Category

Accounting

Jun 14
0

2022 Updates to GAAP Standards

By | Accounting, FASB, Nonprofit, Uncategorized | No Comments

person using calculator at desk with spreadsheetsWe typically report on changes to GAAP standards as they arise. This year has been a particularly active one with numerous changes impacting leases, gifts in kind, reference rate reform, and costs associated with cloud computing. Below are the highlights; for specifics, see the linked information.

Topic 842: Lease Standards

FASB 842

Although the standard was presented six years ago, it must now be fully implemented for all entities reporting on a GAAP basis for calendar year 2022 and fiscal years ending in 2023. The accounting standards for lessors has not changed. However, there are several changes for lessees which must be included on the balance sheet.

Lessees’ commitments and rights can now be recognized on the balance sheet as a liability for the total payments made throughout the term of the lease. The “right to use” the asset can also be recognized as a liability on the balance sheet.

Lease classifications have also changed. Instead of operating and capital leases, they are now to be classified as operating or financing.

Topic 958: Gifts-In-Kind

Update 2020-07

Effective for all entities for calendar year 2022, reporting after June 15, 2021, there are changes to reporting gifts-in-kind (GIK). The standard to determine whether something is a gift hasn’t changed, but the reporting requirements have been updated.

You will need to disclose specific information for each category:

  • Your organization’s policy for gifts-in-kind.
  • Potential donor-imposed restrictions on GIK.
  • How you arrived at the value determination and fair market value.
  • Whether GIK was monetized or utilized.

For more information, please read: An Overview of Gifts—In-Kind

Reference Rate Reform

Topic 848

ASU 2020-04

LIBOR, or the London Inter-Bank Offer Rate, has been the norm since the 1980s as a reference rate for interest. Now, however, it is being retired as a point of reference. This change is effective March 2022 through December 2022 and impacts many loans, leases, and derivatives.

The current GAAP requirement is that entities analyze whether a change in interest rate for a loan is a debt modification or debt extinguishment. This is time-consuming and can be quite complicated. Refer to ASU 2020-04 for helpful tips to make the transition easier and smoother.

Cost Associated with Cloud Computing

ASU 2018-15 Subtopic 350-40

This change is effective for nonpublic entities for the calendar year 2021 and fiscal years ending in 2022. Entities may choose to apply it either prospectively or retrospectively.

Cloud computing software is used on a licensing arrangement. Either the license is a subscription or a license. Licenses are usually recorded as an intangible asset for the software license and a liability for remaining payments due. For subscription-based cloud software, it is expensed as incurred.

For more information on this topic, read: New FASB Cloud Computing Standard Reduces Complexity.

Need Help Navigating GAAP Changes?

If you’d like some assistance navigating these GAAP changes, we’re here to help. We can also assist you with choosing the right nonprofit software to make accounting, including following accepted best practices, and implementing changes to your general ledger and overall accounting software.

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.

Jun 02
0

Making Functional Expense Classifications for Nonprofits Useful for Public Trust

By | Accounting, FASB, Nonprofit | No Comments

Under FASB ASC 958, nonprofits are required to classify functional expenses by category. Most nonprofits choose to do this in one of three ways:

  1. As a separate statement of functional expenses
  2. As a schedule in the notes of their financial statement
  3. Within the statement of activities itself

All nonprofit organizations should classify functional expenses according to their nature and category. Doing so, and sharing the information publicly in the annual report, helps build public trust by making all expenses transparent and easy to understand.

The following tips will help you make your nonprofit’s functional expenses classifications useful for both your organization and for building trust with the public.

Four Tips for Functional Expense Classifications

  1. Use common sense when determining the number of natural categories.

Some nonprofits seem to believe that the more natural categories they include, the better. The opposite is true: less is more. Too many categories can confuse the public and give the appearance of wastefulness.

U.S. GAAP does not specify a particular quantity of expense categories that must be included in the report of functional expenses, so it’s truly up to your organization on how many you’d like to include. Given that the expenses are often depicted in a table or on one page, too many expense categories will be hard to read and understand. Choose a level of detail that paints an accurate picture of your organization’s activities.

  1. Let your program activities tell the story.

Carefully consider which programs to disclose separately. Best practices for nonprofit financial accounting and reporting suggest disaggregating the major classes of program services to meet functional expense reporting requirements. In this way, your program’s finances can tell the story of how and why expenses are incurred.

  1. Review how employee services are classified.

Some expenses such as human resources, accounting, and other internal employee-related services should be reported as general administration and management because these activities benefited the organization as a whole. However, some nonprofits dislike linking all service-related internal positions to this category; it tends to “bloat” the amount, increasing the percent of funds allocated to overhead, which the public may perceive as inefficiencies or “too much money” spent on management needs. Review your allocations and consider how much of a given employee’s time is truly spent working for the good of the whole organization or for a particular program. If it can be clearly argued that an accountant is fully dedicated to a program line funded by a grant, for example, then their salary may be apportioned to that fund rather than general admin. There are many gray areas, so take this as a general guideline, and be thorough in your review of all your expense categories.

  1. Examine your allocation methodology.

One of the reporting requirements is that the allocation methodology is disclosed in your financial statements. Ask yourself, “Would someone looking at this expense understand our rational? Does it sound reasonable?” Because all the information and the methodology are disclosed to the public, it must meet the litmus test of both “is it reasonable” and is it “understandable.”

Clear Communication Improves Public Trust

Functional expense allocation is often tricky, and organizations tend to err on either side—too much disclosure or too little. A review of your current expense allocation and methodology and updating it to match current needs may help the public better understand how funds are spent and how your nonprofit handles its finances.

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.

May 26
0

Should You Classify an Activity as an Advertisement or Sponsorship?

By | Accounting, Nonprofit | No Comments

The IRS often relies upon an accountant’s discretion when choosing how to classify income and expenses. One area that merits further attention is the distinction between advertisements and sponsorships. Are these classified as expenses, gifts, or neither?

The areas we will examine include IRS 513(c) Advertising and IRS 513(i) Qualified Sponsorship Payments, as well as Treasury Regulation 1.513-4 (Certain sponsorship not unrelated trade or business). Taking all three releases into consideration, accountants can develop clear, unambiguous guidelines for their organizations on how to classify activities.

Advertisements vs. Sponsorship: The Main Differences

Most people believe they know what an advertisement is—after all, we’re bombarded with ads from the moment we wake up and switch on the internet, radio, or television to the time we go to bed. But, when it comes to advertising and sponsorships, the distinction may not be as easily recognized.

The IRS, “Rev. Rul. 67-246 holds that where a transaction involving a payment is in the form of a purchase of an item of value (advertising), the presumption is that no gift has been made.”

Therefore, paid advertisements or sponsorships do not qualify as a gift.

The issue arose when corporations began giving substantial gifts to nonprofits. In one case shared on the IRS website, a corporation gave land to a nonprofit to build a historic village replica. Because the corporation donated the land and benefited significantly from the advertising placed around the village owned by the nonprofit, it was considered advertising for the corporation, rather than a sponsorship.

Other areas where the IRS has clearly defined advertising examples (rather than sponsorships) include:

  • When the payment amount is based on attendance or circulation figures—both are examples of advertising. Newspapers, magazines, websites, radio and television stations, for example, base their rates on the circulation or audience. Hence, any promotional space or airtime “given” by the corporation owning these media outlets is considered advertisement, not a sponsorship.
  • A payment which entitles the payor to the use or acknowledgement of its name or logo in printed material published by or on behalf of the exempt organization that is not related to a specific event conducted by the exempt organization; or
  • Payments made in connection with any qualified trade show activity. (IRC Sec. 513(d)(3)(B)).

In these examples, the revenue stream should be considered advertising income and taxed as unrelated business income.

One caveat: a simple acknowledgement of a corporation does not constitute advertising revenue. Putting a sponsor’s logo or URL in an event program, without any promotional text around it, is not advertising. Announcing the sponsoring company and urging event attendees to patronize that company is considered an advertisement. Think of it this way: a simple logo or URL is not advertisement, but anything added to it verbally or in writing extolling people to buy, visit, or take an action would be considered an advertisement. It’s a fine line, but one that’s clear once it’s understood in context.

Action Steps

If you’re concerned that some of your organization’s activities may be misclassified, sit down with your accounting team and review contracts, documents, and supporting materials. Use the rubric provided by the IRS to evaluate activities and, if necessary, revise their classification to ensure transparency, accuracy, and adherence to accounting best practices.

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.

May 19
0

Nonprofits Benefit by Automating Accounts Payable

By | Accounting, Accounting Software, Nonprofit | No Comments

The typical nonprofit accounts payable person spends their day processing invoices, reconciling them to the accounts, and ensuring the bills are paid on time. Manual processes are cumbersome and inefficient.

Areas of inefficiency include:

  1. Paper-intensive data entry process that relies on bills sent via the U.S. mail or electronically retrieved and printed.
  2. Manual data entry of bills into an accounting or spreadsheet program.
  3. Hand-writing checks, signing them, and placing them in an envelope to mail.
  4. Routing physical checks and invoice paperwork to managers for approval.
  5. Reconciling banking statements with accounting programs or spreadsheets.

Each of the five areas of inefficiency can be improved with software that streamlines and automates accounts payable. Such software also closes security gaps that may have occurred due to the pandemic when internal controls were lax given the uncertainty around in-person work. So, if another event occurs that forces the AP person to telecommute, they can still process invoices in a timely manner with a cloud-based system, that runs over the internet, and that can be accessed remotely,

Five Benefits of Automating Accounts Payable

There are many benefits nonprofits receive from automating accounts payable, but the following five are perhaps the most important.

  1. Improved Security

During the pandemic, when much uncertainty remained about who would be in the office on any given day, internal controls at many nonprofits were relaxed. Additionally, nonprofits who did not have cloud systems in place found themselves adding solutions to enable workers to telecommute.

Unfortunately, lax security both with internal controls and digital materials enabled criminals to take advantage of the situation. Nonprofits are always at a high risk of cybercrime since they generally lack a dedicated IT infrastructure to prevent or remediate against attacks.

An automated accounts payable system improves security in many ways. It eliminates time-consuming paper routing of approvals, automating invoice and payment approvals through email which cuts down on delay and potential fraud. It also helps secure the AP system itself against cyberattacks through the added security provided by cloud-based servers and software.

Paper checks can be mostly eliminated, making automatic bank transfer payments and e-checks a simpler, faster solution. These payment methods are also highly secure, ensuring that potential criminals cannot forge signatures on paper checks, for example, to steal funds.

  • Enhances forecasting accuracy

Manual AP processing makes forecasting extremely challenging since cash flow and recorded bank balances may not be entirely up to date. With automated AP processing, the balance shown in the system is accurate, and improves the ability to forecast cash flow, receivables, and payables. It takes some of the uncertainty out of forecasting, which is a huge help during these continuing uncertain times.

  • Transparency into the organization’s finances

With automated AP processing, anyone at your organization logging into the system can view the current state of their budget and payables. This adds a layer of transparency and accountability into the budgeting and payment system that may be more challenging to reach with manual AP processing.

  • Access to accurate data

Organizations that can access and use their financial data can make better decisions around budgeting and expenditures. With manual processes, this information can be difficult to access and utilize. With automated AP systems, reports can be generated quickly to help you utilize the valuable data found in the system.

  •  Easier audit process

The annual audit process is time-consuming enough. Manual accounting practices extend the timeline. Automating AP means faster access to information the auditing team needs, as well as easier access for them if they are auditing remotely (a new trend that arose during the pandemic).

Sage Intacct Automates AP Easily

To automate AP, you need the right software. Sage Intacct easily automates AP and other workflows with no IT support required. It makes working remotely easier, offers excellent security, and improves efficiency throughout the AP process.

With Sage Intaact, your organization can:

  • Add a robust cloud solution to automate AP without costly hardware or infrastructure support
  • Handle complicated fund accounting and grant management easily
  • Segregate, budget, and report on restricted grant funds
  • Comply with strict new audit processes
  • Automate workflows
  • Connect Sage Intacct to other systems to extend and enhance systems and share data

Watch a video demonstration or schedule a demo and consultation with Welter Consulting today. Visit Welter’s Sage Intacct information center for details.

With the right software, AP automation can bring your organization to a whole new level of efficiency. It’s faster, and software such as Sage Intaact makes the process of adding and using the system easier.

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.