The New GASB Accounting and Financial Reporting Standards for Other Postemployment Benefits (OPEB)

By Kurt Miller, CPA

Public sector employers, get ready. First you recorded net pension liabilities, now net OPEB liabilities. The Government Accounting Standards Board (GASB) Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, revises current guidance for financial reporting of most government OPEB plans. GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, establishes new accounting and financial reporting requirements for most governments with other postemployment benefits (OPEB). GASB Statement No. 74, is effective for years ending June 30, 2017, and GASB Statement No. 75 is effective for years ending June 30, 2018. The new statements are intended to make accounting for OPEB, usually retiree health insurance, more transparent by moving the entire unfunded liability to the face of the financial statements.

These two standards provide the same fundamental improvements to accounting and financial reporting as we saw with the implementation of the pension standards. Together, the standards provide governments and the readers of their financial reports a more accurate reflection of the true costs promised to their employees and retirees.

GASB Statement No. 74 Summary

GASB Statement No. 74 (Statement) establishes new accounting and financial reporting requirements for governments whose employees are provided with OPEB. The Statement covers OPEB plans, both defined benefit and defined contribution plans, that are administered through a trust. The OPEB plan must meet the following criteria:

  • Contributions from employers and nonemployer contributing entities to the OPEB plan and earnings on those contributions are irrevocable;
  • OPEB plan assets are dedicated to providing OPEB to plan members in accordance with the benefit terms; and
  • OPEB plan assets are legally protected from the creditors of employers, nonemployer contributing entities and the OPEB plan administrator.

OPEB Plans

For OPEB plans administered through a trust, GASB Statement No. 74 requires the following financial reporting by the plan:

  • Statement of fiduciary net position
  • Statement of changes in fiduciary net position
  • Notes to the financial statements that are required to include:
    • Descriptive information on the types of OPEB provided
    • Classes of plan members covered
    • Composition of the plan’s board
    • Plan investments, investment policies, concentrations and monetary weighted rate of return
    • Contributions
    • Reserves
  • Required Supplementary Information (RSI)
    • Defined benefit OPEB plans are required to present 10 years of plan information to include the annual money-weighted rate of return
    • Single-employer and cost-sharing OPEB plans are required to present 10 years of plan information to include:
      • Source of changes in the net OPEB liability
      • Information about the components of the net OPEB liability and related ratios, including the OPEB plan’s fiduciary net position as a percentage of the total OPEB liability and the net OPEB liability as a percentage of covered-employee payroll.

Measurement of the Net OPEB Liability

GASB Statement No. 74 requires the net OPEB liability to be measured as the total OPEB liability less the amount of the OPEB plan’s fiduciary net position. The total OPEB liability generally is required to be determined though an actuarial valuation.

OPEB Plans Not Administered Through a Trust

For OPEB plans not administered through a trust, the government is required to report assets accumulated in a fiduciary capacity in an agency fund.

GASB Statement No. 75 Summary

GASB Statement No. 75 (Statement) establishes new accounting and reporting standards for most governments. Readers of the financial statements will note that information about the governments’ commitments promised to employees and retirees related to OPEB are now on the face of the financial statements. This Statement establishes standards for recognizing and measuring liabilities, deferred outflows of resources, deferred inflows of resources and expenses/expenditures. This Statement replaces the requirements of GASB Statement No 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, as amended and GASB Statement No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans, for OPEB.

As in the pension standards, employers with defined benefit plans are classified in one of the following categories:

  • Single employers – OPEB plans in which OPEB is provided to the employees of only one employer. A primary government and its component units are considered to be one employer.
  • Agent employer – OPEB plans in which 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 benefits of only its employees.
  • Cost-sharing employers – OPEB plans in which the OPEB obligations to the employees of more than one employer are pooled and plan assets can be used to pay the benefits of the employees of any employer that provides OPEB through the plan.

Total OPEB Liability

As discussed above, the total OPEB liability is generally required to be determined though an actuarial valuation. Actuarial valuations must be updated within 30 months and 1 day of the employer’s most recent fiscal year-end.

Pension Calculation

Pension Calculation

Single and Agent Employers

Governments will record the net OPEB liability on the government-wide financial statements. The OPEB expense and deferred outflows of resources and deferred inflow of resources related to OPEB that are required to be reported by an employer, primarily result from changes in the components of the net OPEB liability. The Statement requires that most changes in the net OPEB liability be included in OPEB expense in the period of change. This includes changes resulting from current period service cost, interest on the total OPEB liability, changes in benefit terms and projected earnings.

Required Notes to the Financial Statements

The notes to the financial statements would include the following descriptive information:

  • Types of benefits provided and number and classes of employees covered
  • Sources of changes in the net OPEB liability
  • Significant assumptions used to calculate the total OPEB liability
  • Date of the actuarial valuation

Required Supplementary Information

The government will be required to present the following information for each of the 10 most recent fiscal years:

  • Sources of changes in the net OPEB liability
  • Components of the net OPEB liability and related ratios, including the OPEB plan’s fiduciary net position as a percentage of the total OPEB liability and the net OPEB liability as a percentage of covered payroll

Cost-Sharing Employers

Governments will recognize a liability for its proportionate share of the net OPEB liability. An employer’s proportion is required to be determined on a basis that is consistent with the manner in which contributions to the OPEB plan are determined. OPEB expense and deferred outflow of resources and deferred inflow of resources relate to its proportionate share. In addition, the effects of (1) a change in the employer’s proportion of the collective net OPEB liability and (2) differences during the measurement period between certain of the employer’s contributions and its proportionate share of the total of certain contributions from employers included in the collective OPEB liability are required to be determined.

Defined Contribution OPEB

This statement requires an employer to recognize OPEB expenses for the amount of contributions that are defined by the benefit terms as attributable to employee’s services in the period of service.

In Summary

The new statements follow the same concepts of the recently implemented GASB pension statements. In 2017, all OPEB plans will implement GASB Statement No. 74, allowing for the information to be provided to government employers about the net OPEB liability. Governments will then recognize the net OPEB liabilities, deferred outflows of resources and deferred inflows of resources attributable to them in the statement of net position starting in 2018.

While all the OPEB information has previously been disclosed in the notes to the financial statements and required supplementary information, governments will now need to recognize the assets and liabilities attributable to OPEB in the face of their financial statements.

Will this affect your bond ratings? The rating agencies have indicated that there will be no adverse consequences from the implementation of these statements. The obligations have already been figured into the ratings.

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

Form 1023-EZ is too Easy

By Laura Kalick, JD, LLM in Taxation

Fifty-five percent of organizations applying for 501(c)(3) status in fiscal year 2015 applied using the new Form 1023-EZ. But the National Taxpayer Advocate, part of the Taxpayer Advocate Service (TAS), recently released a report to Congress indicating that the new form appears to have significant problems and that the Internal Revenue Service (IRS) went too far in reducing the amount of information required from a tax-exempt applicant. The statistics are even more daunting when one compares the number of 501(c)(3) applications in FY 2014 (100,032) to the number in FY 2013 (45,289).

The TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. The Taxpayer Advocate is appointed by and reports to the Commissioner of Internal Revenue and is responsible for identifying problems and proposing changes in the administrative practices of the IRS.

The new Form 1023-EZ was introduced in July 2014 to provide a simplified method for small organizations to apply for tax-exempt status as a section 501(c)(3) organization. While the Taxpayer Advocate had initially also recommended a simplified form for small organizations, it ultimately expressed concern that the new form lacks requirements that would prove whether an organization is eligible for tax exemption.

The Tax Advocate may have recommended a simplified form because of the severe backlog of applications for tax exemption that the IRS and the public were experiencing. At the time, thousands of organizations were reapplying for tax-exempt status after they failed to file Form 990 for three consecutive years and had their status revoked. As a result of the backlog, the applications were taking 18 months or more to be assigned to a reviewer, and nonprofits were waiting months or years for determinations from the IRS.

Initially, the new form was appealing as most small organizations (with gross receipts of $50,000 or less and assets of $250,000 or less) seemed to qualify and it significantly reduced the number of applicants using the full-blown process by implementing a digital solution. However, there has been some debate about whether this solution was the correct one.

Passing (or Failing) the Organizational Test

Organizations seeking tax exemption under Internal Revenue Code (IRC) section 501(c)(3) must pass organizational and operational tests. The organizational test requires that certain provisions be in the organizing documents (articles of incorporation and bylaws) that show the entity is organized for exclusively 501(c)(3) purposes (purposes clause) and that assets are dedicated in perpetuity to charitable purposes (the dissolution clause). Failing the organizational test means that the entity does not qualify as a charity.

The Taxpayer Advocate’s study examined 408 organizations that had applied for section 501(c)(3) status using the shortened Form and found that 37 percent failed the organizational test because their articles of incorporation did not have an appropriate purposes clause or dissolution clause or had neither. The study was based on a review of organizations from states where the articles of incorporation could be found online. The report states, “It took the reviewers about three minutes on average to review an organization’s articles and determine whether there were acceptable purpose and dissolution clauses.”

Key Differences between the Forms

The organizational test is just one example of where the 1023-EZ may have gone too far in the direction of efficiency. While the full Form 1023 with additional schedules and attachments is 12 pages long, the 1023-EZ is only two pages. Aside from the length, the 1023-EZ differs from the full Form 1023 in three significant ways:

  • Articles of Incorporation and Bylaws are not required to be submitted.
  • The applicant does not have to provide a narrative description of its activities.
  • Only an attestation is required regarding private inurement or private benefit – not information such as financial details.

Newly formed organizations can use the simplified form as can some organizations that have had their exempt status revoked for failure to file a Form 990 for three consecutive years. However, not every organization is eligible to use the two-page Form 1023-EZ. The organization cannot have more than $250,000 in assets, nor can it have more than $50,000 of income for the past three years or project more than $50,000 for the next three years. Many organizations that qualify to file the Form 1023-EZ would also qualify to file the Form 990-N postcard, whereby an organization must attest that it normally has no more than $50,000 in gross receipts. Some of the other organizations that would not qualify to file the Form 1023-EZ include churches, schools, hospitals and supporting organizations. The instructions to Form 1023-EZ include an eligibility worksheet with 26 questions, wherein if any of them are answered “yes”, it will cause the organization to be ineligible to use the Form 1023-EZ.

Doubts Remain about Organizations’ Charitable Activities

In addition to deficient articles of incorporation, the study found that only about half of the organizations surveyed had websites that would allow the IRS to easily find information about the activities of the organizations. The study found eight organizations in the sample that had previously filed tax returns as taxable corporations and questioned whether those organizations had changed their operations to be charitable.

Because section 501(c)(3) organizations can receive tax deductible contributions, these organizations are, in essence, subsidized by public funds. Therefore, it is imperative that only organizations that deserve section 501(c)(3) status are granted such status.

The Taxpayer Advocate has provided the IRS Exempt Organizations division with the names of the organizations that failed the tests. The Taxpayer Advocate recommended that the Form 1023-EZ be modified to require applicants to submit organizing documents, a narrative description of activities and financial information.

Although it appears that the IRS may still not require the articles of incorporation, it appears that it is taking steps to limit the risk of ineligible organizations being granted such status—steps such as pre-determination reviews, educational materials and clarifying instructions.


The IRS is taking many steps to make the exemption application process more efficient. In addition to the Form 1023-EZ, the IRS is employing additional requests for information during the regular application process to weed out ineligible applicants. If applicants do not provide the required information in a timely manner, the case will be closed and the applicant will have to re-file with a new user fee. Also, when the IRS now receives an application that is incomplete (for example, it does not have the proper signatures, taxpayer identification numbers, a narrative or other required information), it will be returned to the applicant with the applicable user fee, and applicants can decide whether they want to re-submit.

Facing limited resources, the IRS is attempting to be more efficient. The Form 1023-EZ was an attempt to increase efficiency and it appears that the IRS is starting to take additional steps to insure that small organizations meet the basic requirements.

Tax exemption is a privilege and not a right. Especially in the case of 501(c)(3) organizations where taxpayers can make deductible contributions, a lack of close monitoring leaves opportunities for abuse. The IRS’ first bite at the apple of compliance is to test the organization before it grants the organization exemption. The Form 1023-EZ may be appropriate in situations in which the IRS had already previously vetted the organization with the full Form 1023 but revoked exempt status because Form 990 was not filed for three years. In that scenario, the IRS would already have important information and documents about the organization. However, in other situations, it appears that more information is needed so that the exempt organization community and the public are protected. For now, it appears that the IRS will keep the online application, but it will be taking additional steps to see if these organizations actually do qualify for exemption.

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

“Are We Having Those Good Seafood Salad Sandwiches for Lunch Again?”

The (Real) Questions Committees Should Ask About Executive Compensation

By Michael Conover

That is an actual, and the only, question from a compensation committee member after an hour-long presentation of an analysis presented to highlight serious problems with a proposed compensation arrangement for the organization’s CEO. There were more attorneys in the room than board members as a controversial, sure-to-be-litigated, pay plan was considered. Detailed reports were circulated in advance and the issues were spotlighted in the presentation.

“Any questions?” I asked. That was it – the question about lunch was the only one asked. The proposal was approved and litigation commenced shortly thereafter.

Subsequent testimony revealed that the committee member in question claimed not to be an expert in compensation, relying instead on the CEO’s endorsement of the proposal. When asked about the consultant report, the committee member admitted he thought he “glanced over it” prior to the meeting.

My point here?

I regularly encounter situations with board/compensation committee members of tax-exempt organizations who appear to be just as “detached” as the salad-loving committee member of the above-mentioned publicly traded company. These situations involve board members who failed to request independent compensation analyses, never thoroughly read those reports, and/or never asked a follow-up question. For example:

  • Two different consulting firms prepared an analysis of the compensation for the organization’s CEO over a four-year period. Neither report included comparable organizations from the human services field in the data used to develop their competitive compensation range for the CEO. Instead, data from trade associations (whose roles are demonstrably higher paid than human services) was used.
  • An organization requested an independent analysis of competitive compensation for a newly created senior-level position. A consultant prepared the analysis based on the job title alone and the assumption that it would be the average of the top two or three positions reporting to competitor CEOs. Based on competitor pay data for positions almost certainly not similar to the newly created position (based solely on the title), a competitive compensation range was presented that could hardly be described as objective.
  • A report prepared for a major, global NGO presented competitive compensation ranges for each of the organization’s most senior-level executives. The report provided no names or information on any of the organizations included in the analysis, citing “confidentiality” concerns. Without any information on the size and scope of organizations included in the study, there was no basis for determining whether or not the compensation discussed in the report represented organizations that were comparable in terms of the IRS’ rebuttable presumption of reasonableness.

In each of these instances, board members were provided with reports that never prompted a follow-up question, despite some rather questionable analyses and conclusions. For some reason, board members were unwilling or unable to ask a question that would determine whether the information was useful or useless as a context for the pay decisions facing the governing body.

Internal Revenue Service (IRS) Intermediate Sanctions make it clear that the board may rely on a qualified compensation advisor/valuation expert. However, that does not relieve individuals of the responsibility to take the necessary steps to inform themselves about the decision before them as well as any information provided to them related to the topic at hand. Meetings of governing boards or their committees are not intended to be simply a chorus chanting “Do we have a motion?” “Is there a second to the motion?” or “All those in favor say ‘aye’”.

Any compensation analysis presented to the board for Intermediate Sanctions purposes should readily be able to satisfy the following criteria:

  • The distinguishing characteristics of the subject organization and each of the positions included in the report are clearly identified. For example:
    • Type of organization/service area(s)
    • Size and scope of the organization (e.g., annual revenue, operating budget, assets, number of employees, other pertinent operational measures)
    • Key responsibilities/accountabilities of the study positions, not simply job titles, and any other pertinent information (e.g., special certifications, years of experience) along with any distinguishing characteristic(s) of a particular position that might distinguish it from a typical benchmark to which it might be compared (e.g., a responsibility added to the position not usually associated with it or responsibility missing from the position that is usually associated with it).
  • The criteria used for selecting the organizations/types of organizations and positions that will be used for the competitive analysis. These criteria should be closely based upon and/or resemble the characteristics describing the above-mentioned subject organization and position(s) being studied, more specifically:
    • Same or related types of organizations
    • Appropriately “bracketed” by a group of somewhat smaller and larger sized organizations to obtain an adequate sample for a valid analysis
    • Comparable position(s) based on job role rather than just position title
    • Significant differences noted between subject and benchmark organization(s)/position(s) noted and the implications explained
  • The data analysis should be presented and explained in sufficient detail to support the conclusions reached. Supporting information should be made available in appendix exhibits that present ample evidence of the scope of data supporting the conclusions.

Any report used for support of compensation decision making should be distributed well enough in advance of the meeting to allow it to be reviewed by committee members and for questions to be prepared for the meeting. It is hard to imagine that it would not be possible for each person to arrive with a prepared list of questions about the report and/or its implications on the compensation.

Finally, the individual chairing the meeting or phone call should make a point of asking if members have any questions about the report or the decision prior to proposing any specific proposal for action or a vote upon it. Everyone needs to make an informed decision.

No questions about lunch until business is finished!

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

If a Product or Service is Delivered via the Internet, it’s Not Subject to Sales Tax, Right?

By Jeffrey Saltzberg, J.D.

As not-for-profit organizations try to meet the growing needs of members and non-members by selling products and services delivered via the Internet, they may not realize that such products and services are subject to sales and use tax in a number of states. If the organization has nexus in one or more of these states, it is required to collect sales tax on sales of these products and services. These taxable products and services include information services, software as a service and digital goods.

Many not-for-profit organizations provide access to a database of information or documents that can be accessed by all subscribers. This service may be treated as a taxable “information service” in some states. For example, in a 2015 New York Technical Service Bulletin, TSB-A-15(5)S, the New York State Department of Taxation and Finance (the Department) determined that a not-for-profit organization’s provision of a healthcare registry that provided healthcare providers and suppliers with access to a database that contained common standards to locate products and potential trading partners was an information service subject to New York state sales tax. The Department explained that the collecting, compiling and analyzing of information and reporting the information to others constituted a taxable information service under New York sales tax law. Furthermore, the Department stated that the service did not meet the statutory exclusion from the provision of information services because the information was not personal or individual in nature and could be substantially incorporated into reports furnished to others.

In addition to being subject to sales tax in New York, information services are taxable in a number of other states including, but not limited to, Ohio and Texas.

There is also a trend among not‑for‑profit organizations to provide cloud-based software that allows subscribers to analyze their own data. A growing number of states impose sales tax on such service as “software as a service.” The following describes the typical software as a service situation.

  1. The seller owns and operates the software application.
  2. The seller operates and maintains the server that hosts the software.
  3. Subscribers access the software application through the Internet. The software is not transferred to the subscriber, and the subscriber does not have the right to download, copy or modify the software.
  4. The seller bills subscribers for the use of the software.

The major factor in determining whether a service is software as a service or some other service for sales tax purposes is the amount of control that the subscriber has over the software’s features. The more control the user has over the software, the more likely the service will be characterized as software as a service. Some of the states that impose sales tax on software as a service include Massachusetts, New York, Pennsylvania, Ohio and Texas.

Finally, providing information digitally rather than on paper or CD does not exempt the sale from sales tax in a number of states. These states impose sales tax on “specified digital products.” These products include digital audio works, digital audiovisual works and digital books that are transferred electronically to a customer. Some of the states that impose sales tax on sales of digital goods include New Jersey, North Carolina, Ohio, Tennessee and Texas.


In order to avoid potential sales tax exposure, in addition to focusing on where they have sales tax nexus and are selling tangible items such as CDs and periodicals, not-for-profit organizations need to also examine where they are providing products and services delivered via the Internet to determine if those products and services are taxable in the various states in which the organization conducts activities.

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

2015 ACA IRS Filing Requirements

By Kimberly Flett, CPA, QPA, QKA

Nonprofit organizations are subject to Affordable Care Act (ACA) requirements similar to those that apply to for-profit organizations. While there are some positive aspects of the ACA, there are also several challenges in complying with both the employer and individual mandates. As there are no exceptions for tax-exempt organizations, nonprofits face the same opportunities and hurdles as for-profit companies. It is critical that nonprofit organizations are aware of both the benefits and potential pitfalls of ACA filing requirements.

The Pros

One of the most beneficial aspects of the ACA is that many nonprofit employers are eligible for the Small Business Tax Credit if they employ 25 or fewer full-time equivalent employees and average wages are less than $50,000, along with certain other requirements. The credit is applied against payroll taxes for up to 35 percent of the cost of health payments made by the employer. For 2015, employers must have purchased insurance on the Small Business Health Options Program (SHOP) exchange in order to qualify.

The Pitfalls

While this credit can be a boon to nonprofits, the calculations, filing and reporting requirements involved in claiming it are detailed and time consuming; it is important to involve an experienced tax advisor in this process.

The individual mandate of the ACA requires most taxpayers to have health insurance or pay a penalty, with some exceptions, such as income levels and minimal breaks in coverage. Known as Minimal Essential Coverage (MEC), these plans provide the necessary requirements under the ACA and can be obtained by plans purchased on the Health Insurance Marketplace, Medicare, Medicaid, CHIP, veteran plans and most employer-provided coverage. The Internal Revenue Service (IRS) relied on good faith when individual taxpayers verified they had minimum essential healthcare coverage on the 2014 Form 1040. However, beginning in 2015, in order to determine individual proof of coverage and satisfy the employer mandate, employers with more than 50 full-time equivalent employees, referred to as Applicable Large Employers (ALE), must submit informational reports to the IRS that summarize details about the healthcare benefits provided to employees. The appropriate information will demonstrate to the IRS not only whether an individual taxpayer has met the shared responsibility payment as part of the individual mandate, but also if the employer has met the requirements under the employer mandate.

The compliance forms known as 1095-B or 1095-C (depending on the size of the employer and type of coverage offered) needed to be distributed to employees by March 31, 2016. (Note that this due date was previously Feb. 1, 2016, but an extension was granted under IRS Notice 2016-4). If you have missed this deadline, you should focus on completing and distributing these forms as soon as possible. ALEs must distribute Form 1095-C to all employees regardless of whether they offer fully insured or self-funded insurance plans. Form 1095-B is issued to employees by the health insurance carrier, regardless of the number of employees. Because the process is complicated by special coding, it is important that employers provide accurate information in order to avoid a penalty from the IRS.

Form 1094-B and Form 1094-C are the transmittal forms that employers need to submit to the IRS by May 31, 2016, or June 30 2016, if the electronic filing requirement is met. Additionally, Form 1095-A is issued by the government to taxpayers who purchased healthcare on the exchange.

As mentioned above, the reporting requirements under the Affordable Care Act are similar to those for not-for-profit employers with virtually no distinction. Full-time employees (defined as working 30 hours or more weekly under the ACA) must be reported on the 1095-B or 1095-C series forms whether or not insurance is offered or chosen by the employee. Variable-hour employees determined to be full-time during a measurement period and part-time employees with coverage must also be reported. In particular, it can be complicated when there are a number of employees who fluctuate between full- and part-time working hours and are not covered by insurance, a fairly common situation in the nonprofit sector. Missing an offer of coverage for an employee who should otherwise be covered can trigger a penalty for employers under the ACA.

Coverage information on dependents, type of coverage and costs are listed by month for these reports. This can get complicated for situations where employees are hired mid-year, have been terminated or have a qualified change in status such as marriage or divorce.

Ultimately, the responsibility is on the plan sponsor to ensure the insurance carrier is providing the necessary forms and completing the employer filing requirements. If employers have not prepared for the 2015 filing year, now is the time to take action.

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

Liquidity: Can It Be the Difference between Success and Bankruptcy for NFPs?

By Adam Cole, CPA, and Lee Klumpp, CPA, CGMA

Before New York’s Federation Employment and Guidance Service (FEGS) filed for bankruptcy last year, nobody saw it coming. The legacy social services organization was 80 years old and had $260 million in revenues, but lurking behind those successes was a $20 million deficit. The nonprofit industry was rocked when nobody—not even the board and management—seemed to be aware of the liquidity and cash flow problems plaguing the organization.

The question everyone’s been asking is “how did this happen?” Answering it requires an understanding of the complexities of nonprofit financial statements, including the importance of liquidity, performance measures and net assets, and how the tracking of financial performance differs between private for-profit firms and not-for-profits (NFPs). And from there, how and why that could soon change under guidance from the Financial Accounting Standards Board (FASB).

In practical terms, liquidity is typically understood as the amount of cash and/or assets, such as short-term investments, held by a nonprofit organization that can be easily converted to cash for use in the immediate or near future. In other words, an entity is thought to be liquid if it has ready access to cash to meet its needs. An entity may be described as liquid because it holds cash directly or because it holds other liquid assets, such as money market accounts, certificates of deposit or other short-term investments that can readily be converted to cash. Some might describe an entity as liquid if it has ready access to cash, which can include borrowing power, lines of credit, etc. It’s worth noting, though, that access to cash through borrowing may create liquidity, but it is more akin to the concept of financial flexibility and is not a liquid asset that can be communicated in the statement of financial position at the measurement date.

Liquidity hasn’t historically been emphasized in nonprofit financial statements other than looking at how items are sequenced on the statement of financial position (balance sheet). Nonprofit finances have been akin to a black hole when it comes to liquidity because, to date, the FASB has not required that entities measure and report on liquidity. But that could all soon change for nonprofits. As the FASB Board redeliberates on its proposed Accounting Standards Update (ASU) on presentation and disclosure for Not-for-Profit Entities, it plans on looking at ways to provide meaningful and decision-useful information related to liquidity. Comments submitted on the proposed ASU have supported improving disclosures to provide decision-useful information for assessing liquidity, as well as other indicators of financial performance. Boards, lenders, creditors and, occasionally, big donors tend to be the biggest users of nonprofit financial statements. While mission and overhead typically face a great deal of scrutiny from all of these stakeholders, in our examination of failing nonprofit organizations, critical financial information around liquidity is opaque—or worse, not present at all.

In its redeliberations on the proposed ASU, the board discussed providing qualitative and quantitative information useful for assessing liquidity and potential alternatives and directed the staff to explore an alternative approach that would:

  • require qualitative information about how the NFP manages its liquidity and liquidity risks, and
  • allow for alternative ways of presenting quantitative information that would emphasize information about assets that are liquid and available at the balance sheet date.

Currently, one of the biggest problems for readers of nonprofit financial statements is that nonprofit financial statements do not read like for-profit financial statements, which emphasize financial performance and return on investment for stockholders. Nonprofits, which have no stockholders, are prohibited by the FASB’s Accounting Standards Codification from using phrases like “net income” or “operating income,” so their statements don’t provide much information on financial performance. This can have serious implications for stakeholders, internal and external, who are trying to glean information about the overall health and sustainability of the nonprofit organization. Additionally, nonprofits currently do not have standards or a framework to measure and report on key performance indicators (KPI) about financial performance. As part of its redeliberations, the board plans to look at how NFPs use operating measures and see if there is a way to improve disclosures for those NFPs that choose to present such a measure.

In 1989, FASB decided that it preferred the direct method to calculate cash flow, but still allowed nonprofits to use the indirect method, which is simpler to provide but gives little information about where cash comes from and where it goes. So far in its deliberations, the FASB has decided to allow nonprofits to use the direct method of measuring cash flow without having to present the reconciliation of change in net assets to cash provided or used in operating activities, which had previously been required if the NFP used the indirect method of cash flows.

Another recent redeliberation decision that FASB made is to require nonprofits to present better disclosures related to net assets with and without restrictions, in order to provide more meaningful information and a better understanding of the resources available to the organization versus resources that are set aside to meet a donor’s intent. Without that distinction, most of an organization’s net assets may be locked up in various ways-such as endowments, property and plant, or other restrictions or designations—which may lead stakeholders to falsely believe the funds are available for use when they are not.

While there are advantages to reporting on liquidity, there are also concerns nonprofits must address while FASB continues to fine-tune its requirements, including the effect this new information on cash flow could have on donors. An organization with faltering liquidity may either face skepticism from major donors or, conversely, it could see an influx of donations from supporters who see a dire need for resources. Moreover, a group flush with cash might have more trouble raising funds if donors start to direct donations toward organizations they perceive have a greater need. In any case, before any changes to financial reports become mandatory, nonprofit leaders should become keenly aware of their liquidity and cash flow situation and prepare to address their stakeholders accordingly.

Anytime there’s a transition, organizations will face some costs associated with transitioning. Organizations would need to get up to speed with the new reporting requirements, which might involve an investment in new systems and/or training. Fortunately for organizations, the changes FASB is considering will not add any expense over the longer term once these initial costs even out. Rather, they are simple measures intended to encourage better measurement and communication of liquidity on the part of nonprofit organizations. And most importantly, they are designed to help the users and readers of statements better understand the financial results, which is something that should ultimately benefit the financial health of nonprofits.

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

Wire Transfer Fraud: It Could Happen to You

By Jesse Daves

The article “Nonprofits, Don’t Get Caught in Phishing Schemes” (read the article here) outlines a deceptive breed of phishing scheme that has become common within the nonprofit sector. Specifically, in recent years, there has been a global surge in fraud schemes designed to trick companies into sending wire transfers to bank accounts set up for this fraudulent purpose, often in another country.

When learning about a scheme of this type, an organization should work with a seasoned investigative team and follow the steps below to quickly identify and remediate the fraud.

1. Preserve and Plan

Early in an investigation, it is critical to identify sources of potentially relevant data. Relevant sources include computers, email messages and attachments, mobile devices, network files and logs, as well as various accounting records. Once the sources of information are identified, developing a preservation and analysis plan, including proper “chain of custody” procedures, must be established. Make certain that evidence is properly preserved to maintain its integrity and defensibility.

2. Interview

A fraudster’s strategy relies upon human error and employee fallibility. An investigative team must understand the level of employee participation, if any, in the scam. Interviews of company employees are often conducted to determine whether an employee was a witness, victim or should be the subject of an investigation. Background checks, or investigative due diligence, are often conducted to determine if there are other factors that might influence decisions made by employees. An investigation should include a review of a company’s internal controls, especially those processes associated with executing wire transfers. Collaborating with counsel to address legal concerns involving employees, privilege issues or whistleblower matters is also prudent.

3. Analyze

Analyzing the following data points is key:

  • Wire transfer activity and related accounting records
  • Email messages and attachments
  • Network files
  • Mobile devices
  • Computers and hard drives
  • Phone records
  • Network logs and/or traffic
  • Internet research related to domain registration
  • Policies and procedures related to disbursements

An investigation should also rule out possible malware or other malicious software that may have resulted in an unauthorized intrusion.

4. Communicate

Communication with the relevant board members is essential, including regular updates about the investigative approach and findings. While employees may be stressed throughout the course of an investigation, board members will be keen on finding answers-—particularly about the internal controls environment and understanding the security measures surrounding their funds.

5. Recover

How much effort is warranted to recover funds lost in a fraudulent wire transfer? Fraudsters have become adept at disguising ownership of email addresses (domains) and bank accounts, especially those residing in foreign jurisdictions. An organization should determine if insurance coverage under fidelity bond or computer crime polices for this type of event may be a better option than recovery efforts. A report can also be filed with the Federal Bureau of Investigation to be considered among the growing number of reports filed each year by companies that are similarly defrauded.

6. Remediate and Prevent

It is important to uncover what happened, determine who was involved, identify the potential for recovery and create a remediation plan to mitigate similar fraud events in the future. Successful remediation plans close gaps in the internal controls environment, employ monitoring tools to detect intrusion and include training and education programs.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Winter 2015). Copyright © 2015 BDO USA, LLP. All rights reserved.

Good News for Private Foundations: Final Regulations on Good Faith Determinations Released

By Mike Sorrells, CPA

Private foundations face an obstacle when they wish to make grants to foreign organizations that have not been granted Section 501(c)(3) status by the IRS. In such situations, the foundations are required to either 1) exercise expenditure responsibility over the grant, or 2) have a good faith determination that the foreign organization would qualify as a Section 501(c)(3) public charity if it were a U.S. organization. Without one of these elements, the foreign grant will not be considered a qualifying distribution (i.e., counting toward minimum distribution requirements), and will result in excise taxes.

In the past, such equivalency determinations could only be made based on either an affidavit of the grantee or on an opinion of counsel from either the grantor or the grantee. Proposed regulations were released in 2012, which expanded the list of tax opinion providers to include “qualified tax practitioners”—in other words, certified public accountants and enrolled agents.

The final regulations released on Sept. 23, 2015, make permanent this expansion of persons who can provide the equivalency determination opinion. At the same time, the final regulations make it clear that foreign counsel can no longer make this determination, but that qualified tax practitioners may use foreign counsel to collect information or to advise on foreign law. The final regulations also limit how private foundations may use entity affidavits. Such affidavits may no longer be the sole means of meeting the good faith determination requirement. The regulations do allow such affidavits to be used as a cost-effective source of information by the qualified tax practitioner in making his or her tax opinion.

The final regulations also limit the reliance on written advice to two years, beginning on the date of the written advice, or the date of the factual information used in the written advice. The IRS also noted that when a foundation creates written advice regarding its good faith determination, that advice can be used by another foundation to make the same determination about a foreign entity, as long as the organization has knowledge about the qualified tax practitioner issuing the advice, and the practitioner has received all relevant information.

The final regulations should remove some of the barriers to making foreign grants, while still assuring that the good faith determinations are made with sufficient understanding of the law.

Has your organization gotten up to speed on these new grant regulations?


This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Winter 2015). Copyright © 2015 BDO USA, LLP. All rights reserved.


Nonprofits, Don’t Get Caught by Phishing Schemes

By Nidhi Rao

What are phishing schemes?

These deceptive messages can take the form of emails, phone calls or websites, and are designed to steal funds from an organization by tricking an employee into divulging confidential personal or business information such as a user name, password, bank account number, Social Security number or Employer Identification Number (EIN).

Phishing attacks most often appear as emails, but can also be conducted via instant messages or over the phone. While most organizations’ email services and firewalls are equipped with spam filters, cyber criminals can craft messages that appear trustworthy or impart a sense of urgency, and can sometimes penetrate security filters.

To give a sense of how innocuous phishing emails can appear, we’ve included an example chain here. Characteristics of a typical phishing email include:

  • Slight variations on an email address of the sender;
  • Misspellings and grammar mistakes; and/or
  • An urgent request to complete the task, i.e., “I need you to do this ASAP.”

Cyber criminals are persistent when devising new ways to capture sensitive information from unsuspecting individuals, and spam filters and firewalls are only the first line of protection against phishing schemes. To proactively mitigate these risks, organizations can take the following steps to protect themselves:

Educate employees – Provide training on the risks associated with phishing schemes and caution employees away from offering confidential information, such as user names and passwords, over email or executing banking transactions based on instructions received via email. Employees should be advised to follow internal company policies and procedures when executing transactions or sharing confidential information.

Institute two-party authentication controls – Electronic security and authentication controls are now offered within online banking systems, making it so that an individual initiating a wire transfer cannot also authorize the transfer. If these systems are in place, a wire transfer initiated by an unknowing victim of a phishing scheme cannot be executed until a second individual authorizes the transaction, thereby increasing the chance an error will be discovered.

Require verbal confirmation – Organizations can protect themselves by instructing employees to obtain verbal authorization, no matter how urgent the request might seem, from the sender of an email prior to processing a transaction such as a wire transfer.

Use a code word – If an organization regularly communicates requests to process transactions via email, a “secret word” can be established internally to include in all email transaction requests in order to differentiate a valid email from a phishing email. This should be a unique word or phrase agreed upon by the financial executive department and known only internally.

Additionally, it’s important to note that information technology (IT) staff should be notified if employees receive phishing emails, so that spam filters and firewall settings can be adjusted to mitigate the risk of future messages bypassing these defenses. If an organization does fall victim to a phishing scheme, it’s important to quickly investigate the source of the email. Given the ever-changing cyber landscape and the speed at which digital attack tactics evolve, utilizing approaches to mitigate risk from both an IT and a personnel perspective is an organization’s best line of defense. For more on investigative practices for a nonprofit once it learns it’s fallen victim to fraud, see page 8 for the article “Wire Transfer Fraud: It Could Happen To You.”

NFP Blog - Phishing Scheme

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Winter 2015). Copyright © 2015 BDO USA, LLP. All rights reserved.

Exempt Organizations’ IRS Priorities

By Laura Kalick, JD, LL.M. (Taxation)

Congress makes the laws, Treasury interprets the laws, and the Internal Revenue Service (IRS) enforces them and collects the revenue.

But because the IRS has a limited budget, it’s Tax Exempt and Government Entities Division (TE/GE) has set priorities for enforcement in 2016. In this article, we’ll review those priorities and discuss how tax-exempt organizations can focus their compliance efforts accordingly to avoid penalties up to and including loss of tax-exempt status.

TE/GE Priorities for FY 2016

In order to be more effective and efficient, TE/GE is taking steps to streamline processes, digitize information, and manage knowledge. Most significantly, the IRS is focusing on data-driven decision making—issues where it believes there is a greater risk of noncompliance and therefore, a greater return on its investment of time.

The IRS takes the position that tax exemption is a privilege and not a right. Therefore, the objective is to ensure that organizations that were granted tax-exempt status are in compliance with the tax laws.

With this objective in mind, their priorities list five main strategic areas of focus. In their efforts to pursue the outlined strategic areas, TE/GE will use various approaches, including:

  • Field examinations: In-person examinations.
  • Correspondence audits: This is where the IRS sends a letter to the organization asking the organization to send documents to the IRS by mail and to have phone conversations. These audits are usually more limited in scope but can become extensive and ultimately turn into field examinations.
  • Compliance checks: This is not an examination, but rather a check by the IRS to see if the organization has been properly reporting an item.
  • Compliance reviews: This is where the IRS follows up to see if certain actions, outlined by an organization, have been taken.

Even if your organization receives a notice that it is part of a compliance check, it is important to respond to all IRS correspondence, because the IRS could turn a compliance check into a full-blown field examination.

The highlights of the five strategic areas of focus are:

  1. Exemption: Issues include non-exempt purpose activity and private inurement, enforced primarily through field examinations.

Your organization filled out an application for exemption (either Form 1023 or 1024). If your organization is conducting activities other than those indicated on the form, ask yourself if they are related to exempt purposes. If the activity is unrelated to exempt purposes, is the income being reported as unrelated business income? Most importantly, does the activity constitute more than an insubstantial amount of the organization’s activities? The term insubstantial is not defined, so the facts and circumstances must be reviewed. More than an insubstantial amount of unrelated activity can cost an organization its exemption.

  1. Protection of Assets: Issues include self-dealing, excess benefit transactions, and loans to disqualified persons, and are enforced primarily through correspondence audits and field examinations.

Are transactions at arms-length and for fair-market value? Private foundations have strict rules as to what constitutes self-dealing, and it can be direct or indirect. Public charities and social welfare organizations can establish the rebuttable presumption of reasonableness so that transactions with disqualified persons can be vetted by independent persons and decisions can be made based on comparable data. If the decision-making process is contemporaneously recorded, the rebuttable presumption can be established, which would shift the burden of proof to the IRS to show that the transactions were unreasonable.

  1. Tax Gap: Issues include employment tax and Unrelated Business Income Tax (UBIT) liability, enforced through compliance checks, correspondence audits and field examinations.

These are the two biggest revenue generators for the IRS with respect to exempt organization compliance. The major issue for employment taxes is whether individuals have been properly classified as independent contractors as opposed to employees, and in any event, whether the proper forms were filed. The IRS, more often than not, prevails on these issues.

Regarding unrelated business income (UBI), the typical tactic that the IRS takes is to disallow losses from one activity to offset income from another activity if the loss activity has lost money for several years. In this instance, the IRS will take the position that there is no profit motive, which is a requirement for a trade or business. If there is no trade or business, then there cannot be an unrelated trade or business and therefore, those losses cannot be used to offset UBI.

  1. International: Issues include oversight on funds spent outside the U.S., including funds spent on potential terrorist activities, exempt organizations operating as foreign conduits and Report of Foreign Bank and Financial Accounts (FBAR) requirements. These are enforced through compliance reviews, compliance checks, correspondence audits and field examinations.

If a private foundation makes a grant to a foreign organization, it must either exercise expenditure responsibility over the grant or have an opinion from a qualified person that the foreign organization is the equivalent of a U.S. public charity (see related article on page 7).

Another concern regarding foreign organizations is that of a U.S. charity merely being a conduit to receive tax-deductible contributions that are going straight to the foreign charity without the board of the U.S. charity having discretion over the use of the funds. The potential abuse here is that only contributions to U.S. charities are tax-deductible for income tax purposes. Of course, the IRS is also concerned that charitable donations are being used to fund foreign terrorist organizations. The Office of Foreign Assets Control (OFAC) releases a List of Specially Designated Nationals and Blocked Persons with names of individuals and entities that may be engaged in terrorist activities. Organizations should check the lists prior to making grants and engage in procedures to ensure that foreign expenditures or grants are not diverted to support terrorism or other non-charitable activities. In addition, organizations should comply with all U.S. laws and orders that restrict activities with certain countries or individuals because of economic sanctions.

  1. Emerging issues: Issues include non-exempt charitable trusts and the Internal Revenue Code (IRC) section 501(r), enforced through compliance reviews, correspondence audits and field examinations.

Tax-exempt hospitals now have to be in compliance with Final Regulations under IRC section 501(r) for tax years beginning after Dec. 29, 2015. Congress has mandated that every tax-exempt hospital will be reviewed at least every three years to see if it is in compliance with the rules.

Also, the IRS will be looking at charitable trusts that are not exempt from tax to make sure that they are not violating rules, particularly since they are subject to some of the same requirements and restrictions that apply to private foundations.

In addition to the priorities of TE/GE, the Treasury listed 13 areas where it will provide priority guidance for exempt organizations, including allocation of expenses for dual-use facilities and a new method for charities to provide contemporaneous written acknowledgements (CWAs) for gifts greater than $250, according to the Federal Register. In this instance, the charity would have to collect Social Security numbers from donors in order to comply. Such a proposal could raise a number of concerns pertaining to cyber security risks.


The IRS has become much more efficient and effective in its examination activities related to exempt organizations. Although the examination rate is lower for exempt organizations than for other taxpayers, TE/GE is attempting to better target its examinations for improved results. One final note: the IRS still relies on trustworthy outside data and public information, so it’s important to make sure that your organization is accurately portrayed in the media and on its Form 990, which is a public document available on

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Winter 2015). Copyright © 2015 BDO USA, LLP. All rights reserved.