Archive for the 'Accounting' Category


Advice for Accounting Graduates and Students

Dear accounting graduates – Way to go!  I’m sure you are receiving an abundance of advice from your friends, family and faculty, but that won’t stop me from throwing in my two cents.  Why do you need one more opinion? I think its good for you to hear from those in the business you are joining as you make decisions and navigate these first steps outside of school.  I’ve also gathered advice from my accounting colleagues so you have many industry perspectives all right here.

The top two things I would advise:  First, bite the bullet and work in public accounting.  Second, don’t wait to sit for the CPA Exam.

Bite the bullet and work in public accounting.  Public accounting is a springboard for your future.  For those who have done this, the rewards of the experience outweigh the challenges it brings.  I worked at a medium size local firm and had a great experience in public accounting.  I liked this combination of firm because it allowed me to work on all aspects: tax, consulting, and audit start to finish.  While I didn’t prefer tax then and still don’t now, the exposure I received over my 5 years in public accounting equipped me for the future, and developed competencies I would otherwise have missed if I had gone to a larger firm where you chose either tax or audit.    

Don’t wait to sit for the CPA exam.  I know, I know, you just finished school.  You just finished studying and exams and maybe have even sold your books back already.  If you started in public accounting, the hours will be long.  But you JUST FINISHED SCHOOL.  Your foundation for the CPA exam won’t ever be this solid – don’t let it crumble before you start studying for the exam.

Ok, thats enough from me.  🙂 I’ve gathered advice from my accounting colleagues and want to share it with you.  We all have different backgrounds and experiences, but I value their perspective and know it will be important to you as you begin in your career. 

 Get your CPA licence and keep it active.  Even if you don’t want a long-term career in auditing, get some experience in this area.   It will give you a better perspective on how different businesses operate which will help you better determine what  you like (and don’t like) about the accounting/finance field.

– Stephenie

 My advice to accounting graduates is to not be afraid to be picky while choosing their first job. With the way the economy is, there is a lot of pressure to take the first job that is offered, because there is fear that another job may not come along. Although it is true that finding a job today can be difficult, it does not mean that it’s impossible. Spend time to think about what type of position and industry interests you, then pursue that type of position 100%. Focus on two or three jobs to apply to instead of many at once. By focusing on only a few job possibilities at once, you will be able to build real connections with the recruiters and employees in those companies. If you don’t already have connections within your target companies, you can build these connections by finding recruiters and other employees on Linkedin or at networking events, and asking them what type of applicants their looking for. Once you know what they’re looking for, you can determine if you’re a good fit, and how to present your skills in a way to help them understand why you are a good fit. Most professionals enjoy helping new graduates, and appreciate the initiative it takes to contact someone you don’t know.

– Rachel

 The main thing I would advise an Accounting graduate in a new job would be: Don’t be afraid to ask questions. This is an important concept as many accounting graduates, myself included, are afraid to ask questions because we don’t want to appear to be wrong, or appear to be incompetent. However, it should only be after you really have dug into a problem and need help arriving at a solution that you ask for guidance. Also when asking questions, make sure you thoroughly know the issue at hand.  That way, when a question is asked in connection to yours, you have the knowledge for an appropriate response. Additionally, it should be noted that it is okay to make mistakes at first, because the best way to learn is through trial and error.

– Stephen

There are many paths within the accounting field.  Find a job at a place where you can try out things like tax and audit.  And within those two broad paths, find out what interests you, and specialize in that.  In whatever job you find yourself, be smart, do great work, and get along with others, both co-workers and clients.  Be a team player. 

– B.W. 

My number one advice to any accounting graduate is to try out public accounting for a few years. Public Accounting gave me a wide range of exposure to different industries and improved my technical skills. It helped shape my communication skills and strengthen my ability to become a better team player. My second advice is be open minded about different accounting tasks. There is no job that is too small and too “immaterial.” For example, footing financial statement may seems like a boring job as a new associate but it gave me an opportunity to read through many companies’ financial statements. As a result, I got to ask lots of random questions I wouldn’t otherwise dare to bother managers or partners about during busy season. This in turn helped me build my technical skills and relationships with other managers who I may not have otherwise worked with.

– M.K.

Top 10 thoughts from E.W.:

1. Work for a CPA firm straight out of college – It fast tracks you to better jobs, gives you a variety of experience, and gives you time to figure out what you want to do for the rest of your career while quickly advancing your career.

2. Know what you’re getting into – Working at a CPA firm is tough and the rumors are true, you will face hard times and long hours and little respect, know what it is and work through it.

3. Apply to jobs appropriately – Tailor your resume specifically to the job you’re applying for, use keywords from the ad. Before the interview, research the company/firm you’re applying to, reach out to your alumni network, read every word of the website (that alone can land you a job). At the interview act interested in the job, ask appropriate questions.

4. Take the CPA exam as soon as possible – You may think you are busy now but you’re not. Your life will only get busier from here, take it while you have the chance.

5. Build a good reputation – The reputation of a CPA is probably more valuable than actual job skills, especially while working at a CPA firm. There are tons of resources available for tax and accounting issues, but no available resources will save your reputation.

6. Work on non-accounting skills – Technical accounting will probably make up less than 10% of your job in your career. Figure out how to use the accounting resources available to you then focus on other skills: sales, speaking, writing, relationship building, leadership, project management, etc.

7. Put in your hours – Putting in hours matters, particularly billable hours, and will carry a lot of weight for promotions and raises. If everyone else is staying late, stay late too. Don’t be the one leaving early.

8. Work hard and do what you’re toldThere’s a time and place for innovation and you’re going to need to innovate eventually. At first, though, no one want to hear about what the first year associate learned in their cost accounting class. Work hard, do what you’re told, build your reputation and respect among your peers.

9. Get involved in out of work activities with your co-workers – Play on one of the firm/company’s sports teams (but only if you’re good). Go to the happy hours and parties (but don’t get sloppy drunk, and yes, CPAs can drink A LOT, beware). You’ll need to be friendly with people to help build your reputation.

10. Build a relationship with a decision maker – At some point your firm will gather a group of managers/decision makers and they will decide the raises/promotions for the year. You need to know that there is someone in that room advocating for your promotion. Build a relationship with a manager or higher (without kissing up) who you can stick with and get pulled to the top, choose wisely.


And finally, an interesting perspective from an art school dropout:

Creativity > Intelligence

Let me explain: After receiving my accounting degree, mastering my technical competencies, moving through my career as an accountant, and later controllership, I realized I didn’t have just one narrowly focused talent. I wasn’t just good at math, I wasn’t just good at presentations, I wasn’t just good at understanding complex matters, I wasn’t just good at exercising my intelligence and critical thinking, but everything I learned to that point said that intelligence was paramount, and I had all the measures to prove it.

But I always thought… I have many talents and I want to know how to apply them to the fullest in my work. My epiphany came during graduate school MBA studies. I learned that everyone invited into the MBA cohort was smart, in fact, everyone was exceptionally intelligent. A GMAT in the 700′s was fairly normal, and everyone was a type A over-achiever, just like me.

But you know what truly differentiated us, what set us apart? It was creativity and the ability to summon it during critical times, right when it was most needed to get you out of a complex spot. This is what moved some ahead with momentum. That’s what I want to remind accounting graduates about. Don’t down play creativity in our work: creative problem solving, creative solutions to help the business achieve its goals, creative sessions and openness to innovation. Carve out time to innovate. Place a premium on creativity as you look forward in your career.

Unfortunately creativity, is not something that we encourage in accounting, it is not something that is lifted up as a rule, and there are many jokes about that. However, if you do not practice creativity, like anything that is not used, it will wither, and I think it is essential to lift up this competency and practice. Ideation and creativity is so important as you move down the continuum of your career.

– B.D.


Are Joint Costs Valid?

Charity Navigator last year issued a change to the financial metric reporting.  The tone of the statement by Charity Navigator brings up an interesting debate about what is or isn’t accurate reporting.   The statement by Charity Navigator is this:

“Joint Cost Allocation Adjustment

Generally Accepted Accounting Principles (GAAP) allow for organizations that follow SOP 98-2 or ASC 958-720-45 to report their specific joint costs from combined educational campaigns and fundraising solicitations and the IRS requires organizations to disclose this on the Form 990. In most cases, charities utilizing this technique allocate a small percentage of their solicitation costs to program expenses from fundraising expenses. However, we believe that donors are not generally aware of this accounting technique and that they would not embrace it if they knew a charity was employing it, nor does Charity Navigator. Therefore, as an advisor and advocate for donors, with rare exception, when we see charities using this technique we factor out the joint costs allocated to program expenses and add them to fundraising.”

Let’s break down this statement and address it in light of GAAP and IRS requirements:

“Generally Accepted Accounting Principles allow…utilizing this technique…”

This is an interesting choice of words by Charity Navigator.  They say that GAAP allow organizations to follow principles rather than require.  Charity Navigator is taking a stance here on where they see the importance of GAAP.  What they seem to be saying is that GAAP are a set of principles that are allowed, and organizations simply pick and choose which of the principles they would like to follow.  They also do not refer to them as accounting principles but rather, techniques, not a term I’ve heard used before.

I’d like to suggest that this is bad guidance to follow.  Don’t fall into the trap of thinking that you simply pick the principles that you like, follow those, and ignore the ones you don’t like.  If your organization has an activity that meets the criteria of joint costs/activities, you should report it as such.  Accounting records should not be massaged to influence watchdog rating criteria.

The guidance for Joint Activities is found in ASC 958-720-45, starting at paragraph 45-28.  Looking at paragraph 45-29, the guidance states, “If the criteria of purpose, audience, and content are met, the costs of a joint activity shall be classified as follows…”  The guidance here and in the following paragraphs does not seem to make any provision for organizations to elect or choose to follow this guidance.

For more information on accounting for joint costs, see our previous post Joint Costs and Joint Activities

For more information on functional expense reporting, see our previous post Functional Expense Reporting

The Form 990 line that Charity Navigator is referring to is Part IX, Line 26.  The instructions for this line refer only to specifics kinds of joint activities.  Per the Form 990 instructions, “An organization conducts a combined educational campaign and fundraising solicitation when it solicits contributions and includes, with the solicitation, educational material or other information that furthers a bona-fide non-fundraising exempt purpose of the organization.”  Given this specific criteria, it is possible that an organization would have joint costs allocations in their audited financial statements that would not be included on Line 26 of Part IX of the 990.  As always, check with your tax professional for advice.

“…charities…allocate…solicitation costs to program expenses…”

The wording that Charity Navigator uses to describe the process here, instantly influences the reader to a certain opinion as to what organizations are doing.  It’s subtle, but I think it’s important.  What CN is saying is that organizations are taking expenses from fundraising, and moving them to programs.  It makes it seem like organizations are doing some creative accounting.  But, this is not what is happening in most cases.

An organization following GAAP, is not moving expenses, but is rather reporting expenses in the correct bucket to begin with.  The expenses recorded under joint costs are program expenses because they are the expenses for running programs.  They are not fundraising expenses and therefore cannot have been moved from fundraising to programs.  By framing these expenses as having been moved, it places doubt in the mind of the reader as to the validity of the joint costs.  However, most organizations reporting joint costs are simply accurately reporting their expenses, and not moving anything.

Joint costs, along with the functional expense allocations in general, can and will be manipulated by some charities.  I’m not so naive as to think this doesn’t happen.  However, CN is singling out one line on the Form 990 as being “bad” (the only line they single out on the 990) and worthy of arbitrary reallocation with no input by charities as to the nature of the expenses.

“…add them to fundraising.”

Charity Navigator, once identifying all joint costs as invalid, takes the additional step of deciding for charities where the program costs should then be moved to.  They have decided on fundraising.  Given that joint costs can be programs, fundraising, or management & general, I find it curious that they have been able to determine that all program costs should be moved to fundraising, and not some or all to M&G.  Since the amount of costs spent on fundraising is a key metric for CN, representing about a third of the financial rating of an organization, this change could be critical for some organizations.

The risk that CN is trying to address is stopping organizations from misstating their functional expenses.  However, if an organization is already misstating their functional expenses, they will likely just stop reporting anything on Line 26 and easily avoid the new CN criteria.  The risk CN is trying to address will likely not be addressed with this change, it only hurts the organizations that are being truthful in their reporting and are following GAAP.

“…donors are not generally aware…”

Charity Navigator’s justification for this change is not a justification I would follow for the purposes of financial reporting.  The reason they give for altering charities’ financial statements is that (1) donors are not aware of it, (2) donors would not embrace the practice, and (3) CN does not embrace the practice.  In other words, CN does not approve of GAAP, therefore they are making the assumption that donors do not either, not that the donors are aware of it anyway.

Donor opinions are important and valid in determining practices in many areas of fundraising.  However, this is probably not sound practice for determining whether or not to follow GAAP.  The vast majority of donors do not understand most if not all accounting principles.  For instance, members of the general public likely don’t understand the Black-Scholes method for valuing stock options, but that doesn’t mean that the SEC should restate the financial statements of all companies that follow it.  Donors likely do not understand joint cost allocations or any of the functional expense allocations; therefore, it makes a very poor reason to restate organizations’ financials.

Why then is Charity Navigator making this change?

The answer can be found on Ken Berger’s blog, “Ken’s Commentary”.  Ken Berger, the president of Charity Navigator, was interviewed by Anderson Cooper.  During that interview, Cooper pointed out that CN had given a favorable 3 star rating to the National Veteran’s Foundation, an organization under investigation for shady fundraising practices, and asked if CN would review their rating.  Looking at NVF’s Form 990, you’ll find that 76% of their expenses are reported as joint costs.  It appears that CN’s reaction to being called out by Anderson Cooper was to address the low-hanging fruit: joint costs.  Ken Berger makes the statement in the comments of his blog that “We made a substantial upgrade of our metrics to minimize the chance we would run into a situation like this again.”  The addition of the joint cost adjustment was the only change to the CN metrics in 2012; therefore it is assumed this is what he is referring to.  By reallocating NVF’s joint costs, their rating was dropped to zero, and the problem resolved.  Unfortunately, the treatment given to this one bad apple seems to have been applied to all charities.

(Update 2.25.13 – In this article by the Chronicle of Philanthropy, Ken Berger states that about 50 charities lost ‘stars’ as a result of the rating change.  CN has gone back and reevaluated those charities by examining their websites to check for significant focus on education, and if so, reversed the rating change.  Of those 50, 11 charities have had the joint cost reallocation reversed and ‘stars’ restored.)

The number of watchdog groups is growing, and their influence and popularity is growing.  The work that they do to inform and educate donors is important, however, I urge you, do not let watchdog criteria decide your accounting practices and especially not your programmatic goals.  Follow GAAP, follow IRS guidelines, and report your finances truthfully.


Public Accounting vs Private Accounting: Making the Transition

My colleague, Uma, recently posed about the question brilliance or consistency.  It reminded me of a discussion I often have with staff accountants who move from public to private accounting.  Accuracy or speed?  They are used to “passing” on large adjustments and may find the transition to private difficult where materiality is much smaller.   They often question why they need to sharpen their accuracy skills in their new role.  Public accounts focus on a certain view of materiality, but as private accountants, they need a new perspective.

Here’s how I view it from the private side:

To do or not to do – that is the question.  When you assess materiality on the private side, you often need to start with saying “will this process have a material effect on our organization’s financial reporting?” – period.  Assess the materiality of the process, not the transaction.  If the effort will not materially impact financial reporting (it may have other management or risk mitigation benefits to consider separately), then its possible the effort may be removed from the process.   One example is straight lining leases – organizations could evaluate the materiality of reporting leases on a monthly accrual basis instead of straight lining them over the life of the lease.  If there is no material impact on straight lining, it may not be worth the effort to make the adjustments monthly.  Instead, opt to calculate the materiality of the departure from GAAP and document the immateriality of the decision.  Don’t forget to reassess materiality at a regular interval, such as annually.

 If you’re gonna do something – do it right.  Ok, so you’ve made the decision a process is necessary and material.  Private accountants are kind of like baking soda – one small mistake, and the whole cake doesn’t rise.  We’re responsible to ensure we arrive at year-end without material misstatements. If you overlook the small things throughout the year, or let reconciling or accuracy slide, you may take away any room for judgment calls at year-end around materiality because the materiality level has already been absorbed by the small errors throughout the year.  Additionally, if small errors are making their way through, its difficult to prove large errors are prevented.  If you’re gonna do something – do it right.  If there is a situation when you decide the best judgment is to deviate from policy, document why you are making the exception and the immateriality to isolate the transaction.

Don’t forget to step back and look at the big picture.  The transition to private may put you into the weeds.  It takes a year to prepare for auditors for a reason – there are a number of transactions to assess, process, and allocate.  But don’t get stuck there – remember to take a step back and look at the big picture.  Do you analyze the work you’re processing?  Does it make sense in the big picture?  Do you understand what the inputs are, what the risks to completeness or accuracy are?  Don’t get so bogged down accounting for the volumes as fast as you can that you miss the opportunity to make sure it all still makes sense.  Stopping to analyze may seem like a speed bump when you’re trying to get to done, but in reality, it’s a springboard to accuracy and the path to immateriality.


Reporting on Capital Expenditures . . . or . . . Budgeting Fixed Assets

Last week I was having an interesting conversation with a friend in our budget and analysis department. We were discussing the best way to budget and report on capital purchases. I realized that we can’t be the only accountant and financial analyst to struggle with the best way to treat fixed assets. I also expect many of you have mastered this years ago; but I’m sharing the basics of our conversation here in the hope that some of you also find it useful or interesting.

The concept of capitalizing fixed assets and recording regular depreciation is well established in GAAP accounting. Most accountants can flash back to their first accounting professor using equipment to demonstrate the matching principle. Likewise we would all have some explaining to do to our auditors if we told them we didn’t capitalize fixed assets. GAAP reporting is understood (at least by accountants) . . . so I’m setting it aside for this conversation.

The conversation gets more interesting when we talk about how an organization chooses to budget and report on fixed assets internally. My conversation contrasted two methods of planning and reporting on fixed assets for management purposes. The first is to mirror GAAP accounting when budgeting. Under this approach fixed assets are tracked by department, and budget managers see ongoing depreciation expense in their monthly reporting. The second method is to expense all fixed assets at time of purchase (for budget and internal reporting purposes). Department managers would budget the full amount of the initial purchase, but would not consider ongoing depreciation.

Let’s explore this capital expenditure method a little more. I like this method because it is simple and easy for non-finance managers to understand. Shocking as it is to my little accounting soul, it turns out that not every manager would automatically think to budget depreciation for the next five years after purchasing a new copier. The capital expenditure method allows managers to budget as money is spent. This brings me to the next advantage. Generally the capital expenditure method follows cash flow. This is how most people think when budgeting.

Not surprisingly, what is easy for non-accountants requires some extra work from the finance side of the house. In case you were wondering how this method is compliant with GAAP reporting, here is how it works: When a fixed asset is purchased, it is booked as debit to a capital expenditure account and to the purchasing manager’s department/cost center (Debit expense, Credit Cash). At least once a month all activity in the capital expenditure account is credited, using a non-reporting department/cost center. The offsetting debit goes to fixed assets (Debit fixed asset, credit expense). Accounting tracks and records depreciation expense as usual, recording the expense to the same non-reporting department/cost center. We call this department “accounting use only” and both the budget and accounting teams know that its sole purpose is to re-class capital expenditures to the balance sheet and record depreciation.

The “mirror GAAP” method of budgeting for fixed assets also has some advantages. We already discussed how this method has straight forward accounting. In addition mirroring GAAP highlights capital assets and their long term nature to budget managers because depreciation expense continues to impact their budgets and reports for years after an initial purchase. For this reason this approach works well in organizations that have developed a robust capital budgeting program, to track, prioritize, approve, fund, and monitor long term investments in the business.

I see two potential disadvantages to the GAAP style approach to budgeting for fixed assets. The first is that expense trails cash flow. This can lead to liquidity challenges. Now liquidity can certainly be tracked (and arguably should be tracked) and managed independently of the budget and reporting of expenses. However, human nature often seeks to pay for today’s purchases with future budgets. (Examples include J. Wellington Wimpy – “I’ll gladly pay you Tuesday for a hamburger today” . . . and the national debt of every democracy I’m familiar with). Therefore, caution should be exercised to make sure that the organization has revenue or reserves to cash flow expenditures which will be charged against future budgets.

The second potential disadvantage is that if managers’ budgets continue to be impacted by ongoing depreciation, this may lead them to make future decisions based on sunk costs. Although, as I think about it further, it is probably unfair to bring this into the conversation. After all if your managers make decisions based on sunk costs, the fault is probably with the managers, and not the reporting model.

Both models can be appropriate for different organizations at different times. Factors to consider in choosing between them include:
• The level and importance of capital expenditures to the organization
• The maturity and sophistication of the organizations budget managers
• The maturity and sophistication of the organizations accounting team
• How the organization manages its cash flow, and its general liquidity position.


Draft NFP Audit and Accounting Guide Released

*UPDATED 8/30/12 9:08am*

The AICPA has recently released their draft of the overhauled Not-for-profit Audit and Accounting Guide, and made it available for download and comment.  Unfortunately, the draft is not a redline version, so figuring out what has changed can be a little tricky in the 476 page document.

An article posted by the Journal of Accountancy gives some insight into changes included in the draft, and hopefully more articles come out soon by people who have time to cross reference the new draft with the old guide:

  • A greatly expanded section about reporting relationships with other entities. The guide will provide guidance and examples for reporting relationships with not-for-profit and for-profit corporations, limited liability partnerships, general partnerships, and financially interrelated entities.
  • New sections about reporting and measuring noncash gifts, including gifts in kind; contributions of fundraising materials, informational materials, advertising, and media time or space; below-market interest rate loans; and bargain purchases.
  • A greatly expanded section about municipal bond debt, including IRS considerations, third-party credit enhancements, capitalization of interest, extinguishments and debt modifications, and the effects of terms such as subjective acceleration clauses on the classification of debt.
  • New guidance for reporting the expiration of donor-imposed restrictions.
  • New section on the administrative costs of restricted contributions.
  • New section on programmatic investments.
  • Greatly expanded discussion about the legal and regulatory environment in which not-for-profit entities operate.

While there is sure to be many topics for discussion regarding the new draft (and I’ll leave topics for my fellow bloggers), there was one change I noticed that stood out to me as being a significant change.

Contributed Advertising Airtime

Paragraph 5.159 states two things:

1. “…the use of property, utilities, or advertising time are considered to be forms of contributed assets, rather than contributed services.

2. Recognition of advertising time as a contribution received “is unaffected by (a) whether the NFP could afford to purchase them or (B) whether they would typically need to be purchased by the NFP if they had not been provided by the contribution.

In current practice, contributed airtime is considered to be a contributed service and therefore, subject to the more stringent rules regarding recognition, namely that the organization must have been able to otherwise purchase and would have purchased.  This means that millions of dollars of previously unrecognized revenue and fundraising expenses, would theoretically now be recognized if organizations were to follow this guidance.

To see the effect of this, lets use an extreme example, the United Way.  For the year ended 6/30/10, the United Way recognized the following:

Total Revenue: 92,385,000

Program services expense:  85,456,000

General and Administrative expenses: 7,448,000

Fund-raising expenses: 2,090,000

Total Expenses: 94,994,000

*All numbers taken from United Way’s Financial statements for June 30, 2010, available here

In footnote 23, they also list three types of donated advertising that they receive which totals ~$65 million.  However, they currently do not recognize this as revenue because of “UWW’s inability to purchase such advertising.”  If these donations are now to be considered contributed assets, then the criteria for ability to pay would no longer apply and all would be recorded as revenue.  An open question would be whether this airtime would subsequently be considered a fundraising expense or a program service; but to make a more dramatic example, lets was considered it to be fundraising expense.  Their financials would dramatically change and might look something like this:

Total Revenue: 157,385,000

Program services expense:  85,456,000

General and Administrative expenses: 7,448,000

Fund-raising expenses: 67,090,000

Total Expenses: 159,994,000

*Please note these numbers are used only to provide an example and do not imply that this is the way United Way would record their revenue in the future or that United Way is under any obligation to follow this guidance

Revenue for the United Way would increase 70% to over $150 million and the fundraising ratio could potentially increase from just 2% to 42%.  Granted, most organizations do not have nearly as much donated airtime as United Way, and all this air time could possibly be considered program services, but this shows the extreme that this guidance could be taken.  Many organizations do receive donated airtime and there could be increases in revenue for several organizations.

The 990 Effect

The question that then comes to mind is, how does this affect the 990?  On the 990 contributed services are excluded from revenue/expense but other non-cash gifts are included.  The instructions for the 2011 form, Part VIII Statement of Revenue state “Contributions do not include…donations of services (such as the value of donated advertising space or broadcast air time).”  So as of now, donated air time is still excluded from the 990, but it will be interesting to see if the IRS follows the new guidance or remains different.  If the 990 stays the same, then we’ll have to watch for organizations that possibly could show large differences between their financial statement revenue and their 990 revenue.

The 990 is additionally important as it is the document that is used by watchdog organizations for evaluating charities.  While organizations financial statements may show a significant change, their 990 would likely stay the same.

In conclusion, it appears that this update to the Audit and Accounting Guide should be reviewed closely by organizations to see how the changes could affect them.  For those organizations that receive non-cash gifts, both assets and services, chapter 5 especially should be reviewed.  I’ll eagerly await other’s articles as more changes are found and discussed.


The Future of Not-For-Profit Financial Statements

There are several recent developments which are likely going to have a significant impact on how nonprofit financial statements will look in the future: The establishment of the Private Company Council, the future of IFRS, and new projects added to the FASB agenda as a result of the efforts of the Not-for-profit Advisory Council.

I wrote previously about the debate about how FASB and the FAF should accommodate the needs of private companies. After the debate, letter writing campaigns, and press releases, the conversation settled down to what seems like a compromise: There is a new Private Company Council (PCC) which does not have any FASB member on it. This PCC will examine current and new GAAP standards looking for changes, exceptions and practical expedients for private companies. The PCC’s recommendations are subject to a simple majority approval by the FASB. It is important to note that Not-for-profits are not considered private companies and will not directly be affected by the work of the PCC. However there are two ways the PCC could impact NFP financial reporting. First, I suspect that the work of the PCC will highlight the resource constraints of private companies which will also bring attention to NFP resource constraints. Second, I think that the PCC work will result in practical expedients which will be logical for FASB to extend to NFPS as well.

Another area of change has been the broader talk of US entities moving to IFRS. It seems like it has been years that we have been waiting for the SEC to state a clear direction for public companies. We are still waiting, but there has been a shift in the perceived direction of the conversations. (Here is a great article on the latest IFRS developments, if you are interested) While it may still be possible that the US will go to IFRS at some point, if we do I think that we will likely retain a strong “US flavor”. It is likely that the FASB will retain independent standard setting authority. This may mean that some of the areas where US GAAP has more detailed guidance will remain in effect. ASC 958 for nonprofits is a great example of this.

The most industry specific changes are likely to come from the latest work of the FASB’s Not-for-profit Adversary Council (NAC). The NAC just completed a review of the not-for-profit financial reporting model. There has been some thought in the industry that FAS 116 & FAS 117 should be reviewed and perhaps refreshed or updated. The NAC divided their efforts into three areas:

  • Reporting Financial Performance – This group focused on reporting the results of the period paying particular attention to the statement of activities and statement of cash flows. The group agreed that there was room to improve the reporting of finance performance. One topic often raised for discussion is the idea that NFP’s should have some sort of operating measure (like net income) rather than merely reporting changes in net assets. The challenge with this concept is to find an operating measure(s) which is relevant across the diversity of NFPs. What is meaningful for a university is likely not as relevant for a conservation organization or food bank.
  • Liquidity and Financial Health – There is general agreement that liquidity information is both important, and not as clear as it could be under current GAAP. The NAC recommended that the FASB revisit the current net asset classifications and also consider alternate methods of improving liquidity information.
  • “Telling the Story” – Donors are very interested in what an NFP does, and how effective it is. These interests sparked a conversation about whether GAAP should require some form of MD&A for not-for-profits to expand the story of the organization in the financial statements. Of course organizations can voluntarily do this now, and many organizations produce annual reports highlighting programmatic accomplishments. However, the question is if there is value in standardizing and requiring this information under GAAP.

As a result of the NAC’s recommendations the FASB has added three new NFP standard setting projects on its agenda. These are:

  • Reexamine net asset classifications and improve liquidity information
  • Improve reporting of financial performance
  • Streamline and improve NFP-specific disclosures

In addition, the FASB has committed to do further research on the concept of an MD&A for NFPs. This research may or may not result in a future standard setting project.

So, it appears we are in the beginning of a season of change in nonprofit financial reporting. Now is a great time to make yourself heard. Be aware of these projects, and provide feedback and comments as you have them.


Creating a desk manual

This topic isn’t unique to accountants, or even non-profits, but it is an important part of a good internal control system.  If you come from public accounting, a desk manual might not be something you think about because you’re used to having access to prior year client files.  However, when you enter private accounting, prior year records or even prior month records may be difficult to access or understand.  Below I’ve listed what I think are some of the top reasons why you should prepare and maintain desk manuals along with a few lessons I’ve learned along the way about what to include this manual.

What are the benefits to having a current desk manual

  • It ensures continuity while staff are out on leave
  • It provides the manager visibility into a staff’s process and allows for feedback and input to support the staff with effective, efficient processes
  • While writing the manual, it provides the staff an opportunity to think critically about their own activities and consider what could be improved
  • It is a quick resource for ad-hoc training or cross-training needs
  • When done well, it provides management with more agile resourcing.  If a desk manual documents unique responsibilities or functions separately, it allows agile resourcing because a portion of a job may be more easily transferred to another accountant to help balance out peaks and valleys among the staff.

What should be included in a desk manual?

The What – A basic desk manual should document what needs to be done.  It is said that a picture is worth a thousand words, and that is certainly true in this context.  Screen shots of systems, reports, processes or activities provide for a user-friendly visual desk manual.  If you want to
take a manual to the next level for a reasonable cost, Snagit is an example of a great program for ad-hoc screen shot editing.

The When – Make sure the desk manual documents how frequently processes or activities should occur.  Don’t forget to capture those activities that occur only at the quarter or year-end.  The less frequent they occur, the more likely they will be overlooked during training.

The Why – In public accounting you likely have documentation around not only what procedures were performed, but also why you completed a certain audit step, why you determined outliers were immaterial or not representative of the population, or why you arrived at the conclusions you reached from the test work.  In private accounting this type of “why” documentation may be minimal or absent altogether.  A desk manual provides more then just a record of what to do, it is a great place to document why and alternatively help answer the question why not?  It’s as important to know when to do something as it is to be able to distinguish when not to do something.  The firm I worked at used the term “SALY” to describe doing something just the Same As Last Year.  SALY is often a great place to start.  However, business processes change, exceptions occur, and accounts are the first line of defense for identifying and asking about transactions that might need to be modified because the activity or accounting standard is no longer the same as last year. 

The How – Don’t forget to include documentation about where files are saved, what programs are needed to accomplish the tasks, and who provide the various sources of information.  Documentation about how to get the job done will make the process go smoother when staff is unexpectedly out.

Contacts – What better place to store details about sources and users of information then a desk manual? 

Applicable standards or reference guides – Recognizing that accounting is often grey, include in the desk manual any applicable accounting standards or internal reference guides that apply to the activities as well as any interpretations of the standards which are specific to the business.  (If accounting policies are maintained separately, include in the desk manual a reference to the applicable accounting policies which capture this information.)

Key red flags – I’ve heard it said that “we stand on the shoulders of those who have come before us.”  By documenting red flags in the manual, you allow those who follow next in a staff’s footsteps to learn from the issues that have come up before. 

Finally, don’t forget the maintenance.  Its easy to let desk manuals go stale, but a manual is only as good as the information it contains.  Make maintenance an important priority.  Have someone other then the staff who prepared the manual review it at a minimum every 24 months or when a new staff begins working in the job.

I’ve included a sample segment from a fixed asset desk manual as an example.  I hope you find this useful as you consider how to use desk manuals to benefit your organization.


October 2018
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