Posts Tagged ‘International

23
Dec
12

IFRS Update . . . again

The problem with having a specific interest in new accounting guidance early in the process is twofold, first, you can be tempted to overreact to each pulse and zig in the conversation. Second, you can get so tired of the back and forth you can lose interest in the issue entirely. I feel I am nearing this second phase with IFRS adoption/convergence in the US. Over the course of the last several years I’ve shared several of my thoughts on how this conversation is going and what the impact might be for not-for-profits. However after years of delay and non-events . . . I’m beginning to lose interest.

 
However, while I’m tempted to tune out IFRS news and dismiss the efforts because they have not yet lead to a single global standard, I think this attitude is premature and fails to celebrate the successes made. In this spirit I share the following article:

IFRS Foundation Trustee: Don’t wave white flag on cooperation

I was particularly struck by this line by James Quigley: “If the ambition is a single set of high-quality, globally accepted, and, in my view, principle-based standards, we’re closer now than we were five years ago, and five years from now, we’re going to be closer again.”

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15
Sep
11

A Summary of Foreign Currency Accounting

Foreign currency accounting and reporting can be broken into two categories: foreign currency transactions and foreign currency translation. Transaction guidance covers how to account for transactions denominated in a foreign currency. Translation guidance describes how to convert an entire set of books to a new reporting currency (for example when consolidating a foreign subsidiary)

Key Definitions

Functional Currency – the currency in which most of en entireties transactions are denominated.

Reporting Currency – The currency in which an entity reports its financial statements

Local Currency – the currency of a particular country being referenced.

Foreign Currency Transactions (ASC 830-20)

Most entities report in their functional currency. In these cases, when the organization enters into a transaction denominated in a currency other than its functional currency, it must initially measure the related assets, liabilities, revenue or expenses in its functional currency at the date the transaction is recognized using the exchange rate in effect that date.

When an organization has assets or liabilities which are denominated in a currency other than its reporting currency, fluctuations in exchange rates lead to foreign currency transaction gains or losses. Let’s take a look at an example: Imagine a US based company whose functional and reporting currencies are both the US Dollar has one bank account denominated in Canadian Dollars. Every month when the company closes its books it will mark the Canadian Dollar bank account to USD using the rate at the end of the month. This will almost certainly result in a gain or a loss even if there was no other activity in the account.

Foreign Currency Translations (ASC 830-30)

When consolidating foreign subsidiaries, a different type of foreign currency gain/loss occurs.  When subsidiaries are converted to reporting currency year over year there is also a gain or loss which occurs due to the fluctuation of exchange rates.

GAAP instructs practitioners to convert balance sheet accounts using the exchange rate at the balance sheet date. Income Statement transactions are to be converted using the exchange rate in effect on the recognition date for each transaction. (The FASB acknowledges that not all organizations have the systems, and processes in place to capture transaction date exchange rates for all income statement items. As a result, it is acceptable to utilize an appropriated weighted average exchange rate for the reporting period when converting income statement items).

19
Jan
11

Services-In-Kind at a Global Organization

Services-in-kind (SIK) are donated services to an organization, and can take many forms. Common forms of SIK include volunteer time, donated advertizing, donated space (free rent), and donated transportation or freight.

US GAAP (958-605-25-16)

US GAAP provides specific and fairly restrictive, guidance when it comes to recognizing donated services as revenue and expense. For volunteered time there are two criteria which must be met in order to recognize revenue and expense:

First, the volunteered services must require specialized knowledge or skills and the volunteer must have these specialized skills. For example, if an organization needed legal work done and received pro bono services from a lawyer, this criterion would be met. But if a lawyer volunteers to answer phones or paint an office, the criterion is not met. This criterion is also not fulfilled if the specialized skills do not match the requirements of the needed work; such as if an electrician did bookkeeping or (heaven forbid) an accountant did electrical work.

The second criterion which must also be met is that if the service were not donated, the organization would have purchased the service. So in the example above, if the donated legal services were so needed that the organization would have purchased them anyway then this criterion is met.

For donated volunteer services both criteria must be met in order to book the SIK.

There are other types of SIK beyond volunteers’ time. For items such as donated advertizing and free rent, the “specialized knowledge/skills” test is not applicable. However, it is important to note that the second test is still applicable. To book any SIK the organization must be able to say it would have purchased the service if it were not donated. Implied in this statement is the idea the organization could afford to purchase the service. Let’s look at an example. Here is a link to the United Way’s 2009 financial statements (click on the pdf for the 2009 consolidated financial statements, page 47, footnote 20). The United Way benefits from millions of dollars worth of donated advertizing from the National Football League. However, in their footnotes the United Way notes they could not afford to purchase this advertizing if it were not donated. As a result, they have rightly chosen not to book the revenue and expense.

This can lead to some unexpected results. Consider for a moment two identical not-for-profits  with identical fundraising strategies and budgets. (We’ll call them “A” and “B”). Now imagine that one of these charities (Charity “A”) receives donated advertizing which it would not have otherwise purchased (and therefore does not record as revenue). Charity A clearly benefits from the donated advertizing and can reach more donors than Charity B. As a result, it would seem revenue is conceptually understated as this benefit to the organization is never recorded on the statement of changes in net assets. But this has an impact on ratios as well. If Charity A had recognized revenue the offsetting debit would go to fundraising expense. As a result the overhead ratios between these two charities would be different. However, under US GAAP, Charity A benefits from more fundraising yet has identical fundraising costs and overhead as its peer.

International issues

SIK becomes more complicated in an international context. While US GAAP guidance is very specific, to my knowledge IFRS does not specifically address SIK (please leave me a comment if you disagree). As a result there is room for a wider range of practice. Many offices simply do not book SIK at all. In fact in some countries, Canada for example, recording SIK is prohibited by statutory requirements. Absent these restrictions, I think it is reasonable for an organization reporting under IFRS to reference to US GAAP under IAS 8 (see my previous post discusing this point). However, I realize this is a very U.S. centric view. I also realize there are limitations with the US GAAP approach (consider the Charity A example above). For these reasons, I think there is also room to argue that absent specific guidance under IFRS a charity could book SIK without considering whether or not it would have purchased the service anyway. This diversity of practice clouds comparability and global reporting, and makes it difficult for international organizations to set a global SIK policy.

24
May
10

International Charitable Work and Anti-terrorist Financing Guidelines – Part 2

This is Part 2 of a blog post specific to of international charitable distributions and compliance with U.S. regulations to deter anti-terrorist financing. Part 1 summarized the Treasury Anti-Terrorist Financing Guidelines (TATFG) and Part 2 will now discuss what some organizations are doing from a policy, internal control and process standpoint to ensure compliance with U.S. regulations. The scope of Part 2 of the blog post does not extend to the unique requirements of private foundations, which are subject to equivalency determinations or expenditure responsibility as designated by executive order pursuant to 22 U.S.C. 288 (Treas. Reg &53.4945-5(a)). Although public charities are not subject to equivalency determinations or expenditure responsibility, they still have to be able to prove that charitable distributions (domestic or international) serve the exempt purpose of the organization.

• Based on a limited survey, the environment related to international disbursements (grant-related and vendor-related) and compliance with the Patriot Act is described below:

o Most organizations are checking the OFAC list
o “Have not heard of anyone having a legitimate hit on the OFAC list”
o Typically organizations working in the field are a U.S. organization or are working with U.S. organizations
o Larger organizations have resources to send staff or to have local staff (e.g. field auditors) monitor situation on the ground
o Larger organizations are using a screening tool that assists with screening vendor and partner names
o Smaller organizations tend to rely on intermediaries and have personal relationships with those working in the field
o In the private foundation world, most organizations are performing expenditure responsibility procedures. There is a current proposal to the IRS for an equivalency determination repository that can be relied on by other charities.

• What organizations should do:

o Read Treasury Guidelines
o It is important for organizations first to do a cost-benefit analysis of adhering to the Treasury Guidelines (TATFG) as the guidelines can be onerous and the TATFG do no provide a safe harbor to organizations for failure to comply with the law.
o Establish adequate policies that address the following:
      Detailing expected compliance with relevant laws
      Clarity on who needs to be screened,
      Monitoring standards,
      Reporting standards for international grantmaking
      Procurement policies
      Exception processes (e.g. Follow up procedures if a vendor or partner name shows up on one of the lists)
o Ensure adequate documentation for the following:
      International disbursement, screening, due diligence and monitoring processes
      Details for each transaction such as:
         • Identification of how the funds are transmitted
         • Document the names of the people who will have control of the money and check in with them regularly
         • When the functional currency (currency of the gift/grant/donation) is converted to the operational   currency, is the amount whole?
         • Did the grant recipients get the money and how much did they get?
o Work with people that you know and make sure there are lots of touch points during the grant period so you have visibility in terms of what they are doing.
o Have someone you know on the ground that can help oversee operations and monitor (e.g. local chartered accountants).

• Resources

Principles of International Charity (Nonprofit Sector commentary on the TATFG)

Handbook on Counterterrorism Measures

Independent Sector

IRS

Interaction

Council on Foundations

Special thanks to Jane Searing, Shareholder, Clark Nuber PS, for providing valuable input for this blog post.

22
Apr
10

There is a reason why we do this.

Non-profits exist to serve a need in society. Where we operate is usually dictated by where there is a need. I work for a Christian Relief and Development organization. To serve those in poverty we operate in many international locations from A to Z (literally . . . Afghanistan to Zimbabwe).
Countries suffering from extreme poverty often have other factors which make operating challenging. These range widely: political corruption, underdeveloped infrastructure, poorly educated workforces due to a lack of local university systems, economies highly reliant on cash, frequent/high-risk natural disasters, etc. I should add that this is not just a nation/country issue, serving those in need often means challenging locations within a country: very rural, dense urban, areas just devastated by an earthquake, etc. I approach this topic from relief and development standpoint, but many other organizational missions would lead to operations in similar contexts (such as: environmental and conservation groups, religious or missionary organizations, education, etc.)
This a bit of a paradox for the non-profit finance professional. We in the accounting and audit professions preach the importance of sound internal controls; yet our organizations are called to work in some of the most challenging settings in which to build a sound control environment. So, what are we to do? We cannot hold back aid from those suffering, simply because of control risks; nor can we flippantly ignore the stewardship responsibility which comes with public donations. Our organizations must hold these responsibilities in tension. As finance professionals we must lead this effort.
So, now what? That theory lesson sounds great but there are real control risks to address! I’m not going to pretend I have this all figured out, but here are some good places to start:
1) Hire good people – Organizations should screen potential employees well. HR controls on the front end can build a competent and reliable workforce. Don’t misunderstand me. Trust is not an internal control. Certainly good people, when presented with opportunity, and motivation, can (and do) commit fraud. But sound hiring practices can keep bad apples from coming through the door to begin with, lowering this risk.
2) Standardize policies – Fixed policies across the organization eliminates exceptions and ambiguity. This makes monitoring easier. Standard policies also allow the organization to define how difficult circumstances should be treated before they arise.
3) Communicate policies and expectations – Standard policies do no good unless staff know what they are and where to find them.
4) Monitor – monitoring for compliance with policy is key. When monitoring takes place you have both a detective and a preventative control. You can catch noncompliance and remediate, and when people know they are monitored they are less likely to violate policy or commit fraud. Monitoring can be done through a formal Internal audit function and/or through segregation of duties and review.

08
Apr
10

International charitable work and anti-terrorist financing guidelines

I have wanted to write a blog post regarding the issue of international charitable distributions and compliance with U.S. regulations to deter anti-terrorist financing for sometime now. Particularly to find out what nonprofit organizations are doing from a policy, internal control and process standpoint to comply with Executive Order 13224 and the Patriot Act .

The Treasury Department has issued the Treasury Anti-Terrorist Financing Guidelines (TATFG), which are designed to enhance awareness of practices that charities may adopt to reduce the risk of terrorist financing or abuse. These guidelines were last revised in September 2006, are voluntary and do not provide a safe harbor for organizations in the event of non-compliance. As such, many nonprofit organizations have questioned the value and necessity of complying with all the guidelines given the burdensome internal effort required to implement all the recommended procedures.

This blog post will be written in two parts. Part 1 will summarize TATFG and Part 2 (which will be posted about 3-4 weeks from now) will discuss what some organizations are doing from a policy, internal control and process standpoint to ensure compliance. The scope of Part 2 of the blog post does not extend to the unique requirements of private foundations, which are subject to equivalency determinations or expenditure responsibility as designated by Executive Order pursuant to 22 U.S.C. &288 (Treas. Reg &53.4945-5(a)). Although public charities are not subject to equivalency determinations or expenditure responsibility, they still have to be able to prove that charitable distributions (domestic or international) serve the exempt purpose of the organization.

 

Summary of Treasury Anti-Terrorist Financing Guidelines (TATFG)

 

What is it?

• Issued by Treasury Department to assist nonprofits and grantmakers in complying with the Executive Order and the Patriot Act

o Executive Order 13224 – prohibits transactions with individuals and organizations deemed by the Executive Branch to be associated with terrorism and allows the government to freeze all assets controlled by or in the possession of these entities and those who support them

o Patriot Act – contains various measures directed at strengthening the Federal government’s ability to combat terrorism

• Designed to enhance awareness of practices that charities may adopt to reduce the risk of terrorist financing or abuse
• Guidelines are voluntary

 

What must you do?

• Comply with U.S. law including administered sanction programs – Office of Foreign Asset Control (OFAC)
• Check SDN list

 

What should you do?

• Practice Governance, Accountability and Transparency best practices

• Practice Financial Accountability and Transparency

• Perform Programmatic Verification

o Determining that the grantee has capacity to carry out grant purposes and protect resources from diversion

o Written agreement signed by grantor and grantee

o Ongoing monitoring of grantee and grant purposes

o Periodic reports on use of grant funds

o Grantee should have internal controls (processes) to mitigate risk of fund diversion

o Periodic on-site audits by the grantor 

• Anti-Terrorist Financing Best Practices

o Collect basic information about grantees

o Conduct basic vetting of grantees

o Conduct basic vetting of grantor’s own key employees

 

Other Resources:

Principles of International Charity (Nonprofit Sector commentary on the TATFG)

Handbook on Counterterrorism Measures

Independent Sector

IRS

Interaction

 

Please look out for Part 2 of this blog post coming out in about 3 weeks. In the meantime, I welcome comments about some of the things your organization or clients are doing in order to comply with anti-terrorist financing legislation.




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