accounting 101 for exempt organizations · non-cash transactions 6. ... checklist of required...

Brian Yacker, JD/CPA

Stacey Bergman, CPA

August 13, 2015

ACCOUNTING 101 FOR EXEMPT ORGANIZATIONS

OVERVIEW

YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101 2

1. TERMINOLOGY

2. CHART OF ACCOUNTS / CLASS STRUCTURE

3. FINANCIAL STATEMENTS

4. FORM 990

5. NON-CASH TRANSACTIONS

6. RESTRICTIONS

7. ACCOUNTING SOFTWARE

8. BEST PRACTICE INTERNAL CONTROLS

9. OWNERSHIP OF ACCOUNTING FUNCTIONS

10. RESOURCES

TERMINOLOGY


REVENUE

– Contribution vs Exchange vs Agency

EXPENSE – Tracked by “natural” account

– Categorized by functional class

• Program service

• Management & general

• Fundraising

NET ASSETS

– Equivalent to net worth of an organization

ASSETS

– What an EO has/owns, what is owed

to the EO, what the EO has invested and

what the EO has deposited with others

• Cash, investments, receivables, fixed

assets, inventory, etc

LIABILITIES – What an EO owes to others or holds on behalf

of others

• Accounts payable, credit card payable,

payroll related liabilities, short or long

term loans, etc

TERMINOLOGY


ACCOUNTING FORMULA:

ASSETS = LIABILITIES + NET ASSETS

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

– Preferred accounting treatment – Instituted by:

• FASB (Financial Accounting Standards Board)

• AICPA (American Institute of Certified Public Accountants)

CHART OF ACCOUNTS &

CLASS STRUCTURE

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– CHART OF ACCOUNTS IS THE FOUNDATION OF AN EXEMPT ORGANIZATION’S

ACCOUNTING INFRASTRUCTURE AND PAVES THE WAY FOR TRANSPARENT FINANCIAL

REPORTING

• Cluttered and cumbersome COA = increased risk of fraud

• Concise and well organized COA = greater transparency to the reader of the nonprofit’s

financial statements

– CONSISTENCY IS KEY!

PERIODICALLY REVIEW THE CHART OF ACCOUNTS TO SEE IF ANY

ACCOUNTS CONTAIN RELATIVELY IMMATERIAL AMOUNTS • If so, and this information is not needed for special reports, inactivate these accounts

WHAT IS A CLASS STRUCTURE AND WHEN SHOULD SUCH BE

UTILIZED?

YH ADVISORS, THE EXEMPT ORG EXPERTS EO ACCOUNTING 101

CHART OF ACCOUNTS &

CLASS STRUCTURE

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ACCOUNTS: • Listed in order of appearance in the financial statements (assets, liabilities, net assets,

revenues, expenses)

• Each account should define in 1-2 words the nature of the transaction

o Who was a contribution from?

o What was money spent on?

• All accounts should have a purpose beyond a single transaction to avoid a bulky Chart of

Accounts that lacks value

• Conversely, varying charges should not be combined or overly grouped in order to keep a listing

concise

• Use sub-accounts

• NEVER use:

o “Ask My Accountant”

o “Suspense” Accounts such as this are vague and add no value to the accounting infrastructure


CHART OF ACCOUNTS &

CLASS STRUCTURE

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CLASS STRUCTURE: • Why use?

o Streamlined Form 990 preparation

and Statement of Functional

Expenses

o Assists upper management in

determining how money is being

earned and used

• When to use?

– CREATING CLASSES:

• Start with Part IX of the Form 990 as

a guide: – Program Services

– Management and General

– Fundraising

• Create sub-classes as necessary: – Major programs

– Fundraising events

• Do not duplicate any of the accounts

in the natural revenue and expense

categories


CHART OF ACCOUNTS &

CLASS STRUCTURE

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Classes

Accounts MANAGEMENT & GENERALEducational

OutreachProgram #1 Program #2 Program #3

General

FundraisingChicago Event LA Event NYC Event

INCOME

Contributions

Corporate

Event Contribution

Foundation

Individual

In-Kind (Non-Cash)

Restricted

Sponsorship

Third Party Events

Special Event Revenue

Ticket Sales

Auction

Merchandise

PROGRAM SERVICE FUNDRAISING


CHART OF ACCOUNTS &

CLASS STRUCTURE

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Classes

Accounts MANAGEMENT & GENERALEducational

OutreachProgram #1 Program #2 Program #3

General

FundraisingChicago Event LA Event NYC Event

EXPENSE

Bank & Merchant Fees

Gifts & Appreciation

Grants

Grants for Services

Care Packages

Dues & Subscriptions

In-Kind (Non-Cash)

Insurance

D&O & General Liab

Health

Workers Comp

Licenses & Permits

Meetings

Merchandise (COGS)

Office Rent

Office Supplies

Payroll

Employee Wages

Payroll Service Charge

Payroll Taxes

Postage & Shipping

Printing

Professional Services

Accounting

Consulting

Legal

Other

Repairs & Maintenance

Software & Hardware

Special Event Expenses

Entertainment

Food & Beverages

Other Direct Costs

Outreach

Rent/Facility Costs

Staffing Costs

Taxes & Filing Fees

Travel, Mileage & Parking

Utilities

Internet

Telephone

Website & Social Networking

PROGRAM SERVICE FUNDRAISING


FINANCIAL STATEMENTS

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STATEMENT OF FINANCIAL POSITION

AKA: Balance Sheet

Reflects the overall financial position of an exempt organization at any

given point in time

Assets = Liabilities + Net Assets



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STATEMENT OF ACTIVITIES

AKA: Income Statement or Profit & Loss (P&L)

Reports income and expenses for a specified period of time • The result of the activities of a given fiscal year represent the change to the EOs net assets



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STATEMENT OF FUNCTIONAL

EXPENSES – GAAP requires that expenditures be

classified as programmatic or support

services

• This can be done via footnote

disclosures or the Statement of

Functional Expenses

– Also required to be reported on Part IX of the

Form 990

– Allocation “buckets”

• Program services

• Management & General

• Fundraising


ALLOCATION METHODOLOGY – Allocation must be reasonable, consistent

and periodically reviewed and challenged

– Common metrics:

• Time

• Square footage

• Percentage of direct costs

• Number of employees

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FORM 990

Primary source of information for

“users” of the Form 990:

• Members of the general public

• IRS / State authorities (ie: Attorney

General)

• Potential donors

• Newspapers and other media

• Competitors

• Watchdog groups


PURPOSES OF FORM 990:

Provides transparency into the

operations of the exempt

organization

Ensure the adequate collection

of information for the various

types and sizes of exempt

organizations

• Facilitate comparisons between

similar types of exempt

organizations

FORM 990

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12 CORE PARTS + (UP TO) 16 SCHEDULES:

– Heading

– Part I: Summary of organization's mission and basic structure

– Part III: Statement of Program Service Accomplishments

– Part IV: Checklist of Required Schedules

– Part V: Statements Regarding Other IRS Filings and Tax Compliance

– Part VI: Governance, Management & Disclosure

– Part VII: Compensation of Officers, Directors, Trustees, Key Employees, Highest Paid

Employees & Independent Contractors

– Part VIII: Statement of Revenue

– Part IX: Statement of Functional Expenses

– Part X: Balance Sheet

– Part XI: Reconciliation of Net Assets

– Part XII: Financial Statements & Reporting


NON-CASH TRANSACTIONS

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WHEN TO RECORD?

– Technical answer

• Upon receipt of item, estimate value

• Adjust books when item is sold

– “Real world” answer…

DONATED SERVICES

Contributed services must either

• Create or enhance nonfinancial assets, or

• Require specialized skills, are provided

by individuals possessing those skills,

and would typically need to be purchased

if not provided by donation

VALUATION OF NON-CASH ITEMS

– Determined by the exempt organization

when recording on books

– Do NOT include a value on charitable

contribution acknowledgement letter

– Valuation technique contemporaneously

documented and consistently applied

– Fair market value at the time of donation

based on all relevant factors, including:

• Item’s cost or selling price

• Sales of comparable items

• Item’s replacement cost, and

• An expert opinion (when necessary)

Use of equipment


NON-CASH TRANSACTIONS

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REPORTING – Creation of new accounts + separate line item on financial statements

• Need to book both non-cash revenue AND non-cash expense

– Form 990 reporting

• Part IV, Line 29

• Part VIII, Line 1g

• Corresponding expense should be in the appropriate line item on Part IX or Schedule G (if

expense relates to the conducting of a special event)

GAAP VS IRS TREATMENT


GAAP STATES THAT ALL CONTRIBUTION REVENUE MUST BE

CLASSIFIED AS EITHER:

Unrestricted

• Lacking restrictions from DONORS as to how the contributed asset(s) should be

used

• Board designations and/or quasi-endowments are considered unrestricted

Temporarily Restricted

• Contributions with DONOR-imposed restrictions that limit the use of the assets by

either:

o Purpose

o Time

Permanently Restricted

• Contributions and support that is not expendable by the exempt organization

• Most prevalent is an endowment fund

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DONOR RESTRICTIONS


ACCOUNTING SOFTWARE

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WHEN CONSIDERING:

Basic understanding of

computers/software required

Will not allow the user(s) to get

out of understanding the basics

of accounting and balancing a

check book

Requires just as much skill as

doing the accounting “by hand” • Garbage in = garbage out

ULTIMATE DOCUMENTATION

REQUIREMENT:

CONSISTENT

CONTEMPORANEOUS


BEST PRACTICE

INTERNAL CONTROLS

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At a MINIMUM, an exempt organization should have the following

documented policies and procedures: • Required Officers

o Typically President, Secretary and Treasurer

See the organization’s Bylaws

• Voting procedures

o Also found in the Bylaws

• Compliance monitoring

o Form 990

o Audit requirements

o Home state reporting requirements

o Foreign state reporting requirements

• Board resolutions and minutes

• Board member reimbursement and compensation policy


BEST PRACTICE

INTERNAL CONTROLS

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Additional policies considered best practices (if applicable): • Audit Committee

• Board giving policy

• Compliance with conditions placed upon grants or contributions

• Conflict of interest policy

• Document retention and destruction policy

• Expense reimbursement policy

• Financial reserve policy

• Gift acceptance policy

• Investment policy

• Joint venture policy

• Prohibition on loans to Board members

• Succession plan

• Whistleblower policy


BEST PRACTICE

INTERNAL CONTROLS

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FINANCIAL REPORTING & REVIEW

Why? • A financial statement is the lifeblood of

any exempt organization

• Financial statements are relied on to

know the condition, performance and

ability to efficiently sustain past and

future operations of a nonprofit

o Performing a regular review of the

financial statements helps mitigate

the risk of material misstatement in

financial statements due to error or

fraud.

• Great opportunity for Board involvement

o Reviewing the financial statements

should generate questions to

ensure adequate understanding

• Sets the appropriate tone at the top!


What? • Basic:

o Statement of Financial Position

o Statement of Activities

o Budget to Actual P&L

• Additional Reports to Consider

o Statement of Functional Expenses

(if using a class structure)

o Previous year comparisons

o Cash flow projections

o P&L for specific programs or events

o Promises to give versus amounts

paid in

o Grants paid out YTD

BEST PRACTICE

INTERNAL CONTROLS

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FINANCIAL REPORTING & REVIEW

Who? • Responsibility of preparation will vary

based on accounting functions

• Initial review by upper management

(COO, CEO, CFO, ED)

• Subsequent review by Finance

Committee or full Board of Directors


When? • Timing depends on the nature of the

EOs operations

o For many EOs, a monthly financial

statement review is necessary, for others

(perhaps a small PF), quarterly or even

annually would be adequate

Whether large or small, effective financial management is an ongoing process

• Sound procedures and internal controls help ensure accurate and high-quality

reporting

• Evaluation of the information in financial reports allows management to understand

the financial operations of an organization, thus facilitates good management

decisions

• Regular review of the process leads to consistent improvements in financial

management

If employee base isn’t financially sophisticated enough to manage the

accounting infrastructure, outsource some or all of it to an expert

Ensure Board of Directors has at least one financial expert

Delegate regular review of financial statements and financial related

procedures to a Finance Committee

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OWNERSHIP OF ACCOUNTING

FUNCTION


RESOURCES

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Guidestar – www.Guidestar.com

Nonprofit Accounting Basics – http://www.nonprofitaccountingbasics.org/

Form 990 Instructions – http://www.irs.gov/pub/irs-pdf/i990.pdf

National Council of Nonprofits – https://www.councilofnonprofits.org/


http://www.guidestar.com/

http://www.nonprofitaccountingbasics.org/

http://www.irs.gov/pub/irs-pdf/i990.pdf



https://www.councilofnonprofits.org/

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FOR MORE INFORMATION…

Brian Yacker, Partner

310-982-2803 (direct)

310-266-7196 (cell)

[email protected]

YH Advisors, Inc.

One Pacific Plaza

7755 Center Avenue, #1225

Huntington Beach, CA 92647

Stacey Bergman, Principal

310-982-2805 (direct)

562-965-2554 (cell)

[email protected]

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