turbulent times a sea of change - tax | accounting · tax shareholder 2015 schneider downs...

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Welcome to the 2015 Biennial Schneider Downs

Not-for-Profit Symposium

To download presentations visit:http://www.schneiderdowns.com/pit-nfp-symposium-2015

Make sure you sign up for a lunch roundtable discussion and take note of your table number!

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TURBULENT TIMESA Sea of Change

Presented by:

Susan M. Kirsch

Schneider Downs

Tax Shareholder

2015 Schneider Downs Not-for-Profit Symposium

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Takeaways

• The Only Constant Is Change

• If You Are Standing Still,

You’re Already

Falling Behind


Turbulent Times …..

• RiverQuest and Rivers of Steel Merger

• August Wilson Closes Then Re-emerges

• Princeton University - Real Estate Challenge

• California Blue Shield - State Tax Challenge

• Sweet Briar College – Attorney General Challenge

• College Rating System – Obama/DOE Challenge

• Adjunct Faculty/Athletes – Student/Faculty Challenge


Legislative Matters - Federal

• Highway Bill

• Budget

• Debt Ceiling

• Tax Extenders

• Higher Education Act

• Tax Reform

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Legislative Matters – State/Local

• Budget

• Pension Matters

• Purely Public Charity Status

• Local Tax Audits


Greater Burdens of Compliance Risk

• Scandal = Increased Scrutiny

• Scandal = Additional Regulations

• Unfunded Mandates

• Government Audits– Recoupment

– Material Compliance


Organizational Transformation

• Leadership Engagement• Self-Assessment• Refocus Priorities• Align Mission• Differentiation• Cost Containment• Increasing Regulatory Compliance• Role of Technology• Social Media

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Takeaways

• The Only Constant Is Change

• If You Are Standing Still,

You’re Already

Falling Behind

FASB Update

Staci L. Brogan, Schneider Downs Audit Shareholder

Lauren E. Craig, Schneider Downs Audit Senior Manager


Overview

• Recent Accounting Standards Updates– Going Concern– Pushdown Accounting– Consolidation– Debt Issuance Costs– Net Asset Value and the Fair Value Hierarchy

• Revenue Recognition • Uniform Guidance: Did you know…..• Exposure Draft: NFP Financial Statements• Other Ongoing Projects

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Recent ASUs

• Going Concern (ASU 2014-15)– Defines “substantial doubt”

– Look-forward period defined

– Effective FY 2016-2017

• Pushdown Accounting (ASU 2014-17)– Option when there is a change in control

– Previous SEC guidance rescinded

– Value according to acquisition method

– Effective immediately

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Recent ASUs (continued)

• Consolidation (ASU 2015-02)– Specific considerations for NFPs

– Eliminates separate accounting model for partnerships and similar entities

– Eliminates presumption of control by a general partner

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Recent ASUs (continued)

• Debt Issuance Costs (ASU 2015-03)– To be reported as direct reduction of debt liability for

issued debt (like debt discounts), rather than as a separate asset

• Investments at N.A.V. (ASU 2015-07)– No longer require investments for which fair value is

measured at net asset value (or its equivalent) using the practical expedient to be categorized in the fair value hierarchy

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Revenue Recognition(ASU 2014-09)

• The new revenue standard aims to improve accounting for contracts with customers by:– Providing a robust framework for addressing revenue

issues as they arise

– Increasing comparability across industries and capital markets

– Requiring better disclosure

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Revenue Recognition (continued)

• Scope: All contracts with customers, with certain exceptions– Contributions

– Collaborative arrangements

– Certain contracts with other guidance in place (e.g., leases, financial instruments, insurance, guarantees)

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Revenue Recognition (continued)

Core PrincipleRecognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

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Revenue Recognition: 5 Steps

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1. Identify the

contract(s) with the customer

2. Identify the

performance obligations

3. Determine

the transaction

price

4. Allocate the

transaction price

5. Recognize revenue when

(or as) a performance obligation is satisfied


Potential Application for NFPs

• Membership dues

• Tuition and fees

• Licenses and royalties

• Bifurcation

• Government grants and contracts

• Other

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Uniform Guidance: Did you know…

• Effective Dates: – New administrative requirements and cost principles

apply to all new Federal awards made after December 26, 2014

– Audit requirements effective for fiscal years beginning on or after December 26, 2014

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Uniform Guidance (continued)

• UG applies to funding increments to existing awards in cases where the federal agency considers the funding increments to be an opportunity to modify terms and conditions of the award.

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Uniform Guidance (continued)

• Internal control

• Procurement

• Direct and indirect costs

• Time and effort

• Subrecipient monitoring

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NFP Financial Reporting Model

Key Objectives – Refresh, not overhaul, the current model

– Improve net asset classification scheme

– Improve information in financial statements and notes about:

- Liquidity

- Financial performance

- Cash flows

– Better enable NFPs to tell their financial story

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Why Are Changes Proposed?– Complexities

– Inconsistencies in reporting causes difficulties to users

– Inconsistencies related to reporting of expenses

– Enhance utility of cash flow statement

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Project Timeline

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April – August 2015

Various Stakeholder Outreach/Speaking

Engagements

Sept – Oct 2015

Public Roundtables

Exposure Draft Released for

Public Comments

April 22, 2015

Comment Period Ending

August 20, 2015

Begin Board Redeliberations

Fall 2015



Net Asset Classification

Liquidity Information

Financial Performance: Operating Measure/

Activities Stmt. Format

Reporting of

Expenses

Cash Flow Statement

NFP Note Disclosures

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Net Asset Classification

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Unrestricted Temp. Restricted

Perm. Restricted

Without Donor Restrictions With Donor Restrictions

Amount, purpose and type of board designations *

Nature and amount of donor restrictions

* New disclosure requirement

Current GAAP

Proposed GAAP

+

Disclosures



Statement of Financial Position• Present on face of statement of financial position amounts for 2 net

asset classes at the end of the period versus the current 3 net assetclasses:

• Net assets with donor restrictions

• Net assets without donor restrictions

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Statement of Financial Position, cont’d.

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Present on the face of the statement of activities the amountof the change in each of the two net asset classes

Additionally, present two subtotals:- operating excess (deficit), before transfers- operating excess (deficit), after transfers

Provide details of transfers in the footnotes, unless presented as discrete items on the face of the statements



Information Relating to LiquidityAn NFP would define the time horizon it uses to manage liquidity (for example, 30, 60 or 90 days) and disclose the following:

– Quantitative information:• Total amount of financial assets

• Amounts that are not available to meet cash needs within the time horizon because of (1) external limits and (2) internal actions of a governing board

• Total amount of financial liabilities that are due within that time horizon

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Information Relating to Liquidity (Cont.)

• Qualitative information about how the entity manages its liquidity :– strategy for addressing entity-wide risks that may affect

liquidity, including the entity’s uses of line of credit

– Its policy for establishing liquidity reserves

– Its basis for determining the time horizon used for managing liquidity

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• To be reflected in net assets with donor restrictions rather than in net assets without donor restrictions

Revised net asset classification

• In addition to aggregate amount by which funds are underwater (current GAAP), also disclose aggregate of original gift amounts (or level required by donor or law) for such funds, fair value and any governing board policy or decision to reduce or not spend from such funds

Enhanced disclosures

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“Underwater Endowments”



Operating Measures

Defined requiredintermediate operating measures for all NFPs – based on two dimensions:

Mission (Business & Charitable Activity):based on whether resources are from our directed at carrying out an NFP’s purpose for existence (vs. investing and financing)

Tension Points:Internal actionsCapital‐like transactions

Availability:based on whether resources are available for current period activities and reflecting limits imposed by:• External donors• Internal actions



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Capital‐Like Transactions and EventsGifts of long‐lived assets without donor restrictions

NFP would be required to use the place‐in‐service approach (no more implied time restrictions)

Initial period: all unrestricted gifts are reported withinoperations; then entire amount transferred out of current operations when gifted asset is placed in service

Gifts of cash restricted for acquisition or construction of long‐lived assets

Initial Period: reported as revenues that increase net assets with donor restrictions

Thereafter: release of donor restriction into operations; concurrent transfer of entire gift out of current operations

For practical and other reasons, no subsequent transfers of gift amount back into operations to match depreciation



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Reporting of ExpensesExpense by nature and function one place in the F/S (statement of activities, separate statement, or schedule in notes)

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Program Activities Supporting Activities TotalOperating Expenses

Non‐Operating

TotalExpensesProgram

AProgram B M&G Fundraising

Salaries & Benefits

Grants to Others

Equipment Rental & Maintenance

Occupancy Cost

Depreciation

Information Technology

Professional Service Fees

Supplies

Travel

Printing & Publication

Interest

Other

Total

F U N C T I O N

N

A

T

U

R

E

**

* Either nature or function (or both) on face of Statement of Activities

Not‐functionalized



Cost Allocations

- Required to include a description of the method used to allocate costs among program and support functions

- Board will refine the definition of and guidance for management and general activities- Key concepts: Direct conduct, direct supervision

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• Net presentation of investments expenses against investment return on the face of the statement of activities

• Netting limited to external and direct internal expenses

How to present?

• Disclosure of investment expenses no longer required, except for the disclosure of the amount of internal salaries and benefits that have been netted, if any, against investment return

• No longer require disclosure of investment income components

What to disclose?

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Reporting of Investment Returns



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#1 • The Indirect Method

#2• Disconnect with Statement of

Activities (and any operating measure therein)

Cash Flow StatementWhy underutilized/unutilized?



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• Require Direct Method for operating cash flows– No longer required Indirect Method

• Recategorize certain items to better align “operating” with activities statement and operating measure (see next slide for new categories)– Purchases of and proceeds on sale of long-lived assets

(e.g., PP&E; capitalized and noncapitalized collections)

– Cash gifts restricted for long-lived assets

– Cash received from interest and dividends

– Interest paid on long-term debt

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Cash Flows from Operating Activities

Cash received from service recipients

Cash received from donors

Cash paid to employees

Cash paid to vendors

Purchase of property and equipment

Proceeds on sale of property and equipment

Contributions restricted for property and equipment

Net cash from operating activities

Cash Flows from Investing Activities

Cash received from interest and dividends

Purchase of investment assets

Proceeds from sale of investment assets

Net cash from investing activities

Cash Flows from Financing Activities

Payments of principal on long‐term debt

Interest paid on long‐term debt

Contributions restricted for endowment

Net cash from financing activities

Net increase in cash

Cash at the beginning of year

Cash at end of year



Adoption

• Retrospective basis

• Disclose the nature of any reclassifications or restatements and their effect, if any, on changes in the net asset classes for each year presented.

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FASB Update

Questions?

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BREAK FOR 15 MINUTES

Up Next:

Best Practices for Selecting

and Implementing

Technology Solutions

Best Practices for Selecting and Implementing

Technology Solutions

Presented by:Patrick Armknecht, Senior

Manager, Schneider Downs Technology Advisors


Objectives

1. To provide you with a selection process that you can follow to help ensure that you choose the solution that’s best for your organization.

2. Identify best practices for a successful technology implementation.

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Step 1: Define Your Requirements

• Document the goals and objectives of the technology you intend to implement.

What benefits do you expect achieve?

How will you measure the benefit?

What are your Key Performance Indicators?


Step 1: Define Your Requirements

• Prepare a list of functional requirements for the solution to be implemented.

Do not limit functional requirements to what or how you do it now, but rather how it should work.

Group requirements by functional area (Fundraising, Budgeting, Accounts Payable).

Categorize each requirement (must have, important, nice to have).

Include Team Leads or Subject Matter Experts in the requirements gathering process


Step 2: Identify Solutions & Vendors

• Talk to peers within your industry (the collaboration in the Not-for-Profit sector is second to none).

• Research the Vendors/Publishers that sponsor industry-specific tradeshows or conferences.

• Good old fashion web search (Google, Bing, etc.)– Caution: A well-optimized webpage doesn’t translate to a

great solution.

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Step 3: Engage Potential Vendors

• Share your functional requirements list and project objectives/goals with potential vendors.– Typically, a spreadsheet listing your requirements is

sufficient.– Ask the vendor to classify each requirement as “included

in the solution”, “modification required”, “third-party required” or “not available”.

– Allow vendor to add comments at the functional task level.

– Request an estimated cost of the solution. Software will be accurate, services typically will not.


Step 3: Engage Potential Vendors

• Be willing to have independent conversations with each vendor.– Vendors want access to “decision makers” before

investing a significant amount of time into a response.

– Vendors are much less likely to respond if they think that they are part of “minimum number of bids” process.

– Vendors will want to establish a “budget estimate.”

– These conversations may help identify gaps in your functional requirements.


Step 4: Score Vendor Responses

• Assign point values to each functional requirement – Must haves (highest point value or elimination of vendor

depending upon importance of functional task)

– Important (moderate point value)

– Nice to have (lowest point value)

• Follow-up with vendors that don’t respond.– Verify that vendor did not intend to respond.

– Ask those vendors that declined to respond what solutions they think you should be considering.

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Step 5: Narrow the Vendor List

• Based upon your scoring criteria, narrow down the list of vendors that will participate in onsite demonstrations.– Try to limit demonstrations to 3 to 4 vendors.

• If the estimated cost of the solution is significantly higher than your budget, consider eliminating the vendor.


Step 6: Product Demonstrations

• Schedule product demonstrations with the remaining vendors.

• Prepare a Demonstration Script that you would like the vendors to follow.– The demonstration script should follow the natural flow

of your process and include the previously identified functional requirements.

– The script should include time for the vendor to discuss their approach, typical scope and differentiators.

– Review the Demonstration Script with the vendor ahead of time so that they can provide input.



• Executive leadership and those involved with defining the functional requirements (the Selection Team) should participate in the demonstrations.

• Use your Functional Requirements document to score the vendor demonstration.

• Immediately following the demonstration, regroup the selection team to come up with a consensus score for each functional requirement.– Your score will most likely be different than the initial

response score.

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• If there are any functional requirements that were not addressed in the demonstration, follow up with the vendor immediately.

• After all demonstrations have been completed, select the top two vendors based upon the demonstration score.


Step 7: Request Formal Proposals

• Request formal proposals from your top two vendors.

• Proposals should include:– A Project Time Line– Project Scope, including a detailed Project Plan– Responsibilities (both the vendors and yours)– Project deliverables– Project costs – A representative list of clients similar to your organization (or

references).


Step 8: Evaluate Proposals

• Identify any significant deviations in:– Project scope

– Responsibilities

– Project costs

If necessary, consider having one or both vendors revise their proposal so that you can make an apples to apples comparison.

• Make sure that you understand the tasks included in the project plan. The project plan will serve as the basis for change orders during implementation.

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Step 8: Evaluate Proposals

• Have your legal counsel review the proposals.

• Contact the representative list of clients and/or references. Be sure to inquire as to:

1. The overall experience with the vendor/solution.

2. Was the project completed on time?

3. Was the project completed on budget?

4. The vendors-post implementation support.


Step 9: Contract Negotiation

• Once you have determined your preferred vendor/ solution, try and negotiate better terms. – Let the vendors know you are down to two finalists.

– Publishers are more willing to discount if they know they are in direct competition.

– Vendors may be willing to negotiate service fee rates if they know they are in direct competition.

– Too many competitors has the opposite effect (less willing to discount).

– Nothing is guaranteed, but it never hurts to try.


Criteria For a “Successful” Implementation?

• Project is finished on-time.

• Project is completed on or under budget.

• Results of the project produce the benefits expected.

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Results of ZDNet’s Implementation Survey

According to a ZDNet survey of business that undertook ERP Implementations in 2013:

• 53% experienced cost overruns.

• 61% experienced duration overruns.

• 60% received under half of the expected benefit from their implementation.

The percentages are consistent with other implementations (CRM, EMR and Budgeting Software).


Project Team Roles

It is not uncommon for an employee to assume multiple project roles.

Executive Sponsor –A senior-level executive who has accepted ownership of investigating and investing in a business system initiative and will promote funding and staffing of the project.

Business Decision-Maker –Management-level individuals within your organization responsible for a specific aspect of the organizational process that will be impacted by the implementation.

Project Manager – The person within your organization responsible for ensuring all internal requirements are planned and executed in a manner that will meet the implementation goals for the project.


Project Team Roles

IT Manager – The person responsible for the entire IT environment, including both hardware and software setup in all locations, or the person filling this role may be accountable for assembling the resources, which can be responsible for these technologies.

Organizational Change Manager – The person responsible for ensuring that the change introduced by the new system is introduced and communicated to the stakeholders and users. These activities include mobilizing the leadership, managing communications and ensuring that training is planned and executed.

QA Manager – The person responsible for managing and coordinating the Pilot Test and User Acceptance Test activities. These activities include ensuring the availability of test users, test resources and scheduling the test activities.

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Project Team Roles

Power Users – Power Users (a.k.a. Key Users or Subject Matter Experts) represent a functional area or department within the organization, for example, accounts payable supervisor or accounts receivable supervisor. They are typically a more experienced user who has in-depth knowledge of the business processes and procedures currently being used in their functional area or department.

End Users – End Users are the individuals from various functional areas or departments who will use the new solution to perform their daily activities.

REMINDER: It is not uncommon for an employee to assume multiple project roles.


Leadership Involvement

• It is important to have leadership involved in the implementation throughout.– The tone is set at the top. If leadership is disengaged,

the Project Team will find it acceptable to disengage as well.

– As the implementation becomes more involved, team members may be inclined to do things the “easy way” or replicate the current process. Leadership is responsible for reinforcing the need to do things the “right way.”

– Leadership is responsible for holding Team Members/ resources accountable for their participation in the project.


Project Kickoff

At the onset of the project, it is important to have a kickoff meeting attended by all implementation team members, at which:

– The business reason and the goals of the project are communicated to the Project Team;

– Team members are made aware of their level of involvement (hours, when expected, etc.)

– The project plan is reviewed, and

– Executive Management communicates their full commitment to the project.

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Project Management

• Project Management – The application of knowledge, skills, tools and techniques to meet the project objectives.

• Project Management is continuous throughout a project and includes the following responsibilities:– Monitoring the project status against the Project Plan;– Managing project scope;– Coordinating project resources;– Monitoring project costs;– Identifying and managing project risks; and– Communicating with project stakeholders.


Pilot Testing

• Piloting script should be developed to address daily, monthly and periodic processes.

• Pilot Testing should include testing with external resources when applicable.– Share a new invoice with a customer and obtain feedback.

– Send new ACH file to bank.

• Pilot Testing should be repeated until acceptable results are achieved.

• Changes to design or new customizations occurring after pilot testing require additional testing.


Change Orders

• Throughout the course of an implementation, additional requirements or services may be identified that were not included in the original Project Scope.

• To manage these changes, we recommend that a Change Order Form be completed, approved and signed prior to any services being performed related to the change.

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Change Orders

• A Change Order Form should include:– A description of the change;

– An explanation of the business justification for the change;

– The impact on the Project Scope;

– The impact on resources;

– The impact on the timeline; and

– Additional project costs.


Closing Meeting

• If applicable, create a punch-list for outstanding project tasks.

• Document your lessons learned for future projects.

• Discuss next steps.• Future functionality to be deployed.

• Deferred Scope items.

• Need for additional training.


Other Considerations

• Members of the Project Team can expect to dedicate approximately 20% - 30% of their time to a project during implementation.– Team members regular responsibilities don’t go away

during implementation, so plan accordingly (overtime, temporary re-allocation of duties, outsource, etc.).

• Communicate plan to non-Project Team Members– There will be a lot of speculation amongst individuals not

involved with the project.

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Other Considerations

• Data Conversion– Master Files: Yes– History Files: Make sure the benefit outweighs the cost

• Running in parallel is not recommended– Increases workload– Payroll is the exception

• Make sure to incorporate segregation of duties when configuring the solution security.


Questions & Answers

Daria Crawley, Ph.D. -- Robert Morris University

2015 Not-for-profit SymposiumSchneider Downs

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Institute of Business Ethics 2013 Survey Board of DirectorsCodes of EthicsHow can we support employees in

everyday operations and decisions to live up to the values espoused in any code of ethics?

“The stakeholders in a firm are individuals and constituencies that contribute, either voluntarily or involuntarily, to its wealth-creating capacity and activities, and who are therefore its potential beneficiaries and/or risk bearers.” -- Post, Preston, and Sachs

“A stakeholder in an organization is (by definition) any group or individual who can affect or is affected by the achievement of the organization’s objectives.” -- R. Edward Freeman

“Stakeholders in an organization are the individuals and groups who are depending on the firm in order to achieve their personal goals and on whom the firm is depending for its existence”. -- Eric Rhenman

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Identify - the set of stakeholders that are relevant for this particular issueAnalyze – the nature of the issue to see how it relates to firm operationsPrioritize – among the stakeholder and their competing interest and demandsAct – as quickly as is prudent, attempt to satisfy as

t k h ld i d f i it th t i

Employees

Local Governm

ent

Community

Creditors

Shareholders

Against For

High

Low

Sta

keh

old

er

Sal

ien

ce

Position on the Issue

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Voting

Economic

Legal

Political

Copyright © 2014 John Wiley & Sons, Inc.

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Utility – all stakeholders satisfied?

Rights – are all rights and duties

respected?

Justice – is it consistent with cannons

of justice?

Caring – is it consistent with

responsibility to care?Copyright © 2014 John Wiley & Sons, Inc.

How would I feel if my family found out about this decision?

How would I feel if the decision was published?

What would the person you know or know of who has the strongest character do in this situation?

Copyright © 2014 John Wiley & Sons, Inc.

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Jay CEO – Rocky Mountain Green Bank, a company with a mission to promote environmental stewardship

Board of Directors – Entrepreneurs, Lawyer, Ex-Mayor, Former Executive Maryland Bank, Physician (who was a close school friend of the CEO), Ardent Environmentalist and Pastor of a Megachurch Jay attended occasionally.

HQ – Environmental Showcase Local depositors and small borrowers disenchanted

with big national and global banks Deposits grew at a healthy rate but to succeed

financially, the bank needed to make big loans to a few strong companies.

Board member solicited loan application from a Colorado engineering company using hydraulic fracturing—fracking—and wanted to expand into making the polymers, emulsions, and surfactants the industry relies on. These materials, the executive said, would be significantly less toxic than those currently in use.

$3m Loan Application – from a local gun manufacturer (Military Contractor) – Solid Performer, Growing Source of Local Jobs, Good Corporate Citizen

Should Rocky Mountain Green Bank deny a loan to a gun manufacturer?

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LUNCHGrand Ballroom, Salons 1 and 2

Tables will be numbered for discussion topics

Up Next:

Know Your Exposure from an Executive Liability Perspective

Resumes at 1:20

Not-For-Profit Liability Exposure Discussion:

Presented By:Paul Baldwin – CEO, Huntington Insurance

Will Carlin – Executive Liability Specialist

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Topics for Discussion

• Executive Liability Coverage

• Not-For-Profit Exposure

• Cyber Liability Exposure

• Common Coverage Concerns

• Questions

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Executive Liability Insurance

101

Coverage was designed to address the personal liability exposure created by the Employee Retirement Income Security Act (ERISA) in 1974. Fiduciary Liability Policies cover claims for loss to a plan as the result of a Wrongful Act by a fiduciary.

Directors and Officers Liability

Employment Practices Liability

Crime Insurance

Fiduciary Liability

Directors and Officers can be made liable for the decisions they make on behalf of the organization. An organization’s indemnification may be unable to protect them, leaving their personal assets at stake!

Coverage that protects against liability resulting from harassment, discrimination, wrongful termination, or failure to hire an applicant or employee and is typically amended to include coverage for third parties (customers, vendors)

Protects against theft or forgery of money, securities, or other tangible property

Cyber LiabilityGenerally provides coverage for the first party expenses and the third party liability that arises from a breach of an organization’s network security and confidential information.

Not-For-Profit Exposures• Nonprofit organizations play a very important role in society, but face many of

the same exposures as for-profit private organizations.

• The oversight and direction provided by a Not-For-Profit board of directors can lead to a variety of lawsuits that can significantly impact the organization as well as the personal assets of the board members.

• Most claims involve employment related issues.

• Claims are increasingly being brought by a variety of other sources including donors, recipients of services, creditors, and regulatory agencies.

• Although state and federal laws exist to limit the liability of volunteers, the nonprofit organization is not always included under these immunity provisions.

• Even if claim is groundless, defense expenses can be material.

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Not-For-Profit Exposures


• Corporate Governance• Directors and Officers have the following fiduciary duties to the organization:

• Duty of Care – Perform their duties in good faith and in the best interest of the organization in a manner that a reasonably prudent person in a similar situation would act.

• Duty of Loyalty – Prohibits directors and officers from using their positions to further their private interests.

• Duty of Obedience – Directors and Officers are required to perform duties in accordance with applicable statutes, laws, and the by-laws of the organization.

• A perceived breach of these duties can lead to claims activity and expensive litigation costs that can be a material impact to the organization.

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• Potential Directors and Officers claims can result from:

• Mismanagement of the organization

• Failure to implement controls to prevent misuse or fraud

• Board Representation that lacks independence

• Negligence, Mistakes, Miscalculations, Judgment Errors

• Actions / Conduct of Volunteers

• Errors in Publications, Newsletters, or Updates

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• Grants and Fundraising• Competition for grant money and fundraising dollars is significant

• Non-profit organizations can make promises to donors that are unattainable

• Foundations that give money can be sued for not providing promised funds or for perceived misappropriation of assets.

• When funds are received, claims can arise from questions on fund utilization

• Disagreements with donors or beneficiaries can result

• Resource Constraints• Generally, non-profits are faced with more limited budgets and a smaller

employee base.

• Less resources often creates an environment with less policies and procedures

• Claims can arise from consequential mistakes, errors, omissions, or lack of formalized policies.

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• Antitrust Claims• Membership criteria may create a barrier to entry

• Power of accreditation or certification over individuals or institutions

• Physicians or practice groups often bring claims for denied staff privileges or unfavorable relationships between hospitals and insurance companies.

• Regulatory Oversight• Sarbanes-Oxley

• Whistleblower protection for employees – Employers may not discriminate or retaliate against an employee for disclosing wrongful acts

• State Governance

• Many states more focused on conflict of interest standards and audited financial statements, separate audit committees

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Not-For-Profit ExposuresDirectors and Officers Liability Claims Examples:

• Failure to manage a property lease – $2,000,000

• A group of members sued a country club, alleging the directors and officers failed to renew an option to extend the lease of the land used as a golf course. As a result, the lessor required the club to either purchase the land for more than $10 million or to lease the land for a substantial price. The suit was settled for $2 million.

• Anti-trust violation – $175,000

• A trade association was sued for anti-trust violations in connection with the rejection of a company's application for membership. Defense costs alone were $175,000.

• Misuse of funds - $5,000,000

• The state attorney general sued a large charitable foundation, alleging the trustees were excessively compensated and devoted insufficient time and resources to support the foundation's intended purpose. The suit was settled for over $5 million.

Source – Travelers Insurance

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Employment Practices Liability

• Employment related issues are the leading source of claims activity.

• Claims can be expensive to defend, even if the allegations are unwarranted.

• Common Claims include allegations of discrimination or harassment from past, present, or future employees

• EEOC has been active

• Greater focus on age and religious discrimination rights.

• Former, current and potential employees often also bring suits for an organization’s inappropriate handling of the interview, hiring, evaluation, or termination processes.

• Third Party EPL can also be a significant source of claims activity.• Clubs can experience significant membership discrimination claims.

• Do your employees and volunteers interact with the public?

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Employment Practices Liability Claims Examples

• Wrongful termination and retaliation - $600,000• A hospital employee complained that the hospital had initiated a number of

policies that resulted in inadequate nurse to patient ratios, use of unqualified nursing staff and falsification of hospital staff training records. The plaintiff alleged retaliation and was eventually terminated in response to plaintiff’s attempts to modify the hospital’s policies. The case was settled for $400,000 and defense expenses were an additional $200,000.

• Failure to pay overtime — $750,000• In a class-action suit , employees sued for unpaid overtime wages and

retaliation. The plaintiffs included all employees who had worked in excess of 40 hours in a work week at any time during the past three years. Although Travelers did not pay for the settlement associated with the overtime wage claims, $750,000 was spent by Travelers in connection with the defense of the claim.


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Fiduciary Liability

• Non-profit organizations have exposure if they sponsor a 401(k) or 403(b) plan.

• Employee Retirement Income Security Act of 1974 (ERISA) places a personal liability on anyone with decision making authority over these plans to act in accordance with their fiduciary duties.

• Directors and Officers of a non-profit organization also generally have plan fiduciary responsibilities

• This creates an inherent conflict of interest

• Dissatisfied plan participants can allege the directors made decisions that were in the best interest of the organization, but not to the plan beneficiaries.

• Utilizing third party investment professionals does not absolve fiduciaries of their duties to monitor the advisor, investment strategy, and performance of the plan.

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Not-For-Profit ExposuresFiduciary Liability Claim Examples

• Delayed transfer balance - $1,250,000• A group of employees alleged that the newly selected outside plan

administrator improperly delayed transferring fund balances in the plan from one investment option to another, as directed by the participants. Subsequently the employees used the plan trustees to recover more than $1,000,000 in lost investment income. Defense expenses were $250,000.

• Failure to provide information - $350,000• Two employees approaching retirement age discovered they had never

enrolled in the company’s 401(k) plan. The employees sued the company and plan trustees alleging the plan administrator failed to properly advise them how to enroll and the enrollment was not automatic. The value of the alleged lost benefits exceeded $150,000 and defense expenses were in excess of $200,000.

• Excessive management fees - $124,000• Department of Labor alleged a wholesale electrical company violated ERISA

by charging excessive management fees to the Plan. The burden of proof for compliance with all provisions of ERISA lies with the sponsor/employer.

Source – Travelers Insurance111

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Crime Insurance

• Fraud and embezzlement continues to be a significant source of exposure to non-profit organizations.

• Non-profit organizations don’t always have the controls in place to prevent theft of money by trusted employees or outside fraudsters.

• Do employees have access to funds / assets?

• Do employees who reconcile monthly bank statements also handle deposits and sign checks?

• Does the organization require countersignatures on checks?

• Are key accounting personnel required to take vacation?

• Crime Insurance on Package forms can be limited.• Computer Theft – Insures against theft by a non-employee using a computer

to transfer covered property from the insured's premises or bank to another person or place.

• Funds Transfer Fraud - Provides insurance if a financial institution transfers money or securities based on fraudulent documentation purported to have been sent by your organization.

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Crime Insurance Claims Examples

• Electronic Funds Transfer Fraud -

• A company’s finance director opened an email with an attached .zip file that contained a virus. The virus obtained the user ID and password to the company’s account with its bank. Immediately thereafter, a fraudulent electronic wire transfer initiated by persons unknown caused $147,000 to be wired from the company’s bank account to an unknown bank account in Arizona. The money was withdrawn before it could be recovered.

• Computer Fraud -

• A company’s Web site was hacked into by an employee of one its customers who changed her employer’s bank routing code on the Web site to her own. When the company paid her employer for services rendered, the money went directly into her account instead.


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Cyber Liability

• What Personally Identifiable Information and Personal Health Information exists within the Non-Profit’s custody and control.

• Breaches of third party / employee / corporate confidential information can significantly impact any organizations reputation and financial standing.

• Common information accessed includes past and present benefits, payroll, health information, drivers license, and S.S. numbers.

• Common sources of Cyber Loss• Third Party hackers accessing information through your network

• Loss of laptops / phones / portable devices with information stored on them

• Employee Mistakes / Falling for Social Engineering schemes that lead to a breach of passwords, loss of money, etc…

• Inappropriate disposal or theft of physical data (ie: files)

• Rogue Employees

• First party claim expenses alone can be significant.• (forensics, legal, PR expenses)

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Cyber Liability Insurance

First Party Coverages:Breach Response / Crisis Mgmt.

Notification Costs / forensic investigatory costs / credit monitoring expenses.

Business Interruption / Extra ExpenseLoss of income resulting from a network security breach or network attack and extra expenses incurred to restore network.

Data LossCosts to restore data destroyed or altered as a result of a breach.

Cyber Extortion LossResponds to a threat by a third party to commit a network security or privacy breach.

Third Party Coverages:Network Security Liability

Provides coverage for actions the Insured is legally liable for claims made against the Insured for a Network Security Breach.

Privacy LiabilityProvides coverage for actions that the Insured is legally liable for claims made against the Insured for a Privacy Breach of PII, PHI or corporate confidential information.

Regulatory CoverageProvides coverage for actions / proceedings and fines / penalties by a regulatory agency for a violation of privacy law.

Website Media ContentCovers the legal liability that an Insured has for content on the Insured’s internet site.

Professional LiabilityCovers any acts, errors, or omissions in the services provided to a third party for a fee.

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Coverage Concerns

• Non-profits are evolving to raise funds and operate successfully.

• Once Non-Profit Executive Liability Policies are placed, most carriers allow for automatic, or low touch renewals for multiple years.

• If renewal applications are required, little information is needed

• Automatic renewals often fail to reflect organizational changes

Common Coverage Concerns

• Coverage for Subsidiaries• For-Profit Subsidiaries

• Subsidiaries that fall outside 501(c)(3) classification

• General Partnerships

• Non-profits with Investment Fund related offerings• Investors provide money as a note and receive a small return

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Coverage Concerns

• Does the Non-Profit Organization provide professional services?

• Many forms have Professional Services Exclusions

• Does the organization need an E&O Policy

• If you purchase EPL, does the coverage include Third Party

• How does your Crime Coverage contemplate voluntary parting of money / securities (Social Engineering Losses)

• Social Engineering Fraud occurs when an employee is intentionally misled into sending money or diverting a payment based on fraudulent information that is provided to them in a written or verbal communication

• Do employees have access to client money / securities

• Do employees work within / on client premises

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Coverage Concerns

• What Personally Identifiable Information and Personal Health Information exists within the Non-Profit’s custody and control.

• Does the organization encrypt data on portable devices

• Has the organization implemented physical and network controls to stem unauthorized access of information

• Does any coverage purchased account for Rogue Employees

• Are employees traveling internationally• Certain countries can often be excluded from K&R coverage

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Q&A

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Mergers and Acquisitions:Look Before You Leap

Presented by:Marc P. Brdar,

Schneider Downs Advisory Services Senior Manager

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Introduction

Marc P. Brdar – CPA, CFF, CIASenior Manager, Advisory Services

• Joined Schneider Downs in 2000 after spending 8 years in industry

• Assisted over 50 clients with financial due diligence

• Other specialties include: forensic accounting, internal controls assessments, litigation support, financial analysis

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Agenda

• Merger Benefits

• Strategic Considerations

• Operational Factors

• The Process

• Due Diligence Overview

• Financial Due Diligence

• Negotiations

• Integration


Merger Benefits

• Improve quality of existing services

• Expansion of complementary service offerings

• New skill development

• Increase efficiency of service delivery –including back-office functions

• Knowledge sharing and expertise

• Fundraising capabilities – including grant funding

• Geographic expansion

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Strategic Considerations

• Best pursued in a deliberative manner

• Mission and vision synchronization

• Culture and identity of individual entities and merged organization

• Impact on stakeholders

• Leadership at management and governance levels

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Operational Factors

• Board (including committees), management and organizational structure

• Utilization of technology

• Budgeting and forecasting

• Legal and compliance matters

• Insurance

• Transition

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The Process

• Target/Partner identification

• Initial discussions, mutual interest, non-disclosure

• Letter of intent

• Deal team and responsibilities

• Due diligence

• Negotiations

• Closing

• Integration

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Due Diligence Overview

• Financial and accounting

• Other Key Areas– Legal

– Human Resources

– Compliance

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Financial Due Diligence

• Historical financial results

• Balance sheet evaluation

• Accounting processes

• Liabilities

• Compliance

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Financial Due Diligence –Historical Financial Results

• Financial health

• Recent trends

• Organizational comparisons

• Revenue streams

• Key dependencies

• Cost structure

• Unusual transactions

• Cost / benefit analysis

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Financial Due Diligence –Balance Sheet Evaluation

• Recent balance sheets

• Comparisons – organizational / trends

• Validate completeness of reporting

• Unrecorded “operating” liabilities

• Potential accounting and financial reporting issues

• Restricted assets

• Debt

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Financial Due Diligence –Accounting Processes

• Accounting system compatibility

• Capability to fulfill legal, compliance and unique reporting requirements of donors

• Adequacy of financial management policies and procedures to drive effective reporting of financial results

• Accounting staff capabilities

• Post-transaction considerations

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Financial Due Diligence –Liabilities

• Compliance – regulatory action, audits, grant stipulations

• Human Resources / Employee Benefits

• Significant contracts

• Potential claims and litigation

• Insurance Coverage

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Financial Due Diligence –Compliance

• Tax-exempt status

• Federal reporting (Form 990)

• Funding reporting requirements (Federal, state, grant and private)

• Debt

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Negotiations

• Communication and prioritization of findings

• Legal structure

• Post-transaction organization

• Synthesize findings into articulate positions for negotiation and structure of agreement

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Integration

• Communication

• Managerial and departmental realignment

• Key operating and accounting systems and metrics

• Financial reporting – consistent with goals and mission of programs and the organization

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Questions and Discussion

THANK YOU!

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BREAK FOR 15 MINUTES

Up Next:

Hot Tax Topics

and IRS Update

Hot Tax Topics and IRS Update

Presented by:Gene Logan, Schneider Downs

Tax Shareholder

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Agenda

• Recent Legislation

• Proposed Legislation

• President’s Budget Proposals

• IRS Priority Plan

• State/Local Update

• Changes/Update to Form 990


Tax Increase Prevention Act of 2014(Tax Extenders)

• Tax Increase Prevention Act of 2014, Pub. L. No. 113-295, enacted Dec. 19, 2014, extended “traditional extenders” from 01/01/2014 to 12/31/2014– They are now expired, again. – (“This tax bill doesn’t have the shelf life of a

carton of eggs.” said Sen. Ron Wyden.)


Tax Increase Prevention Act of 2014(Tax Extenders)• EO Provisions include:

– Deductions for contributions of capital gain real property made for conservation purposes;

– Tax-free distributions from individual retirement accounts (IRAs) for charitable purposes;

– The tax deduction for contributions of food inventory by taxpayers other than C corporations;

– The basis adjustment rule for stock of an S corporation making charitable contributions of property;

– Extension of modification of tax treatment of certain payments to controlling exempt organizations.

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• Creates tax-exempt savings accounts for individuals with disabilities under Code § 529A similar to college savings accounts.

• Assets held in the account are not counted for purposes of determining eligibility for Medicaid and Supplemental Security Income (although SSI payments are suspended if the assets in an ABLE account reach $100,000).

• Eligible individuals include those diagnosed with blindness or disability under Title II or XVI of the Social Security Act prior to age 26.

• Eligible expenses in education, housing, transportation, employment support, health/wellness and miscellaneous expenses.

ABLE Act(Enacted as part of TIPRA 2014)


• House passed the America Gives More Act (H.R. 644) by a vote of 279 to 137 on February 2, 2015

– 39 Democrats and all but one Republican voted for the bill.

– The legislation permanently extends the IRA charitable rollover (H.R. 637).

– Permanently extends and expands the enhanced deduction for donating excess food inventory (H>R. 644).

– Permanently extends the enhanced deduction for land conservation easements (h>R. 641).

– Simplifies the private foundation excise tax on investment income to a rate of 1% (H.R. 640).

– Senate passed by a vote of 78 to 20 on May 14, 2015

House of Representatives PassesAmerica Gives More Act of 2015


• Senate Finance Committee marked-up 17 miscellaneous tax bills on February 11, including 3 relating to EOs:

– Agricultural Research Organizations treated as per se public charities under § 170(b)(1)(A) regardless of source of support.

– Exception to Excess Business Holdings rule for Certain Philanthropic Business Enterprises.

– Advance notice to nonprofit organizations whose 501(c)(3) status is in jeopardy.

• Senator Orrin Hatch (R-UT) plans more markups on “noncontroversial” bills with “bipartisan support”.

Senate Finance Committee Markup

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• Rep. Jason Chaffetz (R-UT) introduced H.R. 547, the Properly Reducing Overexemptions for Sports Act, to preclude exempt status for professional sports organizations that have annual gross receipts in excess of $10 million.

• Rep. David Reicher (R-WA) introduced H.R. 630, the Permanent S Corporation Charitable Contributions Act of 2015, which makes permanent a provision that allows a shareholder to reduce S corporation stock basis by an amount equal to the shareholder’s pro rata share of the adjusted basis of property contributed to charity.

House of Representatives2015 Proposed Legislation on Exempt Orgs


House of Representatives2015 Proposed Legislation (cont’d)

• H.R. 181, the Justice for Victims of Trafficking Act of 2015, would permit tax-exempt non-profit organizations to receive grants for combating human trafficking, provided that the organizations refrain from keeping money in offshore accounts to avoid taxation.

• Rep. David McKinley (R-WV) introduced H.R. 343, the Volunteer Emergency Responders Tax Deduction Act, which would provide a charitable deduction for services rendered by volunteer firefighters and emergency medical and rescue personnel.

• Rep. Todd Young (R-IN) introduced H.R. 811, the IRS NOTICE Act, which requires that the IRS provide organizations with notice prior to automatic revocation of exempt status.


• Rep. Morgan Griffith (R-VA) introduced H.R. 133, which would waive reinstatement application user fees for tax-exempt organizations’ small subsidiaries after automatic revocation of their exempt status.

• Rep. David Cicilline (D-RI) introduced H.R. 362, the Paying a Fair Share Act of 2015, which would require that high-income taxpayers – those whose adjusted gross income exceeds $1 million – pay a minimum tax rate of 30% on adjusted gross income less charitable deductions.

House of Representatives2015 Proposed Legislation (cont’d)

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• Sen. David Vitter (R-LA) introduced S. 75, the Education Tax Fraud Prevention Act, which provides that a taxpayer who claims an education credit must provide the student’s social security number and the educational institution’s employer identification number.

• Sen. Dean Heller (R-NV) introduced S. 330, the Conservation Easement Incentive Act of 2015, which permanently extends the special deductibility rules for property contributed for conservation purposes.

• Sen. Jon Tester (D-MT) introduced S. 367, the Sunlight for Unaccountable Non-profits (SUN) Act, which requires that information returns from tax-exempt organizations are available in a searchable format and that such returns include the identities of contributors to certain organizations.

Senate2015 Proposed Legislation on Exempt Orgs


• Sen. Dan Coats (R-IN) and Sen. Ben Cardin (D-MD) introduced S. 400, the Notice Act, which would require the IRS to notify nonprofits in a timely manner prior to automatically revoking their tax exemptions. S. 400 also allows the IRS to retroactively reinstate exempt status if a non-profit does not receive the requisite notice and files an information return.

• Sen. Sheldon Whitehouse (D-RI) introduced S. 161, the Paying a Fair Share Act of 2015, which would require that high-income taxpayers pay a minimum tax rate of 30% on adjusted gross income less charitable deductions.

Senate2015 Proposed Legislation (cont’d)


President’s FY2016 Budget Proposals

• Permanently extend the New Markets Tax Credit and allow New Markets Tax Credit amounts to offset alternative minimum tax liability.

• Reform and expand the Low-Income Housing Tax Credit.

• Require institutions of higher education to report amounts paid, not billed, on Form 1098-T and requires reporting on Form 1098-T by any entity issuing a scholarship or grant in excess of $500 (indexed for inflation) that is not processed and administered by an institution of higher education.

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• Limit itemized deductions to 28% for high-income taxpayers.

• Impose a new minimum tax, the Fair Share Tax (“FST”), on high-income taxpayers. The FST is 30% of adjusted gross income less a charitable credit of up to 28% of itemized charitable contributions.

• Eliminate the two-tiered excise tax on private foundations’ investment income by imposing a single tax rate of 1.35%.




• Modify contribution base limits:– The limit for contributions of cash only to public charities

would remain 50%

– A 30% limit would apply to all other contributions, regardless of what type of property is donated and whether the organization is a private foundation or public charity

• Deny charitable deductions for contributions that give donors the right to purchase tickets to sporting events (Code § 170(1) modified).



• Make electronic filing mandatory for tax-exempt organizations:– Require tax-exempt organizations to file Forms 8872 and 990 tax

and information returns electronically.

– Mandate that the IRS make e-filed returns publicly available.

– Give Secretary authority to require taxpayers who prepare their forms electronically but file them to paper to include on their returns a bar code that the IRS can scan to convert the paper into an electronic format.

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• Make electronic filing mandatory for tax-exempt organizations (cont.):– Impose a monetary penalty of $25,000 for corporations and

partnerships and $5,000 for tax-exempt organizations that fail to comply with electronic filing requirements. (This penalty is waived if there is reasonable cause for failure to file electronically.)

• Increase the standard mileage rate for automobile use by volunteers.


Tax Reform

• There is talk of splitting tax reform into two pieces, doing “business only” tax reform first and individual tax reform separately.

• Business-only tax reform is unlikely to include charitable contribution deduction reforms, but may well include the other provisions discussed in the Tax Reform Act of 2014.


Tax Reform

• Senator Orrin Hatch has outlined 7 broad principles for tax reform: economic growth, fairness, simplicity, revenue neutrality, permanence, competitiveness, and incentives for savings and investment.

– Distributional neutrality is not among the principles, which suggests a departure from the principles underlying the 2014 House-led tax reform effort.

– Senator Hatch announced that he will create five bipartisan working groups to examine various parts of the tax code, similar to the process the House undertook. Committees include: individuals, infrastructure, savings and investment, business, and international.

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2014-15 Priority Guidance Plan

• IRS to adopt streamlined application process for recognition of tax-exempt status (Form 1023-EZ)

• Development of procedures for issuance of determination letters (Rev. Proc. 2014-40)

• Proposed Regs on political campaign activities

• Guidance regarding methods of allocating expenses on dual-use facilities


2014-15 Priority Guidance Plan

• Promulgation of additional guidance on supporting organizations

• Final Regulations concerning IRS authority to disclose exempt organization information to state officials; proposed regulations issued in 2011

• Final regulations concerning the recordkeeping, substantiation, and appraisal requirements for cash and noncash contributions.


Streamlined Form 1023-EZ

• U.S. Organizations

• Under $50,000 in receipts

• Under $250,000 in assets

• Application process for small exempts rendered sane

• Mammoth backlog of applications (74,000) has been substantially eliminated (20,000)

• Too easy to commit fraud?

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State/Local Items

• Warren County Charities Prevail Again

• Update on Allegheny County Real Estate Exemption Applications

• Lemington Home for the Aged v. Baldwin


The Role of the Redesigned Form 990

• Careful completion of the return is necessary because inaccurate or incomplete reporting may be given the appearance of noncompliance, and that may lead the IRS to examine an organization unnecessarily; examples:

– Lack of consistency within the Form 990 return

– Lack of consistency with Form 990 returns of related organizations

– Lack of consistency with other information available to the IRS (e.g., internet searches by the Exempt Organizations Compliance Area’s (EOCA) Review of Operations (ROO) groups)


The Role of the Redesigned Form 990

• The IRS is in the process of using condition codes (computer queries) to flag Form 990 returns for audit (field examinations, limited scope, single issue, and correspondence examinations):

– Searching for the best case for noncompliance to focus resources

• Example: no conflicts of interest policy combined with Schedule L disclosures may indicate potential noncompliance.

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In Part VII, Section A, Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees, changes clarify that reportable compensation should not be treated as deferred if deferred from the calendar year ending with or within the tax year to a date that is not more than 2 ½ months after the end of the calendar year ending with or within the tax year.

Deferred compensation to be reported in column (F) includes compensation that is earned or accrued in one year and deferred to a future year, whether or not funded, vested, qualified or nonqualified, or subject to a substantial risk of forfeiture. But do not report in column (F) a deferral of compensation that causes an amount to be deferred from the calendar year ending with or within the tax year to a date that is not more than 2 ½ months after the end of the calendar year ending with or within the tax year if such compensation is currently reported as reportable compensation.

There is a lot of misunderstanding about 457(f) plans and reporting – failure to report the income correctly can lead to big problems.

Form 990, Part VIIClarification – Deferred Compensation


A Closer Look at IRC 457(f) and Required Reporting

• Part VII, Section A, column D or E and Schedule J, Part 11, column b(iii):– Amounts deferred by employer or employee (plus earnings)

under section 457(b) plan (substantially vested)

– Amounts deferred under nonqualified defined contribution plans (substantially vested) [refers to a section 457(f) plan]

– Earnings or losses of nonqualified defined contribution plan (substantially vested)


A Closer Look at IRC 457(f) and Required Reporting

• Part VII, Section A, column F and Schedule J, Part II, column C– Amounts deferred by employer or employee under

Section 457(f) plan (not substantially vested)

– Amounts deferred under nonqualified defined contribution plans (not substantially vested)

– Earnings or losses of nonqualified defined contribution plan (not substantially vested)

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Example of Reporting Requirements for 457(f) Plans

Instructions for Schedule J, Part II, column C, Example 2Under the terms of his employment contract with Organization B beginning July 1 of calendar year 1, an executive is entitled to receive $50,000 of additional compensation after he has completed 5 years of service with the organization.

The compensation is contingent only on the longevity of service. (Time-based vesting)

The $50,000 is treated as accrued or earned ratably over the course of the 5 years of service, even though it is not funded or vested until the executive has completed the 5 years.

Organization B makes payment of $50,000 to the executive in calendar year 6. Organization B enters $5,000 of deferred compensation in column (C) for calendar year 1 and $10,000 for each of calendar years 2 through 5. For calendar year 6, Organization B enters $50,000 in column (B)(iii) and $45,000 in column (F)


2014 Form 990 Schedule APublic Charity Status and Public Support

• Schedule A’s significant revisions address supporting organizations (SOs).

• Schedule A asks more questions and requests more information about SOs.

• Extensive changes to the Form 990 Instructions explain these changes.


2014 Form 990 Schedule ANew Part IV, Sections B-D

• Part IV, Sec. B – Type I SOs– Did supported organization(s) have power to regularly appoint

or elect at least a majority of the SO’s directors or trustees?

– Did SO operate for the benefit of any supported organization other than that which supervised or controlled the SO?

• Part IV, Sec. C – Type II SOs– Were a majority of the SO’s directors/trustees also a majority

of the directors/trustees of each of the supported organizations?

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2014 Form 990 Schedule ANew Part IV, Sections B-D

• Part IV, Sec. D – All Type III SOs– Did the SO meet its notification requirement to its supported

organizations?

– Was there a close and continuous working relationship?

– How did the supported organization have a significant voice in SO’s investment policies and in directing use of SO’s income/assets?


2014 Form 990 Schedule ANew Part IV, Section E

• Type III Functionally Integrated SOs– How did the SO satisfy the integral part test?

• Satisfied the activities test

• SO is a parent of each of its supported organizations

• SO supported a governmental entity (see Notice 2014-4)

– If activities test box is checked• Did substantially all of SO’s activities directly further support

organization(s)’ exempt purposes?

• But for the SO’s involvement, would one or more of the supported organizations have engaged in the activities?


2014 Form 990 Schedule ANew Part IV, Section E

• Type III Functionally Integrated SOs (Cont.)– If parent box is checked

• Did SO have power to regularly appoint or elect a majority of the supported organizations’ officers, directors, or trustees?

• Did SO exercise a substantial degree of direction over the policies, programs, and activities of each of its supported organizations?

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2014 Form 990 Schedule BSchedule of Contributors

• Revised on-form instructions clarify when a public charity can exclude from Schedule B contributors that fall below the greater than $5,000/2% threshold.

– Organization must complete Schedule A, Part II to show that it is described in Section 170(b)(1)(A)(vi) and qualifies to use the greater than $5,000/2% threshold.


Form 990 Schedule F

• Part IV, Foreign Forms• All Schedule F (Form 990) filers must complete Part IV, lines 1-6.

• If the organization answers “Yes” to any of lines 1-6 because it engaged in the activities described on that line during the tax year, it may need to file the form referenced on that line.

• To determine whether an organization is required to file any of the IRS forms referenced on lines 1-6 (i.e., Forms 926, 3520, 3520-A, 5471, 5713, 8621, or 8865), see the instructions for those forms.

• Do not attach Forms 3520, 3520-A, or 5713 to Form 990.


2014 Form 990 Schedule L InstructionsDefinition of “interested persons”

• 2014 Schedule L Instructions

• Purpose of changes– Increase consistency

– Decrease confusion

– Decrease burden

• Key change: more uniform definition of “interested persons” for Parts II-IV

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• Interested Person Definition:• For Schedule L, Part I – no change

• Disqualified persons under Code Section 4958

• For Schedule L, Parts II –IV (expansion)• The creator or founder of the organization

– And their family members

– Including sponsoring orgs of VEBAs

• Substantial contributors reported in Schedule B (expanded to Parts II and IV)

– And their family members

• 35% controlled entities (expanded to Part II)



• “Interested Person” for Schedule L, Parts II-V (contraction)• Removed (from Part II: highest compensated employees and Section

4958 disqualified persons

• Removed (from Part II): contributing employers of VEBAs

• Removed (from Part IV): entity of which a current or former officer, director, trustee, or key employee, or any family member thereof was serving as

• Director, officer, or trust or

• Partner, member, or shareholder with a direct or indirect ownership interest in excess of 5% in a professional corporation or entity treated as a partnership

• Removed (from Part IV) non-stock organizations more than 35% controlled by other interested persons.


2014 Form 990 Schedule L InstructionsOther Changes

• Other 2014 Schedule L Instruction Changes– Uniform “reasonable efforts” definition that applies to all parts (not just

Parts III and IV)

– Part I (excess benefit transactions): identify in Part V organization manager(s), if any, that knowingly participated in the excess benefit transaction

– Part III (loans): clarification that split-dollar life insurance arrangements described in Regs. 1.7872-15 are loans reportable in Part II

– Part IV (business transactions): new reporting exception for transactions with publicly traded corporations in the ordinary course of business, on the same terms as are generally offered to the public.

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Questions

SCHNEIDER DOWNS

2015 NOT-FOR-PROFIT SYMPOSIUM

THURSDAY, JULY 30,2015

MAUREEN MAHONEY HILL, CFRE

Assessment for Fundraising Success:

The Development Audit

What is a Development Audit?

A development audit is an internal assessment of an organization’s fundraising program and its readiness to embark on new development ventures….

Allows an organization to:

Build on strengths

Overcome weaknesses

Address opportunities for future growth

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When is an Audit Helpful?

When an organization needs to evaluate the current strength of its potential for success….

Consider an Audit When….

Preparing to embark on a major gifts, capital or endowment campaign

Not satisfied with current fundraising results

Seeking to increase board participation in fundraising

Looking for objective evaluation of your fundraising program

Trying to diversify funding streams

Preparing for/engaged in strategic planning process

Looking to restructure your development function

Benefits of an Audit

Weaknesses/gaps identified and addressed Areas of potential and priority identified and

addressed Greater insight, confidence and ownership in

fundraising Provides baseline documentation – measure for

improving results over time Creates a roadmap towards greater sustainability and

fundraising success Puts everyone on the same page with expectations Creates buy-in from leadership First step in creating a culture of giving

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The Audit Process

Documents Review

Constituent Input

Benchmarking Research

Adding External Assessment

Five Areas of Focus

Organizational Readiness

Board Role in Fundraising

Staff Role in Fundraising

Donor Relationships

An Integrated Fundraising Program

Audit Outcomes

Written report of findings and recommendations

Presentation to Board (and staff?)

Optional plan to implement audit recommendations with budget and timeline

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Remember…..

Your current donors are your most important asset, and the time and resources you spend on reflecting how donors experience your organization is time well spent. The development audit provides an effective and formal structure for that reflection.

EMAIL: [email protected]

PHONE: 412-781-3801CELL: 412-780-4708

W W W . L I N K E D I N . C O M / I N / M A U R E E N M A H O N E Y H I L LC F R E

Maureen Mahoney Hill, CFREFundraising, Communications,

Marketing

Review of Day’s Issues and Key Takeaways

Presented by:

John R. Null

Schneider Downs

Audit Shareholder

7/31/2015

64



Risk

• Operational/Financial/Reputational

• Increasing scrutiny

• New rules and standards

• Governance

• Culture and mission



Change

• Economic Political Technology

• Innovation

• Analytical vs. transactional

• Profit motives?

• Collaboration



Accountability

• Higher thresholds

• Allocation of resources

• Setting expectations

• Transparency

• Story tellers

7/31/2015

65

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