Understanding the Discount Rate: FASB Lease Accounting Standard

By | FASB, Nonprofit | No Comments
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In November 2021, the FASB board rejected an extension request for the effective date of the new lease accounting standards. That means that the time is now imminent for nonprofits to adopt these requirements.

Your organization’s discount rate is an important item to both understand and determine as you begin the implementation of Accounting Standards Update No. 2016-02 (Topic 842). The discount rate impacts both lease classification and liability.

Importance of the Discount Rate

To determine lease liability, the discount rate is applied to all future lease payments. This is needed to calculate the present value of lease payments. Because a right-of-use asset is based on lease liability, the discount rate will impact the initial value of a right of use asset.

Determining Lease Classification

There are two lease classifications:

  • Finance lease
  • Operating lease

To determine the classification of a lease, consider whether the present value of lease payments is equal to or almost all of the fair value of the asset.

Now you can see how the discount rate can impact the income statement and the balance sheet. It depends on how you determined the lease classification.

Determining Discount Rate

For lessees, the discount rate is the rate stated in the lease. If the rate cannot be readily determined, you can use either the incremental borrowing rate or the risk-free rate.

What if a lease needs to be remeasured? Then a new discount rate is established at remeasurement.

You Can Elect the Risk-Free Rate

To make things easier, entities that are not public may make an accounting policy election to adopt a risk-free discount rate as their discount rate instead of the incremental borrowing rate. This rate should be applied using a term comparable to the lease term based on the earliest date the lease is presented in the financial statements.

However, if the rate is readily determinable from the lease agreement, that rate should be used instead of the risk-free rate. The risk-free rate can only be used when the rate implicit in the lease is not readily determinable. You can find risk-free rates on the Treasury website.

The bottom line: the rate to be used must be the one that best reflects the accuracy of the transaction and be easily determined. Nonprofits should create various financial what-if scenarios to see how each discount rate affects their income statement and balance sheet. Then choose the one that makes the most sense from both an accuracy and transparency situation as well as what makes the most sense for their financial needs.

Welter Consulting can assist you with this determination and other questions—contact us for an appointment.

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.

Improving Communications with Data and Trend Analysis

By | Accounting, Data, Donations, Nonprofit | No Comments
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Charts, graphs, and financial reports may seem like they don’t say much to those outside of the accounting and finance department. But with the right data and trend analysis, the information contained in these reports can inform and improve constituent communications.

The Tip of the Iceberg

It’s an old cliché, but a good one—the tip of the iceberg. If you imagine an iceberg, you can only see the tip of it. The majority of the iceberg is underwater but it’s probably the more important part.

The same goes for your organization. The data that you can easily find is the “tip of the iceberg” and readily available. And it’s usually what your team uses to base their decisions.

However, what’s going on underneath the surface is often the more valuable information. Getting to it is the challenging part.

How Nonprofits Can Leverage Data

Many organizations only dig at the surface level into their data. They run basic financial reports to gauge how fiscally solvent an organization is, or which programs require more funding and leave it at that. But the data that can be used to assess funding can also be used to dig deeper into issues such as program demand, program use, and more.

Each nonprofit is unique and tracks different data. But, in general, nonprofits can mine their data to find information to help them improve programs, improve donor communications, and ensure transparency.

Look beyond your existing technology for additional data. Although your current accounting system may provide plenty of data, other data exists. If your nonprofit sells items, look at warehouse and inventory reports. If programs provide participation and survey data, add that to the data repository for examination. Consider many sources to leverage all of your data and build a stronger, better organization.

Improve Programs

Nonprofits that track program participation can look more closely at program data to update their offerings. Programs that receive higher participation, for example, should be examined to determine if they can be spun into additional opportunities. For example, an animal shelter offering a spay/neuter clinic may find that a free rabies vaccination clinic is also in high demand and brings people into the shelter to view (and potentially adopt) homeless pets. An education nonprofit that finds its free mathematics tutoring program for elementary school children in high demand may wish to expand into the high schools and so on.

Better Donor Communications

The same data that reports on your program activities can also be leveraged to improve donor communications. Program participation and success data can be parlayed into donation campaigns demonstrating the efficacy of your offerings. People like to give to successful initiatives as it makes them feel that their donation is worthwhile, so demonstrating how successful the programs are can go a long way towards encouraging additional donations.

Enhanced Visibility

Successful nonprofits know that increasing visibility into their activities and finances is an excellent way to court donors and participants. The more transparency and visibility into their actions, the greater the trust they engender with the public, which in turns leads to better utilization of their programs and increased donations. Sharing the data from your systems and using it to for storytelling purposes can take your nonprofit to new levels.

Increasing Nonprofit Success in a Tough Economic Climate

Inflation and global unrest have created a climate of uncertainty, and this in turn means fewer people donating to nonprofits … or does it? It doesn’t have to lead to a downturn in donations. Instead, leveraging stories and data, improving program offerings based on data, and ensuring transparency and communications can build up programs and services during times when other nonprofits may be struggling. For those nonprofits that can dig deeply into their data, they may find information that can lead them to greater improvements across the organization.

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 us for more information.

How Should Your Nonprofit Handle Cryptocurrency Assets?

By | Accounting, Cryptocurrency, Donations, Nonprofit | No Comments
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Cryptocurrency presents many challenges to nonprofits that accept it as payment or donations. Crypto such as bitcoin, ether, and the many other digital assets on the blockchain, are becoming ubiquitous with everyone from college kids to grannies dabbling in the new financial asset. And while regulations are being discussed, companies and organizations are left struggling to understand how to track and manage it. Here are the challenges and some advice for nonprofits interested in accepting or utilizing crypto assets.

What Is a Cryptocurrency?

Cryptocurrency, or crypto, is a digital asset tracked on the blockchain—an immutable public register of transactions that enable anyone to track the original and transfer of the asset. While you may know the major “coins” from the news such as bitcoin or ether, there are hundreds of other coins on the market.

Challenges of Cryptocurrency

Crypto is a new category of financial asset and one that regulators continue examining to determine how to account for them. Are they investments (like stocks or bonds) or assets (like gold or silver)?

In addition to challenges understanding classification and the rules governing such classifications, there are additional challenges inherent in accepting them either as payment or donation, including:

  • Highly volatile value: Unlike fiat currency, which offers a stable store of value (despite inflation), the value of digital assets varies widely from day to day, even hour to hour. This makes it difficult to estimate and track over time.
  • Incompatible with ERP setup: Crypto values are tracked to the 16th decimal place, which is completely incompatible with ERP systems set up to track dollars, euros, and other common currency.
  • Difficulty tracking: GAAP rules require tracking of assets on a cost basis (the initial purchase price of the asset), the fair value of their holdings, and the book value. This is impractical with digital assets due to their volatility, but clear guidelines are lacking from regulators.

Forming a Crypto Asset Strategy

Given the many challenges, you may be wondering why your organization should even consider accepting cryptocurrencies. Donors may wish to contribute to your organization using crypto, and this is a valid reason to consider adding it as a donation method. To do so effectively, you’ll need to create a crypto asset strategy to guide your staff in handling such assets.

  • Learn first: As with any new technology, platform, or asset, it’s important to learn all you can about it before diving in. Discuss adding cryptocurrencies to your organization with your accounting team and outside CPAs (if you have one) to understand their point of view.
  • Research payment gateways: Cryptocurrency payment gateways enable you to streamline transactions. Bit Pay and others offer ways in which you can send and receive crypto in the easiest manner possible.
  • Discuss with your board: Your board needs to be fully behind the project to add crypto as a payment or donation method. Bring the issue to your board and ensure a thoughtful discussion by sharing industry statistics and information with them. Some board members will be unfamiliar or even put off by the news from the crypto world and may need some additional information prior to engaging in a discussion.
  • Engage stakeholders: Bring the issue to your internal teams, too. Ask representatives from each department to be on a committee or group to investigate adding crypto to your organization. It’s vital to hear from every department that may be impacted by the decision.

Keep in mind that if you do proceed with crypto, you may need to customize aspects of your accounting system as well as internal controls to adjust to this new method of payment.

Cryptocurrency seemed like a fad when it appeared in 2008, but it’s still going strong. If it looks like an opportunity for your organization, begin exploring it today.

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 us for more information.

Recommended Financial Controls for Small Nonprofits

By | Accounting, Nonprofit | No Comments
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The Association of Certified Fraud Examiners (ACFE) issued a report in 2020 that provided a unique lens into the world of fraud, specifically nonprofit fraud. Fraud, including embezzlement and other redirection of funds or assets, is a continuing (and growing) problem for businesses of all types, but especially for nonprofits. According to their report, nonprofit fraud accounted for 9% of total corporate fraud with a median loss of $75,000 and an average loss of $639,000.

Perhaps more surprisingly is the fact that the ACFE found that the smallest organizations, both for-profit and nonprofit, reported the second highest amount of theft and fraud. Those with revenues under $50 million and less than 100 employees are at greatest risk of loss due to fraud.

While that may not seem like much compared to for-profit corporations, most nonprofits operate on a significantly leaner budget than their for-profit counterparts. And every penny lost to fraud is a penny that could be spent towards achieving an organization’s mission.

Nonprofits Lack Internal Controls

Internal controls are defined as the methods, processes, and procedures used for accountability and transparency in accounting departments. Good internal controls describe the means, methods, and people who can access the organization’s funds and provide guidelines for how funds should be handled.

The ACFE Report, as well as a statement on the Oregon Department of Justice website, attribute lack of internal controls in nonprofit organizations as the primary weakness by which thieves are able to siphon funds from nonprofits. For example, the ACFE report indicates that the majority of nonprofits (more than 50%) lack surprise audits, formal fraud risk assessments, management review, and internal audit departments, all of which combined deter fraud.

The Solution: Implement Best Practices to Prevent Loss

There are several internal controls that nonprofits can implement to prevent loss. These best practices include:

  1. Separation of financial duties

One individual should never oversee two or more phases of a financial transaction. For example, the person who signs the checks should not be the person who approves the expenses. Having two or more people review, approve, and/or issue the check ensures there are steps in the process in which fraud can be detected.

  1. Reconcile bank and credit card statements

It’s a basic accounting function, but the reconciliation of both bank and credit card statements is often delayed or even overlooked in busy and short-staffed accounting departments. Yet the reconciliation of each of these types of accounts can quickly uncover potential embezzlement and fraudulent charges. The faster that fraud is uncovered, the faster your organization can act upon the information to determine the source.

  1. Enact clear procedures to handle cash

Cash is one of the most tempting items to steal; even people who might not normally embezzle from corporate accounts may be tempted to slip a bill into their pocket. Having clear guidelines for handling cash such as petty cash or a cash box at an event or function is vital to protecting this asset. Guidelines may include having two people present every time the petty cash box is removed from the safe—one person witnessing while another counts the amount, signing receipts for petty cash, etc.

  1. Control disbursements

All disbursements by cash or check should be controlled by two people; one who approves the disbursement and the other who can sign for it. This eliminates one person from having the power to issue disbursements, presumably to themselves.

  1. Limit debit and credit card access

Lastly, if your organization issues credit cards, it is important to have strict guidelines in place about who can receive such a card and when and how they can be used. Such guidelines may include the amount that may be spent and the purpose for which it may be spent without prior authorization, the necessity of providing detailed receipts, and so on. Limiting cards to only those with a clear need, such as managers who travel frequently, also prevents abuse.

As inflation continues to rise and everyone feels the pinch in their pocketbooks, theft becomes tempting. Removing temptation through strong internal controls is the key to preventing nonprofit fraud.

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.