A Deeper Dive Into ASU 2016-14 Implementation Issues – Part Two

By Tammy Ricciardella, CPA

In this issue, we will examine two additional areas of the ASU: Expense reporting and reclassification upon expiration of donor-imposed restrictions.

Expense Reporting

Once ASU 2016-14 is adopted, all nonprofits are required to present expenses by nature and by function, as well as an analysis of these expenses in one location by both nature and function. This analysis can be presented on the face of the statement of activities, as a separate statement (not a supplemental schedule) or in the notes to the financial statements.

As a quick refresher, functional expense classifications are generally shown as:

  • Program services: Activities that result in goods and services being distributed to beneficiaries, customers or members that fulfill the purposes or mission for which a nonprofit exists
  • Supporting services, which often include:
    • Management and general: Activities generally include oversight of the nonprofit and financial management
    • Fundraising: Activities undertaken to induce potential donors to contribute to the organization
    • Membership development: Activities undertaken to solicit new members and retain existing members

The ASU has modified the definition of management and general activities. The revised definition is “supporting activities that are not directly identifiable with one or more program, fundraising or membership development activities.” Thus, activities that represent direct conduct or direct supervision of program or other supporting activities require allocation from management and general activities. Additionally, certain costs benefit more than one function and, therefore, should be allocated. For example, information technology generally can be identified as benefiting various functions such as management and general (for example, accounting, financial reporting and human resources), fundraising and programs. Therefore, information technology costs generally would be allocated among functions receiving direct benefit.

The expense analysis required by ASU 2016-14 should show the disaggregated functional expense classifications, such as program services and supporting activities by their natural expense classification, such as salaries, rent, depreciation, interest, professional fees and such.

If there are expenses that are reported by a classification other than their natural classification, such as when a nonprofit shows costs of goods sold and includes salaries in this presentation, these expenses should still be segregated and shown in the analysis by their natural classification within each function.

However, the external and direct internal investment expenses that are netted against investment return (as required by the ASU) should not be included in this analysis of expenses by nature and function.

In addition, gains and losses incurred by the nonprofit on such items as a loss on the sale of equipment or an insurance loss or gain should not be shown in this analysis of expenses.

It is also important to note that the ASU does not change any current generally accepted accounting principles (GAAP) related to the allocation, reporting and disclosures of joint costs.

The expense analysis presented is required to be supplemented with enhanced disclosures about the allocation methods used to allocate costs among the functions. In developing this disclosure, a nonprofit should assess which activities constitute direct conduct or direct supervision of a program or supporting function, and, therefore require an allocation of costs. An example of a disclosure regarding the allocation of costs is provided below (this is an excerpt from the ASU at section 958‑720-55-176):

Note X. Methods Used for Allocation of Expenses from Management and General Activities

The financial statements report certain categories of expenses that are attributable to one or more program or supporting functions of the Organization. Those expenses include depreciation and amortization, the president’s office, communications department and information technology department. Depreciation is allocated based on square footage, the president’s office is allocated based on estimates of time and effort, certain costs of the communications department are allocated based on estimates of time and effort, and the information technology department is allocated based on estimates of time and costs of specific technology utilized.

The revised ASU provides specific examples of direct conduct and supervision as it relates to the determination of certain types of expenses. These are contained at sections 958-720-55-171 through 958-720-55-176 in the ASU. The ASU provides examples of allocations of a chief executive officer, chief financial officer, human resources department and the grant accounting and reporting function. In these sections it notes that the cost of the human resource department is not generally allocated to any specific program, and that instead all costs would remain as a component of management and general activities because benefits administration is a supporting activity of the entire entity.

Nonprofits should review the clarifications in the ASU with regard to the allocation of expenses and review their allocation methodologies to determine if there are any changes that are necessary. Once the organization determines the correct allocation approach, they will need to decide where they want to present this analysis in their financial statements and develop the format. Some organizations may also need to evaluate the different programs and supporting activities they have historically presented to determine if the presentation is concise. In addition, the organization will have to develop the wording for its allocation methodology disclosure.

Reclassification upon Expiration of Donor-Imposed Restrictions

If a nonprofit has received funds restricted to the purchase or construction of property, plant or equipment or a donation of such an asset with an explicit donor-imposed restriction on the length of time that the asset must be used, then net assets with donor restrictions should be reclassified as net assets without donor restrictions in the statement of activities as the restriction expires. The amount that is reclassified may or may not be the same as the amount of depreciation recorded on the asset. The amount reclassified each year should be based on the length of time of the explicit time restriction for the use of the asset. However, the depreciation should be based on the useful economic life of the asset.

If the donor does not specify how long the donated assets or assets constructed or acquired with cash restricted for the acquisition or construction must be used, then the restrictions on the long-lived assets, if any, expire when the assets are placed in service.

The entire amount of the contribution of property, plant or equipment, or cash shall be reclassified from net assets with donor restrictions to net assets without donor restrictions when the asset is placed in service if there are no explicit restrictions noted by the donor with regard to how long the long-lived asset is to be used.

When examining the effect of the ASU on your organization you should look at whether you have any contributions of long-lived assets that are being reclassified over time without any explicit stipulation of a time period for the use of the asset. If these assets have already been placed in service, the amount of these long-lived assets should be reclassified from net assets with donor restrictions to net assets without donor restrictions upon adoption of the ASU.

In addition, the organization will have to modify its policy with regard to the receipt of contributions for the construction of long-lived assets or donated long-lived assets. Upon adoption of the ASU, an organization will have to recognize revenue without donor restrictions when the donated assets are placed in service absent any explicit donor stipulations otherwise. In the past, organizations had an option to either follow the placed-in-service approach or to place an implied time restriction on the long-lived assets.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2017). Copyright © 2017 BDO USA, LLP. All rights reserved. www.bdo.com

Accounting and Financial Reporting for Other Postemployment Benefit Plans

By Patricia Duperron, CPA

Beginning with fiscal years ending June 30, 2017, the first of the two Other Postemployment Benefit (OPEB) standards from the Governmental Accounting Standards Board (GASB) becomes effective.

GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans replaces GASB Statements Nos. 43 and 57 for reporting of OPEB plans and mirrors the requirements of GASB Statement No. 67, Financial Reporting for Pension Plans. The good news is that most everything you learned in implementing the pension standards will apply to implementing the OPEB standards. There are, however, a few exceptions which will be discussed herein.

OPEB includes postemployment healthcare benefits such as medical, dental and vision, whether the benefit is provided separately from or through a pension plan. However other benefits, such as death benefits, life insurance, disability and long-term care are considered OPEB, subject to GASB 74 only when provided separately from a pension plan. OPEB does not include termination benefits or termination payments for sick leave.

GASB 74 applies to defined benefit plans and defined contribution plans administered through trusts, as well as plans not held in trust. Similar to pension plans, there are three types of defined benefit OPEB plans:

  • Single-employer
  • Cost sharing multiple-employer—in which the OPEB obligations to the employees of more than one employer are pooled and OPEB plan assets can be used to pay the benefits of the employees of any employer that provides pensions through the plan.
  • Agent multiple-employer plans—in which OPEB assets are pooled for investment purposes but separate accounts are maintained for each individual employer so that each employer’s share of the pooled assets is legally available to pay the benefits of only its employees.

GASB 74 does not apply to insured plans (those financed through an arrangement whereby premiums are paid to an insurance company during employees’ active service and the insurance company unconditionally undertakes an obligation to pay the OPEB of those employees).

GASB 74 requires the same two financial statements currently required by GASB 43 for plans administered through trust:

  • Statement of fiduciary net position (similar to GASB 67, receivables for contributions are only included if due pursuant to legal requirements)
  • Statement of changes in fiduciary net position
  • Footnotes specified by paragraph 35 of GASB 74 should include:
  • Basic description of the plan and policies
  • Investment information, including the annual money weighted rate of return
  • Information about reserves
  • Single and cost-sharing plans should also disclose:

–  Components of the OPEB liability

–  Significant assumptions

–  Healthcare cost trend analysis

–  Discount rate

–  Long-term expected rate of return

–  Sensitivity analysis of the discount rate and the healthcare cost trend rate

Note that the sensitivity analysis for OPEB includes the healthcare cost trend rate, which is something that wasn’t required for pension plan financial statements. The net OPEB liability will be shown at the current healthcare cost trend rate and one percentage point higher and lower. The discussion of actuarial assumptions will also include the healthcare cost trend rates.

Required supplementary information (RSI) for single and cost-sharing employers should include 10-year schedules of:

  • Changes in the OPEB liability and related key ratios
  • Actuarially determined contributions and actual contributions
  • Annual money-weighted rate of return on investments
  • Notes to the required schedules

RSI for agent OPEB plans requires a 10-year schedule of the annual money-weighted rate of return.

The OPEB liability should be determined by an actuarial valuation which can be no more than 24 months earlier than the plan’s most recent year-end, using the entry age actuarial cost method. The discount rate should be a single rate that reflects the long-term rate of return on investments that will be used to pay benefits. If there will be insufficient assets to pay the liability, the index rate for 20-year tax-exempt municipal bonds with an average rating of AA/Aa or higher would be used. Keep in mind that actuaries will be quite busy as everyone will be required to get OPEB valuations completed this year, so don’t wait until the last minute.

For assets accumulated to provide OPEB but not in a trust, the employer will continue to report the assets in an agency fund. For defined contribution plans there are specific disclosures required.

GASB has issued an Exposure Draft Implementation Guide No. 201X-X, Financial Reporting for Postemployment Benefit Plans other than Pension Plans, which follows the format of the GASB 67 Implementation Guide. The Implementation Guide includes illustrations to assist in determining the discount rate, money-weighted rate of return and sample note disclosures and should be finalized in April 2017.

Deferred inflows and deferred outflows of resources should be fairly rare as GASB has not identified any deferrals specific to OPEB. The draft Implementation Guide identifies a possible deferred outflow or deferred inflow related to derivatives, if applicable.

Implementing GASB 74 for OPEB plan financial statements will be very similar to the implementation of GASB 67 for pension plans. The GASB intentionally made GASB 74 similar to GASB 67 to minimize implementation issues for governments. However, in 2018 governments will be required to implement GASB statement No.75, Accounting and Financial Reporting for Postemployment Benefits Other than Pensions, which will require governments to record their proportionate share of the net OPEB liability in the financial statements. Previously, governments only recorded an OPEB obligation if they didn’t fully fund the annual required contribution and the net OPEB liability was only disclosed in the notes. Implementing GASB 75 will have a significant effect on a government’s net position because many OPEB plans are significantly underfunded or not funded at all.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2017). Copyright © 2017 BDO USA, LLP. All rights reserved. www.bdo.com

Public Charities and Private Foundations—What’s the Difference?

By Christina K. Patten

When starting a 501(c)(3) organization, the IRS will generally classify it one of two ways—either as a public charity or a private foundation. Public charities are known to perform charitable work, while private foundations are typically grant-making organizations. The main difference between public charities and private foundations is the source of their financial support.

Public Charities

Public charities generally have greater interaction with the public and receive the majority of their financial support from the general public and/or governmental units. Organizations such as churches and religious organizations, schools, hospitals and medical research organizations automatically qualify as public charities while other organizations must prove to the IRS that they are publicly supported.

An organization is considered publicly supported if:

  1. It normally receives one-third of its support from a governmental unit or from contributions from the general public or at least 10 percent public support, and facts and circumstances that show the public nature of the organization; or,
  2. It normally receives more than one-third of its support from gifts, grants, contributions or gross receipts from activities related to its exempt purposes, and not more than one-third of its support from gross investment income.

An organization can also achieve public charity status if it is a supporting organization of another charity that derives its public charity status under one of the tests stated above.

The IRS will automatically presume an organization to be a private foundation unless it can show that it is a public charity. After an organization’s initial five years, its public support test is based on a five-year computation period that consists of the current year and the four years immediately preceding the current year.

Private Foundations

A private foundation is typically controlled by members of a family or by a corporation, and receives much of its support from a few sources and from investment income. Because they are less open to public scrutiny, private foundations are subject to various operating restrictions and to excise taxes for failure to comply with those restrictions.

The IRS recognizes two types of private foundations: Private non-operating foundations and private operating foundations. The key difference between the two is how each distributes its income: A private non-operating foundation grants money to other charitable organizations, while a private operating foundation distributes funds to its own programs that exist for charitable purposes.

Benefits of Public Charities Over Private Foundations

Classification is important because private foundations are subject to strict operating rules and regulations that do not apply to public charities. Some advantages public charities have over private foundations include higher donor tax-deductible giving limits, 50 percent of adjusted gross income (AGI) versus a private foundation’s 30 percent of AGI limit, and the ability to attract support from private foundations. Public charities also have three possible tax filing requirements based upon annual revenue: Form 990 (> $200,000), Form 990-EZ ($50,000 – $200,000), and Form 990-N e-postcard (<$50,000). All private foundations, regardless of revenue, must annually file Form 990-PF. Additionally, a private foundation must annually distribute at least 5 percent of the fair market value of its net investment assets for charitable purposes. The penalty for failure to meet the 5 percent required minimum distribution is 30 percent of the shortfall or the remaining amount that should have been spent to meet the required minimum level. Private foundations are also subject to strict self-dealing rules, a 1 percent or 2 percent tax on investment income and certain expenditure responsibilities.

Public charities may engage in limited amounts of direct and grassroots lobbying. Private foundations that spend money on lobbying will incur an excise tax on those expenditures; this tax is so significant that it generally acts as a lobbying prohibition.

Conclusion

When deciding whether to operate as a public charity or a private foundation, the decision should depend on the organization’s programs and objectives. Once an organization is classified as a public charity, it must demonstrate annually that it meets the public charity tests. Once an organization is classified as a private foundation, it remains a private foundation.

If an organization fails the public support test two years in a row, it is at risk of reclassification as a private foundation, which can have significant implications for sustainability and mission accomplishment. To regain status as a public charity, the organization must notify the IRS in advance that it intends to make a qualifying 60-month termination. Only if it meets one of the public support tests at the end of a 60-month (five-year) period can the organization again operate as a public charity.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2017). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

Building a Resilient Organization—A Toolkit for Nonprofit Boards to Manage Transformational Change

By Laurie De Armond, CPA

Many, if not most, nonprofit organizations will encounter board or leadership turbulence at some point in their lifecycles. Organizational transition, the evolution of mission or executive departures are inevitable. There are times when the board must make challenging decisions and protect the organization from financial and organizational risk, as well as potential reputation damage.

While the “transformational event” is often unplanned, the consequences don’t have to derail the organization’s programming, future plans or ability to successfully carry out its mission. There are a number of different methods and tools to address management hiccups and leadership transitions, as well as concrete steps boards and executives can take to minimize risk in the event of a transformational event.

To illustrate this, let’s examine a few scenarios:

  • Mission friction: A large national leadership and support organization for a variety of local chapters recently began pursuing a strategic partnership with another organization to expand its technical capabilities. Local chapters find the joint fundraising approach proposed by national leadership doesn’t support their priorities and programming at the ground level. There are also concerns in the chapters around increases in executive compensation, coupled with decreases in spending on certain service offerings national leadership believes no longer align with the organization’s broader mission. Some chapter advocates worry this tension could escalate if the strategic partnership moves forward.
  • Succession stress: A longtime CEO at a small research organization affiliated with a regional chain of hospitals has just been diagnosed with a severe medical condition requiring him to accelerate his retirement plans. The organization had begun preliminary preparations for its leader’s eventual retirement to plan and protect the organization from risk, but lacks a thorough succession plan and immediate action steps in the event of a departure as potentially sudden as this one.
  • Fragmented leadership: A foundation associated with a prominent, wealthy philanthropist that has national operations recently grappled internally with discord around its grantmaking practices and priorities. While the organization has yet to institute significant changes, leadership is at a crossroads and it’s likely the board will need to step in to determine future direction. The CEO is threatening to step down, which could likely spur media interest and generate significant negative publicity.

In order to build the right toolkit for forging a path through common transformative events like these, organizations need first to understand the various reasons the disruption occurs.

Mission Friction

Because many nonprofits operate on leaner budgets and resources than for-profit companies, keeping up with a rapidly evolving business landscape and the rise of technology as both a tool and a potential threat can be extraordinarily taxing. Some organizations are better able to navigate this than others. In some cases, like the one mentioned above, a joint venture, merger or acquisition with an organization that has technology infrastructure, or staff with certain expertise, can be the best path forward. However, expanding the organization’s capabilities can come at a high cost in the form of executive compensation and a new set of stakeholders to consider, which saddles the board with a challenging cost-benefit decision.

On the flip side, organizations reconsider the specifics of their mission or programming if they’re facing financial difficulties or are running a deficit. In cases like this, nonprofits may not have adjusted spending in certain areas, like employee benefits, despite slowing cash flow. The organization may also have expanded its programming and services into areas that no longer make sense given the marketplace, staffing or the needs of the community.

Some organizations encounter tension between founders and the board when a reconsideration of mission takes place—coined “founder’s syndrome.” Passionate, dedicated founders can be reticent to embrace certain changes in favor of the way things have always been done. The introduction of new board members with different perspectives can also serve as a conduit to bring issues and conflicts bubbling up to the surface.

During times of friction around a nonprofit’s mission, it’s critical that the board is educated on the issues at hand, as well as the consequences of each potential outcome and of inaction. Leadership also needs to have a dynamic vision of the organization’s future, and be willing to pivot if need be. From there, leadership may need to work with certain individuals at the board level to build consensus so that a risk mitigation plan, as well as a longer-term action plan, can be agreed upon and implemented.

Succession Stress

Succession planning is a moving target for nonprofits of all sizes and sectors. This is due in large part to the approximately 4 million baby boomers reaching retirement age each year, according to Pew Research Center statistics. While many are staying in the workforce longer than previous generations, the mass exit of experienced professionals, many of whom hold positions at the executive level or on boards, exposes some nonprofits to added personnel-related risk.

As a result, conversations around succession planning should shift from focusing on if a departure will happen, to when. Executive retirement can be planned, or, as we discussed above, it can happen quite suddenly. Regardless of the scenario, few things rock the boat like an executive departure. When considering your organization’s future growth and long-term plans, it’s important to proactively factor in succession planning. Depending on the size and scope of the organization, this may include a variety of tactics.

The succession plan may need to consider a potential gap between the current CEO and the successor and how workflow might need to be managed among other members of the leadership team, board and staff, as well as other practical details around the outgoing CEO’s exit and onboarding the new CEO. One stumbling block nonprofit organizations are particularly vulnerable to is a gap in relationship or partnership management with key stakeholders and donors.

The best way to mitigate the aftershock of a sudden departure is to ensure there is an up-to-date job description for the executive’s position. To develop this, the board should consider what skill sets are required for the executive to be successful in that role. Larger organizations might establish a transition team tasked with creating a transition plan, managing priorities, decision-making and communicating across the organization and to stakeholders.

Establishing a relationship with a search firm before the need arises can ensure the organization doesn’t have to vet search firms before beginning the candidate search, cutting down on overall hiring time. Executive hiring can take anywhere from six months to a year in some cases, so the board will need to develop an interim plan in case a successor isn’t immediately found. To bridge the gap during this period, the board should also consider whether there are other executives or board members who could hold the position or absorb the key duties of the role until the organization finds the right permanent replacement.

Fragmented Leadership

In the case of discord around financial priorities, the organization will need to ultimately choose where to allocate its resources—a tough decision that will likely land in the hands of the board. This is especially challenging if board members also have competing definitions of the organization’s mission and the purpose and goals of its grantmaking. The organization will also need to consider the impact of each possible outcome on its reputation.

There are several proactive steps nonprofits can take to unify leadership around the strategy driven by the board. In the example outlined above, the organization’s leadership could submit the pros and cons of each strategy to the board for consideration. The analysis should include the impact upon the organization’s finances, the impact upon its mission and potential reputational risks.

While there are many avenues for tackling a disruption at the executive level, organizations might consider bringing in a “transformational leader.” This individual would serve as a resource to educate key internal stakeholders, manage expectations and institute a plan of action for navigating and rebuilding consensus among leadership and the board. If an executive departs as a result of leadership fragmentation or evolution of mission and programming, this resource could also support the organization in development of a succession plan or communications plan.

The right brass-tacks qualifications each nonprofit organization will need in this leader are as wide and varied as the sector itself. In some cases, it might be beneficial for the individual to have a background in for-profit business. Alternatively, membership organizations, particularly in the medical or technology industries, might prioritize certain credentials that are required among members, to ensure the leader has credibility.

What tools do boards need to make the best decisions?

Above all, culture matters. A board that embraces change as an opportunity rather than an obstacle will enjoy smoother sailing during a rocky transformation of any kind. Arming the board to navigate uncertainty and inevitable change begins here. From there, in order to equip the board with the strongest toolkit possible for forging ahead through a transformational event, organizations should plan ahead by creating and maintaining certain key resources:

  • Board manual that members can reference during a transformational event. This should include standard documents, including the mission, strategic plan, bylaws and other important literature on the organization’s capabilities and services. When faced with difficult decisions, it’s important that board members have these resources close at hand to help them align their decision-making with the organization’s priorities.
  • Training to engage new and established board members. This training should cover key items included in the board manual, and set a tone for the relationship between the board and executive leadership. Additionally, organizations may consider annual workshops to build board members’ level of comfort with one another as well as their ability to collaborate to make decisions and reach consensus.
  • Information on relationships with key outside consultants and service providers, including staffing firms, financial managers and other resources. This will help ensure that all board members, not just the board chair, are equipped to deploy those resources should the need arise.
  • Board-approved succession plan, including caveats for various situations that could arise during an executive transition. This should include job descriptions for all leadership positions. During the development of this plan, the organization should identify and build a relationship with hiring and staffing resources, so that they can get familiar with the organization and its needs. This ensures they can be tapped quickly in the event of an unforeseen departure or transition. The succession plan might also include a list or information on the key relationships or partnerships managed by executives. To prevent gaps in relationship management during an executive transition, organizations can encourage shared ownership and an open flow of information so that key relationships don’t become siloed with one individual.
  • Step-by-step communication road map for navigating transformation and reputation management, including tools for presenting and discussing the event with various internal and external stakeholders and, if applicable, the media and public. The plan should include a list of key stakeholders who should be kept apprised of any leadership issues, as well as basic drafted language that can be filled in and adapted for use in a variety of situations.

While transformational events can arise from a wide breadth of causes and events, they all pose unique challenges to nonprofit organizations and require careful consideration of the risks in play and the right path forward. Boards that have developed contingency plans, and are able to focus on efficiently reaching consensus and pivoting when necessary, will be well-prepared to navigate the shifting tides they will inevitably face.

Article was originally published in Philanthropy Journal.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Spring 2017). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

What’s the Difference Between Nonprofit and For-Profit Accounting, and How Does it Impact the Fiduciary Duties of Board Members?

By Lee Klumpp, CPA, CGMA

There are many opinions on what the fiduciary responsibilities of nonprofit board members are. The National Council for Nonprofits discusses that boards should:

a) Take care of the nonprofit by ensuring prudent use of all assets, including facility, people and goodwill; and provide oversight for all activities that advance the nonprofit’s effectiveness and sustainability. (Legal term: “Duty of due care”)

b) Make decisions in the best interest of the nonprofit corporation; not in his or her self-interest. (Legal term: “Duty of loyalty”)

c) Ensure that the nonprofit obeys applicable laws and acts in accordance with ethical practices; that the nonprofit adheres to its stated corporate purposes, and that its activities advance its mission. (Legal term: “Duty of obedience”)

In light of several nonprofit failures in recent years, it has become even more vital for members of nonprofit boards to exercise the duty of due care as described above by understanding how their organization communicates its financial results and operations. Members of nonprofit boards tend to come from the for-profit world, where financial reporting is quite different. Below, we have highlighted some of the financial reporting differences between nonprofit and for-profit entities to help board members understand and fulfill their fiduciary responsibilities.

First, look at the spectrum of nonprofits to determine where the organization you serve falls.

Charity-Like Nonprofits          Business-Like Nonprofits

 

Some nonprofits might land at one end of the continuum or the other depending on the mission, strategic plan or business model. You might even determine a nonprofit’s position on the continuum based on how they generate revenue—for instance, a nonprofit that raises most of its funds from fees for services might be a more business-like nonprofit (i.e., nonprofit hospital). Whereas a nonprofit that raises most of its revenue through fundraising or contributions might be a more charity-like nonprofit (i.e., homeless shelter). A college or university might fall in the middle of the continuum depending on its business model.

Most of the time when we talk about the difference between nonprofits and for-profits, we consider the differences between the two; however, it’s also important to account for similarities. The following are just of a few of the similarities:

  • Both types of organizations can grow, transform, merge or fail. Success isn’t guaranteed for either.
  • Cash is crucial.
  • Good management and leadership really matter. Delivering quality service, motivating and inspiring staff and conceiving new areas for growth are vital.
  • Planning, budgeting and performance measurement systems are crucial.
  • Both add value to society via job creation and buying and selling goods and services in the market.
Nonprofits For-Profits
  • No shareholders/investors
  • Initial capital from shareholders/investors
  • Provide benefits to their members or the public through their services
  • Provide a return on investment to stockholders
  • Focus on maintaining excess revenue over expenses to maintain and expand services to their constituency
  • Sell goods and services to drive market share to increase profits that either create return on investment and/or invest in expansion
  • Regulated by the Internal Revenue Service; in the case of charities, also regulated by the states attorney’s office. Others have to follow state and local laws that apply to charities and businesses.
  • Public companies are regulated by the Securities and Exchage Commission. Private companies are not generally regulated but have to follow state and local laws that apply to both charities and businesses.

The Goals of Financial Reporting:

Due to the differences between nonprofit and for-profit entities, they also have differing financial reporting goals:

Nonprofits:

  • Meet their obligation to communicate to the public and their donors how they acquired, managed and allocated financial resources to accomplish their mission.
  • Present financial statements that are informative, transparent, reliable and adequately communicate financial position, results and accomplishments to stakeholders.

For-Profits:

  • Report profitability and cash flows so that shareholders and investors can project future dividends and return on investment.

To address these different goals, the financial statements of the two types of entities need to be different. This is where many board members and users of nonprofit financial statements encounter difficulty. The chart below identifies the different components of nonprofit and for-profit financial statements.

Financial reporting differences between nonprofits and for-profits are:

Nonprofits For-Profits
  • Statement of Financial Position
  • Balance Sheet
  • Statement of Activties
  • Income Statement
  • Statement of Functional Expenses (only required for some NFPs)
  • (Generally no for-profit comparison)
  • Statement of Cash Flows
  • Statement of Cash Flows
  • Statement of Net Assets
  • Statement of Owners’ Equity

 

When Reviewing Nonprofit Financial Statements, Remember…

  • Present net assets versus retained earnings;
  • Present net assets as unrestricted, meaning no restrictions are placed by donors; or temporarily or permanently restricted, meaning restrictions are placed on these funds by donors;
  • Show contribution revenue, which is a nonreciprocal transaction where the donor does not expect a good or service of similar value;
  • Present quantitative information on how a nonprofit manages and deploys its resources through the statement of activities, statement of functional expenses (if required), and footnotes.

Understanding the differences between nonprofits and for-profits will aid board members in fulfilling their fiduciary responsibilities by allowing them to analyze the financial statements of nonprofit entities and improve their value as a member of the team driving the organization’s success.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Winter 2017). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

IRS Issues 2017 Work Plan for Tax Exempt Organizations

By Laura Kalick, JD, LLM in Taxation

The Tax Exempt and Government Entities division of the IRS issued its FY 2017 Work Plan at the end of September 2016, which builds upon the agency’s 2016 priorities and its mission to work smarter with fewer resources.

This idea of “working smarter” includes targeting audit initiatives so the IRS can focus on organizations where they will be more likely to find noncompliance, as well as provide more information to organizations so they can be compliant. The work plan can also serve as a helpful resource for nonprofits as they begin planning for the new fiscal year. Nonprofits can review the work plan to determine key strategic actions they should take now to prepare for the possibility of an IRS audit.

In 2016, the IRS launched an effort to use data gathered from the Form 990 series to identify existing and emerging high risk areas of noncompliance. With this initiative, the IRS achieved a change rate of 90 percent when conducting audits in 2016. In other words, 90 percent of its audits identified a discrepancy, and as a result, the organization had to change a position it took on its initial return, which often resulted in additional tax dollars paid to the IRS. Based on the 2016 results, the IRS will continue to utilize data analytics from Form 990 in fiscal year 2017.

Examination Focus

The 2016 priorities put forward five key issues of examination focus, which will continue in FY 2017. They are:

  1. Exemption: Non-exempt purpose activity and private inurement
  2. Protection of Assets: Self-dealing, excess benefit transactions, and loans to disqualified persons
  3. Tax Gap: Employment tax and unrelated business income tax (UBIT) liability
  4. International Operations: Oversight on funds spent outside of the U.S., exempt organizations operating as foreign conduits and requirements under the Report of Foreign Bank and Financial Accounts (FBAR)
  5. Emerging Issues: Non-exempt charitable trusts and IRC 501(r)

Of those five key issue areas, the tax gap was one of the most prevalent in the past year. In 2016, the IRS conducted almost 5,000 exams, and their statistics show a large portion of those exams encompassed the tax gap items listed above. So, as organizations look at their tax positions, they need to examine tax gap concerns such as:

  • Unrelated Business Income: Gaming, non-member income, expense allocation issues, net operating loss adjustments, rental activity, advertising, debt financed property rentals and investment income
  • Employment Tax Issues: Unreported compensation, tips, accountable plans, worker reclassifications and noncompliance with FICA, FUTA and backup withholding requirements

In addition to tax gap concerns, there are several issue areas which are always under scrutiny for section 501(c)(3) organizations, such as private inurement, private benefit, political activity and more than insubstantial lobbying activities.

Other potential audit triggers include:

  • Inconsistent or incomplete information on a filed return
  • Diversion of assets
  • A claim for refund or a request for abatement that requires further review

In addition, the IRS also relies on public sources of information, including complaints or referrals from a federal or state regulatory agency or referrals from the public. Form 13909 is the referral form for exempt organizations and Form 211 is the Application for Reward for Original Information form.Informants can keep their anonymity.

FY 2017 Initiatives

In FY 2017, the IRS will continue to build its knowledge base for its agents and the public by hosting continuing professional education events and preparing issue snapshots. Streamlining processes also remains a key priority for the IRS, for example, making the determination letter process more efficient by returning applications that do not have the required documentation. The IRS lowered the user fee for organizations to apply for section 501(c)(3) status using Form 1023-EZ, in hopes that more organizations use the short form.

To prevent surprise revocations for an organization’s failure to file a return for three years in a row, the IRS has implemented a warning system prior to revocation. This should also reduce the determination letter inventories resulting from automatic revocations.

The IRS has also introduced Form 8976, which 501(c)(4) organizations will now be required to file to indicate their intent to operate as a 501(c)(4). These organizations are also still required to file Form 990. The new form is not a substitute for filing a Form 1024, Application for Exemption; however, the application is still not required, as 501(c)(4) organizations may be “self-declared” as exempt. But with the new notification the IRS may be taking a closer look at the new organizations.

Best Practices

Now that the IRS work plan is out, it gives organizations insight on how they can prepare for the year ahead. As part of an organization’s annual financial audit, it should determine whether or not there are any material uncertain income tax positions. Even if your organization goes through this exercise annually, it may be good to get a fresh look and even conduct a “mock” IRS audit—it’s better to identify any potential issues in the mock audit rather than a real one.

After the analysis of tax positions, organizations would be wise to document, document, document. In a routine audit, the IRS typically examines the three-year open tax period. Under certain circumstances, organizations need to produce documentation for years prior. For example, net operating losses can be carried forward 20 years. If an organization is using a loss that was generated two decades ago to offset current income, the IRS can request documentation from the year the loss was incurred. If an organization does not have documentation to support its position, it may be difficult to prevail on an issue.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Winter 2017). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

A Deeper Dive Into ASU 2016-14 Implementation Issues

By Tammy Ricciardella, CPA

As organizations look to implement ASU 2016-14 and meet its requirements, they must account for how these changes may impact how they collect information. This article will highlight three of these areas:

Investment Expenses

As we have noted, the ASU now requires the netting of investment expenses against investment return; in addition, only the net amount of the investment return is required to be presented in the statement of activities. The investment expenses that should be netted against the investment return are both internal and external. To comply with this presentation, organizations need to fully understand the definitions of these terms and then consider how to appropriately and accurately capture this information.

The ASU states that investment returns related to total return investing and not programmatic investing should be reported net of external and direct internal investment expenses. Programmatic investing is defined as “the activity of making loans or other investments that are directed at carrying out a not-for-profit entity’s purpose for existence rather than investing in the general production of income or appreciation of an asset.” An example of programmatic investing is a loan made to lower-income individuals to promote home ownership.

External investment expenses are those that are reported to the organization by the external money managers and other external investment management firms related to the management of the investment portfolio. This information will be obtained from the external investment firms based on what they have charged.

Direct internal investment expenses are defined in the ASU as those that involve the direct conduct or supervision of the strategic and tactical activities involved in generating investment return. These include, but are not limited to, the following:

  • Salaries, benefits, travel and other costs associated with the officer and staff responsible for the development and execution of investment strategy, and
  • Allocable costs associated with internal investment management and supervising, selecting, and monitoring of external investment management firms.

Direct internal investment expenses do not include items that are not associated with generating investment return. For example, the accounting staff costs associated with reconciling accounts, recording transactions, maintaining the unitization of pooled investment accounts and other such clerical staff time are not direct internal investment expenses, so they would not be included.

Accounting for investment expenses and the related allocation of costs is a process that organizations will have to develop to properly present these investment costs under the provisions of the ASU. The complexity of this will depend on the type of organization and the amount and nature of their investments. For example, the management of a large foundation that handles the strategic aspects of investing their assets internally will have to analyze and establish an allocation methodology for the salaries, benefits and travel related to the total return investing. Entities will need to identify all personnel who participate in the investment process and determine if they have a strategic role or not. In addition, entities may need to develop a process and make modifications to timesheets or other tracking methodologies to capture the time spent aiding the identification and allocation of these costs.

Liquidity and Availability Disclosures

Under the ASU, specific quantitative and qualitative information related to the new liquidity and availability requirements is required to be disclosed. Organizations should assess how they manage their liquid resources to ensure they can meet their cash needs for general expenditures as of and within one year, respectively, of the statement of financial position date. In addition, organizations will need to evaluate their financial assets to determine their availability to meet cash needs; consider the nature of the assets; examine the external limits imposed by donors, laws, and contracts; and account for any internal limits imposed by governing board decisions. These limitations need to be analyzed and tracked so the organization can identify its available financial assets and provide the necessary disclosures. Other qualitative issues including special borrowing arrangements or instances whereby the entity has not maintained appropriate amounts of cash as required by donor-imposed restrictions and limitations that result from contractual agreements with suppliers, creditors, loan covenants and other sources need to be identified and evaluated to prepare the appropriate disclosures.

Internal Net Asset Designations

Under ASU 2016-14, the accounting treatment for internally designated net assets hasn’t changed; however, the presentation of these amounts and the disclosures have. These changes require entities to properly track these amounts and their related purpose so they can meet the ASU’s disclosure requirements.

As we have noted in the past, organizations should review the ASU now and take these items and others into consideration when developing their implementation plan. Though the ASU does not have to be implemented until calendar year 2018 or fiscal year 2019 year ends, preparing for it takes careful planning, so organizations would be well advised to begin the process as soon as possible.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Winter 2017). Copyright © 2017 BDO USA, LLP. All rights reserved. www.bdo.com

How Tax Law Changes May Impact Charitable Giving

By Laura Kalick, JD, LLM in Taxation

Whether we look at the blueprint for tax reform put forth by Republican House Ways and Means Committee members, the deliberations of the Senate Finance Committee’s bipartisan tax reform working groups or the tax proposals of President-elect Trump, there is a very real possibility that tax rates will be lowered in the near future. While the Internal Revenue Code (IRC) hasn’t seen a major overhaul since 1986, the tax law as we know it today may not be the tax law next year.

What does this mean for America’s charitable organizations? In a nutshell, charities should encourage donors to contribute before the end of the year to take advantage of more impactful deductions that may not be available if rates are lowered in the future. Accelerating charitable deductions now could be critical to maximize fundraising if near-term tax reforms include a dollar cap on total itemized deductions like charitable donations. Favorable provisions that now allow fair market value deductions for gifts of appreciated property to charity could come under scrutiny as well, further complicating fundraising potential.

Regardless of what unknown tax code changes are on the horizon, encouraging giving now—while the outcome is predictable—is imperative.

Below are some of the details of tax changes President-elect Trump proposed during his campaign:

Lowering the number of tax brackets for married joint filers from seven to three at the following rates:

• Less than $75,000: 12 percent
• More than $75,000 but less than $225,000: 25 percent
• More than $225,000: 33 percent

Capping itemized deductions and increasing the standard deduction:

• President-elect Trump proposed capping itemized deductions at $200,000 for married joint filers or $100,000 for single filers. These deductions would include charitable deductions, mortgage interest deductions, state tax deductions and others.

• The Trump plan would also increase the standard deduction for joint filers from $12,600 to $30,000, and the standard deduction for single filers will be $15,000. This means fewer people may be itemizing their deductions, and therefore may not be as concerned about generating deductions through charitable contributions.

Estate tax:

• Trump has also proposed eliminating the federal estate tax, currently at 40 percent. Charitable contributions from an estate reduce the overall taxable value of the estate. If there is no estate tax, charitable requests may be significantly reduced.

The future of charitable giving incentives

The charitable deduction is one of the ten largest tax expenditures in the IRC and has long been subject to proposed modifications, including extensive hearings held in 2013, which we covered here in the Nonprofit Standard blog. Proposals to limit the deduction have included dollar caps, floors below which contributions may not be deducted, credits instead of deductions and more. In addition to monetary contributions, many hearings have even included debate on whether the treatment of gifts of property to charities should be revisited. Every time changes are proposed, the nonprofit industry seeks to analyze how the proposals would raise revenue and impact charities.

Not all tax code changes negatively impact charities, however. Last year, Senators John Thune (R-S.D.) and Ron Wyden (D-Ore.) introduced the Charities Helping Americans Regularly Throughout the Year (CHARITY) Act. Among the provisions in the CHARITY Act, the Senate asserted that the promotion of charitable giving should be one of the goals of comprehensive tax reform. The House Tax Reform Blueprint would also provide incentives for charitable giving.

As charities make one final fundraising push to end 2016, they should encourage donors to make gifts now while the tax outcome is certain, rather than waiting until next year when the rules may be changed in a way that negatively affects their bottom line. Despite the interplay between tax deductions and charitable giving, the 2014 U.S. Trust Study of High Net Worth Philanthropy found that a desire to make a difference (73.5 percent) and personal satisfaction (73.1 percent) were the main motivators in giving, while tax benefit was cited by just 34.4 percent of respondents. In looking at those statistics, it’s clear that conveying a compelling mission is key to attracting and retaining donors.

There is enormous competition for charitable donations. It’s essential to make your organization’s mission emotionally compelling and relevant to take advantage of current favorable giving arrangements that may not last.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Winter 2017). Copyright © 2017 BDO USA, LLP. All rights reserved. www.bdo.com

Lawsuits Target Higher Education: What Retirement Plan Sponsors Need to Know

By Beth Garner, CPA

Retirement plan excessive fee litigation surrounding 403(b) plans was a hot topic in the employee benefit plan world this past week. Several universities that sponsor 403(b) plans were added to excessive fee litigation filed by the law firm of Schlichter, Bogard & Denton, bringing the total to eight universities having to defend their decisions for their retirement plans. These suits are the first of their kind in the 403(b) plan industry, while these lawsuits have been occurring for the past decade for 401(k) plans.

Some of the shortcomings of the plan sponsor’s duties based on the litigation include:

  1. Improper investment selections,
  2. Too many service providers,
  3. Too many investment choices, and
  4. Plan sponsors not using their plan size as a bargaining chip to reduce costs.

The recent uptick in litigation makes it clear that retirement plans in higher education will be under increased, unprecedented scrutiny. What can you do as the plan sponsor of a benefit plan, whether that plan is a 403(b) or a 401(k)?

Those charged with governance for an employee benefit plan have a fiduciary responsibility to act solely in the interest of participants and beneficiaries of the plan. Although there is no rule on the proper number of investment options that should be available for a plan, the plan sponsor is responsible for selecting and monitoring the investment alternatives that are made available under the plan. This responsibility also includes ensuring that the plan pays only reasonable administrative fees, which may be made up of fees relating to investments within the plan. Additionally, those charged with governance should understand how fees are paid and monitor those fees and expenses.

Is your head hurting yet? If you are considered one of the professionals charged with governance, how do you go about making sure your plan is making the best decisions?

An employee benefit plan should have an investment policy statement (IPS).  The IPS should outline the process in which plan investments are selected, monitored and terminated. Monitoring of plan investments would include benchmarking the fees associated with the investments and assessing the reasonableness of those fees. Once again, there is no rule on the benchmarking of fees; however, it is best practice to assess and review plan fees annually or at least every two years.

The Department of Labor (DOL) has noted that even a small increase in plan fees paid from plan assets can, over time, significantly eat away at the ultimate account balance. When assessing whether the fees are “reasonable,” consider that you’re ultimately answering to the DOL and the participants. One of the best ways to demonstrate that you’re a prudent fiduciary is to document. Having meeting minutes, copies of documents analyzed and other documentation can demonstrate how you’ve complied with these regulations and carried out your fiduciary duties. The DOL realizes the amount of complexity involved with being a plan fiduciary and has formulated well-documented responsibilities on its website as a resource.

Many plan sponsors have decided to hire an investment advisor to help those charged with governance.  Dealing with investment selections, fee analysis, share class and continued monitoring has proven to be too much for some plan sponsors. Investment advisors can help those charged with governance.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

New Deferred Compensation Regulations: What Nonprofits Need to Know

By Joan Vines, CPA

The Internal Revenue Service (IRS) released proposed regulations that provide guidance for the nonqualified deferred compensation arrangements of tax-exempt organizations in June. The regulations, which have been anticipated by the industry since 2007, address the interplay between Internal Revenue Code Section 457 and Section 409A, which govern the nonqualified deferred compensation arrangements of all employers, including tax-exempt organizations. The newly proposed Section 457 regulations provide plan design opportunities specifically for tax-exempt employers, which could aid in the recruitment and retention of key executives.

The proposed regulations provide comprehensive guidance for nonprofit employers and offer several options for employers structuring deferred compensation plans. Section 457(f) requires the immediate taxation of nonqualified deferred compensation upon vesting. Its newly proposed regulations contain plan design features that effectively delay the vesting event, thereby avoiding immediate taxation and providing much-needed clarity to when compensation is subject to or exempt from Section 457(f).

The proposed regulations become effective upon finalization, but may be relied upon in the meantime.

The new regulations distinguish between for-profit and nonprofit deferred compensation requirements with changes specific to six aspects—risk of forfeiture, salary deferrals, noncompete agreements, short-term deferrals, severance pay and other welfare plans.

ROLLING RISK OF FORFEITURE
The proposed regulations permit an upcoming vesting date, as well as the point of taxation, to be extended, provided:

• The extension is made at least 90 days before the vesting date;

• The extended vesting is conditioned upon the employee’s provision of substantial services for at least two years (absent an intervening event such as death, disability or involuntary severance from employment); and

• The present value of the amount to be paid at vesting must be more than 125 percent of the amount the employee otherwise would have received in absence of the extended vesting date.

BDO Insight: Section 409A similarly disregards an extended risk of forfeiture, unless the present value of the deferral is materially greater than the amount otherwise payable absent such extension. However, Section 409A does not provide a bright line test to determine “materially greater” and does not require a two-year, service-based minimum extension. The Section 457 proposed regulations are more rigid with respect to tax-exempt employers. Where an employer is exempt from U.S. taxation, the employee derives a tax benefit from the deferral while the employer is indifferent. The additional payout required under the Section 457 proposed regulations is designed to constrain tax-motivated deferrals by employees. A tax-exempt employer may not be as willing to agree to the additional vesting period if the payout is significantly higher. For instance, an employer might prefer to pay $100,000 in 2018, rather than potentially more than $125,000 in 2020.

SALARY DEFERRALS
Under prior guidance, current compensation, including salary, commissions and certain bonuses, was considered vested and therefore ineligible for deferral under Section 457(f). However, the proposed regulations permit current compensation to be deferred under Section 457(f), provided the following rules are met:
• The deferral election must be made in writing before the beginning of the calendar year in which any services that give rise to the compensation are performed (or within 30 days after a new employee’s hire date for pay attributable to services rendered after the deferral election);

• Payment of the deferred amounts must be conditioned upon the employee’s substantial services for at least two years (absent an applicable intervening event); and

• The present value of the amount to be paid at vesting must be more than 125 percent of the amount the employee otherwise would have received in absence of the deferral.

BDO Insight: The two-year minimum deferral period applies separately to each payroll deferral. Additionally, an employer match of more than 25 percent may be required to satisfy the 125 percent rule for salary deferrals.

NONCOMPETE AGREEMENTS
Under prior guidance, the vesting schedule for deferred compensation served as a retention mechanism, requiring the employee’s continuous services through the vesting date as a condition to receive the amount. Under the newly proposed regulations, vesting may also serve as an enforcement mechanism for a noncompete covenant, requiring an employee to refrain from providing services to a competitor for a specified period. Provided the noncompete is a written, bona fide and enforceable covenant, the vesting period may be extended through the end of the restrictive period, allowing tax-exempt employers to make post-employment payments during such period. In addition, deferred compensation payable upon a voluntary termination is no longer treated as fully vested at all times if the amounts could be forfeited in accordance with the terms of a bona fide noncompete covenant.

BDO Insight: Among other factors applied to determine a bona fide noncompete covenant, the facts and circumstances must show that the employer has a substantial interest in preventing the employee from performing the prohibited services. To the extent the compensation paid to the employee for entering into a noncompete agreement exceeds the value of such agreement, (measured, for example, by the economic damages the organization would incur from an employee’s violation of that covenant), then the restrictive covenant may not be a bona fide noncompete agreement for purposes of Section 457. A valuation of the noncompete agreement may be in order to support an extension of the vesting date to the end of the restrictive period.

SHORT-TERM DEFERRALS
The proposed regulations provide that Section 457(f) does not apply to an arrangement in which payment is made within the “2 ½ month short-term deferral period” under Section 409A, which is generally March 15 of the first calendar year following the year of vesting.
BDO Insight: The Section 457 proposed regulations apply the Section 409A definition of short-term deferral, but substitute its own definition for “substantial risk of forfeiture.” Accordingly, a short-term deferral under Section 457 may not constitute a short-term deferral under Section 409A as is the case of a plan with a noncompete vesting provision. Technically, income taxes are due upon vesting under Section 457(f). However, the proposed regulations make clear that short-term deferrals are not subject to Section 457(f), thereby allowing income taxes to be collected upon distribution, which is administratively convenient where there is a gap between the vesting and distribution dates.

SEVERANCE PAY
The proposed regulations provide that Section 457(f) does not apply to severance pay in connection with an involuntary separation from service (including a voluntary termination by the employee for a pre-established, good reason condition that has not been remedied by the employer) or pursuant to a window program or an early retirement incentive plan. Payments under such “bona fide severance pay plans” must not exceed two times the employee’s annualized compensation for the preceding calendar year (or the current calendar year if the employee had no compensation from the employer in the preceding year) and payment must be made by the last day of the second calendar year following the calendar year in which the severance occurs.

BDO Insight: Pay due to an involuntary separation from service or participation in a window program is similarly exempt from Section 409A in limited amounts (the lesser of two times the employee’s annual rate of pay for the preceding year or two times the compensation limit set forth under Section 401(a) (17) for the year of separation).

OTHER WELFARE PLANS
The proposed regulations clarify that Section 457(f) does not apply to bona fide death benefit, disability pay, sick leave and vacation leave plans.

BDO Insight: Section 409A similarly exempts such welfare plans from its deferred compensation rules.

WHAT SHOULD I DO NOW?
Prior to the finalization of these regulations, tax-exempt organizations can take immediate action to align current deferred compensation procedures with the recent changes. Nonprofits, foundations and universities should review their current arrangements, severance plans and welfare benefit plans in light of these proposed regulations, and develop a plan to implement the necessary updates. Additionally, nonprofit executives should be proactive and take steps to effectively communicate with their employees in regards to the changes.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com