Nonprofit Agendas - April, 2017

April 20, 2017

New liquidity disclosure requirements for nonprofits

Qualitative information communicates how a nonprofit manages its available liquid resources to meet cash needs for general expenditures within one year forward of the balance sheet date. Quantitative information, reported either on the face of the balance sheet (i.e. statement of financial position) – or in the notes – communicates the availability of a nonprofit’s financial assets as of the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date. The key words to understand are – Liquidity, Availability, Qualitative, Quantitative and General Expenditures.

Liquidity is measured as how quickly a financial asset can be converted to cash. Availability of a financial asset may be affected by its nature; external limits imposed by donors, grantors, laws and contracts with others; and internal limits imposed by governing board decisions. The objective of the new disclosures is to provide more useful information about an organization’s resources and any changes in those resources that will be helpful to donors, grantors, creditors and others in understanding a nonprofit’s financial viability.

For example, let’s consider a nonprofit organization with the following assets as of its balance sheet date:

Cash: $1,500,000

Accounts receivable, net: $1,000,000

Investments: $1,000,000

Prepaid expenses: $200,000

Property and equipment, net: $3,000,000

TOTAL ASSETS 6,700,000

In this example, it is safe to assume cash, receivables and investments can be converted to cash within one year of the balance sheet date. These are considered liquid assets under the new disclosure requirements. The next step is to look at the details of each of these assets and identify any type of restrictions on the use. Restrictions could be either internal or external. For example, if investments include donor restricted endowment funds for a particular purpose, such funds are not considered “available” for the organization’s general expenditures. Another example is board-designated funds for a special purpose, such as constructing a building or other capital improvements. Such board-designated funds could be liquid. However, they may not be “available” for general expenditures within one year. This also highlights the importance of board decisions and its impact on financial reporting. How does an organization make sure it has enough liquidity? The answer could be maintaining a line of credit or bank account balances to cover a certain number of weeks’ expenses.

There is a greater level of flexibility as to how organizations report their liquidity and availability information. It could be presented in a tabular format, or a management discussion and analysis type format. It’s important for organizations to start thinking about this now, and evaluate their financial position by looking at the balance sheet on a “classified” basis and considering the “availability” factor.

Oftentimes, social service agencies carry mortgage liabilities on their balance sheet for residential programs. Payments for such mortgage liabilities may be funded by the governmental funding sources, and included in the rate or budget for the particular residential program. In those situations, nonprofits should consider including in the disclosure requirements that such obligations will be paid down through future reimbursements from the funding source, and not from existing assets as of the balance sheet date.

Lastly, the disclosure information will be audited by your external auditors, so be sure to have verifiable audit evidence to support the information disclosed.

Nonprofit organizations should develop sample disclosures internally and assess the impact of the new disclosures on their banking relationships, funders, donors and other stakeholders. The effective date of the new disclosure is calendar year 2018 or fiscal year 2019, as applicable.

* This article first appeared in the January 20, 2017, edition of New York Nonprofit Media. It is reproduced here by permission of the editors. © New York Nonprofit Media. All rights reserved.

Pledge receivables: The accounting isn’t as simple as it might seem

When can you recognize a pledge?

Let’s say a donor makes a pledge in June 2017 to contribute $10,000 in January 2018. You will generally create a pledge receivable and recognize the contribution as temporarily restricted for the June 2017 financial period. When the payment is received in January 2018, you’ll apply it to the receivable. No new revenue will result in January because the revenue already was recorded.

Of course, you can’t recognize the revenue unless the donor has made a firm commitment and the pledge is unconditional — meaning the donor has committed to the pledge without reservations. Several factors might indicate an unconditional pledge, including when:

• The promise includes a fixed payment schedule;
• the promise includes words such as “promise,” “pledge,” “binding” and “agree” (as opposed to “plan,” “intend” and “hope”); and,
• the amount of the promise can be determined.

What about conditional promises? They could include a requirement that the organization first complete a project before receiving the contribution. It is simple: matching pledges are conditional until the matching requirement is satisfied, and bequests are conditional until after the donor’s death.

In general, you shouldn’t recognize revenue on conditional promises until the conditions have been met. It could be acceptable to record a conditional pledge if the odds of a condition going unfulfilled are remote (for example, if the condition requires the nonprofit to exist in five years and the 20-year-old organization is in a solid financial position or you are required to provide financial statements to the donor each year).

Your accounting department will require written documentation to support a pledge before recording it. The strongest evidence is a signed agreement with the donor that clearly details all of the terms of the pledge, including the amount and timing. If pledges are something that come up often, you might want to develop a standard pledge template to use with all pledge donors. Reluctance to sign such an agreement could be reason to question a donor’s level of commitment to making the contribution, and you probably shouldn’t record the pledge.

Should you apply a discount?

A pledge must be recognized at its present value, as opposed to the amount you expect to receive in the future to reflect the time value of money. For a pledge that you’ll receive within a year, you can recognize the pledged amount as the present value.

If the pledge will be received further in the future, though, present value is calculated by applying a discount rate (the average risk adjusted rate of the time of the pledge) to the amount you expect to receive. The discount rate is usually the market interest rate, or the interest rate a bank would charge you to borrow the amount of the pledge. Additional entries will be required to remove the discount as time elapses.

A word of caution

Proper accounting for pledge receivables is critical. In particular, if you don’t record them in the proper financial period, you could run into audit issues that might, in turn, put your funding in jeopardy.

ENSURING NONPROFIT COMPLIANCE WITH THE FEDERAL OMB UNIFORM GUIDANCE AND NJ'S CIRCULAR 15-08 OMB

The Federal OMB’s Uniform Guidance requires New Jersey-based nonprofit organizations with fiscal year expenditures greater than $750,000 to have a Single Audit. Organizations that receive new or incremental federal funding either directly from a federal agency or passed-through from the state or a local government after December 24, 2014 need to follow the federal OMB’s Uniform Guidance. For federal grants awarded prior to that date, OMB Circulars (A-110 and A-122 for nonprofits) are still in effect.

The Uniform Guidance, which supersedes and combines the requirements of eight existing OMB Circulars (A-21, A-50, A-87, A-89, A-102, A-110, A-122, A-133), is now codified into the Code of Federal Regulations (CFR) Title 2 Part 200. Title 2 Part 200.300 series contains the administrative requirements, Title 2 Part 200.400 series contains the cost principles. Title 2 Part 200.500 series requires independent auditors to perform their Single Audits for all Single Audits performed with year ends after December 26, 2015 regardless of whether the nonprofit has to adhere to the OMB Circulars or the CFR Title 2 part 200. All of this means that some New Jersey nonprofits will find themselves having to comply with both new and existing regulations, depending upon when their grants were issued. This will go on until the federal agency awards them new direct or incremental funding.

New Jersey-based nonprofit organizations are required to have a State Single Audit for their state- funded programs when total state-funded expenditures are greater than $750,000 in the organization’s fiscal year. The State Single Audit under Circular 15-08 follows the requirements contained in the Uniform Guidance. Therefore, NJ nonprofit organizations that have expenditures greater than $750,000 in federal or State funds in their fiscal year must have a Single Audit under Uniform Guidance and/or the State of New Jersey Circular 15-08 OMB.

The State of New Jersey requires NJ nonprofits that expend less than $750,000 in federal or state assistance within their fiscal year, but expend $100,000 or more are required to have either a financial statement audit performed in accordance with Government Auditing Standards or a program-specific audit in accordance with the Single Audit Act.

The Single Audit Guidance under both the Uniform Guidance and New Jersey Circular 15-08 OMB are only for recipients who carry out or administer a program. Contractors (vendors) who provide goods or services but do not carry out or administer a program are not affected.

New Jersey nonprofit organizations should utilize the award notices and agreements and the State Grant Compliance Supplement to determine the compliance requirements. The State Grant Compliance Supplement can be located at:

http://www.state.nj.us/treasury/omb/publications/grant/index.shtml

Therefore, NJ nonprofits must be familiar with the requirements in the Title 2 part 200.300 and part 200.400 series for their federal grants and OMB Circular 15-08 and the State Grant Compliance Supplement for their state-funded grants.

OMB Circular 15-08 requires NJ nonprofits that receive federal funding passed through from a NJ State agency or receive a state of NJ-funded grant or aid to have a Single Audit. The Single Audit report must have the federally required reports and opinions and similar reports and opinions for State grant or State Aid funds including a supplementary schedule entitled Schedule of Expenditures of State Financial Assistance and must show for each State grant:

• State Grantor Department
• Program title/Name
• State Grant Award Number or Account Number
• Grant Award Period
• Fiscal Year Grant Expenditures
• Total Grant Expenditures to Date

The Single Audit reports are due nine months after the end of the organization’s fiscal year-end.

For more information:

If you have questions about this article, please contact John D’Amico, Director in our Nonprofit, Government and Healthcare Group, at 973.267.1400 or via email at jdamico@markspaneth.com, or any of our nonprofit professionals.

News for Nonprofits

Female execs still earn less than males

The 16th annual GuideStar Nonprofit Compensation Report finds that female nonprofit executives continue to earn less than their male counterparts. While the gender pay gap for CEOs has been on the decline at organizations with operating budgets of less than $25 million, it’s grown at organizations with budgets over $25 million. Overall, the gap ranged from 8% at organizations with budgets of $250,000 or less to 23% at nonprofits with budgets of more than $25 million.

But women have made strides in their representation as CEOs since 2004 at every size organization, except those with budgets of less than $1 million. The gains have been the most dramatic at nonprofits with budgets of more than $10 million — however, women still make up less than one-third of the CEOs in those organizations.

Smartphones play revved-up role in working with refugees

Nonprofit Quarterly reports that, for many organizations working to support refugees fleeing war-torn countries, smartphones are becoming vital tools as the displaced people adjust to their new environments. Nongovernment and government agencies have initiated programs that help refugees secure a cell phone, easing many challenges around rebuilding their lives in a new country. The refugees can use the devices to connect with loved ones, navigate unfamiliar areas, open bank accounts, send money across borders, and obtain online access to services and job opportunities.

Report compares “human services” organizations’ fundraising with other charities’

The Growth in Giving (GIG) Initiative — launched by the Association of Fundraising Professionals, the Urban Institute’s Center on Nonprofits and Philanthropy, and DonorPerfect to gather data — has partnered with the Giving USA Foundation to report that human services organizations (HSOs), such as food banks, homeless shelters and sports organizations, have nearly caught up with other types of nonprofits in fundraising productivity.

GIG’s report, Benchmarking Giving to Human Services, indicates that giving to HSOs increased at a slightly faster rate than contributions to non-HSOs in the period 2009–2015. You can order the full report at https://givingusa.org/product/giving-usa-philanthropy-spotlight-benchmarking-giving-to-human-services.

Technology-related nonprofits get priced out of key market

A recent article in Fast Company warns that Silicon Valley’s “talent wars” are outpricing the nonprofits in the region that have a technology focus — organizations that “design apps, build websites and design digital tools that help deliver social programs and services to those in need.” Social responsibility initiatives from tech giants only partially fill the gap; financial support can help, but funders are often less interested in donating money for overhead costs and staff, leaving these organizations in a tough spot.

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Our Nonprofit, Government & Healthcare Group consists of approximately 60 people in New York, New Jersey, Pennsylvania and Washington DC, including our eight Partners and five Directors listed below. If you have questions, please contact one of us. More information can also be found at markspaneth.com.

Nonprofit, Government & Healthcare Leadership Team

Michael McNee, Co-Partner-in-Charge of the Nonprofit, Government & Healthcare Group

Hope Goldstein, Co-Partner-in-Charge of the Nonprofit, Government & Healthcare Group

Joseph J. Kanjamala, Partner

Sibi Thomas, Partner

Warren Ruppel, Partner and Practice Leader of Government

Anthony J. Tempesta, Partner-in-Charge of the Westchester Office

Joseph Frohlinger, Principal, Healthcare Consulting

Jacob A. Beniawski, Partner, Healthcare Audit

Alan Becker, Director

Howard Becker, Director

John D’Amico, Director

Frances McKenna, Tax Director, Exempt Organizations