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Financial Statement and Audit Considerations 2020

The business world has experienced significant changes over the past 3 months and will continue to see significant changes over the next few months and potentially permanent changes to business as we know it.

As a not-for-profit organization, we see some unique challenges which will need to be considered on an ongoing basis. The following represents financial statement areas with the audit consideration we have identified and related recommendations as well as tools and resources we have available that can help you address some of these common concerns and financial/audit issues. Please reach out to us directly to discuss any guidance or considerations further.

Financial Statement Audit Considerations

Area Considerations Recommendation Tools and Resources That Can Help
Contributions -Contributions Receivable and General Receivables
  • Benchmark discount rates for new multi-year pledges may fluctuate.
  • Collectability of contributions and general receivables may be in question.
  • Changes in mechanisms for soliciting gifts are changing and create the need to revisit the inputs and the compliance requirements.
  • Changes in donor behavior.
  • Internal controls may need to be added or strengthened on collection policies.
  • Organizations should revisit the benchmark discount rates on new contributions and pledges as the risk free rate of return rate may be impacted by market changes.
  • Long-term pledges that have multi-year payment schedules may change drastically due to changes in economic ability and discretionary spending of the donors and therefore you may need to revisit your allowance for uncollectible pledges and allowance for doubtful accounts.
  • Organizations should ramp up their collection efforts and maintain documentation of the collection efforts to support the allowance for doubtful accounts analysis.
  • Evaluate your mechanism to solicited and received contributions.
  • Revisit your social media policies and consider establishing a committee to evaluate how you approach charitable solicitation.
  • Consider establishing or revising your gift acceptance policies.
Withum revenue recognition webinar – link to view, here

Withum social media webinar – link to view here.

The New Normal: Business Preparedness Checklist

CARES Act Contains Increased AGI Limitations for Individuals and Businesses

Contribution Revenue Declines There are significant concerns in the not-for-profit community relating to the real possibility that public contribution revenue may be on the decline with the economic uncertainties heading forward. With fundraising events being cancelled or delayed, donors conserving their cash flow and with further potential economic declines, many organizations are evaluating how to maintain their operations with uncertain cash flows. Here are some considerations to accelerate revenue/cash:

  • Reach out to funders providing restricted grants (both time and purpose restricted) to modify those restrictions to allow for more flexibility;
  • If you are expecting payments from predictable funders scheduled more than a year out, one strategy is to approach them about granting their contributions early;
  • Approach individual contributors with a direct request to fill all or part of the funding gap;
  • Consider other services and alternative revenue streams as well as new ways to deliver existing services.
Foundations Pledge to Support Nonprofits

What Are My Nonprofit Funding Options Post PPP?

Functional Allocation of Expenses Many allocations of expenses by functional categories (programmatic, management and general, fundraising) are performed based on payroll costs, direct costs, square footage, etc.  Because work environments are moving to remote settings and employee’s job roles are changing, the allocations may be affected. Organizations should revisit how they allocate expenses and determine if any changes are necessary based on changes in work environment, operations or practices. ‘Same as last year’ does not work.

For example, if you are paying employees to sit idly by but they were a program person, where does that go?  If employees are no longer going to the office and working from home, how do you code your occupancy time?

Functional Expenses: A Revised Focus for Not-for-Profit Auditors

A Graphic Re-visioning of Nonprofit Overhead

Understanding Functional Expenses

Unrelated Business Income During these times, organizations may generate revenue from new sources or new activities due to changes in public contributions and other funding. New revenue streams should be analyzed for treatment as unrelated business income and documentation should be maintained regarding whether transactions are categorized as unrelated business income or not. Discussion with your tax advisor on UBI issues is important as there are estimated tax payment requirements for taxable income generated. Unrelated Business Income Background and Statistics

Unrelated Business Taxable Income

See also: IRS Publication 598

Investment Valuation and Net Assets Considerations Including Endowments Significant declines in investment values need to be analyzed as to whether they are temporary or permanent; additionally, valuations for investments not traded on an active market may be significantly impacted by the market changes.

As a result of COVID-19, organizations may be struggling financially and the required composition of assets to comply with donor restrictions may be difficult to maintain, resulting in underwater endowments which can impact an organization negatively.

Analyze your mechanism to capture fair value and evaluate whether changes are required and the GAAP requirements. Each investment vehicle should be reviewed and in certain cases, discussion with investment fund managers (in the case of investments in alternatives investments, hedge funds and private equity).

Remember:  ASU 2016-14 changed the reporting requirements and accounting for underwater endowments. The organization should revisit its investment policy and track endowments that go underwater for financial reporting purposes. The spending policy should be reviewed as part of this analysis.

Start evaluating the disclosure requirements and discuss with appropriate parties to avoid surprises late in the financial reporting process.

Consider reaching out to donors to have restrictions removed on funds to aid in liquidity needs.

Simplifying implementation of FASB’s not-for-profit financial reporting standard
CARES Act PPP Loan Considerations PPP loans were provided with provisions that the funds must be used for specific allowable purposes and if certain criteria are met, forgiveness can be attained. The rules and regulations are changing frequently.

These loans require you to account for these funds to avoid spending the PPP money on allowable expenses and charging it to another funding source for reimbursement (commonly referred to as “double dipping”). Double dipping funds can result in disallowance of the PPP loan forgiveness and potentially noncompliance with other funders.  Organizations will also need to have the ability to document the reported expenses to the bank to request and receive PPP loan forgiveness.

Lastly, the treatment of these loans needs to be evaluated as there are different interpretations of how to report these funds which may impact your 6/30/2020 financial statement which could cause covenant issues for any organizations with other bank credit agreements.

Keep in mind that functional expense reporting requirements don’t change.  Therefore, Not for Profit organizations need to establish a mechanism to track these expenses based on their function (either program, general and administrative or, fundraising) and develop a mechanism to capture those costs to avoid double dipping with any other funding sources.  The two common ways we have seen that can help here are utilizing a specific cost center for the loans and create contra-accounts on the chart of accounts so as to be able to carve them out for functional reporting and also be able to run a report to show what expenses are claimed against the PPP loans.

For treatment of PPP loan, look at the last article in the tools and resources section for current AICPA guidance.

SBA’s Paycheck Protection Program

Federal Reserve Outlines CARES Act Lending Programs for Mid-Size Businesses

SBA Issues PPP Loan Forgiveness Application

Coronavirus (COVID-19)

Resource Center

Webinar | PPP Loan Forgiveness

AICPA issues guidance on accounting for forgivable PPP loans

CARES Act Tax Deferral Many organizations elected to defer payment of employer FICA payroll taxes based on the program established in the CARES Act. We recommend organizations maintain documentation that tracks the amount of payroll taxes that were deferred as well as the board approval of the organization taking advantage of this program. Care to ensure that payments of the deferred payroll tax liability are tracked and implementing a policy to verify payments are made when required.  Although the payments are not due immediately, the liability will accrue as normal. Should You Defer Payroll Taxes If You Apply for a PPP Loan?
Foreign Currency Foreign currency exchange rates are significantly changing. You should monitor these changes and look at mechanisms to prevent significant losses on foreign currency transactions.  

Reference: risk assessment

Business Process Work continues to move from the traditional office to the virtual office environment. The traditional paper and labor-intensive control processes continue to stretch the resources of most employers. Electronic tools are becoming more prevalent and necessary to facilitate remote work environments. Map out your processes in writing or utilizing a software tool. This will help identify areas that can be automated and updated to facilitate remote work. Webinar | Three Easy Ways to Engage Staff and Manage Projects From Home

Microsoft Teams vs Zoom- Whose “Team” Are You On?

Infographic: Empowering Remote Work with Microsoft Teams

What Business Process Can I Automate Immediately Using Office 365?

Best Practices and Guidance for Remote Work with Microsoft Teams

Going Concern, Debt Coverings and Restructurings Many organizations are experiencing revenue declines, future economic uncertainty and changes in cash flow. As a reminder, the organization is required to evaluate the entity’s ability to continue as a going concern one year from the report date which may have a negative impact under current standards. Your auditor will request your assessment of going concerns during the audit.

Due to potential declining assets, e.g., the investments may be down significantly, organizations may find themselves out of compliance with debt covenants.

Prepare the necessary calculations and evaluate your entities ability to continue as a going concern by having cash flow budgets and other analysis prepared. Evaluate your access to liquidity and capital.

Contact your lenders to discuss negative operating results and what additional funding is available if additional liquidity is needed for short-term or long-term requirements.

Organizations may need to get waivers for violations on debt covenants or consider the need to restructure debt to take advantage of lower market rates. Organizations should ensure they are following the proper accounting and disclosures for these activities.

Evaluation of an Entity’s Ability to Continue as a Going Concern
SBA EIDL Loans The EIDL loan is considered a federal expenditure and required to be reported on the schedule of expenditures of federal awards. If you received an EIDL loan from the SBA, evaluate the dollar amount required to be reported on the schedule of expenditures of federal awards and any implications of the need for an audit in accordance with Uniform Guidance. SBA Business Valuations

SBA Financial Assistance Services

Single Audit Matching Requirements Many organizations have contracts that have required matching components. Due to changes in revenue, these matching requirements may be very difficult to meet. The organization should reach out to their funding source to determine how to approach the matching requirement and avoid any negative impact on their program compliance requirements. Refer to your government contract and the Uniform Guidance 2CFR200 for specific requirements.
Fundraising The CARES Act establishes a new, above-the-line deduction (universal or non-itemized deduction that applies to all taxpayers) for total charitable contributions of up to $300. The incentive applies to taxpayers for contributions made in 2020 and would be claimed on tax forms next year. Organization’s should consider utilizing this benefit to entice fundraising efforts from donors. Nonprofit Fundraising Strategies Amidst COVID-19
Revenue Recognition The FASB extended the implementation date for the accounting standard related to revenue recognition, Topic ASC 606 adoption for private companies. Organizations should evaluate and discuss whether they want to delay adoption of revenue recognition requirements. This only affects ASC topic 606 and does not affect ASC topic 958-605 (ASU 2018-08). Not-For-Profit Revenue Recognition Criteria

Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842)

Additional Considerations

  • Review your lease obligations and do an analysis to determine if there are any cost-saving opportunities to move from a physical work environment to a remote one, whether on a small scale or large scale.
  • Establish a solid “returning back to work” policy – Returning to the Workplace: Post-Pandemic Considerations – reference article, here.
  • Evaluate your business and look at risk assessment protocols– reference article, here.
  • Review your data and the dual bottom impact on each activity you perform. Consider the impact of each program and prioritize your resources.
  • Call your lender, banker, funding source and other compliance organizations to obtain potential extensions to relieve pressure.
  • Evaluate debt covenant requirements now and determine if there is any flexibility with your funding source.

Authors: Svetlana Sunden, CPA | ssunden@withum.com, Brad Caruso, CPA, CFE | bcaruso@withum.com and James Trubenbach-Byrne, CPA | jbyrne@withum.com

Not-for-Profit and Education Services

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