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Accounting

Aug 18
0

Common Functional Expense Allocation Errors—and How You Can Avoid Them

By | Accounting, FASB, Nonprofit | No Comments

One of the most important questions potential donors ask themselves when reviewing nonprofit financials is how an organization uses it funds. Donors want to know that a nonprofit uses them wisely and puts most of its money towards its programs. An analysis of expenses by nature and function can tell a compelling story to potential donors and make it clear that your nonprofit is a responsible steward of its funds.

But there are several common functional expense allocation errors that occur among many nonprofits. Is your organization making these mistakes?

7 Functional Expense Allocation Mistakes

  1. No expense allocation methodology: Now that GAAP requires nonprofits to disclose the methods they use to allocate costs among programs and various support functions, it’s more important than ever to ensure that you have a reasonable allocation method. It’s assumed that nonprofits will each choose their own allocation method. What’s important is that the method makes sense (is considered “reasonable”) and that it is applied consistently. Lack of a documented expense allocation methodology is a common mistake that is easily rectified.
  2. Incorrectly classifying management and general expenses: GAAP rules (FASB ASC 720-958-45-7) stipulate that various expenses should be allocated to management and general expenses. This includes payroll, human resources, and accounting costs. In years past, nonprofits had more leeway to allocate these expenses. If your organization hasn’t updated its allocation guidelines, now’s the time to fix this common mistake.
  3. Allocating too few costs to programs: Another common error is not allocating enough costs to actual programs. An example is an accounting professional whose salary expense is allocated to management, but they provide 100% of support to a particular program. In that case, their costs should be allocated to the program instead of to the overall payroll budget.
  4. Not considering joint costs: If an activity supports multiple purposes, consider allocating it as a joint cost. FASB ASC Subtopic 958-720, Not-for-Profit Entities-Other Expenses describes the reporting requirements. Creating a systematic and reasonable basis for allocating joint costs and applying it consistently helps rectify this error. Consider and choose from among several allocation methods, too, such as the physical-units method, the relative-direct-costs method, and standalone method.
  5. Providing the appropriate level of detail: It can be challenging to provide the appropriate level of detail for the natural component of expenses in the functional expense analysis. To find the best level of detail, consider the needs of your audience. What do they want and need to know? Find a happy medium between disclosing too much and too little information.
  6. Not allocating fundraising expenses: Check that the salaries allocated to fundraising expenses are reasonable. Many organizations fail to allocate fundraising expenses appropriately. Ask yourself if the amount you are currently allocating is reasonable. You may need to make some adjustments.
  7. Misclassifying investment-related activity: Under current GAAP requirements, direct internal and external investment related expenses should be netted on the statement of activities with the investment return. Based on the new presentation requirements, such expenses should be omitted from the functional expense analysis.

Professional Judgment Is Vital

Nonprofit accounting professionals must use their judgment when considering functional expense allocation. Knowing the common errors and keeping them in mind when reviewing your organization’s financials can help you make prudent decisions that are in the best interests of your nonprofit.

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.

Aug 04
0

Gifts in Kind: Upcoming Changes to Presentation

By | Accounting, Nonprofit | No Comments

Philosophers tell us the only thing constant in the universe is change. When it comes to accounting rules, that seems to be the norm as well. The past year we had a little break from the constant stream of changes coming from FASB, but a new change to the presentation of gifts in kind is on the horizon. Here’s what nonprofits need to know about ASU 2020-07, changes to the presentation of gifts in kind.

What Are “Gifts in Kind”?

The term “gifts in kind” may refer to fixed assets or intangible assets. Examples of gifts in kind that are included in the updated accounting rules include fixed assets such as land, buildings, and equipment. It also includes the use of fixed assets, so if a donor allows you the use of a building, for example, that must be included as well.

Other donations must be included: utilities, food, clothing, medicines, and medical supplies. Lastly, intangible assets such as contributed services are also categorized as gifts in kind and should be described as such in your accounting documents.

5 Required Disclosures

Under the revised ASU 202-07, nonprofits are now required to disclose five things related to each item included as a gift in kind.

  1. Qualitative information
  2. Nonprofit policies
  3. Donor restrictions
  4. Valuation technique
  5. Principal market

Let’s unpack each one.

Under qualitative information, nonprofits are asked to disclose whether the asset was sold or utilized. If the asset was used by the nonprofit for its work, the disclosure should include information about which project the asset was used for and how it was used.

Nonprofit policies refer to the organization’s written policy regarding gifts in kind. Some organizations have written policies about how gifts in kind are monetized. For example, are assets sold at auction or sold in a charity shop? How are they valued? Such policies should be included as part of the description.

Donor restrictions include any conditions that donors place upon how the asset is used or disposed of; for example, if the donor restricts an item to use by the nonprofit rather than allowing it to be monetized.

Valuation techniques are described in FASB ASC Topic 820, Fair Value Measurement. The technique used to value items at initial recognition should be described and recorded.

Principal market (or most advantageous market) used to arrive at a fair value measure if it is a market in which the recipient not-for-profit is prohibited by a donor-imposed restriction from selling or using the contributed nonfinancial assets.

Reporting Changes to Gifts in Kind Are Retroactive

FASB has stated that these reporting changes should be applied retroactively, so nonprofits should begin immediately to assess gifts in kind and how they are reported. The amendments take effect for annual reporting periods beginning after June 15, 2021 (for example, fiscal years ending June 30, 2022, and December 31, 2022). And, if you’re so inclined, you may report early—FASB is allowing early adoption of the updated reporting standard.

Everything changes, and that includes FASB standards. If your organization accepts gifts in kind, now is the time to act on these updates.

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.

Jul 22
0

The Data Analytics Chain: A Primer for Accounting Professionals

By | Accounting, Data | No Comments

Accounting professionals are used to working with data. After all, they work with numbers all the time. And aren’t numbers just a form of data?

Numbers are indeed a form of data, but there’s much more to data and analytics than working with standard reports. Data has come a long way from the manual data collection and use that some may remember from years ago. Now the question becomes which data to collect, rather than if it can be collected.

The Data Analytics Process

The data analytics process is a loosely connected series of steps that collects, prepares, organizes, reports, and offers for analysis important data from your company. This data may take many forms. It may include financial data, but it may also include warehouse reports, time to completion, and other quantifiable facts.

Sources of data today abound in the workplace. Many companies utilize enterprise resource planning, or ERP systems, which are finance and accounting systems that gather data from various points through a company.

The data analytics process takes into account every step of the process from finding to utilizing data.

  1. Data Collection

The first step, data collection, may already be taking place within your organization. As an accountant or financial professional, your input into data collection is invaluable. You can identify valuable data within the organization or among its suppliers and vendors that should be tracked.

Take time to work with your team to identify and list all potential sources of data that would be useful to your data analytics process. This activity should also include “dark data.” Dark data is data your business has access to but may not know how to extract it from its source. Sources include competitor websites, government and state websites and data reports, PDFs, and similar public documents. Web scraper or technology that can extract data from such sources can add to your repository of data.

  1. Data Preparation

Data preparation includes profiling, cleaning, and correcting the data before it is used. You’re probably familiar with profiling and cleaning data. It’s not unusual for accountants to work with data files in this manner. What is unusual is the size of the newer data files. They are often too large to work with manually and instead must rely on automated processes to identify data duplicates or discrepancies and clean the files.

  1. Build Information Models

The information model is critical for the analysis phase. The model provides the details of the data to be stored in the data warehouse. If the information model is incomplete or inaccurate, it can lead to significant challenges and mistakes later on during the analysis phase.

This is the time to build and review information models with your team. Go through what-if scenarios to ensure the information you’ve collected is enough to fulfill needed situation analysis. If not, return to earlier steps to define and collect the appropriate data.

  1. Analytics

In the analytics phase, insights are developed and shared with key stakeholders. Many companies find that business intelligence tools, aligned and integrated with enterprise resource planning systems, enable the analytic phase to be completed quickly and easily. Business intelligence software prepares visual representations of data that, depending on the type of report and the data fields chosen for the report, may be more easily understood than pure data alone. Bar graphs, pie charts, scatterplots, and similar diagrams are examples of business intelligence reports that transform data into more easily understandable graphics.

Challenges and Opportunities

There are many challenges and opportunities available in the data analytics process. Being aware of various challenges in each step of the analysis process can help you avoid or overcome them.

Data has always provided accountants with powerful information. Now, more than ever, with access to so many software tools to gather and utilize data, accountants can provide useful and valuable insights to benefit others.

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.

Apr 20
0

Critical Issues Facing Nonprofit Boards

By | Accounting, Nonprofit | No Comments

Nonprofit boards have duties of care, loyalty, and obedience (or trust) to their organizations. How these duties are carried out may depend upon the organization and the work that the board completes, but it almost always spans important areas such as compliance and governance. The following critical issues facing nonprofit boards are sometimes overlooked in the wake of the COVID pandemic, but all are important to the long-term success of an organization.

Tax, Accounting, and Financial Compliance Issues

Even though nonprofits may have tax-exempt status, tax issues are still something that nonprofit boards must be knowledgeable about in order to manage effectively. Boards must be aware of:

  1. Unrelated business income tax: This is a tax imposed on a nonprofit that is not related to the nonprofit’s primary revenue-generating purpose. Boards must be aware of these activities and ensure that positions are well-documented.
  2. Worker classification: A critical compliance issue for nonprofits is the proper designation between employees and independent contractors. Under-counting employees by hiring (and treating) independent contractors as if they were employees can be a significant issue for nonprofits.
  3. Executive compensation: Executive compensation remains a hot-button issue for the public, and one that should be kept in mind by nonprofit boards as they review salary and compensation packages for executives.
  4. Financial reporting: boards are responsible for understanding the organization’s mission and ensuring that the organization’s funds are used appropriately. This means that, at a high level, funds are used to support the organization’s mission. Members must take the time to review financial information and understand the financial ramifications of major decisions.
  5. Clear documentation: Lastly, boards must note anywhere that audited financial statements are shared such as GuideStar and Charity Navigator. They should take care to add any financial disclosures or additional information that may be needed and to alert auditors of any known issues or needs pertaining to financial disclosures.
  6. Revenue recognition: FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, effective in 2018, should be reviewed by boards and understood to ensure consistent and careful compliance.

Nonprofit Governance Issues

Boards also must exercise a duty of care for governance issues. Some issues that may occur include:

  1. Conflicts of interest: Both perceived and actual conflicts of interest should be taken seriously and addressed. Perceived conflicts of interest can be just as harmful as actual ones, and may tarnish a nonprofit’s reputation and goodwill with the public.
  2. Form 990: IRS Form 990 poses good questions that the board members should consider when thinking about governance issues. It’s a useful document to help the board remember important governance issues.
  3. Strategy: Nonprofit boards are key drivers of organizational strategy. It is incumbent upon the board to work with chief executives to develop and drive the strategy and messaging for the organization. To do so ensures continuity of mission and message and helps position an organization effectively.

How Healthy Is Your Board?

Having a seat on a nonprofit board is an honor, but it is also a lot of hard work. Understanding the nonprofit environment, basic accounting and financial information, ensuring the bylaws and rules regarding the nonprofit’s operations and management are followed, and working with key staff members to position the organization for strong and steady growth is the equivalent of a full-time job.

But for board members who believe in the organization’s mission, it is a labor of love. How does your nonprofit board measure up?

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.