COVID-19 or are trying to obtain a diagnosis; companies will be reimbursed up to $511 per employee per day. For paid sick leave wages provided to employees caring for loved ones, employers will be reimbursed up to $200 per worker per day. Self-employed individuals are also eligible for the reimbursable tax credits for their lost wages effected by COVID-19.
    • Make sure to track this leave as a separate item so you can easily provide documentation to the government on hours/amounts paid to each employee to later claim reimbursement for both unpaid and paid leave related to COVID-19. Financial disclosures and accrual of these amounts should be considered before issuing financial statements to any of your stakeholders.

Consider Your Volunteers & Vendors

Do volunteers sign a waiver or an agreement noting that they aren’t due any compensation? Do they acknowledge they aren’t employees and therefore aren’t due for worker’s compensation or other insurance? Take steps to protect your organization against inappropriate claims. Most volunteers are treated differently than employees, but not always. It’s essential to know the distinction and what, if any, legal protections your organization has put into place to avoid excess workers comp claims.

If you use contractors to perform work at your organization, identify if you have a contract with that vendor and what is stated in the contract.  If you have guaranteed a certain # of hours or pay to a certain contractor during this time, you may be responsible for making payments to that vendor even if they are unable to perform the work (i.e.: customer facing).  Talk to this vendor ahead of time about any contracts that state a certain # of hours or dollars are guaranteed to them to determine if you can find a solution that works for both parties.

Should You Shut Down or Find Alternative Ways to Work?

If your local or state government urges everyone to remain at home, you may need to shut down or find alternative ways for employees to continue working. Some may still need to go into work, especially if your organization provides an essential service. For example, a community food pantry may be needed more than ever to keep its doors open. You’ll need to weigh all of the risks involved, talk to your insurance companies and legal counsel, and determine for yourself the risks of keeping your doors open.

Determine now who is essential (must come to the physical office location) and who may telecommute. As long as you do not show any implicit or explicit bias in the decision of who can work from home and who cannot, your organization should be fine with the legal ramifications.

Establish communication channels with everyone so that they understand your organization intends to keep them employed. Phone or message everyone; check in frequently. People are unnerved by the changes to their lives, and having a personal connection with their employer can go a long way to calming their nerves.

  • What if you need to reduce staff? Some organizations may be faced with this unpleasant but necessary choice. Hourly workers can receive FMLA paid or unpaid leave, or you can reduce their hours, so they continue to have some income. If you decide to reduce hours for your employees and they do the same tasks as another employee, then look into the possibility of using job share in your state (compensation for hours worked by your org and partial unemployment compensation for hours not worked which are shared with another employee from the state).
  • What if My Employees Work with the Public? OSHA requires that employers provide a safe workplace for their employees. That’s difficult to do now with a virus at large. If you do need employees to come to work, and they must work with the public, take extra measures to ensure their safety. Provide protective gear, disinfectant, and requirements for social distancing.

Cancelling, Rescheduling or Moving Events Online Due to Coronavirus

When the government asked everyone to eliminate events or gatherings of 10 or more people to limit exposure to COVID-19, it put many organizations into a quandary. Many nonprofits host conferences and events that attract hundreds, if not thousands of people. Some host public events to share information and engage the community in their cause. All of this must come to a halt now for the greater good.

But your organization may be left holding contracts with multiple vendors: hotels, caterers, exhibit venues, and more. What are your rights and responsibilities?

  • If you must cancel events, make calls to the vendors providing event services. Many organizations have been surprised by their generosity. Some are offering a full refund, while others are issuing vouchers for services to cover future events. A few are waiving fees, penalties, and payments until the crisis is over. All these gestures can offset financial worries for nonprofits. If a vendor is unwilling to work with you, then read through that contract to understand what rights and responsibilities you have to that vendor. You may need to consult with an attorney to understand all the nuances of the contract.
  • If you have event insurance, understand what is covered under that policy. Event insurance used to be the go-to for nonprofits who worried about cancellations. For example, hosting a conference in the northeast during the winter offered cheaper airfare and hotel fees, but unexpected snowstorms might derail the event. Event insurance was used to cover losses in the event an act of nature forced the event to be canceled. Some insurers have stopped offering event insurance altogether due to obvious reasons. If you have it, and it covers events canceled due to COVID-19, you can take advantage of it to cover your losses. If not, do not rely upon coverage to plan events. Postpone them until the crisis is over.
  • Move events online! Most content from speakers, program participants and event sessions can lend themselves to virtual events. Consider the pros, cons, and costs of moving the event online. For many, there may be significant benefits to offering one speaker per week virtually instead of the ten scheduled for an in-person all-day event. You can leverage the weekly teleseminar and send emails to constituents and participants to remind them to attend, use the transcripts for future marketing and communications, and remain in contact with everyone using virtual technology.

Nonprofit Insurance and What It Might Cover

Now is a great time to call your insurance company and discuss what your policies cover and what they do not. The overview below offers a big picture look, but your specific policy may differ, so it’s always best to speak directly with your insurance agent regarding coverage.

The typical nonprofit organization holds several insurance policies. These may include:

Workers Compensation
Washington state plans to have coverage for unemployment. Keep an eye on state-specific news to see how this shapes up. Workers Compensation policies and Negligence claims right now are an unknown. If people are forced to work with the public, can they sue your organization if it didn’t take “correct” measures to prevent contact that leads to COVID-19? No one knows the answer to this right now.

Unemployment Insurance
Washington state has decided to allow temporary loss of employment for individuals due to COVID-19 to be covered under unemployment during the time they are not able to work at your organization.  Job Share is another option if you are cutting hours for your employees during this time as well; unemployment insurance will pick up the unemployment amounts related to the lost hours if sharing a job with a similar employee at the organization.

Property and Business Insurance
Among these three types of insurance, many are looking at their Property policy and thinking, “Ah, business interruption – that must cover us!” But it doesn’t. Business interruption insurance typically covers situations such as fire or flood that involve physical damage to the property itself. It doesn’t cover forced closures due to epidemics.

Umbrella Policies
An umbrella policy is often used as a gap or “umbrella” sheltering anything and everything in between various insurance policies. Again, it may or may not cover some elements of the current situation, so check with your carrier.

The bad news is that infectious diseases aren’t covered by any insurance (except health insurance for the individual). The size and scope of the COVID-19 epidemic are unprecedented in modern times. The last time the nation deal with massive upheavals due to a virus was the 1918 Spanish Flu pandemic, but that was during a time when even large companies had relatively little insurance compared with today’s businesses. Nonprofits are navigating uncharted waters.

Now is the time to talk to your insurance company about future policies too. We’re all learning from this event that even with the most thoughtful coverage, not every situation can be accounted for nor every event covered. COVID-19 forces us all to consider alternatives to business as usual.

Who would have thought a virus would spark such changes?

If you need any guidance or assistance during these times, Welter Consulting is here for you. We can be reached by phone (206-605-3113) or through our website.

Leading During Crisis: The Nonprofit Response to the COVID-19 Outbreak

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The Nonprofit Association of Oregon sent an email out today to all members announcing they would cease in-person activities to comply with government and health authorities’ requests for social distancing in an effort to halt the spread of coronavirus, also known as COVID-19.

Their email listed several key points for nonprofit leaders to keep in mind during this time of crisis. With Washington state at the epicenter of the United States’ epidemic, and many nonprofits struggling to meet the growing demand for their services, it is imperative that nonprofits leaders lead by example, helping rather than hindering the efforts of our state and national leaders to combat the disease.

The following 9 tips for leaders can help you lead by example during this crisis.

Some of these points are inspired by Marian Saltzman’s article in Forbes and others are derived from our own experience.

Tips for Leading a Nonprofit During a Crisis

  1. Pain is unavoidable: Furloughs, pay cuts – consider what may happen. You may not be able to soften the blow, but you can deal compassionately with others when addressing these issues with your team.
  2. Allow working from home: Even if your company doesn’t currently allow employees to work from home, many in accounting, finance and marketing may be able to telework.
  3. Avoid spreading rumors: Encourage staff to utilize authoritative resources such as the CDC’s website on COVID-19 for updates. Remind your social media team and anyone who works with the public to refrain from commenting on the topic.
  4. Designate a crisis communication person. The director or public relations spokesperson should be coached on what to say and how to say it during this event. Avoid speculation.
  5. Speak positively but cautiously: No one knows when this crisis will end. It could be weeks or months before activities return to pre-COVID-19 normal. Remain positive and encouraging but refrain from giving false hope to people.
  6. Foster connections: Social distancing means everyone remains at home, but this also means we lose our connections to one another. It’s up to you as the leader of your organization to foster connections. Call employees and check in on them. Set up Slack, Skype or other instant messenger channels and use Zoom or another video conferencing system to keep everyone connected. Make sure that even if people are working from their homes, they still feel like they are still part of a team.
  7. Remain skeptical: During times of crisis, the mind responds to every perceived sign of danger, making some people prone to believing rumors and panicking at false information. Stay vigilant for this type of behavior. Remind everyone to remain skeptical of news sources especially social media, which adds fuel to the fire when well-intentioned people spread what they think is helpful information.
  8. Remember volunteers: Volunteers may feel disconnected during this time if they’re sent home abruptly. Check in with them too, and set up volunteer channels on instant messenger. You may not use them as frequently as you use the employee channels, but it’s a good way to remain in touch with everyone.
  9. Provide resources to stay healthy: For those nonprofits who absolutely cannot shut down entirely, provide support and assistance to those who must work. Put hand soap, hand sanitizers, and disposable paper towels near every sink. Sanitize hard surfaces with a bleach-based cleaner or another disinfectant recommended by the CDC. Ask employees to work six feet apart or more, the recommended distance for social distancing from the CDC. Bear in mind that if you work with the public, additional measures might need to be in place to protect the health and well-being of employees. Contact your local health authority or visit their website for specific guidance.

And, by all means, stay at home aside from necessary trips to the grocery store, gas station, or pharmacy.  Although you may not be among those at high risk for COVID-19, everyone is a risk of becoming a carrier and infecting others. We must unite during this time of national turmoil.

“We must hang together,” to quote Benjamin Franklin, or “we will assuredly hang separately.”

Welter Consulting can be reached by phone (206-605-3113) or through our website.

Alleviate Nonprofit System Scrutiny with True Fund Accounting

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A recent article in the NonProfit Times states that nonprofit hospitals that figure out how to absorb Medicare payments may do better than others. Hospitals have been under the microscope in the past year as more information has been uncovered surrounding their billing practices. With a greater push towards transparency in pricing, hospitals face greater scrutiny around their billing practices.

Yet charitable hospitals face the same pressures that for-profit hospitals face. The Affordable Care Act, for instance, requires nonprofit hospitals to assess the needs of their communities once every three years and to offer financial assistance to patients who need help paying their bills. Given that costs continue to rise along with demand for service, that’s a tall order.

Senator Chuck Grassley (R – IA), chairman of the Senate Finance Committee, has asked the Internal Revenue Service to monitor whether nonprofit hospitals are indeed meeting their charitable obligations. He has also stated he intends to launch a probe into the situation to ensure that hospitals who qualify as nonprofits are indeed acting as such.

You may wonder how this affects your nonprofit organization. You may run an educational nonprofit, or an arts foundation, not a hospital. Why would anyone scrutinize your accounts and activities?

The time may be coming when all nonprofits face additional scrutiny. Greater access to information has alerted the public that nonprofits must fulfill their missions with the margin that they make. The public wants to know that their donations to charitable organizations goes towards their mission, not a mansion for the CEO or a Board member.

True fund accounting can help alleviate this level of scrutiny on your organization. Download our free white paper on the 10 Reasons Why Nonprofits Need True Fund Accounting Instead of a Commercial Accounting System here to better understand this topic.

What Is True Fund Accounting?

True fund accounting is software purpose-built for nonprofit organizations. Unlike typical “off the shelf” small business accounting software, true fund accounting software takes into account the unique blend of funding sources fueling most nonprofits.

While a for-profit company may also have multiple funding sources, they generally do not have the complexities of tracking funding back to its source at the level of detail required of most nonprofits. For example, a shoe retailer may account for revenue from its retail store chains and from its e-commerce site.

A nonprofit organization may have dozens of revenue sources, each with its own requirements. For example, an education nonprofit that is affiliated with a university may have several funding sources, each with different stipulations on how the funds may be spent. Grant funds from a large, private donor may be earmarked for particular programs while money from product sales may be spent on any and all operating costs.

This level of complexity is quite common among nonprofits and one reason why typical small business accounting packages and spreadsheets don’t work well for nonprofit accounting. True fund accounting takes into consideration the many variables at a nonprofit and the different ways that money may be tracked, spent, carried over, and more. The Chart of Accounts for a nonprofit may require multiple dimensions to fully understand it, and only true fund accounting accommodates this level of complexity. Typical accounting software cannot provide the appropriate level of detail most nonprofits need.

True Fund Accounting Helps Avoid the Spotlight

Senator Grassley mentioned scrutinizing hospital spending to ensure they aren’t dodging their mission as nonprofits – to provide healthcare to the vulnerable.

By using a true fund accounting program to track how the nonprofit hospital manages its payments and services, the hospital could publish its results and allow public scrutiny on its documentation. The Senator might find that the multi-dimensional approach to the chart of accounts provides the level of detail needed to allay fears that the hospital isn’t fulfilling its mission. It could document the facts it needs to placate the senators investigating its activities and assure the public that its charitable status remains intact.

No one likes the IRS knocking at their door. With increasing demand for transparency in hospital pricing and other nonprofit organizations, it’s time to pre-empt any arguments about financials by using true fund accounting. Find out more about true fund accounting systems from Welter Consulting.

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.