FAQs from our “New Nonprofit Reporting Standards” Webinar
posted Oct 13, 2017 by Sandy Ross, CPA, CFE in the Mission Matters Blog
We recently hosted a webinar explaining some of the changes ahead in nonprofit reporting. If you missed it, don’t fret. You can access a recording here or reach out to us for further guidance. Below are a few questions, and the answers, that were submitted by attendees during the webinar.
Q: What are some of the internal investment expenses that we can include as part of investment return?
A: Costs associated with internal expenses (salary, benefits, travel, etc.) along with other costs associated with staff time related to planning and execution of investment strategy. This does not include any aspects of managing an endowment; by that I mean dealing with distributions and appropriations.
Q: Can you give me an example of how to allocate office expense on the functional expense report?
A: That actually really depends on the organization. What we typically see is that office expense is based on whatever the largest expense is. For example if I have 50% of employees that are program related staff and they use the office expense in the same rate that the administrative staff works, they would use time sheet allocation as the basis to allocate office expenses. The exception is direct expenses that are specifically purchased and used for a specific function, like the purchase of notebooks for a student at a school or paper for a classroom would be allocated to the classroom or education program.
Q: How do we track the net assets restrictions using these new accounting standards?
A: Basically, internally the recording of activity is going to remain consistent with the current practices. The major change is in the reference to the restrictions. We will no longer use the terms unrestricted, temporarily or permanent restricted in the financial statements.
Q: We have many individuals that are funded through several different contracts, the staff working with these individuals are staffing the individuals for all of the services they are funded for throughout their work day. What is the best practice for allocating these employees?
A: The best way to track labor is through the time sheets, time keeping system or a labor distribution system. If an employee is working in a specific program, that’s how you’ll document that person’s time for that day. When you have an employee funded under different contracts, the direct service employee doesn’t need to be managing the contract that should be left to the accounting and billing department.
Several of our clients have modified their timesheets to include the patient or individual the employee is working with. The timesheet is then approved by their direct supervisor. For example, the employee would note on their timesheet that they worked with John Smith from 7a-12p then worked with Jane Doe from 1-2p. The time sheet now has information to support services provided to John Smith who is funded under contract A and Jane Doe who is funded under contract B. The accounting department also has support for the allocation of salaries and related expenses. The right timesheet format really depends on the complexity of services. Modifications can be made to existing procedures to support the allocation. We have seen many organizations choose a very manual process or an automated process and both have worked successfully. Each situation needs to be tailored to the needs of the organization.
Q: Could you expand on the comment made that Admin allocation using one line will not be appropriate?
A: Admin allocation is not a natural class it is a total allocation of grouped expenses. What happens in admin allocation is that several accounts will be totaled such as salaries, benefits, rent, etc. and an allocation of the total will be made to each function. These allocated totals were reported in a line item in the statement of functional expenses as administrative allocation rather than the natural class of expense. There has to be a little bit more detail than just admin allocation— it has to meet the natural class standard.
Q: Can the costs associated with the raising of an endowment fund or temp-restricted campaign for a specific purpose be taken from the cash raised? Or must this be accounted for as expense in investment return?
A: There are two parts to this question. The first question — the answer depends on how the funds/contributions were solicited and the gift instrument (i.e. pledge card, donor letter, etc.). The big part is solicitation—how are you seeking these contributions? The second question - the cost of developing the campaign is actually fundraising. It’s not an investment return expense.
The financial reporting standards changes will be effective December 2017; be sure you’re well read on the changes before it’s too late! Consult our series, “New Financial Reporting Standards for Nonprofits” for more details on what will change. As always, contact us for more information.