Has your nonprofit organization ever considered lobbying activities? An organization exempt from taxation under section 501(c)(3) will lose its tax-exempt status and its qualification to receive deductible charitable contributions if a substantial part of its activities are carried on to influence legislation.

However, there are circumstances where lobbying is allowed for certain eligible 501(c)(3)s. Read the rest of this entry »

Anyone…at least that is how one should think when analyzing fraud risks.

Fraud is a hot topic. If you don’t think so ask someone who used to work for Enron or invested in Madoff’s investment company, they might change your mind. But, because of instances like these, people often think of fraud in large terms, and the mention of the words carries a lot of weight; when very often fraud occurs in all sizes and forms.

But, who is likely to commit fraud? Most people use what is commonly known as the fraud triangle to identify areas where one can commit fraud. The three criteria are Pressure/Incentive, Opportunity, and Rationalization.

The pressure/incentive trait is common with performance based jobs where there is motivation for employees to record false sales to meet sales/performance quotas or up their commission, or other incentive pay.

Opportunity rears its ugly head when an individual has too much control over one key process in a business. Let’s say a cashier at a bank did not have to reconcile the cash drawer at the end of the day. The “opportunity” is there for cash to be stolen without any knowledge of it being gone.

A big one in today’s economy is rationalization. This is commonly referred to as the “I deserve this,” mentality. Where an individual develops a frame of mind where they can justify their actions and commit the fraud even though it is outside their typical ethical guidelines. For example, the company is generating large revenue streams, but an employee needs money to pay for his kid’s summer baseball league; this employee could find themselves thinking “They won’t miss this money, and I can’t say no to my child.”

Now let’s not confuse fraud with honest mistakes, errors, or plain ignorance; there is a difference. Fraud is defined as “intentional” deception…intentional being the key word.

Stay tuned as we post methods to address these instances and help you to minimize fraud in your business.

With unemployment nearing the double digits, there is a large population of professionals in the marketplace. You might have seen the news cast that played on NBC this Wednesday the 23rd (click here).

One thing to know is if you have any professionals donate services that you would normally have to pay for you should be recording that time as an “in-kind” contribution. FASB states that if the services donated (a) create or enhance nonfinancial assets or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation.

Examples to watch for are …. Read the rest of this entry »

Does your organization lease property, plant & equipment? Odds would have it that many of you utilize leasing equipment. And Why not? Leases allow you to obtain assets while minimizing the affect on your cash flow, since most leases require a minimal, if any, initial investment. Also, we all know that everytime you blink technology advances, and leasing helps you keep up with that pace by allowing your assets to change as quickly as your business needs do.

But, one of the biggest advantages to leasing is about to have a major renovation.

Currently the U.S. accounting standards define two types of leases, operating and capital. The difference? Capital leases are included in the organization’s balances sheet, whereas operating leases only touch your income statements. See the advantage? You can keep major assets off your books and their long-term payment obligations as well.

Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), are teaming up and discussing the elimination of the operating lease. Under their proposed guidelines, essentially all leases, for all companies, will be treated as capital leases starting as early as 2011. To see reactions to this change you can read this article.

How does this affect your organization? Read the rest of this entry »

Generally accepted accounting principles (GAAP) require non-profits to report expenses on a functional basis. What this means is that expenses must be broken out into categories of program services and supporting activities. Supporting activities generally includes administrative expenses, fund raising expenses and membership services.
Program services are those activities which help fulfill the purpose or mission of the non-profit. These services generally include salaries, rent, supplies, etc., basically anything that is used directly in one of the programs relating to the mission. It should be noted that some things, like rent, might have to be allocated between different functional categories if it is not completely identifiable to just one of the categories.

Support services include general and administrative, fundraising and membership services. Administrative expenses are those expenses that do not relate directly to a program, but are not considered fund raising or membership services. These expenses may include management salaries, budgeting, record keeping, etc. Fund raising expenses are the expenses incurred while eliciting funds for the organization. They can include fund raising campaigns, special fund raising events, maintaining donor lists, etc. Membership services include costs incurred for maintaining membership records and providing benefits to the organization’s members. This includes soliciting for prospective members and membership dues, membership relations, and similar activities. Read the rest of this entry »

As discussed in “Unconditional Promises to Give” post, promises to give can be unconditional or conditional. Conditional promises to give come with donor-imposed conditions. If the condition is not met, the donor is not obligated to fulfill the promise to give. If the donor has already fulfilled the promise but the condition is never met, the donor has a right to have the assets returned to them.

Conditional promises to give are recognized only when the conditions are satisfied. Therefore, no revenue or receivable should be recognized at the time the promise is received. If any assets are received prior to the conditions being met, the assets should be accounted for as a refundable advance (liability). Once the condition is met, the liability is removed and revenue is recognized.

Additional disclosures must be made regarding promises to give. When disclosing conditional promises to give, you should disclose the following:

1. the total of the amounts promised; and
2. a description and amount for each group of promises having similar characteristics, such as promises conditioned on establishing new programs, completing a new building, or raising matching gifts by a specified date. Read the rest of this entry »

A promise to give is a written or oral agreement to contribute cash or other assets to another entity. To be recognized in GAAP financial statements, you must have sufficient evidence that a promise to give was made and received. Sufficient evidence must be in the form of verifiable documentation such as a pledge card or written agreement. Oral promises to give may be substantiated by tape recordings, written registers or other means that permit verification.        

Promises to give can be unconditional or conditional. Unconditional promises to give are exactly that: unconditional (no strings attached). Once received, they can be used toward the ongoing operations or mission of the not-for-profit organization. 

The timing of recognition of contribution revenue or receivable depends upon the promise to give being unconditional or conditional. Unconditional promises to give are recognized when received, even if the donor restricts the promised contribution for use in a future period and even if the promise will not be paid until a future period. If the promise to give is restricted for use in a future period or won’t be paid until a future period, it should be reported as restricted support, either temporary or permanent. 

Contributions received should be measured at their fair values.  If the promise is expected to be collected in less than a year, it is measured at net realizable value, which in most cases would be the face value net of any estimated uncollectible amount. If the promise is expected to be collected after one year, the fair value should be based on future cash receipts, discounted at a rate “commensurate with the risks involved.”  Basically, the discount rate should be based on the same criteria that would be used for trade receivables.  The entity should consider the following factors:

1. when the receivable is expected to be collected;
2. the creditworthiness of the other parties;
3. the entity’s past collection experience;
4. the entity’s policies concerning the enforcement of promises to give;
5. expectations about possible variations in the amount or timing of the cash flows; and
6. other factors concerning the receivable’s collectibility.

Additional disclosures must be made regarding promises to give. When disclosing unconditional promises to give, you should disclose the following:

1. the amount of promises receivable in less than one year, in one to five years, and in more than five years; and
2. the amount of the allowance for uncollectible promises receivable.

 Examples

 Unconditional Disclosure 1:

Unconditional promises to give are recorded as receivables and revenue when received. The Entity distinguishes between contributions received for each net asset category in accordance with donor-imposed restrictions. Pledges are recorded after being discounted to the anticipated net present value of the future cash flows.

              Pledges are expected to be realized in the following periods:

                                                                                                  20X1                20X0     

                    In one year or less                                                 $  1,438,547     $   1,313,217
                    Between one year and five years                                 1,970,255          1,780,764
                                                                                                 3,408,802          3,093,981
                    Less:
                        Allowance for uncollectible pledges                            (969,036)          (717,538)
                        Discount, at 6%                                                     (387,800)          (324,867)
                                                                                             $  2,051,966     $   2,051,576

Unconditional Disclosure 2:

The pledges receivable consist of operating and capital project fund-raising campaigns. At June 30, 20X1, all pledges receivable are expected to be collected during the next year. Management has determined that the pledges receivable are fully collectible; therefore, no allowance for uncollectible accounts are considered necessary at June 30, 20X1.

For more information about conditional promises to give, watch for my next post.

When an employee is paid for his or her services to a company, an entry must be made to record salary expense. If the gross amount of an employee’s salary was equal to the amount that would ultimately be paid out in cash, the accounting would be simple. An entry would be made to debit payroll expense and credit cash. For example, if an employee’s salary for the pay period was $1,000, the entry would be as follows:
                            DR Payroll Expense         1,000
                            CR Cash                                          1,000

However, the amounts paid to employees will never reflect the gross amount of salary expense, due to payroll taxes and other voluntary withholdings such as taxes, insurance premiums and 401(k) contributions. Amounts withheld from an employees’ paycheck, for their elective deductions and payroll taxes, are never an expense of the company; the amounts would be recorded as a liability when withheld and the liability relieved when paid. The payroll expense will still be recorded gross, however the amount paid out in cash is reduced by the amounts withheld for payroll and income taxes, insurance premiums, 401(k) contributions, or other voluntary withholdings. The difference between the gross payroll expense and the net cash paid out is recorded as a liability. Read the rest of this entry »

Organizations that are organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes, foster national or international amateur sports competitions, or for the prevention of cruelty to children or animals are eligible to be exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code. Unless the organization is a church, or a related-type entity, or  the organization has annual gross receipts less $5,000, the organization is required to file Form 1023 with the IRS. These charitable organizations must be organized and operated exclusively for one or more exempt purposes (as listed above).

Based on Form 1023, the IRS will classify the entity as either a public or private charity. What are the major differences?

A public charity has a broad base of support (contributions typically exceeding 33 1/3% of total support). A private charity has a small base of public support and the majority of the support is derived primarily from the investment earnings of the organization.  For recent legislative information for private foundations, see this post.

So what type of organization are you? Look at the composition of the organization’s support.

Organizations disburse funds in order to pay for costs incurred by the entity. An operating expense is an on-going cost to run the organization. Operating expenses can be broken out into program services expenses and supporting services expenses. Program service expenses are expenses of an organization which are directly related to the organization’s non-profit purposes. Supporting services include management and fundraising expenses. Operating expenses can include salaries and wages, communications or telephone, and rent. Non-operating expenses are expenses not directly related to the main business, such as insurance, interest, repairs and maintenance, special events, fundraising and depreciation.

Expenses are incurred, for cash basis purposes, when a check is written or cash is paid by an organization to another organization or person for services or goods. To record an expense, you debit the expense account related to the purpose for which a disbursement is made and credit the cash account from which the cash is paid or check is written.

Recording expenses properly and keeping detailed records of the types of disbursements an organization makes is very important. Expenses are used in determining how the funds received by the organization are being used and whether those funds are being used for the entity’s exempt purpose. It is also important to monitor restricted contributions to determine that the donor’s restriction has been met. The way an organization spends the money received can impact future fundraising efforts.

Written by Lauren McComic, senior auditor