Tag Archive for Accounting

Navigating The Crowded Non-Profit Sector

Nonprofit donors

How organizations can set themselves apart to secure—and retain—donors

By Shannon Crowley, CPA, MSA
Accounting Manager

Despite the Great Recession and the long process of economic recovery of the 2000s, the non-profit sector has become one of the country’s fastest-growing industries. According to the National Center for Charitable Statistics’ most recent research, the United States is home to more than 1.5 million registered non-profit organizations—marking a nearly 20 percent increase over the last 10 years, a time frame in which many businesses in the for-profit sector have struggled.

This rapid growth is certainly a sign of success, and—as non-profits employ nearly 11 million American workers and contribute roughly $887 billion to the national economy—it is difficult for anyone to argue against the economic value of a thriving non-profit sector.

However, the unprecedented rate at which new organizations are being created is also creating a challenge. The non-profit sector is more crowded than ever before, making it very difficult for organizations to secure—and retain—their donor bases.

On a local level, there are 33,000 non-profit organizations registered in Massachusetts—each competing with one another for precious dollars from a limited pool of individual donors, corporate foundations and other fundraising sources. In a recent cover story in The Boston Globe, many industry experts argue the field of non-profit organizations in Massachusetts is simply too large to sustain.

However, the organizations themselves, and the tens of thousands of Massachusetts residents employed by non-profits, are doing everything they can to prove those experts are wrong.

And that starts with donor retention.

The Association of Fundraising Professionals reports that, on average, donor retention rates across the non-profit sector are around 43%, meaning less than half of an organization’s 2016 donor base will contribute. In order to grow in a competitive non-profit environment, organizations have to find a way to land recurring donors. To do this, non-profits are employing several strategies. For the purposes of this article, we’ll focus on three:

Differentiating themselves from other, potentially similar organizations

Many potential donors or grant-awarding foundations would love to support every deserving cause that asks for and needs their help. Realistically, though, donors need to choose between hundreds, if not thousands, of similarly operating organizations to which they can lend their financial support. Non-profits, especially non-profits working to support similar demographics, are under enormous pressure to set themselves apart to attract new sources of funding. It’s never been more important for a non-profit to have a very clear, very specific mission.

Investing in “fundraising infrastructure”

Fundraising success is entirely beholden to the amount of time and resources organizations are willing to invest. In order to succeed in today’s hyper-competitive non-profit sector, organizations must invest in fundraising professionals, such as high-ranking development officers, and fundraising “infrastructure,” such as top-notch technology and donor databases.

The clear, specific vision makes an organization attractive to donors. Development professionals and in-depth donor databases help organizations find them.

Increase efficiency by streamlining their accounting functions

Back-office financial work is crucial to the long-term success of the organization. That said, it’s also very time-consuming. As many organizations are investing significantly more time to their fundraising operations, some non-profit leaders are finding ways to take complex financial paperwork off their desk so they can focus on the organization’s core competencies. This may entail creating new jobs for a full-time accounting team, or hiring a third-party financial organization to take on those responsibilities.

How BlumShapiro Can Help

BlumShapiro offers the accounting, tax and business consulting expertise non-profits need today. We are one of the largest non-profit accounting service providers in New England, our blend of accounting expertise and knowledge of non-profit organizations means we can offer you tremendous added value. We can assist you in complying with state and federal grant requirements, charitable giving rules, capital campaigns, endowment fund responsibilities and other specialized needs. Learn more >>

View Shannon’s Bio Here >>

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.

Advertising vs. Qualified Sponsorship Payments

iStock_000001334173MediumAs a follow-up to our “What is Considered Unrelated Business Income?” blog post regarding unrelated business income tax (UBIT), written by Shannon Crowley, the following highlights some of the key factors used when determining whether or not advertising and sponsorship revenue are considered unrelated business income (UBI).

Generally, the IRS considers revenue derived from commercial advertising activities to be UBI; however, advertising revenue is not UBI if:

  • It is not regularly carried on;
  • It is substantially related to the organization’s exempt purpose;
  • Substantially all the advertising activity is conducted by volunteers;
  • The purchaser of the advertising does not expect more than a negligible commercial benefit by the advertisement; and
  • It is simply a listing of names of businesses with no advertising message or index to advertisers.

Advertising

Often, a non-profit will produce a periodical (e.q., newsletter, magazine, etc.) that is related to their exempt purpose and sell commercial advertising space within the publication. When the advertising is purchased for the purpose of inducing a reader to purchase the goods or services of that business, the revenue is likely UBI. Indications of advertising usually include messages that contain qualitative language, promotion of the business entity’s products, services or facilities, or statements of pricing or value.

Qualified Sponsorship Payments

Revenue derived from qualified sponsorship payments (QSP) are excluded as UBI. Typically, this is seen with fundraising or program events and acknowledgements of corporate sponsors in an event program. A QSP is a payment (cash, property or services) by a business entity to an exempt organization, without an arrangement or expectation that the sponsor will receive any substantial return benefit from the payment. A substantial return benefit generally does not include use of the business entity’s name, logo, slogans or contact information. If there is some element of advertising (as described above) provided to a sponsor in return for their payment, the amount exceeding the fair market value of the advertising purchased would be considered to be a QSP.

For more information, see IRS Publication 598.

Jeanne Pagnozzi Boston AccountantJeanne Pagnozzi is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Jeanne oversees attest and tax engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects.

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.

Internal Control Checklist for Small Non-Profits: 5 Critical Steps

Frauds in NonprofitsEstablish a strong control environment:  Setting a tone at the top of the organization can go a long way in deterring fraud.  Having an effective control environment will naturally foster strong controls and facilitate employees following protocol.  Ideas:  create written procedures and assign responsibilities/authorization power, use budgets and deadlines and hold employees accountable and, most importantly, involve the Board or other governing body by providing financial reports and expect them to stay engaged and ask questions.

Create and maintain segregation of duties:  This is essential.  History shows that most instances of fraud occur because the person had an opportunity, usually meaning there was no one else involved in certain functions and thus no one would notice, especially in small incremental amounts.  In a small office, this can certainly be a challenge; however there are several things you can do between two or three people that will create those checks and balances.  Ideas:  a) when dealing with cash receipts, have two people count, double check and record cash; b) for purchases, separate individuals should be approving purchases, generating checks, recording expenses in the general ledger and reviewing and signing checks (and avoid using a signature stamp); c) also be sure to consider authorization rights with your online banking and discuss available controls with your bank, such as email notifications or authorization codes for payments made online.

Physical Controls:  Simple things such as keeping offices locked, check stock locked in a file cabinet (one or two people keep the key) and passwords on computers and for software will help keep your assets safe.

Review and reconcile the bank statement:  Ideally, someone other than the person writing checks should receive the unopened bank statement and prepare a reconciliation of bank activity to general ledger activity, in which case discrepancies can be detected timely.  The bank statement should be reviewed by someone outside the cash function.  In a very small office, it may be necessary to have the treasurer or other board member perform this review.  Pay particular attention to cancelled checks and withdrawals, noting payee, amount and frequency for reasonableness.  A person committing fraud may record a payment to a known vendor in the system or on a check stub, while the actual check is made payable to someone else.

Payroll:  Look at weekly payroll reports from the payroll company to make sure employees and pay rates are within your expectations.  It is also important to review year-to-date figures by employee (summarized on one report), which will include all payments, including bonuses, corrections, direct deposits, etc.  Payroll fraud often occurs in separately processed payroll, which can be excluded from your weekly payroll reports, but would be reflected in year-to-date totals.  Try to discuss available controls with the payroll company. Many will offer emails to be sent directly to a designated individual for notification of all processed payroll, pay rate changes, added and terminated employees.  If this were the case, it would be difficult for any erroneous information to go undetected, especially in a small office environment.

 

Jeanne Pagnozzi Boston AccountantJeanne Pagnozzi is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Jeanne oversees attest and tax engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects.

DATA ACT Passes House and Senate

This past Monday, the House unanimously passed The Digital Accountability and Transparency Act of 2014 (The DATA Act). The DATA Act was passed by the Senate earlier this month and President Obama is expected to sign it into law, based on his support of this Act in the past.

The Data Act

The DATA Act is an extension of the 2006 Federal Funding Accountability and Transparency Act and mandates the adoption of consistent government-wide data standards in its reporting on government spending. Using this consistent language in its financial reports enhances accessibility for policy makers and tax payers. A public, searchable and reliable database of government spending will be accessible on a new and improved www.USASpending.gov, allowing users greater access to information regarding government grants and contracts between the federal government and grantees and contractors. The result is anticipated to be greater accountability of those who spend tax payer dollars, as well as those who grant and monitor government dollars. The DATA Act will commit the Office of Management and Budget (OMB) and the Treasury to utilizing more robust data standards throughout all aspects of funding, including budgets, grants, contracts and other financial reporting.

The DATA Act aims at reducing waste and fraud and increasing the transparency and effectiveness of government spending across agencies. Many believe this bill will greatly modernize the way the government tracks and monitors agency spending, as well as increasing the ease of information gathering. Under the current system, all budgets, grants, contracts and disbursements are largely reported in manual formats, such as tedious forms and spreadsheets.  As a result, obtaining information regarding agency spending and grant reporting is extremely cumbersome and time consuming. In addition, the current system lacks methods for enforcing existing regulations regarding reporting certain information. The hope under the DATA Act is that a universal automated system will help to enforce existing requirements.

Non-Profit Industry Impact

How this will impact the non-profit industry is yet to be determined. Some question if implementation of new reporting standards will be a burden. Others feel that once up and running, a more modern system will save organizations a great deal of time and effort automating much of their financial reporting. Bill Co-sponsors, Sen. Mark R. Warner (D-VA), Sen. Rob Portman (R-OH), Rep. Darrell Issa (R-CA) and Rep. Elijah Cummings (D-MD) explained in a Congress blog post published on thehill.com, on December 16, 2013 that a new system would greatly decrease the burden on entities that are awarded taxpayer dollars, such as state and local government agencies, as well as higher education institutions, citing the current system of duplicative forms and reporting. The lawmakers claim that “If this reporting were streamlined, our institutes of higher education and our state and local governments could direct more funding to programs and less to overhead costs.”

While the implementation issues and questions have yet to be answered, most agree that the requirements set forth in this proposed legislation will create greater accountability, accuracy and efficiency in overall government spending and help to tackle the ongoing concern of government waste and fraud.

Jeanne Pagnozzi Boston AccountantJeanne Pagnozzi is a manager in BlumShapiro’s Accounting and Auditing Department, based in Quincy, Massachusetts, Jeanne oversees attest and tax engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects.