Lately we’ve received numerous inquiries from Not-For Profit organizations on various topics. Below are some of the questions we thought you might find interesting and will hopefully assist you in managing your Not-For-Profit (NFP) business.
Q: How much should a nonprofit spend on overhead?
A: While there is no set percentage that would indicate that a nonprofit is running effectively, the answer here is typically whatever is necessary to advance the organization’s mission. The instructions from Form 990 defines overhead as a combination of “management,” “general,” and “fundraising” expenses. These are costs that are necessary to deliver the nonprofit’s mission. Overhead that is too low may impact the efficiency of a nonprofit organization. A better gauge of an efficient nonprofit is its effectiveness and its impact in the community. But, always remember that donors want to see their contributions going to the mission of the organization, not to overhead.
Q: What happens if my Form 990 is filed late?
A: Don’t be late! There’s a daily penalty for filing Form 990 after the due date. The IRS will impose a penalty of $20 per day for each day the return is late for NFPs that have gross receipts less than $1,000,000 for its tax year, and $100 per day for an organization whose gross receipts exceed $1,000,000. The maximum penalty is $10,000, or 5 percent of the organization’s gross receipts, whichever is less for the smaller NFPs, and $50,000 for the larger organizations. But, penalties may be waived if there is a valid reason for late filing. Contact our office if you find yourself in a late filing situation.
Q: How is time donated by volunteers valued?
A: Contributed services received are recognized, according to generally accepted accounting principles (GAAP) if the services received
- create or enhance nonfinancial assets; or
- require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. Services requiring specialized skills are provided by accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers, and other professionals and craftsmen.
Contributions fitting this description are recorded at fair market value. In accordance with IRS regulations, nonprofits may not report volunteer time as contributions in line 1 of Parts II or III of Form 990, Schedule A. It may be described in Form 990, Part III, Statement of Program Service Accomplishments.
Q: What are the new changes concerning how to classify and record net assets?
A: Annual financial statements issued for fiscal years beginning after December 15, 2017 will now classify net assets as either with donor restrictions, or without donor restrictions. FASB ASU 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-For-Profit Entities eliminates the distinction of temporarily or permanently restricted donations.
Q: What are the new revenue recognition standards and how do they affect my NFP?
A: FASB’s new revenue recognition standard (Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606)) will become effective for most not-for-profit (NFP) entities in 2019.
NFPs recognize contributions when an unconditional promise is made. Contributions are not considered contracts with customers and therefore would not fall under Topic 606. Exchange transactions are recognized either at a point in time or over a period of time, based on different factors.
Under the new rules, the term “contract with a customer” will replace “exchange transaction”. The theory will however remain the same. A contribution will continue to be recognized under existing guidance based on the factors in the chart below. A contract with a customer will be recognized either at a point in time or over time as the contract is fulfilled, based on the facts and circumstances. The significant part of the new standard is that revenue recognition should “depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services” (ASC 606-10-05-3). It establishes specific requirements for determining when a transfer occurs, and accordingly, when revenue should be recognized. Fees in the form of membership dues, for example, may require the NFP to provide numerous types of benefits at various points in time, and judgment will have to be used to determine when the revenue is recognized.
Q: Do I need to include a Statement of Functional Expenses in my financial statements?
A: Currently, only “Voluntary Health and Welfare Entities” NFPs are required to present statements of functional expenses, though the AICPA encourages NFP organizations that are supported by the general public to present them. However, effective for annual financial statements issued for fiscal years beginning after December 15, 2017, new rules require NFPs to present expenses by both function and nature in one place. These rules are further discussed in FASB ASU 2016-14.
Q: How should I allocate functional expenses?
A: Organizations allocate functional expenses differently. Some allocate expenses based on the square footage and apply a percentage based on that to the indirect expenses. Others base their allocation on time or headcount. Most organizations use a combination to produce an accurate approach to expense allocation.
Feel free to contact us with any additional questions you may have, or if you would like further information on anything discussed above.