FIN 48 is an accounting standard that publicly traded companies have been complying with since 2007. Due to many comments and concerns about the standard, the implementation was delayed for nonpublic entities. FIN48 is an interpretation that clarifies accounting for uncertainties in income taxes, but more importantly, it changes the way that resulting liabilities are recognized, measured, presented and disclosed in the financial statements. When a tax return is completed, every answer or number is really a tax position. FIN48 asks the theoretical question, “would that tax position (either taken on a return or expected to be taken on a future return) stand up to examination by the IRS if they have full knowledge of the facts?”. 

Ok that is a bunch of tax talk. How can this standard affect tax-exempt organizations? The Financial Accounting Standards Board actually addressed that issue specifically, in a staff position paper issued last year. There are several FIN48 issues that can affect tax exempt agencies, but the most common are (1) performing services that are not consistent with the organization’s tax exempt purpose and (2) unrelated business income.

The first assessment of any tax position is whether or not the position is more likely than not to be upheld during an IRS examination. If the position would be upheld, then it is NOT an uncertain tax position and there is NO liability.  If the position cannot be upheld, then FIN48 requires a liability to be recorded and disclosed. The calculation of the liability is prescribed but allows some judgement. The recorded liability is the difference between the benefit recorded (full amount) and the amount that would be 50% or more likely to be allowed after the examination. The disclosure will identify this as an uncertain tax position, and will raise red flags for an IRS audit. As reported in the Journal of Accountancy, the IRS is currently proposing companies with more than $10 million of assets to disclose uncertain tax positions on their annual returns. 

Need help in determining what is considered an “uncertain tax position”? See our next post.

Organizations comprised of property owners can be classified into the following four groups:

1. Condominium Associations - comprised of unit owners owning their individual living quarters, having an undivided percentage interest in the common property.

2. Homeowners’ Associations - comprised of members who own their dwellings and the land on which the dwelling sits however the common area/property is owned by the Association.

3. Cooperative Housing Corporations - comprised of residents owning shares of stock or membership certificates, giving them the right to occupy a unit in the cooperative. The Corporation has title to the property (individual units and common area) within the development.

4. Timeshare Developments - comprised of users having access to certain accommodations annually or other repeating basis.  

These organizations are commonly referred to as Common Interest Realty Associations or “CIRAs”. The principle activities for these organizations include: Read the rest of this entry »

Our next Executive Exchange is scheduled for Wednesday, March 3rd, located at the Funding Information Center, 329 S. Henderson in Fort Worth, TX. The training is designed for executive directors, presidents, chief financial officers, controllers and board members.

Topic: Exploring the New Governance Realities

Nonprofit governance is more in the spotlight than ever with the rewrite of the Texas Business Organizations Code and the Form 990. While the principles of good governance have not changed, laws, regulations, compliance and scrutiny certainly have. The following Panelists will discuss their experiences in the past couple of years and how Boards and regulators are dealing with the major issues:
• Carol Klocek, Executive Director, YWCA of Fort Worth & Tarrant County
• Sandy Kautz, retired nonprofit CEO and Realignment Consultant with Girl Scouts of the USA; Current Community Volunteer
• Becky DaVee, CPA – Rylander, Clay and Opitz, LLP 

Date: Wednesday, March 3, 2010
Time: 11:30 – 1:30
Location: Funding Information Center, 329 S. Henderson, Fort Worth – 817-334-0228
Cost: $20 (lunch is provided)
Registration: http://www.fic-ftw.org/signup/EE%203.3.10.htm

Purpose of Schedule D
Schedule D is designed to provide additional information regarding information presented in the financial statements of Form 990.

Information You Will Need to Prepare Schedule D
You will need to gather or prepare the following information:

• Details regarding your donor advised funds, (Part I).
• Details regarding your conservation easements, (Part II).
• Details regarding your collections of art, historical treasures, and similar assets, (Part III).
• Details regarding your trust, escrow, and custodial arrangements, (Part IV).
• Details regarding your endowment funds, (Part V).
• Details regarding your assets, investments, and liabilities, (Part VI, VII, VIII, IX, and X).
• Your audited financial statements, (Part XI, XII, and XIII).
• View the IRS Website for additional instructions for preparation of Schedule D.

How to Prepare Schedule D

Part I, Organizations Maintaining Donor Advised Funds or Other Similar Funds or Accounts

A donor advised funds allow donors to maintain advisory privileges regarding the distribution or investment of their donated funds. Generally a donor advised fund is a fund or account:

1. That is separately identified by reference to contributions of the donor;
2. That is owned and controlled by your organization; and
3. For which the donor or donor advisor has or reasonably expects to have advisory privileges in the distribution or investment of amounts held in the donor advised funds of accounts because of the donor’s status as a donor.

Read the rest of this entry »

In my previous post we discussed external financial statement audits. Now we will discuss the audit process.

To begin the audit, the accountant (or equivalent) will present the auditor with a listing of all accounts and the related balances that are used to compile the financial statements. Basically, the accountant is saying this is what I believe to be the balances of these accounts. Then the auditor goes through various steps, such as confirming information with third parties, reviewing invoices, contracts, receipts, bank statements, and analytical procedures to prove that the balances are not “materially misstated” and that the statements conform to generally accepted accounting principles.

An audit does not look at every transaction that occurred during the year. Normally this would be cost prohibitive. So the auditor will look at various accounts and take a sample of transactions from those accounts. Because we “test” the account balances and not review 100%, our report is not saying that the financial statements are necessarily 100% accurate, but our report tells the users of the financial statements that we believe there is not a material misstatement that would cause you to alter a decision.

For example, your organization may report to us that they have a balance of accounts receivable of $2 million. Through various means of testing this balance, we have reviewed $1.9 million of this balance and believe it to be accurate. But we have not audited the remaining $100,000. We believe that the users of the financial statements would make the same decision if the actual balance were $2 million or $1.9 million. When errors are found during the audit, the auditors will discuss the issues with management and propose adjustments to the financial statements.

Understanding what an audit of financial statements entails helps management, Board of Directors and others to know what they are paying for and that the statements fairly represent the financial status of the organization. If the accountant uses the same generally accepted accounting principles to compile the monthly financial statements, this will help management and the Board of Directors make consistent, well-informed decisions.

FAS 164 issued in April 2009, sets out the principles and requirements for how a not-for-profit entity should determine whether a combination is in fact a merger or an acquisition. Prior to the issuance of this standard FAS 141 provided guidance on combinations for Business entities (for-profit organizations). There are different motivators for acquiring or merging with another organizations. For-profit entities tend to be motivated by market share, generating revenues and maximizing net income. Nonprofit organizations may merge for different reasons, other than the effect on the bottom line. Enhanced program services and missional outreach while reducing overhead, play important factors in negotiating a combination.

Non-profit organizations exempt status requires continued operational compliance with its exemption. Whether the organization fulfills a religious, educational, scientific, cultural service to the community, any organizational changes have to be focused on continuing or expanding the operational exemption. Many non-profit combinations involve an inherent contribution between the organizations.

When two non-profit organizations are combined – is it a merger or an acquisition? After the combination, who controls the combined entity? Who is in control? A new governance team – the combination is recorded as a merger. If one entity cedes control to another entity – the combination is recorded as an acquisition.

How is the combination recorded? Read the rest of this entry »

One of the most critical tasks in monitoring and managing operations is to establish an annual budget. Whether you are responsible for one line item, one program, one department, or an entire organization, you will want to participate in this workshop held in the Fort Worth area, and sponsored by the Funding Information Center.

Participants will learn:

• The importance of sound budgeting
• The basic principles of budgeting
• How the budget is used as a planning and management tool
• Steps in the budgeting process
• How to develop various types of budgets, including programs and special events

Speaker: Christi Stinson, Executive Director, Funding Information Center
Fee: $20 for FIC members; $40 for nonmembers

Date: Tuesday February 16th, 2010

Time:  9:00 a.m. to 11:00 a.m.

Location: Funding Information Center
329 S. Henderson, Fort Worth, TX 76104
817-334-0228
To register, follow this link.

Listed below are some additional controls that I believe are necessary for a sound control environment in an employee benefit plan (again this list is not intended to be all inclusive as the facts and circumstances of employee benefit plans vary):

1. Determine if employee deferrals comply with current regulations (See limitations at: http://www.irs.gov/retirement/sponsor/article/0,,id=151925,00.html)
2. Determine if employee deferrals comply with the Plan’s maximum percentage requirements, if applicable (controls should be in place to ensure that employees are not allowed to elect to contribute more than the Plan’s elected maximum percentage as indicated in the Plan Document)
3. Controls should be in place to ensure that contributions are submitted to the Plan in a timely basis (Determine the who and the when to make sure it happens as required by law). Key – Timing should not be in excess of the number of days it takes an employer to transmit payroll taxes
4. Knowledgeable personnel should review and approve all loans and distributions made from the Plan . This knowledgeable person has read and fully understands the Plan document and requirements contained therein.
5. For loan approval – Understand the plan requirements for the following: loan amount complies; interest rate in loan agreement complies; condition for loan.
6. For distributions – Understand the following:  distribution complies with plan provisions and ensure all necessary documentation is retained (specifically for hardship distributions); distribution request includes the appropriate amount and the accurate amount of withheld taxes (10% and possibly an additional 20% if early distribution); ensure the appropriate vested percentage is utilized for employer contributions; determine if distributions required by law (required minimum distributions, etc) were completed during the year.

I hope the information is helpful in establishing a sound control environment for your organization’s employee benefit plan.  If there are areas that I have missed feel free to leave a comment to help out the other readers.  The controls that I have listed are coming from an auditor’s point of view and you may have insights related to your field of expertise that could be beneficial to others!

Let’s be really honest – year-end giving wasn’t exactly what we hoped for. In a recent study conducted by the Barna Group, 57% of pastors surveyed said the economy had negatively impacted their church compared to last year. The good news is that only 8% of church leaders said the economic impact was “very negative,” and 9% actually described last year as financially positive. Even if your not one of the 57%, you’re probably not as comfortable going into 2010 as you’d like to be.

So what can churches do to weather this environment? Here’s a few suggestions: Read the rest of this entry »

President Obama recently signed into law H.R. 4462 which allows taxpayers to claim a charitable deduction in the 2009 tax year for donations made after January 11, 2010 and before March 1, 2010 for the relief of victims in areas affected by the recent earthquake in Haiti. This new law applies only to contributions of cash (not property) and the contribution must otherwise meet the requirements for a charitable contribution. Cash contributions would include contributions made by text message, check, credit card, or debit card. 

Federal law requires the taxpayer keep a record of any deductible contributions made. For donations by text message, a copy of the telephone or wireless account bill must show the name of the donee organization, the date of the contribution, and the dollar amount. For other cash contributions, be sure to keep a bank record, such as a cancelled check, or a receipt from the charity showing the name of the charity and the date and amount of the contribution.

For additional information regarding Haiti donations, see this IRS release.

What are the specific requireqments for a charitable contribution? See this IRS publication for additional information.