Tag Archive for Nonprofit Accounting Services

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.

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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.

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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.

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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.

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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.

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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.

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 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.

Payroll Fraud: A Risk & How to Address It

We often hear stories in the news about fraud affecting non-profit organizations. Frequently, such organizations are victimized when an individual in a position of financial authority makes unauthorized withdrawals or disbursements from bank accounts or misdirects cash deposits. In response to these risks, many organizations have added controls that are intended to prevent and detect fraud relating to cash, but what is often overlooked is the potential for payroll fraud. 

According to a 2014 report by the Association of Certified Fraud Examiners (ACFE), payroll fraud is the top source of accounting fraud and employee theft. The ACFE indicates that payroll fraud occurs in 27% of businesses (for-profit and non-profit) and happens twice as often in organizations with less than 100 employees than in larger ones. Finally, they note that the average payroll fraud lasts approximately 24 months. So, for not-for-profit organizations, who typically have limited resources, the risk is too great not to be addressed. While adding additional controls and steps in the payroll process may seem cumbersome, the benefit of reducing the risk for payroll fraud is worth it. Following are a few simple steps that can be taken to prevent and detect fraud in this important area:

  • An organization should maintain timecards for all employees, and supervisors should be required to review and approve them each pay period. Particularly, overtime (for hourly employees), sick time, vacation and other leave time should require an approval. The timecards should be filed as support with the payroll registers each period so they can be reviewed along with the registers.
  • An organization should maintain an adequate segregation of duties within the payroll processing function. For example, the individual who posts the payroll to the general ledger should not be the same individual who processes the payroll within the payroll module of the accounting software or with the third party payroll provider. This will allow for a reasonableness review of each period’s payroll at the time it is paid.  
  • Payroll registers should be reconciled to the general ledger payroll accounts quarterly. This exercise will assist in detecting if payroll has been mis-posted to another area of the general ledger or if other fraudulent transactions (i.e. cash-related fraud or fraudulent financial reporting) have been posted to payroll accounts in attempt to “bury” it within typically large numbers.
  • Many organizations prepare a detailed payroll budget each fiscal year. Comparing actual payroll results to budget monthly or quarterly can be helpful in identifying fraudulent activity. Any significant variances from budget should be easily explainable. Reviewers should also keep in mind known variances from budget (i.e. an open position that was budgeted for) and ensure that these variances are being realized.
  • An executive of the organization, who is independent of the payroll and accounting function (such as the president, executive director, treasurer, etc.), should review the payroll registers periodically for unusual or unexpected activity. For example, he or she should review the hours worked (for hourly employees) along with employee pay rates to ensure they are consistent with expectations. Further, he/she should review the listing of employees paid to identify potential “ghost employees” (individuals being paid who do no work for the organization), or terminated employees who continue to be paid. Many organizations outsource their payroll processing to a third party provider. Through the online platforms made available by payroll providers or within payroll modules embedded in the accounting software, organizations typically have access to a variety of useful reports, including an “audit report” which can be run for a specific payroll period or longer period of time and provides a detail listing of all changes made within the payroll system, such as employees added, employees terminated, rate changes, withholding changes, etc. This is an especially important control for smaller organizations in which the individuals processing and posting payroll also have responsibility for maintaining the employee database, pay rates, withholdings and deductions. Reviewing such a report in connection with a review of the payroll registers can be very useful. Changes identified by an “audit report” should be supported by the appropriate paperwork and authorizations within the employee files. 

In the end, the key to payroll fraud prevention is identifying how it could occur within your organization and adding reasonable controls, such as the ones recommended above, to address the risks. 

Chris Ernest, CPA oversees audit and tax engagements and is responsible for engagement planning, staff supervision and coordination with client personnel to ensure successful completion of projects.  Chris provides services to a wide range of  non-profit organizations, including independent schools, country clubs, museums and trade associations. In addition, he specializes in audits of employee benefit plans.

FASB Exposure Draft on Not-for-Profit Financial Reporting Issued

Last month, the FASB issued a much anticipated exposure draft relating to the proposed accounting standards update relating to not-for-profit and health care entity financial reporting.  BlumShapiro Partner Reed Risteen summarized the exposure draft in a recent article to help explain the proposed changes, and provided some practical examples of how financial statements may look under the new proposed guidelines. Read the full article here.

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.

990 Policy Compliance Series – Conflict of Interest Policy

Continuing with our 990 policy compliance series is a discussion about what is required for a sound conflict of interest policy. Everyone can agree that an entity that uses public, government or donated funds should have a policy to address potential conflicts of interest with those that are controlling the organization. On Part VI of the 990, there is a three-part question regarding the existence of a conflict of interest policy and its components.

First, what is a conflict of interest (COI)? The IRS defines COIs as a circumstance that arises “when a person in a position of authority over an organization, such as an officer, director, manager or key employee (as defined by the IRS), can benefit financially from a decision he or she could make in such a capacity, including indirect benefits, such as to family members or businesses with which the individual is closely associated.”

The following criteria must be met in order to answer “yes” to the three-part question on Part VI of the 990 regarding your COI policy:

  • #12a: Is there a written policy? Answer yes only if a written policy is in place, as of the last day of the tax year, that defines conflicts of interest, identifies the class of individuals to which the policy applies, facilitates disclosure of information that can help identify potential conflicts of interest, and specifies procedures to be followed in managing conflicts of interest.
  • #12b: Are covered individuals required to disclose potential conflicts? Answer yes only if officers, directors, trustees and key employees (as defined by the IRS) are required to disclose or update annually (or more frequently) information regarding their interests and those of their families that could give rise to conflicts of interest.
  • #12c: Did the Organization regularly and consistently monitor and enforce compliance with the policy? The IRS does not define how this is to occur, but, if the answer is yes, then a narrative disclosure describing the process of how the policy is monitored and how conflicts are dealt with is required on Schedule O. Schedule O is the supplementary schedule that is used to provide any narrative or other information to answer required questions throughout the 990 or to provide any information that would be useful to the IRS or reader of the 990. In describing the process on Schedule O, include the following:
    • Explanation of which persons are covered by the COI policy.
    • The level at which determinations of whether a conflict exists are made and at what level they are reviewed.
    • Explanation of what restrictions, if any, are imposed on individuals with a conflict, such as prohibiting them from participating in the deliberations and decisions regarding the transaction under review.

In our next post we’ll cover the process for determining compensation for top earners at organizations.

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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.

990 Policy Compliance Series – What is an Independent Board Member?

On the 990, the first questions regarding the governing body are how many voting members are on the board and how many of those members are independent. A member of the governing body is considered “independent” only if ALL of the following four circumstances were applicable at ALL times during the organization’s tax year (fiscal year):

1. The member was not compensated as an officer or other employee of the organization or a related organization (simply put, any entity that is a parent, subsidiary, brother/sister, supporting/supported organization to the filing entity at any point during the year – see Schedule R instructions for more complete definitions). The member also was not compensated by any unrelated organizations for services provided to the filing entity or to a related organization. There is an exception for receiving compensation as an agent of a religious order (there are specific conditions that must be met).
2. The member did not receive total compensation exceeding $10,000 during the tax year from the filing entity and/or a related organization as an independent contractor (not including reasonable compensation for services provided in the capacity as a board member).
3. Neither the member nor any of his or her family members was involved in any transaction with the filing entity which is reportable on Schedule L (Transactions with Interested Persons – see IRS Schedule L filing tips for more detailed reporting requirements).
4. Neither the member nor any of his or her family members was involved in any transaction with a related organization that is reportable on Schedule L.

The IRS specifically states that the following circumstances do not indicate a lack of independence as a board member:

1. The member is a donor to the organization.
2. Religious exception (as discussed above).
3. The member receives benefit from the organization by being a member of the charitable or other class that is served by the organization.

Further, the IRS expects the organization to engage in all reasonable efforts to obtain the necessary information in order to determine whether members are independent. A good conflict of interest policy can help with this effort. Stay tuned for a future blog post on effective conflict of interest policies.

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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.