Category

Nonprofit

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 11
0

The Essentials of Unclaimed Property Reporting Compliance

By | Nonprofit, Unclaimed Property | No Comments

In recent years, states have become more aggressive in their pursuit of unclaimed property audits. The reason is simple: unclaimed property can be a source of revenue for states.

Nonprofits aren’t immune, with a full 60% of unclaimed property audits occurring at nonprofit organizations. Legally, all unclaimed must be declared. Each state issues their own guidelines for reporting unclaimed property. Washington state, for example, requires that unclaimed property of $75 or more be reported. Their reporting deadline is October 31.

Failing to comply with unclaimed property laws is a serious matter which can result in fines or criminal prosecution. There’s no statute of limitations, either, so reporting errors can be costly!

Definition of Unclaimed Property

Before talking about reporting unclaimed property, it’s helpful to have a shared definition of what it actually is. Unclaimed property may be defined as any financial account that has no activity in over a year or any property remaining with a company for longer than a year. An example common to nonprofit organizations is an uncashed paycheck, or checks returned without being forwarded to a sender. Other examples may include gift certificates or customer overpayments that go unclaimed after a full year.

5 Steps to Unclaimed Property Reporting Compliance

It’s the responsibility of the organization to take the proper steps to track down the owners of unclaimed property. A few steps to take include:

  1. Review ledgers and accounts: Review all your ledgers and accounts to find potentially unclaimed property. If your organization has multiple EINs, document each list of unclaimed property by EIN.
  2. Ask all departments for their reports: Ask all departments to supply lists of potentially unclaimed property, too, and check it against your records.
  3. Review journal entries and accounts receivable reports: Thoroughly review journal entries and accounts receivable reports to identify possible unclaimed property.
  4. List all possible unclaimed property and note which steps have already been taken to contact the owners before initiating a formal contact process.
  5. Documentation: Many states require that you send a physical letter to the property owner’s last known address. The letter should include the name of the property owner, the name of your organization, a description of the unclaimed property, and the language required by your state to notify the person they have unclaimed property. Give the person a timeframe and process for claiming the property, too.

Submitting Reports: Software Simplifies the Process

One tool that greatly simplifies and streamlines the unclaimed property reporting process is having the right software. MIP Fund Accounting can track and report unclaimed property and provide a standard file format that can be uploaded to most states’ unclaimed property reporting system. It makes the entire process a lot easier than manually creating spreadsheets, and removes much of the potential for human error, too.

What Triggers an Unclaimed Property Audit?

If you’ve taken the right steps, you’ll hopefully avoid an unclaimed property audit. But there are certain red flags that states look for that can trigger an audit. These include:

  • Not filing reports on time. Even if you have no unclaimed property, some states require you to complete and submit a report. Check your state requirements and submit the reports by the deadline.
  • Not following the correct reporting standards.
  • Providing inadequate detail on the unclaimed property, the owners, or the steps taken to find the owners.
  • Reporting property before it’s officially unclaimed. Don’t report an uncashed paycheck a month after it’s been sent to the recipient, for example, if the law declares it unclaimed only after a year has elapsed. Check your state laws.
  • Not taking adequate steps to find the owners. The due diligence process is important, as is the documentation that the process was followed in accordance with state law.

Unclaimed property reporting is something many nonprofits overlook. Be sure to review your state’s guidelines and follow them to avoid an audit.

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 29
0

Become a Data-Driven Organization

By | Data, Nonprofit | No Comments

Nonprofits today have more data at their fingertips than perhaps at any other time in history. But if this data remains hidden among reams of reports, it’s useless. Data that is difficult to read, interpret, or use offers no benefit to anyone.

You can change that by helping your nonprofit transition into a data-driven organization. True data-based decision making can be challenging to implement and may take years as you add more data-focused people to the staff, update technology, and provide training to everyone on how to use data (more on that later). But it is worth it in the long run.

Why Become a Data-Driven Organization?

Data-driven organizations can provide stakeholders with facts to substantiate their claims. They can offer donors, granting organizations, and others the proof through verifiable data of program efficacy and responsible stewardship of funds.

Perhaps more importantly, using data, these nonprofits can make better decisions on which programs to fund and where to put their efforts. Instead of guesswork, data driven organizations look at the facts to support their choices. They can better fulfill their mission when they see the facts that support their choices.

Steps to Becoming a Data-Driven Organization

As you shift your organization’s focus toward using data to make decisions, you may need to take several steps to help the transition.

  1. Provide staff with the tools they need.

Your current software may be unable to produce or analyze the data available. You may need to update or upgrade software. You may need to add business intelligence software, grant reporting software, and true fund accounting. A thorough assessment of the systems used to collect, support, and share data is necessary before choosing new software. But, in order to use data, staff must be able to collect it and access it easily, and that calls for the right software.

  1. Offer training and support.

Few people are trained in the use of data, and fewer still know how to analyze data. You may wish to find a consultant to work with your team to help them learn how to access, analyze, and report on data.

  1. Share data.

Another important step is to ensure all data from your organization can be shared easily and quickly. Silos may exist now that must be breached in order to ensure data is shared among all departments. A data-driven organization is no place for “data misers” who hoard their information. Make it an organization-wide expectation that data should be shared, within reason.

  1. Make data gathering a priority.

Ask key questions and add data gathering to all projects where it makes sense to do so. Ensure new initiatives get the green light only if there is enough data to support their launch. Make sure your teams know you expect efficacy data, retention data, and other key data to support projects and goals.

The Marriage of Data and Storytelling: A Match Made in Heaven

Data alone rarely sticks in people’s minds. Data, when combined with stories, does. Using storytelling techniques and having a hero, a villain, a wise guide, a quest, and other traditional story points, underscored with data to support the story, can make data come alive for your audience.

For example, a food bank may know that hunger affects 5% of their local community. What does 5% mean? What does it look like?

Telling a story about a hardworking single parent of four who is juggling two jobs to pay the rent and needs a weekly grocery supplement from the food bank makes that 5% statistic come alive. Now, it’s clear how donations to the food bank are used and who that 5% represents.

Ready for a Data-Driven Approach?

If you’re ready to focus more on data but you aren’t sure where to start, we 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.