NONPROFIT CONNECTION
Newsletter by Hawkins Ash CPAs
In this edition
August 2020

Is an Endowment Fund a Good Fit for Your Organization?

Changes to Form 941

Accounting for Paycheck Protection Program (PPP) Loans

Cybersecurity: Understanding Phishing

Client Feature and Executive Director Q&A:
Freedom House Ministries, Inc.
Is an Endowment Fund a Good Fit for Your Organization?

Has your organization been thinking about creating an endowment fund? Endowment funds can appeal to donors as a way of providing a long-lasting gift to an organization.

What is an Endowment Fund?

There are certain things to consider as you begin this process. First, you should understand what an endowment exactly is. Endowments are generally donations of cash or other funds received, invested with the purpose of funding the organization’s programs and operations or growing the endowment principal over time with the income earned through the underlying investments.

There are different types of endowments to consider. The most common include true (permanent) endowments and quasi endowments.

True Endowments
True endowments require the principal amount from a donor gift to be held in perpetuity with the intent of it growing in value each year so earnings are available for expenditure as stipulated by the donor or based on the endowment’s purpose. Generally, the principal amount is not invaded to fund annual operating expenses.

Quasi Endowments
Quasi endowments include organization funds directed into an endowment by an individual or group (generally the board of directors) for a specific purpose. A quasi endowment is like a true endowment, but without any restriction to hold the funds permanently. The principal of a quasi endowment can be spent at some future date.

Investment Portfolio or Separate Entity?

You also will want to consider if you should create the endowment as part of your organization’s investment portfolio or create a separate entity to hold the endowment funds. From a practical standpoint, creating an endowment as part of the organization normally makes the most sense. However, creating a separate entity for the endowment would be a consideration if:

  1. There was an expectation by a donor or funding source that the endowment was separate.
  2. There would be concerns over potential legal issues (concerns over the fund assets being taken in a lawsuit against the organization).
  3. There are concerns with funds not being spent as intended or funds being improperly managed.

You should talk with an attorney to determine what option is best for the organization.

How Does the Endowment Operate?

Generally, a document will govern how the endowment operates. This can be done through a trust agreement, board resolution or investment policy. If you choose to hold the endowment funds within your organization, you may also want to consider creating an endowment committee to oversee the operations of the fund.

Be Mindful of UPMIFA

Once the endowment is created, you will want to understand the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which contains rules and standards for nonprofit organizations holding assets for investment purposes, including endowment funds. UPMIFA covers endowment spending and requires that organizations are prudent with their spending of endowment assets. Organizations may determine prudent spending levels across the entire endowment pool (rather than fund-by-fund) based on these seven factors:

  1. The duration and preservation of the endowment fund
  2. The purposes of the organization and the endowment fund
  3. General economic conditions
  4. The possible effect of inflation or deflation
  5. The expected total return from income and the appreciation of investments
  6. Other resources of the organization
  7. The investment policy of the organization

The organization can apply these seven factors when determining their endowment-spending rate. Generally, a spending rate of between three and five percent of the value of the endowment assets averaged over a period of time (for example, three years) is common.

What Happens If the Endowment Fund Goes “Underwater”?

Occasionally, due to market conditions, the endowment fund may go “underwater,” which means that the fair value of the fund at the reporting date is less than either the original gift amount or the amount required to be maintained by the donor or by law. The goal would be for the market conditions to improve and restore the principal balance over time.

This does not mean you cannot take distributions from the account; you just need to ensure you are being prudent with your spending and following your spending policy. It is important to have documentation showing approval by the governing body for any appropriations from the endowment. The documentation could be as simple as noting the approval in meeting minutes. Consider creating guidelines to address this issue in your spending rate policy.

What About Additional Disclosures?

There are additional disclosures required in financial statements prepared under generally accepted accounting principles (GAAP), so it is important that the organization has documents outlining the endowment fund operations, as well as support for the amounts included in the endowment fund. Examples of what is required to be disclosed include the following:

  • Investment policy
  • Spending policy
  • Aggregate amount of the original endowment gifts
  • Aggregate amount of all underwater endowment funds (if any)
  • Aggregate amount of investment earnings (This detail will have to be broken out by with donor restrictions and without donor restrictions.)

Because of the additional disclosures required for endowment accounts, it is important that you have procedures in place to identify contributions that have been restricted by donors for the endowment. These amounts should be tracked based on restrictions (both amounts required to be held in perpetuity and any other purpose restrictions). This will be used to allocate the investment income each year to the amounts with donor restriction and without donor restriction, as well as to determine if your endowment is considered “underwater.”

With donor restrictions will include the amounts required to be held in perpetuity (previously called “permanently restricted”), as well as any amounts with purpose restrictions (previously called “temporarily restricted”). Under Accounting Standards Update 2016-14, organizations are now required to account for amounts underwater in the “with donor” restriction category of net assets.

Complex Considerations

In summary, the setup, accounting and reporting for endowments can be complex. But if done properly, you will create tremendous benefits for your organization and guarantee an ongoing source of income for years to come.

Please contact your Hawkins Ash CPAs representative if you have questions related to the setup, accounting and reporting of an endowment fund.

Author: Matt Neu, CPA
Direct: 920.684.2549
Email: mneu@hawkinsashcpas.com
Changes to Form 941

Form 941 has been revised to incorporate the changes that were brought about by the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Several new lines have been added to the Form to report information for:

  • Qualified sick and family medical leave wages credit
  • The employee retention credit
  • The deferral of the employer’s share of social security tax

This new Form will be effective for reporting for the quarter ending June 30, 2020.
Links to the new 941, as well as the instructions, can be found below.
Cybersecurity: Understanding Phishing

Have you heard of phishing? No, it’s not sitting in a boat with a hook and line trying to catch fish, but it is similar. Phishing is the fraudulent attempt to obtain sensitive information or data (such as usernames, passwords and credit card details) by disguising oneself as a trustworthy entity in an electronic communication. You can remember it by thinking of fishing, as where the attacker places a disguise on a “hook” in order to snare you into a trap.

Phishing is commonly done via email, but also is done via social media, instant messaging and texting, among others. Phishing is the most common root cause of all security breaches. No longer are hackers just trying to break into your systems through brute force or a backdoor, but more frequently they are walking in the front door and asking for direct access—and employees are giving it to them!

So how do you protect yourself and your organization? Like with many issues, the best solution is education: Knowing how to identify something as phishing vs. something as legitimate. I suggest a process that my children were taught in kindergarten: Stop, Think, Act.

Stop

When you receive a message asking you to do something (like click on a link, send some information, etc.), the first thing you should do is resist the urge to click before thinking. Stopping only takes one second and can save you from tragedy.

Think

Once you have stopped, take a moment to assess the request. This initial process can be used to decide one of three outcomes this request can take: “It is Valid,” “It is a Scam” or “I don’t know.”

Act

If the request is deemed valid, proceed with the process. If it is deemed a scam, ignore it or report it to your IT team. The hardest decision of the three is accepting the “I don’t know” answer. However, not knowing is common, and as an IT professional, it is the one we have to address most often.

How do you decide if it is valid or not, and move away from the “I don’t know” status? You look for red flags. A red flag is an indicator that something isn’t quite right. Your gut is a powerful red flag—trust it! Other red flags include:

  • Misspellings, especially in links or email addresses
  • An unusual sense of urgency

Three simple questions that we ask in response when we are faced with the question, “Is this phishing?”

Do You Know the Sender?
Is it from a person and/or email address that you know and trust?

Is It Expected?
Did you expect the request to happen, and did it come through all of the proper channels?

Can It Be Confirmed?
The easiest solution to answer the question is to change the channel of communication and confirm the request. If the message came via email, pick up the phone and call the sender through the known phone number (not a phone number included in the email).

If you answer “yes” to all three of those questions, it is safe. Confirming the message through a different channel is the most secure way to validate it, but it does take the most time. Either way, this simple process of quick thinking should protect you and your team from 99 percent of the attacks out there. No amount of technical security can stop an attacker if someone hands them the key. Cybersecurity training should be a part of every person’s security toolkit. Stay safe!

Author: Bob Spencer
Phone: 608.784.7737
Accounting for Paycheck Protection Program (PPP) Loans

There is no shortage of information available related to the forgivable loans that were awarded by the Small Business Administration (SBA) in response to the coronavirus outbreak. These Paycheck Protection Program (PPP) loans have had what seems like constantly changing guidance released about the parameters of the loans and how they will be forgiven. Now that the dust has settled some, how should they be accounted for?

The first step in arriving at the answer to this question is determining the intent of the PPP loan for the organization.

If the intent of the loan was to obtain a bridge loan to take advantage of the low interest rates, this should be recorded as a loan in compliance with FASB Accounting Standards Codification (ASC) 470, Debt.

If the intent of the loan was to have the funds to continue operations and eventually obtain forgiveness, this should be recorded similar to a conditional contribution or a refundable advance in compliance with FASB Accounting Standards Codification (ASC) 958-605 Not-for-Profit Entities: Revenue Recognition.

If the PPP loan is accounted for as a loan, it would be recorded as a financial liability, and interest would be accrued over time. The proceeds from the loan would stay recorded as a liability until one of two things occurs:

  1. The loan is, in part or wholly, forgiven and the organization has been “legally released,” or
  2. The organization pays off the loan to the creditor.

If the loan is partially forgiven, the liability would be reduced by the forgiven amount and a gain would be recorded on full extinguishment.

If the PPP loan is accounted for like a conditional contribution, the funds would be recorded as a refundable advance when they were received. This refundable advance would be reduced and contribution revenue would be recognized once the conditions of the contribution have been substantially met or fully waived.

The requirements for PPP loans include:

  • Headcount
  • Limitations on compensation reduction
  • Spending the funds on qualified expenses to reach certain metrics

At this point, concrete guidance on how to determine if the conditions have been substantially met has not been provided.

Please contact your Hawkins Ash CPAs representative if you have additional questions related to the accounting for PPP loans.

Author: Rachel Burrow, CPA
Direct: 608.793.3114
Email: rburrow@hawkinsashcpas.com
Client Feature and Executive Director Q&A:
Freedom House Ministries, Inc.
January 2020 marked the beginning of a new chapter for Freedom House Ministries, Inc. The nonprofit organization officially moved into a newly developed, 16-room, energy-efficient complex on the east side of Green Bay, WI. From humble beginnings in a donated four-bedroom house downtown, the organization bought what was previously a 12-room nursing home and converted it into a shelter. Eventually that was demolished to make room for its current facility.

The mission of Freedom House is to “provide for the short-term needs of homeless families and children, and in love, empower these families with long-term solutions to end their cycle of homelessness.” According to President Jessica Diederich, this philosophy was brought to light in 1992. A group of concerned citizens saw a gap in services to help families with children, and decided to work with these families to help get them back on their feet. In its 27-year history, Freedom House has served more than 1,300 local families and 2,500 children.
Today Freedom House offers emergency shelter, food and case management support to residents who come from a variety of backgrounds and situations. They stay anywhere from eight to twelve weeks. Volunteer groups teach comprehensive weekly programming, for which resident attendance is required. Class topics range from financial planning and job search skills like resume-building to nutrition and parenting.

“We find residents are extremely grateful,” she says. “They’re vulnerable when they come here. They need somebody to help them find their way—take them under their wing. It’s really rewarding to see how far they come in the time that they stay with us. They’re feeling a lot of confidence. It’s really wonderful to see that progress.”

Upon completing the program, each family leaves equipped with a personal budget, along with skills and knowledge to start fresh. Freedom House also maintains a transitional living program of apartment units called The Bridge. Post-graduate Freedom House families are able to apply for residency there, and also participate in an aftercare program for general support and access to the many donations that the organization receives. According to Diederich, Freedom House operates solely on donations from the community. Items like basic hygiene products are essential to help take some stress off of families’ monthly budgets and hopefully prevent a second shelter stay.

Diederich is thrilled to report that the layout of the new facility enables them to stay more focused on the organization’s programming and mission. “What’s really neat is that now we have a playroom, and right next to that is our intake interview room,” she says. A huge window separating the two rooms facilitates candid conversations with parents and staff—allowing parents to have privacy while still keeping an eye on their children next door. “They definitely open up a lot more,” observes Diederich. “That has been a big help, and a nice thing to have in our new building.”
Other benefits of the new construction include a training room (with eight desktop computers and tables to hold in-person classes in an organized setting), a free store (that has interview clothing, undergarments, shoes and items for children), and a large cafeteria that can seat half of the shelter population at once. Three meals are served there each day, and the space provides an opportunity for residents to visit with one another.

“We are constantly welcoming new families in, so people are coming and leaving at different times,” said Diederich. “I think the new families find comfort in feeling accepted by other families. It’s great for them to try to connect and support each other since most of the parents are very like-minded.” Some former residents of the shelter have become Freedom House staff as well.

In the recent months since move-in, and now during the current COVID-19 crisis, Freedom House remains open and continues to function at a fully increased capacity—24 hours a day, seven days a week. The administrative building is separate from the residents’ building, but members of staff are always close by and on-site.

Despite these trying times, Diederich feels very fortunate to be a part of the Freedom House organization. “The community has completely supported us and found really creative ways to wrap their arms around us so we can stay focused on our mission,” she says. “We would not be here without the generosity of our community. We are just so incredibly grateful.”
Q&A with Jessica Diederich
Originally from Sioux Falls, SD, Jessica Diederich’s professional journey led her to Green Bay, WI, where she has served as president of Freedom House Ministries, Inc., since November 2019. In this role she is responsible for leading the staff at Freedom House, serving homeless families in the Greater Green Bay area. She also oversees the staff at the organization’s transitional housing program, The Bridge.

Jessica has dedicated more than a decade to making an impact in the local nonprofit community. Prior to her current position, she was instrumental in establishing initiatives for the Greater Green Bay Convention & Visitors Bureau and Habitat for Humanity. She also presently serves on the Executive Committee for the Women’s Fund of Greater Green Bay Board of Directors and the Board of Definitely De Pere.

What are some things you know now that you wish you knew when you first started as a nonprofit leader?

I did not anticipate becoming so attached to the families staying with us. In some cases, they are here upwards of three months, so we really get to know them and become invested in their journey. It is truly inspiring!

What has been your biggest source of pride as executive director?

Watching a family enter our program on day one, seeing them thrive throughout their time at our shelter and successfully accomplishing all their goals and getting back on their feet. I take great pride in knowing that we are making a difference in people’s lives.
What are the dominant challenges that you see nonprofit organizations facing and what do you think would be viable solutions?  

I think we can all agree we are trying to navigate the unknown that COVID-19 has presented. This not only encompasses our staff and the families we serve, but also fundraising, volunteers and the way we traditionally have received donations. The answer is not simple, but if we keep adapting to the changes and finding creative ways to still get what we need to serve our clients, I would call that a success!

What aspects of nonprofit accounting do you find most challenging?

When we receive grants or large gifts with restrictions attached, I look right to our stellar accountant on staff to make sure we stay in line with everything the donor has requested.

What other executive directors or philanthropic leaders do you look up to?

I look up to many of the executive directors in the Green Bay area. I believe it is important to build strong relationships with others in the same field and in similar positions. Being new to this role, I am very fortunate to have friends in similar roles who I can lean on for advice, feedback and encouragement. A strong support system is critical to one’s success!
How do you see the organization changing in the next two years, and how do you see yourself creating that change?

While I absolutely love the current programs we have in place for families staying with us, I feel there is more we can do. Youth programming is one of them. I will be directly involved as our new director of programming works to create new programs for our organization. It is something I am very excited about!

I also will be working on community collaborations during the next couple of years. If we can share resources with like-minded nonprofits in the area, it can make our dollar stretch and be more efficient for our staff. I think donors would appreciate knowing we strive for this, as well.
More Resources from CPA-HQ
Holding a Virtual Meeting or Event? Plan for Cybersecurity

Information Technology Manager Bob Spencer provides food for thought in terms of critical questions to ask and best practices to follow, explaining why planning for cybersecurity is key.
COVID-19: We Are Here for You

From tax and legislation updates to informative podcasts, visit our website for COVID-19-related resources. Please know that we will continue to be there for you every step of the way as together we navigate this unprecedented time of great need.
Beneficial Interest in a Community Foundation: How Do I Record This?

This article, Matt Neu, CPA, explains what, exactly, a community foundation is, and the benefits it can provide.
Hawkins Ash CPAs
www.HawkinsAshCPAs.com
info@hawkinsashcpas.com