Presented by: Julie Floch
Partner and Director of
Not-for-Profit Services
EisnerAmper LLP
(212) 891-4109
julie.floch@eisneramper.com


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
Accounting 101 Terms
Non-Cash Donations
Endowment Accounting
GAAP vs Tax
What Exactly is an Audit?
Resources
2
AUTHORITATIVE GUIDANCE:

Financial Accounting Standard Board (“FASB”)

Generally Accepted Accounting Principles (“GAAP”)

Accounting Standards Codification (“ASC”)

International Accounting Standards Board (“IASB”)

Generally Accepted Auditing Standards (“GAAS”)

Public Company Accounting Oversight Board (“PCAOB”)

Committee of Sponsoring Organizations (“COSO”)
4
NOT-FOR-PROFIT INDUSTRY TERMS:

Contributions vs Exchange Transactions
◦
◦
◦
◦
◦
◦

Unrestricted
Temporarily restricted
Permanently restricted
Endowment

UPMIFA vs UMIFA

Board actions

State distinctions
Investment vs Endowment
◦
◦
◦
◦
Restrictions
Conditions
Variance power
Non-cash activities
Governmental grants
Deferred revenue
Net Assets
◦
◦
◦
◦



Unrealized gains & losses

Realized gains & losses

Dividend and interest income
Release of restrictions
◦
◦
◦

Fair market value (“FMV”)
Fair value hierarchy
Net asset value (“NAV”)
Investment income
Programmatic
Time
Board appropriations
Functional expenses
◦
◦
Programmatic
Ratios
5
December 31,
2011
2010
ASSETS
Cash and cash equivalents
Investments
Pledges receivable, net
Grants receivable
Prepaid expenses and other current assets
Inventory
Property and equipment, net
Security deposits
$
1,953,000
10,250,000
3,108,000
1,175,000
37,000
34,000
5,729,000
3,000
$ 22,289,000
$
2,193,000
10,108,000
3,207,000
943,000
55,000
31,000
4,761,000
3,000
$ 21,301,000
6
December 31,
2011
2010
LIABILITIES
Accounts payable and accrued expenses
Deferred revenue
Accrued vacation
Annuities payable
Accrued pension liability
Bonds payable
Total liabilities
$
671,000
301,000
231,000
150,000
650,000
3,700,000
5,703,000
$
569,000
290,000
228,000
125,000
645,000
4,000,000
5,857,000
Commitments and contingency (Note M)
7
December 31,
2011
2010
Net assets:
Unrestricted:
Operating fund
Board-designated fund
6,996,000
325,000
6,649,000
301,000
Total unrestricted
7,321,000
6,950,000
Temporarily restricted
Permanently restricted
2,491,000
6,774,000
2,494,000
6,000,000
16,586,000
15,444,000
$ 22,289,000
$ 21,301,000
Total net assets
8
Year Ended
Year Ended December 31, 2011
Unrestricted
Operating support and revenue:
Support:
Government grants
Contributions
Direct mail campaigns
Special events (net of direct benefit to
donors of $280,000 and $145,000 in
2011 and 2010, respectively)
Donated services and materials
Total support
Revenue:
Catalog sales
Change in value of split-interest
agreements
Investment income allocated for operations
Other income
Total revenue
Support and revenue before net assets
released from restrictions
Net assets released from restrictions:
Satisfaction of program and time restrictions
Total support and revenue
$
2,519,000
2,853,000
1,293,000
Temporarily
Restricted
Permanently
Restricted
$
$
774,000
1,295,000
688,000
8,648,000
Total
$
578,000
578,000
774,000
206,000
December 31,
2010
2,519,000
4,205,000
1,293,000
$
2,685,000
3,483,000
1,462,000
1,295,000
688,000
843,000
814,000
10,000,000
9,287,000
206,000
124,000
30,000
55,000
101,000
25,000
30,000
80,000
101,000
15,000
50,000
103,000
392,000
25,000
417,000
292,000
9,040,000
603,000
10,417,000
9,579,000
0
0
10,417,000
9,579,000
626,000
(626,000)
9,666,000
(23,000)
774,000
774,000
9
Year Ended
Year Ended December 31, 2011
Temporarily
Permanently
Restricted
Restricted
Unrestricted
Expenses:
Program services:
Program 1
Program 2
Program 3
December 31,
Total
2010
3,101,000
2,338,000
2,534,000
3,101,000
2,338,000
2,534,000
2,849,000
2,442,000
2,269,000
Total program services
7,973,000
7,973,000
7,560,000
Supporting services:
Management and general
Fund-raising
734,000
528,000
734,000
528,000
699,000
539,000
Total supporting services
1,262,000
1,262,000
1,238,000
Total operating expenses
9,235,000
9,235,000
8,798,000
1,182,000
781,000
50,000
21,000
(90,000)
(200,000)
Change in net assets from operations
Change in net assets from nonoperating activities
Investment results, net of
allocation to operations
Pension-related charges other
than periodic costs
(23,000)
30,000
20,000
774,000
(90,000)
Change in net assets
Net assets - beginning of the year
Net assets - end of the year
431,000
371,000
6,950,000
$
7,321,000
(3,000)
2,494,000
$
2,491,000
$
774,000
6,000,000
1,142,000
15,444,000
6,774,000 $
16,586,000
602,000
14,842,000
$
15,444,000
10
Program Services
Program
1
Salaries
Employee benefits and
payroll taxes
Donated materials
Professional fundraising
fees
Professional fees
(including
Contributed
services)
Program supplies
Occupancy
Telephone
Office expenses and
supplies
Equipment repair and
maintenance
Insurance
Conferences and
related costs
Marketing and
promotion
Printing and
publications
Direct mail and other
fund-raising
Postage and shipping
Depreciation expense
Interest expense
Miscellaneous
$
Total expenses
832,000
Program
2
$
742,000
Program
3
$
Year Ended December 31, 2011
Supporting Services
Management
and
FundTotal
General
Raising
779,000
$ 2,353,000
$
335,000
$
Total
164,000
$ 499,000
2011
$
2,852,000
373,000
251,000
439,000
128,000
1,063,000
128,000
114,000
33,000
18,000
60,000
147,000
18,000
60,000
1,210,000
146,000
60,000
465,000
202,000
72,000
739,000
80,000
78,000
158,000
897,000
943,000
134,000
8,000
3,000
674,000
267,000
30,000
3,000
879,000
34,000
19,000
16,000
2,496,000
435,000
57,000
22,000
20,000
9,000
7,000
11,000
15,000
4,000
31,000
24,000
11,000
2,496,000
466,000
81,000
33,000
95,000
31,000
29,000
155,000
15,000
3,000
18,000
173,000
31,000
12,000
15,000
7,000
8,000
21,000
54,000
40,000
13,000
7,000
5,000
8,000
18,000
15,000
72,000
55,000
10,000
9,000
19,000
19,000
39,000
28,000
67,000
100,000
39,000
39,000
69,000
29,000
21,000
30,000
33,000
3,000
5,000
37,000
390,000
70,000
9,000
528,000
$1,262,000
19,000
33,000
33,000
11,000
30,000
1,000
183,000
1,000
114,000
5,000
60,000
7,000
357,000
2,000
1,000
1,000
4,000
$ 3,101,000
$ 2,338,000
$ 2,534,000
$ 7,973,000
1,000
12,000
70,000
2,000
$
734,000
$
$
9,235,000
11
THE IMPORTANCE OF A GIFT ACCEPTANCE AGREEMENT

May outline the terms of a contribution so that the donor and charity agree on
how the contribution will be used

Have a clear understanding of the donor’s purpose and the charitable
organization’s requirements

Important to understand ultimate beneficiary of gift

Common problem gifts:
 Ambiguous Gifts
 Overly Restrictive Gifts
 Naming Rights Gifts
 Large Gifts
 Hard to Value Gifts
 Split Interest Agreements
13

Art, Antiques and Collectibles

Securities and Business Interests

Split Interest Agreements

Real Estate

Life Insurance

Medical Supplies

Clothing
14
ART, ANTIQUES AND COLLECTIBLES
FASB ASC 958-360-25-3 states that an NFP that holds works of art,
historical treasures, and similar items that meet the definition of a collection
has the following three alternative policies for reporting that collection: (a)
capitalization of all collection items, (b) capitalization of all collection items
on a prospective basis (that is, all items acquired after a stated date), or (c)
no capitalization. Capitalization of selected collections or items is
precluded.
15
SECURITIES AND BUSINESS INTERESTS

Publicly Traded Securities
 May include stocks, bonds or mutual funds
 Great incentive to contribute rather than sell on the part of the donor
•
Avoid Federal and state income taxes on gain
•
But not securities held at a loss
 Recorded at FMV at the date of the gift

C-Corporation Stock
 Deduction generally equal to fair market value of stock
 No tax on gain
 Charity will want an exit strategy
 Recorded at FMV at the date of the gift
16
SECURITIES AND BUSINESS INTERESTS

S-Corporation Stock
 Ensure charity is permitted S Corp shareholder
 Alternative: Have S Corp gift assets to charity
 Recorded at FMV at the date of the gift (hard to value)

LLC and Partnership Interests
 Deduction generally equal FMV less any ordinary income gain
 Charity subject to UBTI on trade or business income
 Recorded at FMV at the date of the gift
17
SPLIT INTEREST AGREEMENTS


Charitable Remainder Trusts (CRT)

Pays an annual stream of income to a non-charitable beneficiary for one life, two lives or a
term of years

Assets remain in the CRT at the end of the trust term
and pass to charity

Recorded at present value of the trust at the date of the gift (third party trustee)

Record the present value of the assets at the date of the gift along with the present value of
the annual income stream payable to the beneficiary (npo trustee)
Charitable Gift Annuities (CGA)

Donor may transfer assets to a charity and in return the charity will make the annuity
payment to one or more individuals for their lifetimes

Allows donor to retain income interests and deduct the fair market value for the contribution

Record the FMV of the assets at the date of the gift and the present value of the annual
income stream payable to the beneficiary
18
REAL ESTATE

Gift of unencumbered real estate to public charity
 Charitable deduction equal to the fair market value of the real estate
 If private foundation, donor may deduct his or her basis
 Qualified appraisal required
 Recorded at FMV at the date of the gift

Real estate encumbered by a mortgage
 Must reduce contribution deduction by the mortgage
 Unrelated Business Taxable Income (“UBTI”)
• Debt-financed property will often result in UBTI (gross income from an unrelated
trade or business)
 Recorded at FMV at the date of the gift less the amount of the mortgage
19
LIFE INSURANCE

Must contribute the entire policy to receive maximum tax benefits
 No immediate income tax deduction for the mere payment of premiums for a
policy with a charity named as beneficiary where the donor still maintains the
ability to change the beneficiary

Recorded at the estimated present value at the date of the gift
In order to donate an existing life insurance policy to charity, you must assign all
rights in the policy to the charity. You must also deliver the policy itself to the charity.
By doing this, you give up all control of the life insurance policy forever. This
strategy provides the full tax advantages of charitable giving because the transfer of
ownership is irrevocable. You may be able to take an income tax deduction equal to
your basis or its fair market value. The policy is not included in your gross estate
when you die, unless you die within three years of the transfer. In this case, your
estate would get an offsetting charitable deduction.
20
MEDICAL SUPPLIES
The estimated fair value of the donations of medical supplies and equipment should be recorded at
fair-value based upon the wholesale list value for new items and resale values listed by local and
national dealers. The estimated fair value of these contributions is recorded in the financial statements
as inventory and contribution revenue. As the medical supplies and equipment are distributed,
program expenses are recorded.
CLOTHING



Thrift stores
Goodwill
Recorded at FMV at the date of the gift

Could be poundage

Could be by appraisal

Hard to measure
21
WHAT IS AN ENDOWMENT?


To a donor, an endowment is a sum of money given to a charity
for charitable purposes, with only the “income” being spent and
“principal” being preserved.
To an accountant, it is a fund which is “permanently restricted”,
or if board restricted then clearly labeled as such in unrestricted
net assets.

To a lawyer, it is an institutional fund not wholly expendable on
a current basis under the terms of the gift instrument.

Thus, a “true” endowment is one established or created by the
donor.
23
WHAT IS THE ENDOWMENT BALANCE?


A simple question that does not have a simple
answer
Each endowment has at least three answers to this
question:
 The book value
 The market value
 The amount available for appropriation
24
THE BOOK VALUE




Also referred to as corpus or principal
Equal to the original gift amount
Only changes if additional gifts are made, spending
occurs from corpus (not income), or in some cases,
if payout is re-invested
Has important legal and accounting implications
under Uniform Prudent Management of Institutional
Funds Act (UPMIFA)
25
THE MARKET VALUE



What the corpus is worth today
Includes both the book (corpus) value and all
accumulated income and/or losses
Payout reduces the market value, not the corpus
26
AMOUNT AVAILABLE FOR APPROPRIATION


Board of Trustees authorizes a payout rate
annually for the following year
Once distributed, the payout no longer
participates in earnings, even if it is not spent
27




Donor directed/permanently restricted net
assets
Quasi endowment/board designated unrestricted
net assets
Uniform Management of Institutional Funds Act
(“UMIFA”)
Uniform Prudent Management of Institutional
Funds Act (“UPMIFA”)
28

Donor directed/permanently restricted net assets
 The part of the net assets of a not-for-profit organization resulting
(a) from contributions and other inflows of assets whose use by the
organization is limited by donor imposed stipulations that neither expire
by passage of time nor can be fulfilled or otherwise removed by actions
of the organization, (b) from other asset enhancements and
diminishments subject to the same kinds of stipulations, and (c) from
reclassification from (or to) other classes of net assets as a consequence
of donor imposed stipulations.

Quasi endowment/Board designated net assets
 An action by a not-for-profit organization's board of directors to
earmark an asset for a specified purpose. Since this is not a donor
imposed restriction, the designated asset is classified and reported as
part of unrestricted net assets.
29

Uniform Management of Institutional Funds Act (“UMIFA”)
 Is a uniform law which provides rules regarding how much of an endowment a charity
can spend, for what purpose, and how the charity should invest the endowment
funds. The drafters of UMIFA thought charities should be able to spend a prudent
portion of the gains earned by an endowment.

Uniform Prudent Management of Institutional Funds Act
(“UPMIFA”)
 The most significant change made by UPMIFA is its elimination of the “historic dollar
value” limitation on expenditures from endowment funds. Under UMIFA, while net
appreciation could be spent, the “historic dollar value” of an endowment had to be
preserved. Institutions are no longer limited in their ability to spend from
“underwater” endowment funds (i.e., those with assets having current values less than
when they were given). Under UPMIFA, an institution may spend as much as it deems
“prudent” (subject to donor intent), depending on its particular state law.
30
Endowment net asset composition by type of fund
December 31, 2011
Permanently
Unrestricted
Restricted
Donor-restricted endowment funds
Board-designated endowment funds
$
325,000
Total funds
$
325,000
Total
$
6,774,000
0
$ 6,774,000
325,000
$
6,774,000
$ 7,099,000
Changes in endowment net assets
December 31, 2011
Permanently
Unrestricted
Restricted
Endowment net assets, beginning of year
301,000
$ 6,000,000
Investment return:
Investment income
Net depreciation (realized and unrealized)
19,000
(4,000)
0
19,000
(4,000)
Total investment return
15,000
0
15,000
Contributions
14,000
774,000
788,000
Appropriation of endowment assets for
expenditure
(5,000)
0
(5,000)
325,000
$ 6,774,000
Endowment net assets, end of year
$
$
$
Total
$
6,301,000
7,099,000
31

GAAP
 Donated services
 Unrealized gains and losses
 Variance power
 Special events revenue and expense
 Materiality

Tax
 Investment expenses
 Entity level reporting vs consolidation
 Related party transactions
33
 GAAP
Treatment
 Tax
Treatment
 Record gifts of property at fair market
value
 Record gifts of property at fair market
value
 Record gifts of use of facilities if
otherwise needed to be paid
 Do NOT record use of facilities or gifts
of donated services
 Recognize contributions of services if:
 Form 990 provides for a reconciliation
to audited GAAP financial statements
 Create or enhance nonfinancial assets or
 Require specialized skills and would typically
need to be purchased if not provided by
donation
 Disclose in footnotes the extent of
donated services even if not at a level
that leads to recognition
34
 GAAP
Treatment
 Tax
Treatment
 Show most investments at fair market
value
 Unrealized gains and losses are not
reported
 Investment expenses are generally
netted against investment earnings
 Investment expenses are detailed on
the schedule of functional expenses
 Form 990 provides for a reconciliation
to audited GAAP financial statements
35
 GAAP
Treatment
 Tax
Treatment
 Consolidated financial statements must
be prepared if certain criteria are met
 Consolidated filings may not be filed,
except under a group exemption
 Functional expenses not required for all
organizations
 Functional expenses required for all
501 (c)(3) and (4) organizations
 Related party transactions are required
to be disclosed for material items
 Related party transactions are required
to be disclosed under various
circumstances and thresholds on
Schedules L and R
 Audit although not a matter of GAAP
may be required by some states,
funders and watchdog agencies
 Audit not required by IRS
36

The objective of an audit is for a professional auditor to
evaluate or measure a subject matter that is the
responsibility of another party against identified suitable
criteria, and to express a conclusion (opinion) with a level
of assurance about the subject matter for the intended
user.
38







Kind of audit / assurance engagements
A three party relationship
The subject matter
The scope of the audit
Suitable criteria
The audit process
The report
39

The auditor has to observe:








Integrity
Objectivity
Independence
Professional competence and due care
Confidentiality
Professional behavior
Application of technical standards
The auditor should be:
 A member of a respected institute or organization with:
•
•
•
•
quality control policies and procedures
disciplinary rules
a code of ethics
auditing standards
40

Pre-audit
 Preliminary investigation
 Assignment process

Performing the audit
 Initial investigation
 Evaluating and forming an opinion

Completion
 Reporting
 Evaluating the audit
41
GAAS
 Internal Control

 Management letter
 Material weakness
• A material weakness is a deficiency, or a combination of deficiencies, in
internal control, such that there is a reasonable possibility that a material
misstatement of the entity’s financial statements will not be prevented, or
detected and corrected on a timely basis.
 Significant deficiency
• A significant deficiency is a deficiency, or a combination of deficiencies, in
internal control that is less severe than a material weakness, yet important
enough to merit attention by those charged with governance.
42

American Institute of Certified Public Accountants
(“AICPA”)
 Audit & Accounting Guide: Not-for-Profit Entities
Audit Risk Alerts: Not-for-Profit Entities Industry
Developments
 NPO Audit Committee Toolkit

Financial Accounting Standards Board (“FASB”)
 FASB Codification
 Emerging Issues Task Force (“EITF”)
44

Watchdog Agencies
Charity Navigator
Better Business Bureau Wise Giving Alliance
GuideStar
45