Got Free Rent?

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Neal Helf

If there is one thing that just about everyone gets excited about it is receiving something free.  For those organizations that rent or lease and have the benefit of free rent for a time period in their contract, I wanted to quickly go over the proper GAAP treatment.  You may  not be aware that the “free” months still must be recorded as rent expense in the accounting records.

The first step is to calculate the total payments over the term of the contract or lease.  For our purposes, let’s assume a 5 year operating lease with monthly payments of $4,500 and the first six months of rent abated.  The sum of cash payments for months 7-60 would be $243,000 ($4,500 x 54 = $243,000).

The next step would be to allocate the total rent expense over the life of the lease.  Therefore, we would allocate the $243,000 over the 60 months to give us $4,050 per month of lease expense ($243,000/60 = $4,050).  This would be the amount of rent expense that we would record over the life of the lease (including the six months free).  Additionally, we would record an accrued lease liability for the six months of abated rent.

Let’s now look at what our journal entries would look like.  For the first six months of free rent we would record:

Rent expense:                         $4,050

Accrued lease liability:                                   $4,050

This would give us a total liability of $24,300 after month six.  We then would amortize this liability over the remainder of the lease.  In months seven through 60 we would start making the $4,500 rent payments and record the $4,050 of rent expense calculated as in the first six months.  The remaining difference of $450 will be a reduction of the accrued liability until the end of the lease term.

Rent expense:                         $4,050

Accrued lease liability:               450

            Cash:                                                   4,500

This is a situation that does not occur every year, but is important to keep in mind when it is applicable as it can have a significant impact on financial reporting.  We have a knowledgeable staff that is well versed on GAAP reporting requirements and would be happy to answer any such questions or be of service to you or your organization in whatever way we can.

Categories: Financial Reporting, Liabilities, Operational Issues
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Hidden Rules of the 401(k) and 403(b) – Part 2

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Emma Kong

Last time, we discussed issues with late contributions and fidelity bonds. Employee benefit plan audit season is in full swing right now, so it is the perfect time for us to discuss some more common benefit plan concerns.
Did you acquire your employees’ spousal consent?

In the following situations, your employees will need their spouse’s consent:

1) Request a cash distribution of more than $5,000
2) Any change of beneficiary
3) Take out a loan from the retirement plan

Most employers use a distribution form provided by the service provider or third party administrator which may or may not have a section to be completed for spousal consent. At the end of the day, the plan administrator is responsible for obtaining the consent of the participants’ spouse before performing any of the actions above.

Who is ultimately responsible?

At this point, you might be thinking, “even though I didn’t know any of the information discussed, I am not worried because I have hired a third party administrator (TPA). They should be the one to blame.” The truth is that the TPA is there to aid plan administrators. Your TPA will give advice, but the employer as the plan administrator, must make the decisions and oversee the operation of the plan. You can delegate the tasks to a TPA but you cannot delegate the responsibility. The Department of Labor (DOL) states: Fiduciaries that do not follow the required standards of conduct may be personally liable. For example, if the plan lost money because of a breach of their duties, fiduciaries would have to restore those losses, or any profits received through their improper actions…Fiduciaries also can be removed from their positions if they fail to follow the standards of conduct.

If you don’t know who exactly is the plan administrator, please read your plan document to find the person who is identified as having the responsibility for running the plan. It usually is the employer, but can be a committee of employees, a company executive, or someone hired for that purpose. At the end of the day, the employer is ultimately responsible for complying with the myriad of DOL and IRS requirements.

Helpful Resources

The following are two very informative websites you can check out if you want to know more.

And remember, if you have questions, your auditor is just a phone call or email away.

See Part 1 of this post

Categories: Contributions, Employee Benefits, General Information, Operational Issues
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Hidden Rules of the 401(k) and 403(b) – Part 1

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Emma Kong

The issues most plan administrators don’t know until they go through their first audit

Administering a retirement plan is often an area that accountants may not be very familiar with.  There are many rules and laws that apply to these plans, and if not followed can lead to some serious penalties for the employer and the administrator.  The rules and laws apply to all 401(k) and 403(b) retirement plans, not just the ones that are subject to an independent audit.

In order to assist plan administrators and employers avoid potential penalties, we wanted to discuss some common issues that we see.

Are you making deposits for employee contributions too late?

If your retirement plan’s contribution is deducted from the employee’s paycheck each pay period, you are required to deposit the contributions in a “timely manner”. The Department of Labor regulations states that the employer must deposit participant contributions as soon as it is reasonably possible to separate them from the company’s assets, but no later than the 15th business day of the month following the payday.

What is reasonably possible?  For small plans with fewer than 100 participants, the “safe harbor” time period is 7 business days. For bigger plans, the DOL has refused to provide a “safe-harbor” time period for this requirement. If the plan administer demonstrates that they can segregate the contributions within 3 business days, the DOL could consider a contribution made 5 business days after the payroll date to be a late contribution. In most instances, the assets can be separated the day the payroll taxes are paid, therefore, the remittance would need to occur the same day as payroll and any deposits beyond that would be considered late.

If the contributions were deposited “late”, it could be considered as a breach of fiduciary duty and a prohibited transaction. In this case, the plan administrator will have to reimburse all participants for the lost earnings due to the delay in the transmission of the funds.

 Do you have a Fidelity Bond?

DOL regulations states, “as an additional protection for plans, those who handle plan funds or other plan property generally must be covered by a fidelity bond. A fidelity bond is a type of insurance that protects the plan against loss resulting from fraudulent or dishonest acts of those covered by the bond.” The bond must name the Plan as the insured (not the employer) and include willful/ knowledgeable misconduct such as fraud as being covered under the policy. If you don’t purchase and maintain a sufficient ERISA fidelity bond, it can be a red flag to DOL that invites them to take a closer look at your plan

How much coverage must the bond provide? Your fidelity bond must be for at least 10% of plan assets with a minimum of $1,000 per plan and a maximum of $500,000 per plan. Generally, DOL, EPL and related insurance policies are not adequate to meet the requirements related to this coverage.

Look for future posts for additional areas of concern.

See Part 2 of this post.

Categories: Contributions, Employee Benefits, General Information, Operational Issues
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Housing Allowance for Members of the Clergy

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Karen Garcia

It is quite typical for religious organization to provide a housing allowance for its ministers as part of their compensation. When this occurs, the organization and minister should be aware of what is allowable to exclude from gross income.

The Internal Revenue Service allows ordained, commissioned or licensed minsters of the gospel to be able to exclude rental allowance or housing allowance from income tax. This exclusion is only applicable to income tax; ministers must report rental allowance for self-employment taxes as stated in IRC §1402 (a) (8).

IRC §107 states that “In the case of a minister of the gospel, gross income does not include:

(1)   the rental value of a home furnished to him as part of his compensation; or

(2)   the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.”

The IRS Publication 517 (2011) explains that the religious organization must officially designate the definite payment of housing allowance before the actual payments are made. If the minster is a member of a national church agency that cannot designate a housing allowance then the local organization must designate a part of the salary for housing allowance. If a designation is not made to housing allowance before payments are made then all of the salary must be included in gross income.

The Publication further explains that if the minister owns a home then the excludable amount from gross income is the lesser of:
Read the rest of this entry »

Categories: Definitions, Employee Benefits, Religious Organizations, Tax Compliance, Uncategorized
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Fraud “Red Flags”

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Donna Mayes

Unfortunately, non-profit organizations are not immune from fraud. Often times after a fraud has been committed, the organization can look back on the situation and recognize some red flags that should have raised some concern which could possibly have prevented a fraud or at least detected it earlier. I thought it would be helpful to present a list of red flags that may indicate that a fraud could be occurring in your organization.

  • Living beyond one’s means (fancy car, expensive home, lavish vacations)
  • Experiencing financial difficulties
  • Suspicious behavior
  • Too controlling – wants to do everything
  • Caught in lies (often insignificant)
  • Works odd hours (always the first to arrive or last to leave; works weekends when workload doesn’t indicate the need)
  • Password protects files on server that shouldn’t be
  • Takes loan from 401k
  • Gets very defensive when asked a question about work
  • Unusually close relationship with vendor or customer
  • Addiction, gambling or legal problems (How do they pay for these issues?)
  • Won’t take vacation (or comes to the office during vacation to “take care of business”)
  • Doesn’t follow the internal controls that are set up
  • Unusual number of manual journal entries
  • Excessive number of voided transactions
  • No original documentation – everything is scanned in or copied
  • Lot of errors in work

These red flags don’t necessarily mean that someone is committing fraud; however, coupled with other indicators, the employee should warrant closer supervision, surprise internal audits, etc. You may also want to review your internal controls for any possible weaknesses.   Being alert to these red flags can go a long way to preventing fraud and keeping your organization financially sound. (Note:  This is the first in a series of posts about fraud.  Check back for future postings.)

Categories: General Information, Internal Controls, Operational Issues, Sector
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Mark Your Calenders

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Donna Mayes

Rylander, Clay and Opitz, LLP, a leader in not-for-profit tax, assurance, and advisory services is hosting an informative “Lunch ‘n Learn” seminar for non-profit accounting personnel. The topic of the panel discussion is “Accounting for Special Events” and will focus on various accounting issues related to raffles, auctions, sponsorships, internal controls surrounding cash collected at events, sales tax implications and other IRS reporting requirements related to special events. The seminar will be held on October 4th with registration beginning at 11:45 am. The program will start at noon and conclude at 1pm. It will be held at Easter Seals North Texas located at 1424 Hemphill St., Fort Worth. Please RSVP by September 29th by logging on to The cost is $15 per person and includes lunch. For more information, please call 817-332-2301.

Categories: Community Events, General Information
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Mileage Reimbursements

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Donna Mayes

Effective July 1, 2011, the IRS has changed the optional standard mileage rate to 55.5 cents per mile. According to the IRS, this optional rate can be used to compute the deductible transportation costs paid or incurred for business purposes. Many non-profit organizations use this rate as a guide to reimburse employees who use their personal vehicle to conduct the organization’s business. Although 55.5 cents doesn’t sound like much, it is something that can add up quickly. Unfortunately, in tougher economic times, this could be a way that staff increase their paychecks if they think no one is watching.

Whether you use the IRS rate as your reimbursable amount or some other rate, here are some suggestions to manage these reimbursements:

  1. Review the policies at least annually.
  2. Ask staff how they interpret these policies, and address any ambiguities.
  3. Usually organizations only reimburse employees for mileage in excess of the miles that would be driven to the place of employment. For example, a case worker drives directly to a client’s house, which is 10 miles from the employee’s house. Your office is 6 miles from the employee’s house. Typically, you would only reimburse the employee for 4 miles of travel.
  4. As part of the hiring process, inform new staff of the organization’s policies and give examples of what is allowed and what is not.
  5. Periodically review these policies at staff meetings.
  6. Employees should keep a written log of the mileage, which should include at a minimum for each trip:  Date of travel, destination, purpose of trip, and miles driven.  If you receive federal or state grants, the granting agency may require you to keep more detailed records, such as odometer readings, address of the destination, or attach maps showing mileage.
  7. Prior to reimbursement, the mileage logs should be approved by the employees’ supervisors who are knowledgeable of their activities. The logs should also be periodically reviewed for inconsistencies, errors, redundant trips, and abuse.
Categories: Employee Benefits, General Information, Internal Controls, Operational Issues, Sector
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Internal Controls Surrounding Federal Grant Awards

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Donna Mayes

     Does your organization receive federal grants? If so, did you know that you are required to establish and maintain internal controls to ensure that you are following the provisions of the grant? Most of the time organizations are concerned with having proper internal controls over their routine accounting related functions, but having internal controls over compliance requirements of federal grants can be just as important.

     What are you required to do? According to OMB Circular A-133 (which governs the administration of federal awards), organizations are required to:
“Maintain internal control over Federal programs that provides reasonable assurance that the auditee is managing Federal awards in compliance with laws, regulations, and the provisions of contracts or grant agreements that could have a material effect on each of its Federal programs.”
       To ensure that you have the proper controls in place, it is a good idea to perform an assessment of each of the compliance requirements that affect your federal grants. Here are a few questions you can ask yourself and others involved with the administration of the grant:
     “How do we know that case managers who are carrying out the program are fully informed of the provisions of the grant?”
     “What process do we have that would prevent an unallowable cost from being charged to the grant?
     “How do we know that participants in the program are eligible to receive services? Does anyone verify eligibility after the initial assessment?”
     “How do we make certain that we have paid for allowable costs before we request reimbursement from the grantor?”
     “How do we communicate changes involving the grant to those personnel who need to know?”
     “Do we routinely check the “Excluded Parties Listing System” to ensure that we are not doing business with any vendors that have been suspended or debarred?”
     “What process do we have in place to make sure that all reports were filed accurately and timely?”

     After doing this assessment, you may find that your internal controls need to be strengthened. If you need assistance with this, please give us a call.

Categories: Federal Awards, Gov't/United Way Agencies, Internal Controls, Operational Issues
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Do We Really Need An Audit?

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Donna Mayes

To some, this question is equivalent to “Why would I stick a red-hot poker in my eye?” Going through an audit doesn’t have to be the worst experience in your life, but that isn’t the topic of today’s posting. I frequently get the question “Why do non-profit organizations need an audit?” There are many reasons why your financial statements should be subjected to the scrutiny of independent certified public accountants. Here are the most common ones:

• The by-laws of the organization require an annual audit of the financial statements.
• Affiliated fund raising organizations, such as United Way, may require recipient organizations to have an audit as a condition of receiving allocations.
• Lending institutions may require audited financial statements before making a loan and in each year that the loan has an outstanding balance.
• Potential donors, especially foundations, may ask for a copy of the most recent audited financial statements. Although it may not be a prerequisite to receiving funding from them, it is a tool that the foundation can use in its decision-making.
• The federal or state agency from which you are seeking funding requires an audit.
• Management and/or the Board of Directors believe that it is a “best practice” to have an annual audit.

This last reason is the one that I like the most because there is no outside interest that is forcing an audit. I have a friend who recently became a controller at a local church that had never been audited. He requested that his Board of Trustees hire a CPA firm to conduct an audit because he wanted to start his tenure with a clean slate and to have full accountability. What better way to demonstrate to your Board that you are above board, capable, and fiscally responsible than to open your books and records to professionals trained in auditing that will provide an opinion on whether the financial statements are free of material misstatements.

If you’ve never had an annual audit (or it has been a long time since your last audit), some may ask when you should start. Following are a few ideas:

• A year or two before launching a capital campaign
• If there is an expectation that you may be involved in a merger or acquisition
• Before starting a new program that may require some creative funding
• Construction of new facilities that may require interim or permanent bank financing

If you are wondering if the organization you are involved in should have an audit of your financial statements, give us a call.

Categories: Definitions, Federal Awards, Financial Reporting, General Information, Governance, Uncategorized
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Internal Controls for Remote Locations Part II

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John Greenslade

Does your organization struggle in determining “what” policies would mitigate loss when cash collections are decentralized? This post is a continuation of my previous post on internal controls at remote locations. If you just can’t get enough piece of mind (and who doesn’t love that), you might find these other “processes” useful.  And now, the continued list of suggestions:

  • Determine staffing during collection times. For receipts over a certain dollar amount, always have at least two employees present (counting/depositing) to help lower this heightened risk factor.
  • If receipts are provided to the donor or client: consider using a triplicate form. One copy to the donor/client, one that is included in the deposit report sent to the accounting office , and one to be retained in numerical sequence for accountability over the forms used.
  • Maintain a cash receipts log when using numbered receipt forms. The log should include receipt number, date received, name of payor, amount of payment, form of receipt (cash, check, money order, etc.), check number and date (if applicable), and purpose of payment (if known or applicable).
  • Posting signs at collection areas informing payors that they should get a receipt showing their transaction.
  • When transporting cash receipts from the remote location back to the central office or bank, utilize a courier service if possible or appropriate. Minimally, keep receipts in a locked security bag with a trustworthy employee not involved in the recording or reconciliation process transporting the bag. If there is a large amount of receipts being transported, have two employees be involved for additional safety. Read the rest of this entry »
Categories: Internal Controls
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