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Nonprofit Advisor Q1 Winter 2017
Contact Us At [email protected] www.windes.com
Windes Nonprofit Advisor
The Windes Nonprofit Advisor is a periodic technical publication focusing
on the tax, regulatory, and accounting issues that nonprofit organizations
routinely confront.
The Windes Nonprofit Group possesses experience in preparing and
reviewing Forms 990, 990-T, 990-PF, and state tax-exempt forms,
in addition to having experience in the preparation and filing of both
federal and state tax exemption applications for public charities, private
foundations, and other exempt organizations. Furthermore, we can assist in providing valuable guidance
(governance / reasonable compensation documentation / public support test / special events / lobbying /
transactions with related parties) to nonprofit organizations.
The Windes Nonprofit Group prepares audited financial statements and ERISA audits for more than 85
nonprofit organizations. For retirement plans, Windes has experts on staff for §403(b) plan administration
and compliance, including plan document issues, Form 5500 preparation and filing, non-discrimination
testing and government compliance programs.
Our Nonprofit Group is composed of the following individuals who are dedicated to providing nonprofit
organizations with high-level tax, regulatory and accounting consulting, tax compliance services, and
financial statement audit and assurance services:
Michael Barloewen, CPA, CGMA Audit Partner, Nonprofit Group Practice Leader
Lance Adams, CPA Audit Partner
Ron Kulek, CPA Audit Partner
Tom Huey, CPA Audit Senior Manager
Kelly Buck, CPA, MAcct Audit Manager
Richard Green, CPC, APA, ERPA Employee Benefit Services Partner
Donita Joseph, CPA, MBT Tax Partner
Amy Vaughn, JD, CPA, LLM Tax Senior Manager
Chérie Williams Tax Senior
Please do not hesitate to contact any member of the Windes Nonprofit Group toll free at 844.4WINDES
(844.494.6337) or via email at [email protected] .
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Contact Us At [email protected] www.windes.com
Understanding and Applying the New Rules for Nonprofits
In August 2016, after spending over a year deliberating upon its preliminary release, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14 “Not-for-Profit
Entities (Topic 958).” This update is the culmination of the work of the FASB Not-for-Profit Financial
Statements Project and comprehensively addresses the accounting model utilized for nonprofit entities for
the first time in over 20 years. The resulting ASU has the effect of updating, but not overhauling, the current
financial statement model used by nonprofit organizations. This article details the largest components of
this update, discusses transition dates and strategies, and provides implementation and readiness tips for
organizations.
What is in the new standard? The key changes in the new standard:
enhance information about the liquidity and availability of financial resources. An additional
disclosure will add qualitative information about how an organization manages its liquid available
resources and its liquidity risk. In addition, new quantitative disclosures will require presentation
of information that communicates clearly the availability of an organization’s financial assets at the
statement of financial position date to meet cash needs for general expenditures within one year;
improve presentation and disclosure for net asset classes by streamlining the classes into two
categories, instead of the current three. The new categories will simply be net assets with, and
without, donor restrictions. The new standard reemphasizes disclosure requirements about net
asset restrictions and adds new disclosure requirements about net asset designations. It also
revises and strengthens accounting disclosures for underwater endowments. Finally, the ASU
eliminates implied time restrictions for capital gifts;
allow free choice between the direct method and the indirect method in presenting operating cash
flows. Organizations are no longer required to present an indirect method reconciliation if they
choose to present the direct method;
require better information about expenses and expense allocation. This new requirement forces
presentation of expenses by nature as well as by function,
including a related analysis. Regardless of whether the
organization chooses to display this information in the
notes or in a separate statement of functional expenses,
the effect of this requirement is that all organizations will
now be presenting a statement of functional expenses (at
present, only Voluntary Health and Welfare Organizations
have this requirement). In addition, the ASU requires
qualitative information about cost allocation and improves
guidance on allocation from management and general
expenses; and
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Understanding and Applying the New Rules for Nonprofits (continued)
improve reporting of investment returns by requiring reporting net of external and direct internal
investment expenses and eliminates the disclosure requirement for netted investment expenses
and investment return components.
When does it become effective? The effective date of this new update is for fiscal years beginning after December 15, 2017. As a result,
this update will generally need to be in place for calendar years ending December 31, 2018 or fiscal years
ending 2019. Early adoption is permitted; however, in the year of adoption, all provisions need to be adopted
at once. In the year adopted, for comparative years presented, organizations need to apply all provisions
retroactively. The only exceptions to this is that for comparative information presented, an organization can
choose not to present the analysis of expenses by nature and function (unless already required) and the
disclosures around liquidity and availability of resources. In the next couple of years, organizations will need
to determine when they will adopt the ASU.
How can nonprofits prepare? Organizations should start to evaluate how they will be affected by this update. We recommend organiza-
tions:
prepare for the enhanced liquidity disclosures by preparing the required qualitative and quantitative
disclosure based on the most current audited financial statements and evaluate what it might say
to readers of their financial statements. Organizations can use the time until adopting the new rules
to determine how the disclosure will best benefit the organization. Our expectation is that this new
disclosure will prompt discussion at the management and board levels of nonprofit organizations
and may provoke useful and meaningful conversation on what it reveals. It is better to have these
discussions now rather than later;
that currently do not present a statement of functional expenses, spend time now considering how
they will include such a statement in their next financial statements. It will take time to design
procedures for allocating and presenting these expenses in a timely manner and in more detail
than may be required on the Form 990;
with both temporarily and permanently restricted net asset classes consider how the presentation
of their financial statements will be affected by the reduction in the presentation categories. There
are new options for presentation of board-designated net assets in this regard. Organizations with
underwater endowments should explore the new disclosures in this regard and evaluate how they
reflect upon the organization;
for which investment returns are a significant and material component to the financial statements
evaluate how their current financials would be changed to reflect the new rules on netting investment
returns and costs; and
examine if switching to presentation of the cash flow statement using only the direct method would
provide more useful information about the operations of the organization to users of the financial
statements.
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Understanding and Applying the New Rules for Nonprofits (continued)
Conclusion The Windes Nonprofit group looks forward to assisting nonprofit organizations and fellow professionals in
implementing this new accounting standard as it becomes effective.
To that end, we presented a workshop for nonprofit organizations about the new rules on January 17, and
will conduct another seminar on May 2, from 11:30 a.m. to 1:30 p.m. at our corporate headquarters in Long
Beach. Lunch will be provided. This is your opportunity to get ahead of the process and understand what
will be required.
If you are interested in attending on May 2, you will find detailed information and may register at the link
below. For questions about the workshop, please contact Carolyn De Baca at [email protected] .
Select the following link for details and to register for the ASU 2016-14 workshop:
http://bit.ly/2iOS0PH.
For questions or more information about this article, please contact Michael Barloewen at
[email protected] or toll free at 844.4WINDES (844.494.6337).
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Michael J. Barloewen, CPA, CGMA
Partner, Audit & Assurance Services
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Contact Us At [email protected] www.windes.com
Nonprofit Tax: In-Kind Contributions
We often find that nonprofit organizations struggle with certain
concepts related to donated items or services. In-kind donations
are non-cash gifts that may take a variety of forms: new or used
goods to use or sell, vehicles or real estate, services like marketing
and website hosting, interest-free or below-market loans, debt
forgiveness, remainder interests, and life insurance policies, among
other things. Organizations that receive these gifts are generally
obliged to recognize them at fair market value at the time of receipt,
though each gift presents different valuation challenges.
Valuation The Financial Accounting Standards Board (FASB) Fair Value Measurement (FMV) codification (ASC 820)
defines fair value as "the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date," meaning quantity, quality and
appropriate discounts (e.g. for the freshness of perishable goods) must be considered. For example, the
FMV of used clothing would be what typical buyers would pay for items of similar age, condition and style —
usually much less than new. In addition, donated real estate with a covenant restricting its use to open
space conservation would be worth less than developable land. In-kind donations of $5,000 or more require
the donor to obtain an independent appraisal, which may assist the receiving organization. While prices for
new items are easily found, valuing items for which there is no ready market, as with used goods, is less
simple. It may be helpful to look up completed sales of similar items on a site such as eBay, or to estimate
the value based on the cost to purchase similar goods or services.
Resources for determining FMV include IRS Publication 561, the Salvation Army Donation Valuation Guide,
and the free Turbo Tax “It’s Deductible” app.
In-kind gifts contributed for fundraising purposes, such as items to be sold at auction or raffled, require a
two-step recognition process. First, the gift should be recognized as a contribution measured at FMV. Then,
per FASB ASC 958-605-25-20, any difference between the initial FMV estimation and the actual amount
received at sale should be recognized as an adjustment to the original amount. For example, an item valued
at $300 and sold for $500 would require a $500 debit to cash and a corresponding $300 credit to the asset
account and a $200 credit to contribution revenue. On the other hand, if the $500 asset sells for only $100,
the correct entry would be a $100 debit to cash, a $400 debit to contribution revenue and a $500 credit to
the asset account. Though bidders at charity auctions tend to inflate their bids to benefit the organization,
meaning the auction price will not actually reflect FMV, FASB permits organizations to use that price as
the asset’s value.
There are a few special cases where FMV is not used. These include when the donated item has no future
economic benefit or service potential to the organization and cannot be sold. Note that this is different from
a program-inappropriate item that the organization chooses not to use or sell. In the latter case, as when a
fur coat is donated to an anti-fur organization that will only destroy the item to keep it off the market, the
organization should recognize the FMV of the coat and then deduct the value as a program expense.
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Nonprofit Tax: In-Kind Contributions (continued)
Substantiation Gifts of property valued at less than $250 may be, but need not be, acknowledged with a contemporaneous
written receipt, unless the contribution was received partly in exchange for goods or services from the
nonprofit organization. Such quid pro quo gifts greater than $75 require a written disclosure statement from
the organization to the donor. The disclosure should inform the donor that any tax deduction for the gift is
limited to the value of the gift in excess of the goods or services received in exchange.
For property contributions of $250 or more, the donee organization should provide a written receipt that
describes the donated property (but does not necessarily estimate its value) and includes the name of the
organization and date of the contribution. The receipt should also indicate whether the organization provided
any goods or services to the donor in exchange for the contribution and, if so, provide an estimate of the
value of those benefits.
While donors have additional reporting requirements for contributions over $500, organizations generally
do not — until the donor claims a deduction of $5,000 or more or if the property contributed is a vehicle,
boat or airplane. When the value of such a donation exceeds $500, the organization must provide the donor
with written acknowledgement within 30 days and file Form 1098-C (Contributions of Motor Vehicles, Boats
and Airplanes) with the IRS by February 28. Further, the organization must indicate on Form 990, Part V,
that it has received such a contribution. If the organization disposes of donated property valued at $5,000
or more within three years of its donation, the organization must notify the IRS using Form 8282 (Donee
Information Return). This form is not required if the organization consumes or distributes the property as
part of its tax-exempt purpose.
For more information, see IRS Publication 1771, “Charitable Contribution Substantiation & Disclosure
Requirements.”
For questions about this article, please contact Donita Joseph at [email protected] or Megan Lasswell
at [email protected] or toll free at 844.4WINDES (844.494.6337).
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Megan Lasswell, JD, LLM
Staff Accountant, Tax & Accounting Services
Donita Joseph, CPA, MBT
Partner, Tax & Accounting Services
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Excessive Fee Lawsuits Target Large Nonprofit Retirement Plans
The retirement plans of three large universities were recently
hit with lawsuits charging the plan fiduciaries with a breach
of their duties and for maintaining plans with excessively
expensive investment options.
The class action lawsuits are primarily the work of one New
York law firm (Schlichter, Bogard & Denton), who have filed
20 such complaints (with 9 settlements) since 2006. The most
recent plans to be sued were those of MIT, Yale and New
York University. Columbia University also faces a similar suit
filed by a different firm. The suits target both 403(b) and 401(k)
plans of the nonprofit institutions.
The suits claim various breaches of fiduciary duty, alleging that plan fiduciaries selected and retained
numerous high-cost and poor-performing investment options compared to available alternatives. The suits
charge that these actions caused plan participants to pay millions of dollars in unreasonable and excessive
fees that substantially reduced retirement income. The claims of damages against these plans are in the
billions of dollars.
In addition, some of the lawsuits assert that the use of multiple record keepers, rather than a single provider
(common in many 403(b) programs) has caused duplicative fees to be charged to plan participants.
While being served by a class action lawsuit is unlikely, except for the largest plans, these complaints do
provide some valuable information to all plan fiduciaries against similar claims from plan participants.
Plan investments should be measured (benchmarked) against industry standards for both performance
and fees. Plan fiduciaries must document their actions and maintain plan documents and records. Service
providers must also be evaluated regularly to determine whether their fees are reasonable compared to the
services rendered.
We have resources and checklists to assist plan fiduciaries in executing their duties and protecting their
plans from claims. We can also refer plan sponsors to qualified partners to perform benchmarking on
investments and fees.
For more information or questions about this article, please contact Richard Green
at [email protected] or toll free at 844.4WINDES (844.494.6337).
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Richard Green, CPC, QPA, QKA, APA, ERPA
Partner, Employee Benefit Services
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www.windes.com
Windes is a recognized leader in the field of accounting, assurance, tax, and business consulting
services. Our goal is to exceed your expectations by providing timely, high-quality, and personalized
service that is directed at improving your bottom-line results. Quality and value-added solutions from
your accounting firm are essential steps toward success in today’s marketplace. You can depend on
Windes to deliver exceptional client service in each engagement. Since 1926, we have gone beyond
traditional services to provide proactive solutions and the highest level of capabilities and experience.
The Windes team approach allows you to benefit from a wealth of technical expertise and extensive
resources. We service a broad range of clients, from high-net-worth individuals and nonprofit
organizations, to privately held businesses. We act as business advisors, working with you to set
strategies, maximize efficiencies, minimize taxes, and elevate your business to the next level.
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