Tapp Social Recap: Accounting Changes, Fraud, Tax Reform and How it Impacts Your Nonprofit

In case you missed it: The July edition of our Tapp Social Series, Change Happens in the Nonprofit Accounting World, focused on shifts in the accounting standards for nonprofit organizations.

This month’s presenter was Kerri Padgett from Your Part-Time Controller. YPTC have been working as nonprofit accounting specialists with nonprofit organizations for over 25 years.

Kerri’s discussion focused on the most recent accounting standards update (ASU), the impact of the latest tax reform on nonprofits, protection against accounting fraud, and “Best in Class” tips for nonprofit finance departments.

Accounting Changes

There are three major accounting changes taking effect that will have a big impact on non-profit reporting. Theses accounting standards updates will impact three very distinct aspects of nonprofit reporting.

• Presentation of financial statements of nonprofit organizations
• Revenue from contracts with customer
• Leases

ASU 2016-14 deals with the presentation of financial statements and presents two big changes for nonprofits. No longer will nonprofits present the classic three classifications of net assets: Unrestricted, Temporarily Restricted, and Permanently Restricted. Instead, Unrestricted assets will now be classified as assets Without Donor Restrictions, while Temporarily Restricted and Permanently Restricted assets will now be combined and classified as assets With Donor Restrictions.

The other major change nonprofits can expect to experience from ASU 2016-14 is the introduction of new footnote disclosures such as qualitative and quantitative liquidity disclosures. ASU 2016-14 has already taken effect this fiscal year, so nonprofits need to be aware of these changes immediately.

ASU 2016-09 effects accounting for revenue from contracts with customer. This change will take effect in this upcoming fiscal year and will require a common standard of revenue recognition from contracts with customers as well as new revenue disclosures.

Some of the steps Kerri recommended nonprofits take to combat these included: identifying performance obligations, determining and allocating a transaction price, and recognizing revenue when the performance obligation is satisfied.

The final accounting update discussed, ASU 2016-02, Kerri believes will be the most difficult for nonprofits to deal with as it changes reporting standards for leases.

Luckily, nonprofits have time to prepare for this change as it does not go into effect until the fiscal year beginning after 12/15/2019. The reason this revision may potentially present the most difficulty is that nonprofits will now have to identify and prove who has the right to control the property being leased.

The nonprofits who act as the lessee will now have to categorize these leases as either finance leases or operating leases. Steps Kerri proposed as ways to prepare for this change included:

• Assigning a project manager,
• Creating lease inventory,
• Reviewing lease inventory with management,
• Discussing implementation and disclosure options with auditors.

Tax Reform

The latest tax reforms are set to have a major impact and nonprofits need to be on the lookout as they wind up on the short end of the stick in many of these new reforms.

An increase in the standard deduction on charitable contributions is set to give potential donors less of an incentive to donate to nonprofits. This standard deduction of $12,000 dollars per person is almost double what it previously was under past tax laws.

Executive directors who have poured their hearts into nonprofits for decades are now set to see a 21% tax on severance payments greater than three times their average earnings. Perhaps most concerning for nonprofits is that certain fringe benefits are now taxed at a 21% rate. This means that benefits such as parking lots and commuter passes are no longer tax exempt.

Fraud

As technology has allowed the world to rapidly become a global community, the threat of fraud is now more prevalent and dangerous than perhaps ever before.

As fraudsters engage in scams such as phishing schemes, malware hacks, and automated clearing house fraud, organizations need to be more alert and aware of the dangers of accounting fraud. Kerri suggested three steps nonprofits can take to reduce these threats.

1. Establish Proper Tone from the Top: The head of management sets the precedent for the rest of the organization. Management heads and directors need to provide proper fraud training and guidelines as well as ensure employees safe and anonymous channels to report potential fraud.
2. Understand High Risk Areas: Ensure segregation of duties within an organization. Be aware of potential threats when making online bill payments, credit card transactions, and payroll payments.
3. Establish and Enforce Policies and Procedures: Safeguard access to accounting information. Clearly establish protocol for financial management and recording. Fortify communication and understanding across all departments.

Kerri concluded the discussion with ten tips to ensure that your organization has a “best in class” finance department.

“YPTC's Best In Class” Tips

1. Build a strong finance department
2. Hire the right people: Make sure those responsible for your accounting and financial reporting are qualified CPA’s
3. Promote a secure internal controlled environment: Ensure proper and safe reporting protocol, policies, and procedures
4. Perform monthly bank reconciliations: The number one way to catch fraud
5. Educate management and the board on compliance and fiduciary responsibilities
6. Timely remit payroll tax and retirement plan contributions: IRS can come after your board members if this is not done properly
7. Follow the Generally Accepted Accounting Principles (GAAP)
8. Audit financial statements: Helpful in reducing fraud
9. Utilize a finance calendar: Fosters better communication across the organization
10. Demand timely and accurate monthly financial reports: Compare budgeted and actual reports

Join us for our next #TappSocial discussion on August 14th, when our friend Peggy Geisler, Principal of PMG Consultants, will share her over 25 years of experience in the not-for-profit field focusing on topics including infrastructure, strategic planning, and collective impact.

Highlights of Peggy’s presentation will include:  

• Gaining insights to identify a shared vision with your donors
• Understanding donor and stakeholder engagement
• How little or how much is needed? 
• Are your success metrics aligning?

or visit https://august2018tappsocial.eventbrite.com