Tag Archives: Accounting

REPEAL FASB 116!

7 Jun

The accounting profession has done a huge disservice to the nonprofit world.

One need look no further than the accounting rule that used to go by the name of FASB 116*.  If you have ever tried to read and understand financial reports for a nonprofit organization that has received multi-year awards, you know what I mean.

FASB 116 forces accountants to ignore the longstanding “matching principle” in which revenue and related expenses are matched by showing them in the same time period.   Instead, with FASB 116, if you receive a multi-year grant, pledge, or other award, and if the award meets certain accounting requirements, all of the revenue must be shown in the first year even though expenses related to that award continue to be incurred in subsequent years.

This creates the bizarre set of circumstances in which, during the first year of the multi-year award, the organization shows what appears to be a huge windfall in its budget and financial reports, while in subsequent years losses are shown from continuing expenses even though the organization received the funds to pay them!

For an example of how this all works, see my previous blog called, “The Single Biggest Problem With Nonprofit Accounting Rules.”  (See https://ericyptc.com/2013/01/20/the-single-biggest-problem-with-nonprofit-accounting-rules/ )

For a real-life example of how this rule ensnared the Clinton Foundation, see my blog, “Bill Clinton Feels Your Pain.” (See https://ericyptc.com/2013/09/01/bill-clinton-feels-your-pain/ )

Without going too far into the accounting details, it is helpful to understand for comparison purposes how multi-year awards used to be treated prior to FASB 116.

Prior to 1993, when FASB 116 was passed (effective for fiscal years beginning after December 15, 1994), future years’ funds from multi-year awards were simply shown on the balance sheet as a liability.  Each subsequent year the liability was reversed, thereby showing the revenue that should be matched against that year’s expenses.

This pre-FASB 116 treatment was easy to account for.  It was easy to explain.  It made it easy for nonprofit organizations to develop their budgets.  It made it easy for readers of financial reports (e.g., board members, funders, management, etc.) to read and understand their numbers.

Because of this rule, accountants, like me, have spent the last 20 years explaining the consequences of this rule to our nonprofit clients and to the readers of their financial reports.  Over the years we have had to develop a variety of workarounds to help our clients with this accounting fact of life when preparing their budgets and when presenting and explaining their financial reports.

The management teams and boards of nonprofits all across America treat this accounting rule with disdain, and derisively ridicule the accounting profession which foists rules like this upon them.  Why, our clients want to know, must they show a deficit for programs in the second and subsequent years of an award when they were awarded the funds to cover the costs?  Logically, it makes no sense either to the lay person or to the accounting professionals.  How much time is wasted every year by organizations as they try to figure out how to portray and reflect these so-called “carry-over” funds, a phrase we hear often, in their budgets and financial reports?  While there are various techniques we use with our clients to help them through this, most organizations view the accounting rules, and the profession that promulgates them, as something they are forced to put up with, something that hinders their ability to properly manage their organizations.

Organizations put up with this accounting rule because they have to.  If a nonprofit is audited by a certified public accountant and wants to receive a “clean” unqualified audit opinion, the organization must follow this rule, among all other generally accepted accounting principles.  As a result, accountants and their rules are often viewed as a necessary evil.  (I exempt my firm, Your Part-Time Controller, from this since our clients appreciate our advice about how to understand and deal with the problems created by this rule.)

The FASB states on its website that its mission is to:

“…establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports.”

FASB 116’s required treatment of multi-year awards does not provide decision-useful information to anyone.

We, the accounting profession, have created this problem.  Fortunately, there is a simple solution.

FASB, repeal this provision of FASB 116.

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC
The NONPROFIT accounting specialists
Washington, DC – New York, NY – Philadelphia, PA

*As of 2009, the FASB’s (Financial Accounting Standards Board, a group of people based in Norwalk, CT) numbering system was replaced by the ASC (Accounting Standards Codification) numbering system.  Those of us who have been working in the accounting field for long still refer to the subject of this blog as FASB 116.  Also note that FASB 116 deals with a variety of topics related to nonprofit accounting.  This blog is concerned with just one aspect of this rule, that which deals with the treatment of multi-year awards.

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The Truth About Nonprofit Outcomes Measurement: Trying to run when you cannot yet walk

28 Dec

Outcomes measurement at nonprofit organizations will never gain widespread traction until at least one fundamental problem is solved.

Much has been written about the potential benefits of outcomes measurement.  Who can argue that knowing the effectiveness of a nonprofit’s programs is anything but a good thing?  Donors and nonprofits alike should want to know the effectiveness of their grantmaking so that they can fix what is broken or redirect funds to what works.

I’ve written separately about the futility of attempting to find a single measure of effectiveness (see “In Search of the Holy Grail of the Nonprofit World” ).  Yet, though often difficult and expensive, measuring effectiveness can be very beneficial.

But there is an underlying problem, typically overlooked in the outcomes measurement debate, which prevents most* nonprofits from being able to measure their outcomes: most organizations cannot effectively measure, report on, and analyze their basic finances.  How can these organizations, who cannot adequately and timely report on their financial operations, be expected to move to the next level of measuring, reporting, and analyzing their outcomes?

* My assertion that “most” nonprofits cannot do a proper job of reporting the basics of their financial operations is based on my experience over the last 20 years working with and visiting hundreds of nonprofits.  (I exempt our accounting clients from this troubled group: our clients have strong financial reporting systems!)

The uncomfortable truth is that asking a nonprofit organization to perform relatively sophisticated outcomes measurement when they cannot properly perform basic accounting and financial reporting functions is like asking a child to run who cannot yet walk.

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC
The NONPROFIT accounting specialists

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Fare & Square & Vision

30 Nov

A vision was recently realized.  What was the vision and who was behind it?  Read on.

The first nonprofit supermarket, named “Fare & Square,” opened in a “food desert” in Chester Pennsylvania on Saturday, September 28, 2013.  Chester, a city of 34,000 where one in three people live in poverty, had been without a supermarket for twelve years.

If you’ve not heard about this, I refer you to various news articles and videos.  See the citations below.

In this blog, though, I am interested in the vision that made this possible, and the man behind the vision.

The man is Bill Clark, executive director of Philabundance.  Philabundance is the largest hunger relief organization in the greater Philadelphia metropolitan area. It was founded in 1984 by Pam Lawler as a food rescue organization and later taken over by Scott Schaffer who expanded the organization’s operations.  Bill came in as executive director in 2001.

I can’t say for sure when the idea that has become Fare & Square first germinated, but various press stories have given credit to Bill for working on this for seven years.  I can say this, however: it has not been an easy seven years.

Along the way Bill had to overcome every imaginable obstacle.

To secure funding Bill had to cobble together a hesitant coalition of government, foundation, and private support.  He had to persuade his board that the plan was viable.  He had to win the hearts and minds of his staff that worried that the organization was straying too far from its food rescue origins.  The business model had to be developed.  Consultants and experts of all types had to be consulted.   A skeptical local community in Chester, who had seen too many promises in the past go bad, had to be wooed.  And ultimately, an executive director willing to risk his job, career, and reputation was required.

Team efforts are needed for grand visions to succeed.  In this case the team consisted of a strong board which gave the go-ahead, a highly motivated staff that did the work, funders who understood the potential, and a local community who appreciates the results.

At the center of all this was a man with a vision.  Bill Clark.

Fare & Square is still brand new.  The final chapters on this story have yet to be written.  But two things are eminently clear:

(1) thousands of people in the city of Chester will benefit greatly, and;

(2) none of this would have happened without a man of vision, Bill Clark.

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC

For additional information about Fare & Square, I refer the reader to the following links:

The Philadelphia Inquirer – http://articles.philly.com/2013-09-30/news/42505117_1_ninth-and-trainer-streets-west-end-food-center-grocery-store

The New York Times – http://www.nytimes.com/2013/11/24/opinion/sunday/an-oasis-of-groceries.html?_r=0

A video on Billmoyers.com – http://billmoyers.com/content/an-oasis-in-a-food-desert/

Philabundance website – www.philabundance.org

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BILL CLINTON FEELS YOUR PAIN

1 Sep

If you’ve ever had a complaint about nonprofit accounting rules, you have a friend in former President Bill Clinton.

In a recent article from the New York Times, the Bill, Hillary and Chelsea Clinton Foundation has come under criticism for mismanaging the foundation’s finances.

According to the New York Times article, “The foundation piled up a $40 million deficit during those two years [2007 and 2008], according to tax returns [IRS Form 990].”

In an open letter on the Clinton Foundation website, Bill Clinton indicates his frustration with accounting rules. He says:

“The New York Times recently reported that the Foundation ran a deficit of $40 million in 2007 and 2008 and $8 million in 2012. The reporting requirements on our tax forms, called 990s, can be misleading as to what is actually going on. Here’s why. When someone makes a multi-year commitment to the Foundation, we have to report it all in the year it was made. In 2005 and 2006 as a result of multi-year commitments, the Foundation reported a surplus of $102,800,000 though we collected nowhere near that. In later years, as the money came in to cover our budgets, we were required to report the spending but not the cash inflow… In other words, for any foundation with a substantial number of multi-year commitments, the 990s will often indicate that we have more or less money than is actually in our accounts.”

In other words, according to President Clinton, it’s not me, it’s the accountants.

There is a great deal of merit in President Clinton’s claim.

In a previous blog I wrote about The Single Biggest Problem With Nonprofit Accounting Rules. (See https://ericyptc.com/2013/01/20/the-single-biggest-problem-with-nonprofit-accounting-rules/)

The trouble making accounting rule in question is commonly known as FASB 116.

(FASB stands for Financial Accounting Standards Board. Several years ago the accounting rules were “codified” to make them easier to follow. Send me an email if you’d like the reference to the new rule number.)

This troublesome rule obscures, rather than illuminates, nonprofit performance. In our accounting practice we spend a lot of time helping nonprofit managements explain to their boards and to funders this quirk in their financial reporting.

Bill, if you are listening, call us. We have a New York City office!

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC
The NONPROFIT accounting specialists

Washington, DC – New York, NY – Philadelphia, PA

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Accounting uses one software system, development uses another, and the information never agrees! What should you do about this?

5 May

Has this ever happened to you?

Your finance committee meets. The committee members are presented with a packet of information that includes financial reports prepared by your accounting department and reports prepared by your development department. As your committee reviews these reports they notice that the donor grants and contributions from your accounting department do not agree with the revenue numbers from your development department. Questions are asked, the staff tries to explain, and everyone is bewildered.

Shouldn’t the two sets of reports contain the same information? Is one set of reports right and the other wrong? The differences between the two can be confusing and, if inadequately explained, embarrassing.

You may also be wondering: are we wasting time by entering the same information twice, once by accounting and once by development?

All nonprofit organizations have an accounting system. Many, if not most, nonprofits also have a donor database. Can and should these parallel systems talk to each other? This article will discuss the basic issues.

Nonprofits typically receive grants, contributions, donations, pledges, gifts in-kind, sponsorships, etc. These sources of revenue may come from foundations, corporations, individuals, and governments.

Your accounting department will record this revenue in its accounting system. If your organization has a separate donor database, someone in your organization, perhaps in your development department, will also record this revenue information in the donor database. If the same information is being recorded in two different places, why, unless someone makes a data entry mistake, might the two systems report different revenue numbers?

The answer is that accounting rules (called Generally Accepted Accounting Principles or GAAP) require accounting information to be entered one way, but the development department may need the information to be entered in a different way. Therefore when reports generated by the accounting and development departments vary, it is quite possible that neither one is wrong.

Let’s look at some examples to see how this might happen. Suppose a donor sends a check for $10,000 to pay a pledge the donor made in a previous period (such as last month, or two months ago, last year, etc.). The development department enters this $10,000 in the donor database and at the end of the month will produce a report including this $10,000 in their list of contributions.

The accounting department, on the other hand, will apply this $10,000 against a pledge receivable that was recorded in the previous period. If your accounting system is on an accrual basis, it counts revenue when the pledge was made, as opposed to the development department, which might be on a cash basis and logs its donations when the checks actually arrive. Since the revenue from this pledge was already recorded in the accounting system in a previous period, no new revenue results from the receipt of this check. So when the accounting department produces its Statement of Activities, they show no revenue while the development department report shows $10,000. The reports seem to be off by $10,000, yet no one actually made a “mistake.”

Another common example of different treatments of the same transaction can occur with grants.

A grant letter typically spells out the terms, restrictions, and conditions, if any, of the grant. For example, say that a foundation awards your organization a grant for $100,000. The development department will want to carefully track this grant through its donor database and they will print reports showing the receipt of this grant.

The accounting department, however, has to follow GAAP. For example, this $100,000 grant may have a condition attached, such as the need for some uncertain event to occur in the future. This condition may preclude this grant from being recorded in the accounting system until the condition is resolved. This creates the potentially bizarre situation of the development department reports showing $100,000 of revenue while the accounting reports show zero!

So how do we solve this problem? The finance committee must be given information that is clear and unambiguous. Presenting them with reports showing seemingly conflicting information is not satisfactory. What can be done about this?

The answer lies in three parts: Part one is the need for better communication between the accounting and development departments. Specifically, there needs to be a clear set of policies and procedures such that both departments understand how to treat various types of contributions and grants. Furthermore, the donor database and the accounting general ledger, the place where accounting information is stored, should be set up so they are in alignment with each other. For example, if the donor database uses account number 4500 to designate corporate contributions, then the accounting system must also use account number 4500 to designate corporate contributions.

Part two of the answer is that both the accounting system and the donor database must be reconciled to each other at least once per month. With a willing accounting department, and with a willing development department, along with support from the organization’s management and executive director, this communication and alignment is very doable and can be accomplished relatively easily.

Part three is the need to modify report formats, both from the accounting and development systems, to display the information in ways that make clear what is happening to the reader.

Once the issue of conflicting data is addressed, the next issue to address is the potential inefficiency of entering contributions twice; once in the accounting system and once in the donor database. If, for example, your organization receives 100 donor checks per month, is there a way to avoid having two people enter each check in both systems? Can this duplicate entry be avoided?

Of course yes.

The solution involves establishing a disciplined process in which all the contribution details are entered into the donor database, with only summary information posted to the accounting general ledger. For example, assume an organization receives 10 donations on a given day. Each of these donations must be entered in the donor database so that the development department has all the information they need to track the donors, send them thank you letters, follow up with them, etc. Once these contributions are all entered, a summary report can be printed from the donor database showing the total dollars by account distribution. Seven of the checks might have been individual contributions, so they can all be summed into one number. The other three might have been foundation grants, and they can be summed into one total as well. Your accounting department can take this summary report and enter a single journal entry to record the day’s contributions. The double entry problem is effectively eliminated. Note again, though, that a monthly reconciliation must be done to insure the integrity of the information in both systems.

It is clear that an organization can perform quite nicely with two separate systems: one for accounting and one for donor data. However, would an integrated system be more efficient?

By an integrated system I mean a single piece of software that will handle both your organization’s accounting and donor data needs. The theory is that you enter a contribution once and you are done.

The answer is generally yes, an integrated system would be preferable. However, it depends on the system as some are marketed as being integrated when they are really not. It also depends on price and sophistication, as some integrated systems might be unnecessarily expensive and complicated to use.

Integrated systems still require communication between the development and accounting departments. There still needs to be a disciplined set of policies and procedures governing how contributions are recorded. There still needs to be a single chart, or list, of accounts that both departments use. And there needs to be consistency around the use and understanding of financial terms such as knowing when a cash receipt is revenue for the period versus payment on a pledge from a previous period. There still needs to be an accepted understanding of how and when to recognize revenue on conditional grants.

For these reasons, our advice to our clients who have separate accounting and donor systems is to put the brakes on spending more money on an integrated system until they better understand the pros and cons. The essential first step is to get the development and accounting department to communicate about the issues described above. Once all the necessary policies and procedures are in place and things are running smoothly, that is the time when a proper cost-benefit analysis can be done on whether or not to move up to an integrated system.

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC

NOTE: This article originally appeared in Don Kramer’s “Nonprofit Issues.” I highly recommend Don’s newsletter to anyone in a position of authority and responsibility in the nonprofit world. For more information, visit: http://www.nonprofitissues.com.

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