Archive for Michelle Hatch

Setting Executive Compensation: How Much is Too Much?

This is part of a series of articles focused on issues relevant to non-profit boards of directors

shutterstock_46389259In recent articles, I have outlined the roles and responsibilities of non-profit boards and focused on the legal and ethical responsibilities of individual non-profit board members. Now, I want to spotlight one very important task non-profit board members must complete carefully and strategically: setting executive compensation.

A non-profit’s chief executive is often the heart, soul and public face of the organization. The chief executive is responsible for leading and coaching staff members; overseeing revenue-generating and fundraising activities; making final strategic decisions to ensure the organization’s mission is advanced; and countless other day-to-day tasks.

Clearly, the chief executive position is vitally important to the overall success of any non-profit organization. So, how do you put a dollar value on something so important? In today’s hyper-competitive environment, non-profit organizations across the country are struggling to answer that question.

As we discussed in my previous article, the board of directors has the responsibility of hiring and setting compensation for executive leadership.

Study the marketplace: Of course, every non-profit organization wants to hire their first choice for the executive director role–but many quickly learn they’ve only budgeted for their third, fourth, or fifth choice.

Before going through the process of selecting a new chief executive, non-profit boards must find out the “going rate” for that position. That means analyzing the salaries and benefits of comparable positions in private, public, and non-profit sectors and comparing those salaries to what the organization is prepared to offer. Having in-depth knowledge of the current marketplace will help your board set expectations and budget appropriately.

Protect your bottom line: The board needs to find middle ground between compensation that attracts the top talent and cost-cutting strategies that help the organization fund its services. That means offering a salary range that the IRS calls, “reasonable and not excessive.”

The National Council of Nonprofits encourages non-profit boards to think carefully before finalizing a deal with a new executive leader and ask itself: “Are the assets of this non-profit being used prudently and to advance the mission?”

Play by the rules: The IRS has rules and regulations that aim to prevent non-profit organizations from overpaying their executive staff. If the non-profit board knowingly overpays an executive a salary the organization can’t afford, the IRS sees that as “excess compensation.” Penalties range from hefty fines to an organization losing its tax-exempt status.

Keep detailed records: Hiring a chief executive is one of the most important decisions a non-profit board has to make, and it should be documented as such. Non-profit board members will be asked by donors, supporters, reporters and perhaps the IRS to explain their hire and justify their salary and benefits.

Guidestar recommends a three-step process to ensure the board complies with IRS regulations and board members remain unbiased:

  • The board should approve compensation before an offer to the candidate is made and to ensure no board member has a conflict of interest related to the transaction.
  • The board should research comparable positions before approving compensation.
  • The board should document the decision-making process throughout the process.

Guidestar’s recommendations follow the IRS “rebuttable presumption of reasonableness” rules. In other words: The board is doing its due diligence and covering its bases while it makes a strategic, well-thought-out decision on executive compensation.

 

Hatch-Michelle-150x150

Michelle Hatch is a partner in our Non-Profit Services Group. She oversees audit and accounting engagements for non-profit organizations, including independent schools, trade associations, health and human service organizations and art, cultural and membership organizations. Michelle is also a member of the Employee Benefit Assurance Group and oversees audits for 401(k), 403(b) and defined benefit retirement plans.

 

The firm, with over 400 professionals and staff, offers a diversity of services, which includes auditing, accounting, tax, and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services, such as succession and estate planning, business technology services, employee benefit plan audits, litigation support, and valuation.  The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

What are the responsibilities of individual non-profit board members?

shutterstock_275563196In my previous article, I laid out the overarching responsibilities of non-profit boards, which include big-picture strategic planning; selecting executive staff members; overseeing executive leadership; approving the organization’s budgets; overseeing compensation for staff members and leadership; and fundraising.

In this article, I will focus on the responsibilities of each individual board member.

Understand your fiduciary responsibilities

As members of non-profit organizations’ governing bodies, individual board members must adhere to the legal responsibilities of fiduciaries. A fiduciary is a “person who has the power and an obligation to act on behalf of another under circumstances that require total trust, good faith and honesty.”

As fiduciaries, non-profit board members have three specific legal duties:

  1. Duty of Care: To act with such care as an ordinary, prudent person would employ in your position.
  2. Duty of Loyalty: To act in good faith and in a manner you reasonably believe is in the best interest of the organization.
  3. Duty of Obedience: To be faithful to the organization’s mission. You are not permitted to act in a way that is inconsistent with the central goals of the organization. A basis for this rule lies in the public’s trust that the organization will manage donated funds to fulfill the organization’s mission.

Long story short: board members must, at all times, act in the best interest of the non-profit organizations they represent.

Educate yourself on the organization you represent

In order to responsibly serve on a non-profit’s board, members should understand the organization’s mission, strategic vision and financial situation. That means reviewing:

  • Audited financial statements of past years
  • The organization’s Form 990
  • Missions and values of the organization
  • The organization’s bylaws
  • The organization’s most recent strategic plan
  • Current financial statements

Once new board members are initiated, they should review all provided information in advance of board meetings, including financial information, so that each member is prepared to make informed and responsible decisions.

Joining committees to stay involved with the organization

Most non-profit boards have committees dedicated to specific organizational efforts. These committees vary based on the size and operations of each organization.

Individual board members should actively seek out committees relevant to their specific skill sets and interests.

 

Hatch-Michelle-150x150Michelle Hatch is a partner in our Non-Profit Services Group. She oversees audit and accounting engagements for non-profit organizations, including independent schools, trade associations, health and human service organizations and art, cultural and membership organizations. Michelle is also a member of the Employee Benefit Assurance Group and oversees audits for 401(k), 403(b) and defined benefit retirement plans.

The firm, with over 400 professionals and staff, offers a diversity of services, which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services, such as succession and estate planning, business technology services, employee benefit plan audits, litigation support and valuation.  The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

Top 7 Responsibilities of Non-Profit Boards

iStock_000012107875_MediumNon-profit organizations in today’s business climate are expected to meet increasingly large demands while operating with small staffs and limited resources. In order to ensure sustainable success, non-profits must have in place effective, focused and committed leadership.

That starts with the organization’s Board of Directors.

Board Responsibilities:

Boards of directors (or boards of trustees) hold a great deal of responsibility in advancing non-profit organizations’ missions and leading the organizations toward successful futures. Some responsibilities of a non-profit board include:

  1. Strategic planning: The board should always be thinking about the “big picture.” From determining the organization’s mission and purpose to enhancing the organization’s public image, the board is responsible for the overall health of the non-profit.
  1. Selecting executive staff: Who will be the public face of the organization? That is one of the first and most important questions a non-profit board must answer. While the board operates behind the scenes to steer the organization in the right direction, the executive staff manages the day-to-day operations.
  1. Overseeing (and evaluating) executive leadership: The board should support the organization’s executive staff, making sure they have the resources and moral support they need to effectively do their jobs. Every organization hopes to avoid overturn, but – should the board deem it necessary – it does have the authority to remove executive leaders and team members.
  1. Budget approval: Serving as the non-profit’s governing body, the board is responsible for securing and strategically allocating financial resources in order to advance the organization’s mission. This is typically done through the approval of the annual budget.
  1. Setting compensation: While the board is not usually involved in setting individual staff salaries, they usually do this through the overall budget process.
  1. Fundraising: Non-profits’ annual budgets typically rely heavily on fundraising efforts. As the board is in charge of approving the organization’s budget, is is also responsible for ensuring the organization has the money it needs to fulfill its mission.
  1. Recruiting new members to the board: Membership on non-profit boards is typically very fluid. Board members step down for a variety of reasons, and new members are brought in to replace them. To ensure long-term success, an effective board will articulate clear prerequisites for members and offer training and guidance to new members.

Serving on a non-profit board can be a tremendously rewarding and enriching opportunity for any professional. But, as you can see, it also comes with a great deal of responsibility.

 

Hatch-Michelle-150x150

Michelle Hatch is a partner in our Non-Profit Services Group. She oversees audit and accounting engagements for non-profit organizations, including independent schools, trade associations, health and human service organizations and art, cultural and membership organizations. Michelle is also a member of the Employee Benefit Assurance Group and oversees audits for 401(k), 403(b) and defined benefit retirement plans.

 

The firm, with over 400 professionals and staff, offers a diversity of services, which includes auditing, accounting, tax and business advisory services. In addition, BlumShapiro provides a variety of specialized consulting services, such as succession and estate planning, business technology services, employee benefit plan audits, litigation support and valuation.  The firm serves a wide range of privately held companies, government and non-profit organizations and provides non-audit services for publicly traded companies.

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

Revenue Recognition Step 5: Recognize Revenue When (or as) the Entity Satisfied a Performance Obligation

As noted in our prior blog post, new revenue recognition standards were issued in 2014. The fifth and final step of the new revenue recognition standard is to recognize revenue when (or as) the entity satisfies a performance obligation. An organization satisfies a performance obligation by transferring control of a promised good or service to the customer. The transfer can occur over time or at a point in time. A performance obligation is satisfied at a point in time unless it meets one of the following criteria, in which case it is satisfied over time:

  • The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
  • The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced.
  • The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.

Assessing whether each criterion is met will likely require significant judgment.

Read other articles in our “Revenue Recognition” Series:

Hatch, Michelle Michelle Hatch is a partner in our Non-Profit Services Group. She oversees audit and accounting engagements for non-profit organizations, including independent schools, trade associations, health and human service organizations and art, cultural and membership organizations. Michelle is also a member of the Employee Benefit Assurance Group and oversees audits for 401(k), 403(b) and defined benefit retirement plans.

Revenue Recognition Step 4: Allocate the Transaction Price to the Performance Obligations in the Contract

As noted in our prior blog post, new revenue recognition standards were issued in 2014. The fourth step of the new revenue recognition standard is to allocate the transaction price to the performance obligations in the contract. For a contract that has more than one performance obligation, an organization should allocate the transaction price to each separate performance obligation in the amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for satisfying each separate performance obligation.

To allocate an appropriate amount of consideration to each performance obligation, an entity should determine the standalone selling price at contract inception of the distinct goods or services underlying each performance obligation. Sometimes, the transaction price includes a discount or variable consideration that relates entirely to one of the performance obligations in a contract. The requirements specify when an entity should allocate the discount or variable consideration to one (or some) performance obligation(s) rather than to all performance obligations.

Any subsequent changes in the transaction price should be allocated on the same basis as at contract inception.

Read other articles in our “Revenue Recognition” Series:

Hatch, MichelleMichelle Hatch is a partner in our Non-Profit Services Group. She oversees audit and accounting engagements for non-profit organizations, including independent schools, trade associations, health and human service organizations and art, cultural and membership organizations. Michelle is also a member of the Employee Benefit Assurance Group and oversees audits for 401(k), 403(b) and defined benefit retirement plans.

Revenue Recognition Step 3: Determine the Transaction Price

137299508The third step of the new revenue recognition standard is to determine the transaction price,  which is the amount of consideration to which an entity expects to be entitled and includes:

  1. An estimate of any variable consideration (i.e. amounts that vary due to rebates or bonuses) using either a probability weighted expected value or the most likely amount, whichever better predicts the amount of consideration to which the entity will be entitled.
  2. The effect of the time value of money, if there is a financing component that is significant to the contract.
  3. The fair value of any non-cash consideration.
  4. The effect of any consideration payable to the customer, such as vouchers and coupons.

The transaction price is generally not adjusted for credit risk. However, the transaction price is constrained because of variable consideration. This means that the standard limits the amount of variable consideration to the amount for which it is probable that a subsequent change in estimated variable consideration will not result in a significant revenue reversal.

This is a change from current accounting for revenue, as accounting for variable consideration is inconsistent across industries. Under current guidance, an organization does not include variable amounts in the transaction until the variability is resolved. The new standards give a single model whereby variable consideration (e.g., rebates, discounts, bonuses, right of return) will be included in the transaction price to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. This inclusion of variable consideration may accelerate the recognition of revenue compared to current standards.

Read other articles in our “Revenue Recognition” Series:

Hatch, MichelleMichelle Hatch is a partner in our Non-Profit Services Group. She oversees audit and accounting engagements for non-profit organizations, including independent schools, trade associations, health and human service organizations and art, cultural and membership organizations. Michelle is also a member of the Employee Benefit Assurance Group and oversees audits for 401(k), 403(b) and defined benefit retirement plans.

Revenue Recognition Step 2: Identify the Performance Obligation in the Contract

The second step of the new revenue recognition standard is to identify the performance obligation in the contract. In this step, an entity will evaluate the goods and services offered and determine which are distinct and should be accounted for as separate performance obligations. The key determinant for identifying a separate performance obligation is whether the good or service is distinct.

A good or service is distinct if both of the following criteria are met:

1. Capable of being distinct. This means a customer can benefit from a good or service if the good or service can be used, consumed, sold for an amount that is greater than scrap value or otherwise held in a way that generates economic benefits.

2. Distinct within the context of the contract. Factors that indicate that an entity’s promise to transfer a good or service to a customer is separately identifiable include, but are not limited to, the following:

• The organization is not using the good or service as an input to produce or deliver the combined output specified by the customer.

• The good or service does not significantly modify or customize another good or service promised in the contract.

• The good or service is not highly dependent on, or highly interrelated with, other goods or services promised in the contract.

Each distinct good or service is separately identified from other promises in the contract and represents a separate performance obligation.

Stay tuned for our next post, which will cover transaction pricing.

Read other articles in our “Revenue Recognition” Series:

Revenue Recognition Step 1: Identify the Contract(s) with a Customer

As noted in our prior blog post, new revenue recognition standards were issued in 2014. The first step of the new revenue recognition standard is to identify the contract(s) with a customer. A contract with a customer must meet all of the following criteria:

1. Has approval and commitment of the parties
2. Rights of the parties are identified
3. Payment terms are identified
4. The contract has commercial substance
5. Collectability of consideration is probable

The contract may be written, verbal or implied by customary business practices. The enforceability of the rights and obligations in a contract are a matter of law and vary across legal jurisdictions, industries and entities. An entity should consider these practices and processes in determining when an agreement with a customer creates enforceable rights and obligations of that entity.

A contract does not exist if each party has the unilateral enforceable right to terminate a wholly unperformed contract without compensation to the other party. A contract is wholly unperformed if both of the following criteria are met:

1. The entity has not yet transferred any promised goods or services to the customer
2. The entity has not yet received, and is not yet entitled to receive, any consideration in exchange for promised goods or services.

If an organization receives consideration from a customer, and a contract with a customer does not meet the criteria to be considered a contract under revenue recognition, the entity should recognize the consideration received as revenue only when either of the following events occur:

1. The organization has no remaining obligations to transfer goods or services to the customer, and all, or substantially all, of the consideration promised by the customer has been received by the entity and is non-refundable.
2. The contract has been terminated and the consideration received from the customer is non-refundable.

If one of the above criteria is not met, the organization should record the consideration received as a liability until a contract exists or one of the above criteria is met.

There is also an option to combine two or more contracts entered into at or near the same time with the same customer, and account for them as one contract if they meet the following criteria:

1. The contracts are negotiated as a package with a single commercial objective.
2. The amount of consideration to be paid in one contract depends on the other price or performance of the other contract.
3. The goods and services promised in the contracts (or a portion of goods and services promised in the contracts) are a single performance obligation.

In addition, in this step entities must also determine whether or not it is probable that the consideration to which it is entitled will be collected. This includes considering the customer’s ability and intention to pay the consideration when it is due. If it is not probable that an organization will collect the consideration, then revenue will not be recognized until payment is collected from the customer.

In our next post, we will cover how to identify the performance obligation in a contract.

Read other articles in our “Revenue Recognition” Series:

 

Michelle Hatch is a partner in our Non-Profit Services Group. She oversees audit and accounting engagements for non-profit organizations, including independent schools, trade associations, health and human service organizations and art, cultural and membership organizations. Michelle is also a member of the Employee Benefit Assurance Group and oversees audits for 401(k), 403(b) and defined benefit retirement plans.

Five Steps for Recognizing Revenue under New FASB and IASB Standards

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued their final standards on revenue recognition in 2014. The new standard will be more principles based versus rules-based, which is how US Generally Accepted Accounting Principles (GAAP) standards are currently structured.

This new standard includes increased disclosure for all entities, but does not affect a non-profit’s accounting for contribution revenue. It will, however, have an effect on the accounting for a non-profit organization’s earned revenue.

The new standard is based on a five-step model for recognizing revenue. The five steps are as follows:

1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenue when (or as) the entity satisfies a performance obligation

The effective date for this standard was recently delayed one year and will now be effective for public entities for annual reporting periods beginning after December 15, 2017 (2018 calendar year-ends) and for non-public entities for annual reporting periods beginning after December 15, 2018 (2019 calendar year-ends and after). Organizations should start thinking about how they will be impacted by this new standard.

Check back over the next few weeks for further detail on each of the five steps for recognizing revenue under the new FASB and IASB standard.

Read other articles in our “Revenue Recognition” Series:

 Michelle Hatch is a partner in our Non-Profit Services Group. She oversees audit and accounting engagements for non-profit organizations, including independent schools, trade associations, health and human service organizations and art, cultural and membership organizations. Michelle is also a member of the Employee Benefit Assurance Group and oversees audits for 401(k), 403(b) and defined benefit retirement plans.

Reminders on 403(b) and 401(k) Remittances

As we start the new year, one reminder for non-profit organizations is to make sure you are remitting your employees’ contributions  and loan repayments to your organization’s
403(b) or 401(k) plan on a timely basis. The Department of Labor (DOL) requires that employee contributions and loan repayments to pension plans be deposited as soon as they can be segregated but, in no case, later than the 15th business day of the month immediately following the month in which the contribution or loan repayment is either withheld or received by the employer. The DOL created a safe harbor rule under which participant contributions to small plans (those with fewer than 100 participants) will be deemed to be made in compliance with the law if those amounts are deposited within seven business days of withholding or receipt.

Employee Benefit Plan Audits ConnecticutWhile the requirements for large plans mention the 15th business day of the month immediately following the month in which the contribution is withheld or received, the rule is as soon as the amounts can be segregated. Most organizations are able to segregate these amounts much earlier than the 15th business day of the following month. This typically happens when payroll is made, so amounts should be remitted the same day as payroll occurs or within one or two days after that payroll date.

If your organization is currently not remitting your contributions as timely as required, you might want to look at your process and work with your third-party administrator to change the process in order to meet these requirements in 2015.

Michelle Hatch is a partner in our Non-Profit Services Group. She oversees audit and accounting engagements for non-profit organizations, including independent schools, trade associations, health and human service organizations and art, cultural and membership organizations. Michelle is also a member of the Employee Benefit Assurance Group and oversees audits for 401(k), 403(b) and defined benefit retirement plans.