February 2018

In This Edition
How to Start Preparing for the New Liquidity Disclosures
Nonprofit Tax Tidbits: Form 990 Schedule D
Client Feature and Executive Director Q&A: 125 Live

How to Start Preparing for the New Liquidity Disclosures
Making the transition to the new FASB Accounting Standards Update (ASU 2016-14) will require thought and planning.  The Standard will take affect for years beginning after December 15, 2017. Having discussions now gives management and the Board of Directors time to provide more useful information to the users of the financial statements. Here's some initial steps to take.

Create a Liquidity Policy
If an organization does not already have one in place, creating a liquidity policy is the first step. It is the intent of the policy to ensure that all parties involved in the management of the organization understand which assets are considered to be liquid and available for use in the operation of the day-to-day business of the organization.

Create a Board Designation Policy
A board designation policy will ensure that management and members of the Board of Directors understand who has the authority to spend board-designated funds for a specific purpose and when those funds can be appropriated.  Discussing the difference between board-designated and donor-designated net assets with the board and reviewing the various net asset classes will help calculate the available funds for operating purposes.

Create an Operating Reserve Policy
Building an operating reserve allows organizations to better manage cash flows on a daily basis and prepare for unexpected expenses.  An operating reserve policy will help management and members of the Board of Directors define:
  • What is an appropriate amount to reserve
  • How funds will be appropriated for the reserve
  • What steps should be followed if the reserve falls below the desired level
With the Standard's emphasis on board designated assets, organizations may want to take a look at other policies that may be affected by any new policies put in place.

Decide on the Presentation Method
Finally, decide how the organization would like to present the availability of their financial assets that could be used for their cash needs in the next fiscal year.  The Standard requires both qualitative and quantitative information. It does not require a specific way to present the disclosures. The disclosures can be on the face of the financial statements, in the notes to the financial statements, or both.

Organizations may want to take their prior year audited financial statements and practice implementing the new Standard as if it had been in place during that fiscal year. This would be a way to see which presentation works best for their organization and its users.

There is less than one year for organizations to get prepared before the implementation of the new Standard is required. Be proactive and not reactive. Starting the discussions now will make the transition smooth and efficient and provide more useful information to the users of the financial statements.

Contact Hawkins Ash CPAs if you have questions.

Author: Claudia Weinberger, CPA

Nonprofit Tax Tidbits: Form 990 Schedule D
The fourth installment in our series on the sections of the IRS Form 990 focuses on Schedule D - Supplemental Financial Statements.

Schedule D is used by an organization to provide the required detailed reporting of donor advised funds, conservation easements, certain art and museum collections, escrow or custodial accounts and arrangements, endowment funds, and supplemental financial information.  Schedule D is included with Form 990 only, meaning it is not required if the organization files Form 990-EZ or Form 990-PF.  There are multiple questions asked on the checklist of the required schedules section of Form 990 that may trigger the requirement to file Schedule D.

In general, Schedule D is intended to help the readers and users of the financial statements and the Form 990 understand the differences between GAAP and IRS reporting requirements.  The various sections of Schedule D provide a breakdown of these differences. 

Read on to learn more about the significant sections of Schedule D and areas your organization should focus on in order to be ready to provide additional information when preparing the schedule.

Donor Advised Funds
Generally a donor advised fund is a fund or account that is separately identified by reference to contributions of a donor(s), owned and controlled by a sponsoring organization, and for which the donor advisor has or reasonably expects to have advisory privileges.  For Schedule D reporting purposes, donor advised funds are not limited to funds or accounts that meet the definition of "funds" under GAAP. 

A donor advised fund does not include any fund or account:
  1. That makes distributions only to a single identified organization or governmental entity
  2. In which a donor or donor advisor gives advice about which individuals receive grants
  3. That the IRS exempts from being treated as a donor advised fund because either such fund or account is advised by a committee not directly or indirectly controlled by the donor or donor advisor or because such fund benefits a single identified purpose
Due to the difference in GAAP vs. IRS reporting requirements of donor advised funds, it is important to have a breakdown of the funds that meet the GAAP requirement for financial statement reporting as well as the funds that require disclosure on Schedule D.

Conservation Easements
This section is completed if the organization receives or holds a conservation easement, including easements to preserve open space, the environment, historic land areas, or historic structures.  It is important to track non-financial information (staff and volunteer hours devoted to monitoring, inspecting, handling of violations, and enforcing conservation easements for the year) for Schedule D disclosure.  Also note that qualified conservation contributions received during the year must be reported on Schedule A (Public Charity Status), Schedule B (Schedule of Contributors), and Schedule M (Noncash Contributions) and reported consistently with how the organization reports revenue from such contributions in its books, records, and financial statements.

Endowment Funds
Similar to financial statement disclosures, Schedule D provides additional information regarding an organization's endowment funds.  One difference from GAAP financial statement reporting is that Schedule D reports endowment balances and activity for the current year and the prior four years.  Schedule D requires the intended uses of the organization's endowment funds be disclosed; this information can be found in the notes to financial statements.

Assets and Liabilities
Various sections of Schedule D provide an opportunity to disclose additional details about some of the organization's assets and liabilities.  For example, Part VI (Land, Buildings, and Equipment) of Schedule D provides more detail on the total included on Part X (Balance Sheet) of Form 990 for fixed assets.  Part VI also provides a section for investment-related property to be disclosed; such as fixed assets held for an investment, like rental properties.  Schedule D also has various sections to disclose investment in securities information.  In order to complete Schedule D properly, it is important to have information on any closely held stock the organization may own.  In addition, if the organization owns 5% or more of the outstanding shares of the same class of publicly-traded stock, or if publicly-traded stock in a corporation comprises more than 5% of the organization's total assets at year end, each are required to be disclosed on Schedule D.

Reconciliation from Audited Financial Statements to the Form 990
If an organization has audited financial statements, Schedule D Parts XI and XII are required to reconcile revenue per the audited financials to the Form 990 and to reconcile expenses per the audited financials to the Form 990.  Most of this information is obtained during the audit of the financial statements.  The most common reconciling items include:
  • Unrealized gain or loss on investments
  • Donated services
  • Investment expenses
Unrealized gain or loss on investments may be grouped with "investment income" on the financial statements.  Form 990 does not take into account unrealized gain or loss in arriving at total revenue, thus it is a reconciling item on Schedule D.  Donated services (such as donated accounting or attorney fees) are required to be included in the financials per GAAP, but not per the IRS, thus the need for a reconciling item on Schedule D.  Investment expense may be reported on the financial statements with investment revenue, net of expense.  However, for Form 990 reporting, the investment revenue and expense must be reported at gross, thus the need to reconcile it on Schedule D.

If you have any questions regarding Form 990 Schedule D, please contact your Hawkins Ash CPAs representative.

Curt Bach Author: Curt Bach, CPA

Client Feature and Executive Director Q&A
125 Live

125 Live is a nonprofit organization that serves the aging population in Rochester, Minnesota and greater Olmsted County in southeastern Minnesota. The organization provides a wide range of programs and services geared to empower individuals 50+ to live on their own terms with independence, dignity, and a sense of fulfillment.
The organization was founded in 1961. Since its foundation, programs and services have been offered out of a variety of locations, the last, the former Armory building located in downtown Rochester. Last year, 125 Live celebrated one year in its new, state-of-the-art facility that provides the space needed to fulfill the three facets of its mission-help the aging population exercise, maintain physical and cognitive wellness and remain independent. Engagement highlights of 2016-2017 include:
  • 7,300 check-ins in just October
  • 16,000 miles on the cardio equipment
  • 60+ group fitness classes
  • 75% increase in art classes
Sally Gallagher, Executive Director at 125 Live
"Not even wintery weather keeps our members and guests away," said Sally Gallagher, Executive Director of 125 Live. "They love having a place to go for camaraderie with their peers. One's support system can significantly diminish later in life, especially for those 80 years and older. 125 Live provides socialization and critical healthy-aging resources to help active adults feel connected and supported."
125 Live provides social programing in the form of "create your own recipe for aging success," as Sally puts it. Members and guests can choose to participate in numerous art and cooking classes, book club, join the Young at Heart singers, or even simply hang out in the billiards area or library lounge.
The organization also links with community resources to provide the support individuals need through the aging process.
125 Live once operated under the name Senior Citizens Services, Inc. Sally Gallagher has been an employee of the organization for 29 years and has been the Executive Director for 21 of those years. Serving the aging population is her passion.
"My heart has always been in helping older adults," she said. "I have a lot of gratitude toward my grandparents who both played a significant role in my life."
Sally has a Bachelor's degree in recreational therapy and a Master's degree in business management.
We had a chance to sit down with Sally to get her thoughts on a few aspects of running a nonprofit organization.
What are some things you know now that you wish you knew when you first started as a nonprofit leader?
I wish I knew how hard the job would be. The act of pouring so many hours into the organization simply to keep it running is not for the faint of heart. As a nonprofit leader, you're often times pulled in many directions and expected to manage it all with limited volunteer and Board resources.
What are the dominant challenges that you see nonprofit organizations facing, and what do you think would be viable solutions?
I see three main challenges faced by both my organization and others.
The first is limited financial resources to maintain sustainability and continue the mission. Connecting with potential donors takes a lot of time and effort, and nonprofits don't have either readily accessible. So we struggle engaging and retaining donors. Fundraising is similar, as every nonprofit is competing for potential donors to attend their event or gala.
The second is the lean staffing due to those financial restraints. It feels impossible to compete with for-profit businesses in terms of pay scale and benefits. In our area, it seems like we are always trying to keep staff from moving to a position at Mayo because they provide what employees need-an appropriate wage and adequate benefits. There is an expectation that nonprofits shouldn't have to compete with the for-profit world in terms of pay scale and benefits. Therefore, hiring the right people to get the job done is very difficult.
Managing expectations is the third biggest challenge facing nonprofits. Unless you have worked at the reigns of a nonprofit, I believe it's impossible to truly understand how difficult it is to do good in the community regarding the mission you are charged to implement. Community leaders, the media, the public, and even your participants and/or clientele often have unrealistic expectations about what you should be doing and accomplishing. They don't know the workload placed on the nonprofit employees. The public, the media, your stakeholders, donors, board members and participants/clients all deserve transparency and effective programming to meet the organizations mission and goals. Expectations, however, should be realistic.
Solutions? That's a good question. If I knew the answer I'd have implemented them by now. Money is required. Without money, it's nearly impossible to effectively meet your mission. However, I have a few ideas.
If media sources would take a more active role in supporting nonprofits and marketing their fundraising events and efforts at no cost, that would be a tremendous help. Providing more airtime, print space, etc. would enable the public to understand the mission, goals and objectives of the nonprofits. This would also help fundraising efforts.
For businesses to give back more and link up with nonprofits they see as a good fit would be a great assistance. Every day more and more businesses are taking an active stand and supporting causes they align with. If consumers looked more closely at shopping and utilizing business that give back and support community needs, more and more businesses may get on board with supporting community nonprofit organizations.
Another idea would be to have businesses/organizations and grant sources consider broadening their focus areas. As an example, it's always difficult for our organization that supports aging needs to compete with children or youth programs. Many businesses, and even service organizations, have a specific focus area, like children/youth projects, for example. Based on our growing elderly demographic, supporting our aging population related needs is an important focus area as well.
What aspects of nonprofit accounting do you find most challenging?

It is very difficult for our organization to afford the type of accountant that we need to ensure we are on top of all the accounting related requirements and functions. It takes a great deal of training, background and experience to understand, implement and manage all the accounting and human resource related requirements and expectations. Also, adding to the problem, in the nonprofit world, staff is typically required to wear several hats. Therefore, the workload and expectation level is very high.