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Archives for March 2022

The Summary of Changes under ASC 842 – Lease Accounting

After multiple delays, the Financial Accounting Standards Board’s (FASB) new lease accounting guidance is in effect for nonprofit organizations with fiscal years beginning after December 15, 2021 (Calendar year 2022 for organizations with a December 31, fiscal year end and the fiscal year beginning in 2022 for most other entities). The FASB’s stated objective when initially announcing Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) was to improve transparency and accountability between organizations regardless of whether the assets used by an organization were purchased or leased.  To do this, the guidance calls for most leases to be recognized as lease assets and lease liabilities on the statement of net position, and to disclose key information about leasing transactions.

Accounting Standards Codification (ASC) 842 defines leases as contracts, or portions of contracts, granting control of an identifiable asset for a specific period of time in exchange for compensation. Control of an asset is demonstrated when a business entity is able to obtain substantially all of the economic benefit from the asset’s use and direct its use throughout the period of the contract.

ASC 842 applies to most leases and subleases, but exceptions do exist. Leases of intangible assets (including intangible IT arrangements), leases for natural resources or biological assets, leases of inventory and leases of assets under construction are not included within the scope of the ASU. However, both leases previously treated as operating leases and those previously treated as capital leases are included, as are sale-leaseback transactions and leveraged lease arrangements.

Similar to the previous standards, the new lease accounting standard uses a two-model approach for lessees; each lease is classified as either a finance lease or an operating lease. Finance lease is a new term and the term capital lease, previously used to define some lease agreements, is no longer in use. While similar, the criteria in which a finance lease is defined is not the same as the criteria used in the past for capital leases, so it is more than just a terminology change.

Topic 842 requires lessees to recognize both the assets and the liabilities arising from their leases. The lease liability is measured as the present value of lease payments. The lease asset is generally equal to the lease liability, but should be adjusted for certain items like prepaid rent and lease incentives.

Under the new rules, both financing and operating leases will be reflected on the statement of financial position. FASB defines the lease asset as a right-of-use asset, or (ROU asset), and represents the lessee’s right to use the underlying asset. The lease liability represents the lessee’s financial obligation over the lease term. When measuring the assets and liabilities, both the lessee and the lessor should also include “reasonably certain” lease renewals beyond the current lease term and “reasonably certain” asset purchase options, based on the criteria in the ASC.

Leases which have a term less than 12 months after accounting for all renewal options are permitted to not recognize a ROU asset and lease liability. If they choose not to recognize, they should instead recognize lease expense on a straight-line basis over the life of the lease.

Existing capital leases have been provided transitional relief and will not require adjustment or remeasurement upon transition. However, the financial statements should refer to them as finance leases.

Financial statement recognition of the leases is similar for both operating and finance leases, but there are few key differences.  Operating leases should recognize a single lease cost allocated over the lease term, generally on a straight-line basis, and should be recognized within operating activities on the statement of cash flows.  Finance leases should recognize the interest component of the lease separate from the rest of the repayments. The interest portion of the repayment should be considered an operating activity for the statement of cash flows, while the rest of the payment should be treated as a financing activity.

Lessor accounting practices remain largely unchanged from ASC 840 to 842, except that the “leveraged lease” type of lease has been eliminated.

Interested in knowing more about ASC 842?  Contact us at Barbacane Thornton & Company, LLP.  We have a team of professionals excited to be your auditors and trusted advisors.

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ASC 842 – Leases Transition: Getting Ready

  1. Identify all leases

Identification of all leases is crucial for compliance, and will not apply just for leases entered after the implementation of the new standards. All leases currently in place should be identified and assessed under the new guidance.

  1. Begin gathering your embedded leases:

Not all leases are obvious. Some may be embedded into service contracts or other agreements. Be sure to identify embedded leases. Examples of embedded leases include:

  • Equipment leases may be embedded in security contracts, such as scanners, monitors, and other equipment.
  • Contracts for logistics and transportation may identify and assign specific vehicles to be used solely for your organization.
  1. Prepare for the calculations and disclosures needed under ASC 842:

The new disclosure requirements are significantly more robust than those required under prior guidelines. Beyond calculating the initial lease liability and right-of-use asset discussed above, you may also need to calculate implicit discount rates, weighted average lease terms, and amortization schedules.

The disclosure requirements for FASB 842 are both qualitative and quantitative. A few of the specific disclosures required are:

  1. Discussions covering the lease arrangements
  2. Descriptions of significant judgments made
  3. Details about the lease costs reported on the income statement
  4. Weighted-average analysis of discounts and remaining lease terms

 

Interested in knowing more about ASC 842?  Contact us at Barbacane Thornton & Company, LLP.  We have a team of professionals excited to be your auditors and trusted advisors.

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Fraud Prevention Best Practices for Nonprofits

Nonprofits, like any organization, must protect themselves from fraud. While fraud in the nonprofit sector isn’t as prevalent as in for-profit entities — comprising just 9% of fraud cases according to the Association for Certified Fraud Examiner’s 2020 Report to the Nations – the results can be devastating because nonprofits usually have fewer resources to prevent and recover from losses.

The following fraud considerations can help you protect your nonprofit from fraud.

Educate employees, donors

Fraud schemes tend to follow trends. For example, disaster relief scams trend up after every natural disaster or other emergency. These scams seek donations to help victims via emails, phone calls, social media posts, and crowdfunding platforms. The trouble is, the donations end up with the fake charity’s creator.

These fake charities often have names that sound similar to well-known relief organizations. Not only do they funnel donations away from legitimate charities, but they can also harm a legitimate organization’s reputation. If your organization collects donations for disaster relief, consider educating regular donors on how to identify legitimate requests for help. Remind them legitimate charities don’t ask for large donations in cash, gift cards, or bank wires.

Keep digital donations secure

Online fundraising allows nonprofits to collect donations from anywhere and enables donors to give one-time and recurring donations easily. But keeping donors’ personally identifiable information (PII) is crucial.

In addition to credit card, driver’s license, and Social Security numbers, PII also includes names, addresses, and other numbers and information linked or linkable to an individual.

The first way to protect donor PIIs is not to collect them. Hackers can’t steal information you don’t have, so avoid collecting and storing unnecessary information about donors. Ensure that all communication to and from your website is encrypted with a Secure Sockets Layer (SSL) certificate purchased from a trusted certificate authority. Work with your IT professional or use a reputable online fundraising platform to ensure all online transactions take place in a secure environment.

Implement sound internal controls

Many nonprofits have small teams and may rely on volunteers to help with back-office work. In that environment, sound internal controls are more challenging but not impossible.

Internal controls are like armor protecting your organization’s assets and financial reporting. Consider implementing these basic financial controls to safeguard your data:

  • Segregate duties. Limit a single individual from having control over two or more phases of a financial transaction or operation. For example, the employee who receives cash or check donations should not also record the deposit in the accounting records. The person who sets up new vendors in the accounting software should not issue payments to vendors. Our team of professionals can provide advice on other ways to segregate duties in your organization.
  • Reconcile bank and credit card statements monthly. Regularly reviewing and reconciling bank and credit card statements can help you spot unusual activity or fraud and take steps to limit potential losses.
  • Secure your physical premises and assets. Ensure petty cash boxes, blank check stock, undeposited cash and checks, debit and credit cards, and other assets are locked up when not in use. Something as simple as locking office doors when nobody is monitoring the entrance can prevent someone from stealing computers and other assets.
  • Take tips and complaints seriously. According to the ACFE, 40% of nonprofit fraud is detected because of a tip or complaint, compared to just 17% by internal auditors and 6% by examination of documents. Educate everyone in your organization on the importance of fraud prevention and detection, and provide a way to report suspected fraud without the risk of retaliation.

Ultimately, trust is the true value of preventing fraud at your organization. Trust is the foundation of the organization’s relationship with employees, directors, board members, fundraisers, donors, and the communities it serves. Proper training, technology, and controls will help your organization build and maintain that culture of trust so you can continue creating positive change in the world.

Do you need help updating or creating your nonprofit’s security strategy? Contact our team of professionals today!

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What Do Federal Agencies Look for When Issuing Grants?

Nonprofits often pursue federal grants to provide services and fulfill their missions, yet the process of applying for government grants can feel intimidating. Generally, there is a short timeline between when a federal agency releases a grant opportunity and when applications are due. That’s why organizations need to have the basic elements in place well in advance.

What are the basic requirements of a federal grant?

Each federal grant has its application and award criteria outlined in the Notice of Funding Opportunity. Audited financial statements are a common requirement, but nonprofits have unique financial reporting needs. For example:

  • Net assets in the Statement of Financial Position generally are broken down into those with and without donor restrictions. These restrictions may be temporary or permanent and have limitations on time or purpose. The net assets section should list sources of funds broken down into three areas: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets.
  • Your organization’s Statement of Activities breaks out sources of gross receipts to show where they came from, such as fundraising, grants, donations, etc.
  • Nonprofits issue a unique financial statement: the Statement of Functional Expenses. This statement breaks out expenses into categories such as programs, fundraising, and administrative costs to show readers of the financial statement — including potential grantors — how your organization balances spending on programs and overhead.
  • The footnotes on your nonprofit’s financial statements are just as important as the individual statements because they provide deeper context into the financial statement numbers.

Working with an audit firm specializing in nonprofit financial reporting can ensure your organization appropriately tracks revenues and expenses, prepares accurate and thorough financial statements, and demonstrates to grantors that your organization is accountable for all funding sources.

Financial transparency and accountability

Federal grants come from taxpayers’ money, and each federal agency is required to see those resources are used appropriately. That’s why government agencies require transparency and accountability from recipients of awards.

Financial transparency and sound business/board practices start long before the grant application process. In addition to having audited financial statements, nonprofits should:

  • Be clear about how the funds will be used. Thoroughly document the problem you intend to address with the grant funds in the grant application. Support your request with facts and figures documenting the issue and how any funds awarded will help address it. Propose specific, measurable results you plan to achieve, including how many people will be impacted and in what way. Provide a proposed timeframe and method to measure results.
  • Demonstrate sound governance. Maintain minutes for all meetings of the board and committees that act on behalf of your board. Some of the activities to document in the minutes include:
    • Annually reviewing written conflict-of-interest policies and disclosure statements.
    • Approving your executive director/CEO’s compensation and benefits and how your board determined the compensation is appropriate
    • Reviewing annual financial statements and IRS Form 990 before they are filed
    • Approving the annual budget
  • Demonstrate sound business practices. Your organization should have a written document retention and destruction policy and travel expense reimbursement policy.
  • Document internal controls. Ensure your organization’s financial management systems include adequate internal controls, including proper segregation of duties to safeguard resources.
  • Demonstrate accountability. Publish your organization’s most recently filed federal tax return and list each member of the board of directors on your website.
  • Demonstrate responsible borrowing. Like businesses, nonprofits sometimes need to take out loans to make capital investments, even out cash flow and take advantage of opportunities. However, it’s important to document how you will use the funds and have a realistic repayment plan.

Government grant applications can be demanding to prepare, and competition is fierce. However, if your organization is new to seeking federal grants, you can often receive free training and technical assistance from the federal agency issuing the grant. Need help preparing, organizing, or reviewing any of the documents or strategies listed above? Call our team today!

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