The NonProfit Times - July 1, 2008 - (Page 16)

ACCOUNTING HARMON BURSTYN, CPA We Barely Got To Know You Just as nonprofits are getting used to GAAP here come IFRS I t used to be that when you asked the executive director of a nonprofit what keeps the person up at night, the riposte would have been, “Oh, that’s easy, fundraising.” If you dug a little more it would be, “Board development, without a doubt. They need to be more committed to our mission and active in the community.” If you had asked a certified public accountant (CPA) the same question about nonprofit clients and you would have heard the complaints, “Oh, that’s easy; there is very little guidance in the way of financial accounting standards to follow. There are certain general concepts but nothing to really hang one’s hat on.” Ask that same question now and it is more than likely that the executive director will mention, without much enthusiasm, financial reporting as a critical issue rather than an after-thought. And the CPA’s answer would be “my clients have poor financial data and accounting systems.” WHAT CHANGED? In the post-Sarbanes-Oxley environment, transparency, internal controls, and complete and accurate accounting are expected as the norm for public companies. But these have reached nonprofit organizations, as well. The executive director now is tossing and turning at night, worried about a large donor who wants a “guarantee” that the donation will be used properly. The organization just received a large grant from the federal government and the group topped $2 million in revenues for the first time.Think it’s time to celebrate? You’d be wrong, because of Generally Accepted Auditing Standards (GAAS) and OMB Circular A-133. The CPA is actually resting a little easier. It was not that long ago that the Financial Accounting Standards Board (FASB) moved from general guidance on accounting standards to more specific statements targeting nonprofits. During recent years the FASB has issued SFAS 116 (Accounting for Contributions Received and Contributions Made), SFAS 117 (Financial Statements of Nonprofit Organizations), and SFAS 124 keep the accounting records straight.They create a chart of accounts and classify everything as it should be.With a press of a button the Statement of Financial Position and the Statement of Activities are generated, all in accordance with generally accepted accounting principles (GAAP).They might even pay attention to the auditor’s management letter. And the CPA now has the necessary other’s positions and work together to create a GAAP-infused environment, something looms on the horizon of this somewhat sunny scene. MOVE OVER GAAP, HERE COMES IFRS If you have been following the financial reporting news for the past couple of years, you have no doubt come upon International Financial Reporting Standards (IFRS). It is a set of accounting standards, developed by the IASB (International Accounting Standards Board), that are becoming the global standard for the preparation of public company financial statements.The IASB is an independent accounting standard-setting body based in London. Its stated goal is to provide the world’s integrating capital markets with a common language for financial reporting. In 2006 the IASB and FASB agreed to create a roadmap for convergence between IFRS and U.S. GAAP According to the American Institute of CPAs (AICPA) more than 12,000 companies in almost 100 nations have adopted IFRS. Other countries are expected to transition to IFRS by 2011 and some estimate that the number of countries requiring or accepting IFRS could grow to 150 in the next few years. At one time the talk was about a slow convergence of U.S. GAAP and IFRS, one principle at a time.That’s not the case anymore. In three years large U.S. companies could start using IFRS instead of GAAP, while a mandatory conversion could take effect in five years, according to some accounting firms and chief financial officers. GAAP and even the FASB might simply go away. And the idea that IFRS will apply only to public companies is dissolving just as quickly. Check out this FAQ developed by the AICPA regarding IFRS: • What might make some private companies or nonprofit organizations in the United States adopt IFRS? The eventual adoption of IFRS by small businesses and nonprofits is likely to be market-driven. The IASB is developing a version of IFRS for small -- and medium-sized entities that would minimize complexity and reduce the cost of financial statement preparation, yet allow users of those entities’ financial statements to assess financial position, cash flows, and performance. On the FASB Web site regarding the IASB: • Conceptual Framework—Phase G: Applicability to the Not-For-Profit Sector The objective of Phase G, Applicability to the Not-For-Profit Sector, is to consider the applicability of the concepts developed in earlier phases to not-for-profit entities in the private sector.The boards have not yet deliberated or made decisions regarding the applicability of particular concepts to not-for-profit entities.The boards directed the staff to focus on the near-term prioriAccounting, page 25 (Accounting for Certain Investments Held by Not-for-Profit Organizations). So now it seems that the two parties are, if not on the same page, at least in the same book. The nonprofits realize they must understand and follow GAAP to pass audits and satisfy its donors and the government.They install accounting software and hire a professional bookkeeper to tools to audit with confidence. With the above mentioned standards and the new AICPA Risk Assessment Auditing Standards (SAS 104 through 111) the CPA expects a greater degree of accounting and financial reporting knowledge from its client. Just when it seemed like the testy executive director and demanding CPA were beginning to understand and accept each TAXING ISSUES Continued from page 15 ever, if a profit generally results, additional analysis would need to be made. Issues regarding return positions can also arise if your tax-exempt organization shares revenues and expenses with another entity, whether it is a tax-exempt organization or taxable entity. You must provide your preparer with the agreement documenting how revenues and expenses are shared with another entity so that the person can review it to determine that the transactions are properly reflected in the return. For the income derived from the agreement to be tax-exempt, the agreement should clearly indicate that profits are not shared. If profits are shared, then a partnership exists and the income derived from the agreement may be subject to unrelated business income tax. If you file Form 990-T to reflect unrelated business taxable income you should be able to explain how you are determining deductible expenses shown on the re- turn. For example, salaries and wages shown on Form 990-T should be based on time entered on timesheets, not allocated based on an estimate. Therefore, all deductible expenses shown on Form 990-T should be directly related to the revenue shown on the return.Again, your preparer will have to evaluate the allocations to determine if they meet the more likely than not standard of Section 6694. To make the transition in complying with Section 6694 tax return preparers and tax-exempt organizations will become more involved in the tax preparation process and in the underlying details of the amounts reflected. As a result of the changes, tax return preparers will be requesting information from tax-exempt organizations that they haven’t requested in the past.You should probably prepare to spend more time amassing the information used by your preparer in the return process. The IRS has indicated that proposed regulations under Section 6694 will be is- sued in the near future. The proposals might clarify some of the uncertainty that currently exists.Additionally, some organizations are lobbying Congress to make the preparer and taxpayer standards the same and legislation has been introduced. We will see whether this results in an increase in the standards applicable to taxpayers or a lowering of the preparer standards. For now, we can all expect the amount of work to increase. NPT Harvey Berger is a retired tax partner with Grant Thornton and currently serves as a consultant on nonprofit tax issues. His email is harvey.berger@gt.com. Greg Goller is Grant Thornton’s national partner-in-charge of Not-for-Profit Tax Services and is based in the Washington, D.C. area office. His email is greg.goller@gt.com. William Winter is a senior associate in the not-for-profit tax practice in Grant Thornton’s Washington Area Office. His email is william.winter@gt.com JULY 1, 2008 THE NONPROFIT TIMES www.nptimes.com http://www.nptimes.com

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The NonProfit Times - July 1, 2008 Time to Let GO Sparks Flying From Blackbaud's Bid For Kintera Holiday Jeer Contents Who...When...Where...How...What? The Wrong Arguments Calendar Measure the Unmeasureable Getting Good Advice We Barely Got to Know You Special Report: Giving USA Shows Bequests, Foundations Boosted Otherwise Flat Giving to 306 Billion Dollars National Benchmarking Nothing Is Forever Diversified Planet Business Briefs NPT Jobs Resource Directory Bridge Map Insert

The NonProfit Times - July 1, 2008

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