Posts made in August 2019

What you should know about preparing your Schedule of Expenditures of Federal Awards (SEFA)?

Not-for-profit organizations often seek out grants and other awards in order to provide the necessary funding for their programs. It is important to know the source of all grants and awards as well as the requirements of the U.S. Office of Management and Budget’s (OMB) Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, Final Rule (Uniform Guidance). In this article we will explore a small but very important part of the Uniform Guidance requirements: The Schedule of Expenditures of Federal Awards (SEFA).

What is the SEFA and How is it Used?

In its simplest form, the SEFA is a financial statement schedule that lists an organization’s expenditures of federal assistance for the fiscal year by federal agency, grant number and amount. It is the organization’s (auditee’s) responsibility to prepare a complete and accurate SEFA, which is a key component of the reporting package required under the Uniform Guidance. The SEFA is also used by external auditors to determine the required procedures and test work under the Uniform Guidance.

How to Accumulate the Data for the SEFA

Every grant and award received needs to be evaluated in order to determine the funding source.  A checklist or standard intake form should be used to document every individual grant/award (even those that do not appear to be federally sourced). This process may involve some research, as the funding source may not be obvious in the grant/award paperwork.

  • All grants/awards should be reviewed in detail to determine if they contain any special provisions (for example, some awards require they be treated as major programs, even though they might not otherwise qualify as such).
  • If the grant/award contains federal funding, the organization will obtain the following: name of the federal agency, award period, Catalog of Federal Domestic Assistance (CFDA) number.
  • The grant/award should also be researched to determine if it is part of a cluster (including research and development) or a federal loan program.
  • If the grant/award is passed through to/ from a subrecipient, the organization will obtain the pass-through entity identifying number.

Gathering this information is time consuming, and obtaining the name and contact information of the program manager can be invaluable.

Prior to the grant/award becoming operational, the organization should review the OMB Compliance Supplement’s Matrix of Compliance Requirements. For every federally funded grant/award, personnel should be assigned for each area of compliance. Expenditures must be tracked for each individual grant/award. The accounting system must be set up to capture this information, and individuals must be established to assign expenses to each grant/award.

How to Prepare a Complete and Accurate SEFA         

If the organization has a good system of accumulating data for grants/awards, preparation of the SEFA should not be difficult. It is simply a matter or organizing the data in the appropriate format. The draft SEFA should be reviewed for the following:

  1. Are all awards sorted by federal program and agency?
  2. If received through a subrecipient, is the name and number of pass-through entity included?
  3. Review Uniform Guidance for clusters of awards. Are the federal programs within that cluster all separately identified within the cluster?
  4. Are Research and Development awards totaled by federal award?
  5. Are total federal awards excluded for loan or are loan guarantee programs included?
  6. Are total federal awards provided to subrecipients by program totaled?
  7. Are the required footnotes to the SEFA prepared?
  8. If any non-federal awards are included in the SEFA, are they clearly segregated and designated as non-federal awards?

Where are Some Useful Resources?

Organizations are encouraged to review the 2017 and 2018 Uniform Guidance Compliance Supplements located at Whitehouse.gov. The AICPA’s Government Audit Quality Center provides a free resource center for auditees.

Please contact us to help you with the requirements of the Uniform Guidance. We can assist you early in the process at an organizational level. This will help assure a smooth and successful process to manage your federal funds and the related compliance requirements.

Nonprofit Treasurer Roles and Responsibilities

When you think about it, it’s a bit inaccurate to refer to your organization as “nonprofit.” In fact, money is rarely far from the minds of your organization’s leaders. At least, it shouldn’t be.

Like your for-profit counterparts, you can’t succeed without maintaining sound fiscal health. That’s why the title of “treasurer” is so much more than an honorific. By watching over your organization’s “treasure,” the person holding that position facilitates the accomplishment of the nonprofit’s greater goals.

The role in a nutshell

The treasurer generally is charged with overseeing the management and reporting of the organization’s finances. In a large nonprofit with accounting staff and a chief financial officer, the treasurer will usually head a finance committee that reports to the board of directors. He or she focuses mainly on reviewing internally prepared financial reports and evaluating financial policies and procedures.

By contrast, in a smaller organization with no internal accounting staff, the treasurer may need to get down in the trenches — writing checks and making deposits, managing and safeguarding funds and maintaining financial integrity. Where applicable, he or she also might oversee outside bookkeepers, tax preparers, fundraisers and investment advisors.

Regardless of the organization’s size, the treasurer typically shepherds the development of the not-for-profit’s financial policies, such as those for investing, borrowing and cash reserves. And he or she presents regular treasurer’s reports to the board of directors. These can range from a simple “dashboard” to more detailed information.

Specific areas of concern

The treasurer must ride herd over several different areas. Depending on the organization’s resources, the treasurer’s degree of involvement will vary. He or she might take on the following duties personally or just provide the necessary oversight to confirm that staff is handling them appropriately.

Budget. The annual budget represents the financial map of the organization’s goals and how it plans to achieve them in the coming year. The treasurer should present the budget for board approval, being realistic about both revenues and expenses. He or she also should review current reports frequently for variances between actual and budgeted figures and determine the reasons for those discrepancies.

Financial reports. The board relies on the treasurer to provide timely and accurate financial information to support its decision-making. In addition to financial statements, the treasurer might supply information on financial ratios and trends that describe the organization’s current and projected financial status.

Compliance. Complying with relevant laws and tax regulations is a top priority. Among other things, the treasurer should work with your CPA and keep a calendar of reporting and filing deadlines to avoid late fees, penalties and the reputational damage they can bring.

Risk management. The treasurer also should coordinate with your CPA and insurance agent to regularly perform assessments that identify and mitigate risks to the organization’s assets, data and confidential information. You might have risks, for instance, related to the use of volunteers in money-handling positions. Mitigation could include internal controls designed to deter and detect fraud.

Audit. Once your nonprofit reaches a certain size, its books should be audited annually by an independent CPA. The treasurer should review the results and recommendations — asking questions where appropriate — and present them to the board.

The right person for the job

With so much responsibility, it’s clear that not just anyone can function well in the treasurer position. You need to be very selective about candidates’ qualifications.

For starters, the treasurer must have a demonstrable financial literacy, including a thorough understanding of the particular financial reports and accounting practices used by nonprofits. He or she also should possess an attention to detail, adherence to deadlines, patience, curiosity and recordkeeping skills. A passion for the cause also is valuable, as the treasurer needs the motivation to make, and keep up with, the ample time commitment required for the job. It helps, too, if the treasurer has some people skills — a grumpy introvert may not work well with staff and other board members.

The bottom line

Although the specific duties treasurers perform will vary depending on the not-for-profit’s circumstances, the importance of the job does not. Without a qualified treasurer performing proper oversight, your organization’s financial health will be in jeopardy. Investing in a thorough search for the right person will pay off in the long run.

Is a merger right for you?

In the wake of the new tax law and other developments, many nonprofits are looking for ways to solidify their financial footing — including the possibility of merging with another organization. But a merger isn’t something to be entered into lightly. It’s a big step that requires careful planning and consideration.

Possible structures

The term “merger” is a bit of a catchall, and your organization may opt to pursue a different type of collaboration. In an actual merger, all the assets and rights of one organization transfer to the surviving organization. And the former nonprofit no longer exists as a legal entity. Notably, the surviving organization assumes all the merged-out organization’s liabilities. There are several other popular ways to combine forces:

Consolidations are like mergers, except that both organizations are dissolved, and an entirely new entity is created that assumes all assets and liabilities of both former organizations. The new entity will need to apply for tax-exempt status.

In an asset acquisition, one nonprofit acquires identified assets — and possibly liabilities — of another. When dealing with two nonprofits, you could simply structure the transaction as a gift from one to the other. This approach usually is permitted if the transferring organization’s creditors are either transferred, or paid in full, before it dissolves.

Alternatively, two nonprofits could enter into a parent-subsidiary arrangement. The “parent” doesn’t own the other organization. But it takes control, for example, by serving as the sole voting member of the subsidiary’s board or having the right to appoint the board members. Notably, though, the parent doesn’t assume the subsidiary’s liabilities. Each organization continues to function individually, with separate IRS filing obligations and boards of directors.

The parent-subsidiary arrangement — also known as an affiliation of nonprofits — can be implemented by amending the subsidiary’s articles of incorporation and bylaws to describe the parent’s control. If the arrangement doesn’t work out as hoped, it can be reversed simply by amending the documents again. The organizations usually also enter an affiliation agreement that addresses a variety of topics, such as the subsidiary’s activities.

State nonprofit corporation acts generally govern the processes and requirements for each of these transactions. Both state and federal laws must be considered when structuring the combination.

Due diligence

Each nonprofit should conduct a thorough investigation into the other organization’s history, finances and operations before entering into a collaborative agreement. Neither party can afford to take due diligence lightly — the board members for the nonsurviving organization have a fiduciary duty to obtain reasonable assurances that the surviving organization can properly steward the nonsurvivor’s assets postmerger.

The organizations should exchange a wide range of information, including corporate documents (for example, charters, bylaws and policies); financial statements and audit reports; and fundraising records and donor lists. They should also share third-party contracts, including grants and other funding; HR records; and meeting minutes.

Moreover, the two organizations should look at IRS determination letters and filings; documentation of exemptions from property, sales and other state or local taxes; real estate records; and current and pending litigation. Due diligence can be performed in phases so that more confidential or sensitive information isn’t exchanged until further along in the process, as the combination becomes more likely. Final approval must come from each organization’s board of directors and possibly its members.

Potential costs

Nonprofits often consider collaborations for financial reasons. But the process can come with significant costs, some of which aren’t always obvious. Potential expenses include:

  • Staff time, severance pay and professional fees (attorneys, accountants and consultants),
  • Audit and filing fees,
  • Rebranding and replacement of promotional materials,
  • Moving expenses and infrastructure upgrades,
  • Lease and loan buyouts, and
  • Lost funding.

Other possible staff-related costs could include a need to increase some salaries to achieve organizationwide pay parity. This could happen if one of the nonprofits paid its employees significantly more than the other did.

Don’t forget to report

Most nonprofits that end their operations by merging with another nonprofit must inform the IRS by filing a final Form 990, 990-EZ or 990-N. It must be filed within four months and 15 days of the organization’s termination. Certain states also require notification to the state attorney general or other appropriate office. Keep in mind that a merger can be complex.

FASB proposes moving back effective date for lease and other new accounting standards

The Financial Accounting Standards Board (FASB) recently voted unanimously to propose a delay to the effective date for the implementation of the new lease accounting standard, ASC 842, for non-public business entities. The proposed delay in the effective date is until January 2021, which provides an additional year to privately held companies to comply with the new lease rules.

Additionally, the vote proposed delays to other recent standards updates including credit losses, derivatives, and long-duration insurance contracts. For credit losses and long-duration insurance contracts, the proposed delay could potentially also apply to nonprofits and smaller reporting companies as the FASB seeks to re-define its reporting entity buckets in relation to implementation dates of its future standards.

Refresher on lease accounting

The existing lease accounting standard, Leases (Topic 840), requires companies to record lease obligations on their balance sheets if the arrangements are considered financing transactions, such as rent-to-own contracts for buildings or vehicles. Few arrangements get recorded, however, because U.S. Generally Accepted Accounting Principles (GAAP) give companies leeway to arrange the agreements to look like simple rentals. If an obligation isn’t recorded on a balance sheet, it makes a business appear less leveraged than its reality.

After nearly a decade of debate, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). The new standard calls for major changes to current accounting practices for leases. In a nutshell, companies will be required to recognize on their balance sheets the assets and liabilities associated with rentals, such as offices, factories, airplanes and heavy equipment. The effects of the new standard are expected to be pervasive, because businesses rent anything from forklifts to photocopiers to recycling bins.

ASU No. 2016-02 defines a lease as a contract (or part of a contract) that conveys the right to control the use of a rented asset for a specified period in exchange for consideration. The concept of control is a key change from the definition of a lease. It means that the customer has both the right to realize substantially all of the economic benefits of the asset and the right to direct the asset’s use.

Most existing arrangements that currently are reported as leases will continue to be reported as leases under the new standard. In addition, the new definition is expected to encompass many more types of arrangements that aren’t reported as leases under current practice.

Delayed implementation

The new standard took effect for public companies, employee benefit plans, and non-for-profit conduit bond obligors in January 2019, and was intended to take effect for private companies for reporting periods beginning after December 15, 2019. However, the AICPA asked the FASB for a delay earlier this year in light of the overlap with the implementation of the new revenue recognition standard and the struggles public companies have incurred thus far in complying with the new lease accounting rules.

The additional year will allow for further educational opportunities for private companies and other organizations that anticipate a major disruption when implementation arrives.

If you have questions on how this delay will affect you and your company, please reach out to us.

New rules clarify accounting for grants and contributions

When the Financial Accounting Standards Board (FASB) released new rules for revenue recognition in 2014, contributions were specifically excluded. Now the FASB is offering further guidance in its Accounting Standards Update (ASU) No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made.

The new rules likely will result in more grants and similar contracts being accounted for as contributions than have been under current Generally Accepted Accounting Principles (GAAP). So, if you haven’t learned the new rules yet, now is the time!

What prompted the new rules?

The new rules reflect the FASB’s stance that nonprofits have taken inconsistent approaches when characterizing some grants and contracts as exchange transactions (reciprocal) rather than contributions (nonreciprocal transactions). Organizations also have acted inconsistently when distinguishing between conditional and unconditional contributions, according to the standard-setting agency. For example, some nonprofits account for government grants as contributions while other organizations account for them as exchange transactions.

These issues came into the spotlight in the wake of the FASB’s new revenue recognition standard. Contributions generally are reported in the period the pledge or commitment to donate the funds is received. But exchange transactions will be subject to the revenue recognition rules, including robust disclosure requirements.

Is it a contribution?

When characterizing a grant or similar contract, a nonprofit must evaluate whether the “provider” (the grantor or other party to a contract) receives commensurate value in return for the assets transferred. If so, the transaction is an exchange transaction.

The ASU makes clear that “the provider” isn’t synonymous with the general public. Thus, indirect benefit to the public because of the asset transfer doesn’t constitute “commensurate value received.” Execution of the provider’s mission or the positive sentiment from acting as a donor also doesn’t equate to commensurate value received.

If the provider doesn’t receive commensurate value, the nonprofit must then determine if the asset transfer represents a payment from a third party for an existing transaction between the nonprofit and an identified customer (for example, Medicare or a Pell Grant). If so, the transaction isn’t a contribution and other accounting guidance would apply. If not, it’s a contribution.  If the contribution is considered unconditional, it is recognized into revenue immediately.

Is it conditional?

Whether a contribution is conditional affects when the revenue is recognized. This ASU explains that a conditional contribution comes with 1) a barrier the nonprofit must overcome to receive the contribution, and 2) either a right of return of assets transferred or a right of release of the promisor’s obligation to transfer assets if the condition is not met. An unconditional contribution is recognized when promised or received. However, a conditional contribution isn’t recognized until the barriers to entitlement are overcome.

To assess whether the nonprofit must overcome a barrier to receive the contribution, it should consider the following indicators:

  • The inclusion of a measurable performance-related barrier or other measurable barrier (for example, raising a certain amount of matching funds),
  • Limits on the nonprofit’s discretion over how to conduct an activity (for instance, a requirement to hire specific individuals to run a new program), and
  • A stipulation that relates to the purpose of the agreement (excluding administrative tasks and trivial stipulations, such as producing an annual report).

Depending on the circumstances, some indicators might prove more important than others. No single indicator will determine the outcome.

Effective dates

The new rules impact agreements for most nonprofits who are resource recipients for annual reporting periods starting after December 15, 2018. For organizations who are resource providers the new rules apply one year later. Early adoption is permitted.