NONPROFIT
CONNECTION
Newsletter by Hawkins Ash CPAs
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In this edition
August 2019
New Guidance for Grants and Contracts
Nonprofit Tax Tidbits: Form 990 Schedule L
Client Feature and Executive Director Q&A: House of Hope
Employee Feature: Brittany Leonard
New Lease Standard (ASU 2016-02)
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New Guidance for Grants and Contracts
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On June 21, 2018, the Financial Accounting Standards Board (FASB) issued
ASU 2018-08 to clarify how organizations should characterize grants and similar contracts with government agencies and others. Specifically, it assists organizations in evaluating whether transactions are:
- reciprocal exchange transactions or contributions (non-reciprocal transactions)
- conditional or unconditional contributions
Step 1: Distinguish if the transaction is an exchange transaction or a contribution.
With an exchange transaction, each party directly receives commensurate value. The new standard explicitly states that when the general public receives the primary benefit, even if it furthers the resource provider’s charitable mission, it is not commensurate value.
Using the following examples, we will determine if an exchange transaction or contribution exists.
Nonprofit A is a regional destination marketing organization that regularly conducts research to discover what drives tourism and ways to increase the economic impact of tourism. NFP A receives funding from local businesses to finance the cost of a tourism study to review the social and cultural aspects of tourism in the region. The local businesses determine the specifics of the study, and the rights to the results of the study belong to the local businesses. Because the results of the study have particular value to the local businesses, the local businesses are receiving commensurate value as the resource provider. Therefore, this transaction would be accounted for as an exchange transaction.
The same nonprofit receives a grant to assist with bringing events to the area. Nonprofit A is required to incur qualifying expenses during a specified timeframe in order to receive the funding. Any unspent money is forfeited by Nonprofit A. The grantor is not receiving any commensurate value for providing this funding as the public (local businesses) is receiving the primary benefit of this funding. Therefore, Nonprofit A would account for this grant as a contribution.
Step 2: Determine if a contribution is conditional or unconditional.
The organization needs to determine whether conditions have been placed on the resources being provided. This determination is important for the nonprofit as unconditional contributions are recognized immediately, whereas conditional contributions are not recognized until the conditions have been substantially met. ASU 2018-08 clarifies that both of the following must exist for a contribution to be conditional:
- there is a barrier the nonprofit must overcome to be entitled to the resources, and
- the contributor retains a right of return for the resources provided
The new standard provides the following indicators that a barrier may exist:
- The nonprofit is required to achieve a measurable outcome (ex: help a specific number of beneficiaries or produce a certain number of units).
- The nonprofit is required to overcome a barrier related to the primary purpose of the agreement. This excludes trivial or administrative requirements. Examples such as producing an annual report or providing financials are common administrative requirements in contribution agreements. This reporting is not related to the underlying purpose of the agreement and generally it is to confirm the resources were used in accordance to the agreement and is not intended to affect the extent to which the nonprofit is entitled to the contribution.
- The nonprofit has limited discretion over how the resources are spent (ex: a requirement to follow specific guidelines about incurring qualifying expenses).
Using the following examples from the ASU, we will determine if a contribution is conditional or unconditional.
Nonprofit B is a homeless shelter that receives a grant to build a new wing onto its existing building. The agreement contains a multiyear promise to give and includes specific building requirements. Payments of the multiyear promise to give will be made as Nonprofit B achieves milestones identified in the agreement. If a particular milestone is not met, Nonprofit B is not entitled to the assets. In this example, a milestone is deemed a measurable performance barrier because NFP B’s entitlement to the transferred assets is contingent upon the completion of a milestone. In addition, the agreement includes a release of the resource provider’s obligation to transfer assets if the stipulations are not met. Therefore, this would be considered a conditional contribution and revenue would be recognized as the barriers are met.
The same nonprofit receives a grant to be used towards its community meal program. The agreement includes specific guidelines for which Nonprofit B could use the assets (for example, to hire three additional cafeteria workers or to purchase additional food) but does not specify that Nonprofit B’s entitlement to the funds is dependent on Nonprofit B meeting any of the specified guidelines in the agreement. The grant contains a right of return for funds not spent on the community meal program. Nonprofit B determined this is an unconditional promise to give as the agreement does not contain a barrier to overcome in order for it to be entitled to the assets.
Effective Date and Application
The amendments in ASU 2018-08 are effective for annual financial statements issued for fiscal years beginning after December 15, 2018, and for interim periods within fiscal years beginning after December 15, 2019. Application to interim financial statements is permitted, but not required in the initial year of application.
The amendments should be applied only to the portion of revenue or expense that has not yet been recognized before the effective date. No prior-period results should be restated. The organization will be required to disclose the nature of and reason for the accounting change and an explanation of the reason for significant changes in each financial statement line item resulting from the amendments.
Early application is permitted.
If you have any questions regarding how ASU 2018-08 will impact your organization, please contact your Hawkins Ash CPAs representative.
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Author:
Briana Peters, CPA
Direct: 920.337.4549
Email: bpeters@hawkinsashcpas.com
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Nonprofit Tax Tidbits: Form 990 Schedule L
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The next installment in our series on the schedules of the IRS Form 990 focuses on Schedule L, Transactions with Interested Persons. Schedule L provides information on certain financial transactions between the organization and interested persons. There are four different sections to Schedule L, each part covering a different type of transaction with an interested person. Various thresholds and exceptions may determine whether a given transaction must be reported in one of these parts.
An
interested person
is any person who is in a position to influence the tax-exempt organization at any time during a five-year period ending on the day of the transaction or a disqualified person under section 4958. An interested person can also include a member of the disqualified person’s family or his/her business. Schedule L is also used to determine whether a voting member of the governing board is independent for reporting on Form 990, Part VIII, Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees and Independent Contractors. A transaction between the organization and an interested person is only reported in one place on Schedule L. Answering questions 25-28 of Form 990 Part IV Checklist of Required Schedules will assist the organization in choosing the correct section to report these transactions.
Part I, Excess Benefit Transactions applies only to 501(c)(3), 501(c)(4) and 501(c)(29) organizations that had excess benefit transactions at any time during the five-year period. Excess benefit transactions are reported regardless of the amount. An excess benefit transaction can have serious implications for the person who benefited from the transaction, the managers of the organization and the organization. On part I, the organization discloses the disqualified person’s name, his/her relationship to the organization, a description of the transaction, whether or not the transaction has been corrected, and the amount of excise tax that was paid by the disqualified person and the organization managers.
Parts II-IV applies to all types of organizations.
Part II, Loans to and/or From Interested Persons reports details on loans including salary advances and split-dollar life insurance arrangements treated as loans. The interested person’s name, relationship to the organization, the purpose of the loan, whether the loan was to/from the organization, the original amount, as well as the current balance is detailed for each loan. Questions regarding whether the loan is in default, approved by the governing board, or if there was a written agreement in place must be answered. A loan from a 501(c) 3 organization, a governmental unit, or an exempt organization with the same tax-exempt status as the filing organization does not need to be disclosed in Part II. Only loans outstanding as of the fiscal year end need to be reported.
Part III Grants or Assistance Benefiting Interested Persons reports grants or assistance of any amount that is provided by the organization to an interested person during the organization’s tax year. Assistance can be in the form of scholarships, discounts on goods and services, prizes, or the use of facilities. The interested person’s name, relationship to the organization, amount of assistance, type and purpose of the assistance is disclosed.
Part IV Business Transactions Involving Interested Persons reports transactions that occur between the organization and interested persons that exceed the reporting thresholds. The reporting thresholds for transactions that occur between the organization and an interested person are as follows: (1) all payments during the tax year that exceeded $100,000; (2) all payments during the tax year from a single transaction that exceeded the greater of $10,000 or 1% of the filing organizations total revenue; (3) compensation payments which exceeded $10,000 during the tax year by the organization to a family member of a current or former officer, director, trustee, or key employee of the organization; (4) the organization has invested $10,000 or more in a joint venture with an interested person (whether or not during the tax year) and the profits or capital interests of each party exceeds 10% at some time during the tax year. Typically, these types of transactions should be approved by the board of directors and should be included in the minutes of the organization.
As with most schedules in the 990 series, the last schedule is a supplemental schedule which gives the organization additional space to provide any further explanation that is needed.
The organization must make a reasonable effort to ascertain the identity of interested persons. One way to accomplish this is to create a questionnaire to be filled out annually by persons who have an opportunity to influence the organization such as board members, members of management and/or substantial contributors.
If you have any questions regarding Schedule L of Form 990 or would like assistance in developing an interested person questionnaire, please contact your Hawkins Ash CPAs representative.
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Author:
Sandy Jensen, CPA
Direct: 608.793.3126
Email: sjensen@hawkinsashcpas.com
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Client Feature and Executive Director Q&A: House of Hope
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House of Hope was created in the late 90’s as a startup nonprofit organization by a group of healthcare professionals to help mothers who weren’t receiving substantial prenatal and postnatal care because they didn’t have a stable and safe home. By partnering with numerous nonprofit organizations, House of Hope was able to start providing a holistic program to the young mothers and children in the Green Bay community. Its specific services include providing a safe home and basic necessities for these families, as well as support to young mothers in need of attaining:
- Safe and stable housing
- Employment, career stability, resume development, interviewing skills
- Positive parenting skills
- Financial literacy, budget counseling, debt management
- Nutrition and meal preparation
- General education diploma (G.E.D.) acquirement and secondary education
- Healthy living skills
- Positive thinking, mental health, anger management, stress reduction/manageability
- Healthy relationships
The nonprofit started out with a four bedroom home only able to assist 13 families at a time. The community need for the services House of Hope provides continuously mounted with 18 new families added to the waitlist each month, resulting in almost a seven-year waiting list. Three years ago, to close this gap, the House of Hope board, staff, and community leaders initiated a plan called Key to Hope to raise money to expand its facilities and services. The Key to Hope campaign has successfully raised $3.6 million dollars through fundraising events and big and small private donations.
This campaign enabled House of Hope to add a new wing of housing, expanding to 27 rooms; a healthcare and therapy unit; two playrooms; and an expansion to the kitchen and dining area. House of Hope is aiming to raise an additional $1 million to sustain this growth.
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As the Executive Director for House of Hope since 2012, Shannon Wienandt has served at-risk youth since the beginning of her career in nonprofit work. Prior to joining House of Hope, Shannon served youth at the Boys and Girls Club. She holds her Bachelor’s degree in Psychology. At House of Hope, Shannon works to deepen the impact of the nonprofit’s services and create a sustainable future so that the nonprofit can continue to serve young mothers and their children.
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We had a chance to talk with Shannon to get her insight into several facets of being a nonprofit leader. Here’s what she had to say.
What are some things you know now that you wish you knew when you first started as a nonprofit leader?
Most people who work for small to mid-sized nonprofit organizations wear a lot of hats. I wish I had more experience in many areas when I first started, particularly computer networking and the legislative process. Over the years, I have learned so much from the talented people I’ve been lucky enough to work with. The nonprofit sector provides lifelong learning opportunities in numerous subjects, but I’ve learned that relationship building is the most important.
What has been your biggest source of pride as Executive Director?
I am so proud of the great work our team does here at House of Hope. I get to be around the most caring and intelligent people every day. I love to see the young parents we serve achieving their goals, and it’s heartwarming to witness their children being proud of them. It’s wonderful when a House of Hope family can move into their own apartment or celebrate a milestone, like earning a G.E.D. or getting a promotion at work.
What are your three biggest accomplishments in your career as a nonprofit leader?
My biggest career accomplishments have been the result of partaking in the efforts of a team to create improvements where opportunities for community development existed.
1.)
Working with the staff team, Board of Directors, volunteers, and shelter residents to expand House of Hope and provide more opportunities. We developed structured, state-recognized programs resulting in a 250% increase in services provided which serve the need in our community for youth experiencing homelessness.
2.)
With a team of professionals, I helped to organize and facilitate state-wide trainings, resulting in a significant cost savings for many nonprofit organizations.
3.)
Alongside other caring professionals, I opened after school programs in two rural, underserved communities. This well-rounded youth development program was conducive to creating opportunity and fostering educational advancement for at-risk, school-aged youth.
What are the dominant challenges you see nonprofit organizations facing and what do you think would be viable solutions?
Nonprofits employ professionals on many levels and are not always able to offer the same wages and benefits as other companies. Often, staff are working with less resources and tools and often doing the work of more than one person. Making it a priority to show how much the staff and volunteer team are appreciated is very important. Investing in appropriate systems and technology is crucial, as is offering great benefits for staff; this is an important step in the right direction.
What other Executive Directors or philanthropic leaders do you look up to?
There are many amazing directors and philanthropic leaders I look up to. To name a few:
Warren Buffet who, among many other philanthropic adventures, founded
The Giving Pledge
in 2009 with Bill Gates, whereby billionaires pledge to give away at least half of their fortunes.
How do you see the organization changing in the next two years, and how do you see yourself creating that change?
House of Hope Green Bay will be deepening the impact of the programs and services offered to our community. Over the next few years, a concentration of measuring effectiveness and discovering opportunities for improvement in the programs and services provided will ensue. We will move forward with a focus on collaborative efforts with other organizations in order to provide individualized services and remove barriers for the success of those who need us most. House of Hope remains flexible in order to serve the need the community is presented with and holds true to its mission of
providing a safe and supportive place where young parents and children experiencing homelessness will become confident, independent, and successful members of our community.
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Employee Feature: Brittany Leonard, CPA
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Brittany is an audit manager in the La Crosse office of Hawkins Ash CPAs. In this role, she provides audit services to nonprofit organizations, educational agencies, tax credit projects, municipalities, commercial enterprises, and housing authorities. Her experience also includes tax return preparation and small business bookkeeping.
Education
Bachelor of Business Administration
Accounting and Information Systems
University of Wisconsin-La Crosse
Certified Public Accountant
Contact Brittany
608.793.3123
bleonard@hawkinsashcpas.com
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New Lease Standard (ASU 2016-02)
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The effective date for ASU 2016-02 Leases, is just around the corner. For
n
on-public entities it is effective for periods beginning after December 15, 2019, which would be an organization’s December 31, 2020 year end for calendar year-end organizations. Early adoption is permitted.
Now is the time to get an understanding of what your organization needs to do to prepare for implementation.
We all wonder why there is a need for a new standard. The lease standard was created due to the Financial Accounting Standards Board (FASB) noting that over $1 trillion of leases for publicly traded companies were not recorded on the balance sheet and IFRS citing over $3 trillion worldwide companies for having lease commitments that were not presented on the balance sheet.
With the exception of leases with a term of 12 months or less, all leases should be accounted for on the statement of financial position under the new lease standard. Previously, operating leases were only required to be disclosed in the footnotes to the financial statements.
The accounting for finance leases does not change. The accounting for operating leases, however, does.
Below is a table to show where each type of lease, finance and operating, need to be shown in the financial statements:
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A right-of-use-asset is defined as the initial amount of lease plus any payments made to the lessor before the lease was in place, plus any direct costs to put the lease in place, minus any incentives that the lessor may have given to the lessee. The right-of-use asset is initially measured at the present value of the lease payments.
The lease liability is defined as the present value of the lease payments discounted by the implicit interest rate at the time the lease rate is readily determinable. If the rate is not determinable, the lessee will use its incremental borrowing rate (the interest rate that the lessee would have if he/she borrowed the money to pay for the lease).
What can you do to get ready?
- Familiarize yourself as to what the definition of a lease is per the FASB.
- Create a list of the leases your organization has, including the terms of each lease.
- Determine if your leases are operating or financing leases.
- Decide if any of the leases are less than 12 months.
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Here is a table showing the criteria needed to be classified as a finance (previously called capital) or operating lease.
If you have any questions about ASU 2016-02 (topic ASC 842) and/or ASU 2018-11, please contact your Hawkins Ash CPAs representative.
NOTE:
FASB has proposed a delay to this standard for one year which, if approved, would make it effective for years beginning after December 15, 2020.
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Author:
Claudia Weinberger, CPA
Direct: 608.793.3124
Email: cweinberger@hawkinsashcpas.com
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More Resources from CPA-HQ
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Podcast: How to Keep Your Organization's Tax Exempt Status
There are many organizations that operate like they are tax-exempt, even though they are not. Listen more to this podcast about how to keep your organization tax-exempt.
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Not-for-Profit: Revenue Recognition Standard
Check out the update in the revenue recognition standard and follow our steps to take with our downloadable guide as a reference.
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Assisting your Board in Becoming More Efficient and Effective
Providing useful information and clear objectives will enable Board members to be both efficient and effective. Learn more about these insightful tips here.
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Hawkins Ash CPAs
www.HawkinsAshCPAs.com | info@hawkinsashcpas.com
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