Mark Koscinski CPA D.Litt.

March 14, 2023 Mark Koscinski NFP

SVB and NFP

Unless you have been living in the virtual world for the last week, you know the Silicon Valley Bank (SVB) has collapsed. This bank made venture capital loans to startup companies in the tech industry. What can Not-For-Profit managers learn from this episode?

During the last banking crisis I was serving as the CFO of a large NFP. The executive management arrived at the mistaken conclusion the banking industry was going to collapse. Despite my strenuous objections they required me to spread our disposable cash and a large portion of our investment portfolio into low yielding certificates of deposit at multiple banks. All of the CDs had to be under $250,000, the guarantee limit of the FDIC. We had to employ brokers to spread the deposits over many banks. Needless to say, this was an overreaction. Not only did we spend a lot of time on the project, but we also lost a lot of return on our investments and paid increased brokerage fees. The banking system did not melt down and we looked a little foolish. I wrote an interesting article on that topic, which you can find here.

Nevertheless, there was a valid underlying concern.There is a legal limit as to what the FDIC is required to guarantee. It seems in this case the depositors with balances above the guarantee limit will be made whole, but there is no guarantee this will happen with future bank failures. It might take some time for them to access their funds. If your organization does have balances above the limit at a bank and you need the funds, your organization should consider opening another bank account to make sure it can continue to operate in case of a bank failure.

The risk of bank failure is not the only concern with using one bank either. A temporary halt in a bank’s operation can be a problem as well. During the infamous 9/11 crises, the bank my company was using was located in Jersey City NJ, directly across from the World Trade Center. After the attack the bank was closed for days. We could not access our funds and payroll was looming. This would have been disastrous for the company. We were a toy manufacturer and were in the middle of the heaviest shipping season. Any disruption would have seriously cut into our earnings. Fortunately, I was able to meet the company’s obligations including payroll because I opened a second bank account where I kept sufficient funds to operate the company for a period of time. You may say this was a” belt and suspenders” approach to banking and what are the odds such a thing could happen again? I would answer that question with another question. In today’s environment who wants to take such a risk? Also, a little competition is good. Having a second banking relationship is not necessarily a bad thing.

In short, do not rely on the FDIC deposit guarantee. If you have more than $250,000 in place, move some of the deposits to another bank. You not only have a risk of losing the funds but you may not be able to access them for a while. Either could be a catastrophe for your organization.

January 27, 2023January 13, 2023 Mark Koscinski fraud, NFP

Passing From the Scene

Pope Benedict XVI, the pope emeritus, and George Cardinal Pell, two giants of the contemporary Catholic Church, passed away recently. Both made courageous decisions that had monumental consequences for the Catholic Church. As this blog is about the management of not for profit organizations and not politics or religion, Benedict’s and Pell’s theological views won’t be examined here. That is for others to do elsewhere.

George Cardinal Pell was an Australian charged with the cleanup of the Vatican finances. He worked very hard at it and came too close to uncovering the real problems with Vatican finances. Pell was later accused of sexual assault on a minor, a charge on which he was originally convicted and then exonerated on appeal. There were whispers these accusations were bought and paid for by nefarious forces at work in the Vatican. We of course don’t have evidence of that, but what we do know is that Pope Francis eventually stopped the audit engineered by Pell, fired the auditors and scaled back these efforts. Pell was forced from office and could not complete his work. Recently, an anonymous memo attributed to Pell circulating about the next Papal Conclave addressed some of these management issues. The comments about financial management are excerpted here:

“(A) The financial situation of the Vatican is grave. For the past ten years (at least), there have nearly always been financial deficits. Before COVID, these deficits ranged around €20 million annually. For the last three years, they have been around €30-35 million annually. The problems predate both Pope Francis and Pope Benedict.

(B) The Vatican is facing a large deficit in the Pensions Fund. Around 2014 the experts from COSEA (Commission for Reference on the Organization of the Economic-Administrative Structure of the Holy See) estimated the deficit would be around € 800 million in 2030. This was before COVID.

(C) It is estimated that the Vatican has lost € 217 million on the Sloane Avenue property in London. In the 1980’s, the Vatican was forced to pay out $ 230 million after the Banco Ambrosiano scandal. Through inefficiency and corruption during the past 25-30 years, the Vatican has lost at least another € 100 million, and it probably would be much higher (perhaps 150-200 million).

(D) Despite the Holy Father’s recent decision, the process of investing has not been centralized (as recommended by COSEA in 2014 and attempted by the Secretariat for the Economy in 2015-16) and remains immune to expert advice. For decades, the Vatican has dealt with disreputable financiers avoided by all respectable bankers in Italy.

(E) The return on the 5261 Vatican properties remains scandalously low. In 2019, the return (before COVID) was nearly $ 4,500 a year. In 2020, it was € 2,900 per property. “ (1)

While one has to read this material somewhat skeptically, the overall tone and content of the memo is surely correct. What is the takeaway from this? NFP financial management is often the poor stepchild of NFP management. Nowhere is this more evident than in the largest NFP in the world: The Vatican. Donors do not like to hear their contributions are being squandered. Peter’s Pence, the annual collection taken up for the Vatican in every diocese of the world, has been declining for years now. (2) There are many reasons for this. COVID the declining number of Catholics in the West and the sexual abuse scandals are all factors. Why exacerbate a growing problem with bad news about corruption and mismanagement?

Pope Emeritus Benedict passed from the scene also. It has been long rumored Benedict resigned the papacy because he did not have the personal energy or the will to fight the corruption in the Vatican. This was a courageous decision, as a papal resignation had not happened in centuries. Benedict understood what it would take to combat the Vatican bureaucracy. Looking inwards, he did not perceive an ability to fulfill that mission.

Again, what is our takeaway from this? As an NFP manager, understanding your capabilities is critical. Knowing when to ask for help is a key to success. I had a fairly large manufacturing company as a client. It was owned by two people who were looking to hire a president. One was the head of sales and the other was the head of purchasing. I asked them why they did not want to run the company. After all, they owned it. The answer was surprising at the time, but in retrospect, not now. The answer was simple. They knew they didn’t have the knowledge to address some of the issues the company was facing as it was growing or to manage an increasingly complex organization. Like Benedict, they understood their limitations and sought help, even if it meant giving up day to day control of their organization. Or as one famous modern philosopher put it:

Pope Emeritus Benedict and Cardinal Pell are profiles in courage. The world is much worse off without them. May they rest in peace. The question still remains How do you combat the management issues at the Vatican? They were too big for these two men. It appears drastic action is needed. Perhaps it is time to consider what Constantine the Great did when he found his Rome to be too inflexible to change to new realities. He moved the capitol.

http://magister.blogautore.espresso.repubblica.it/2022/03/15/a-memorandum-on-the-next-conclave-is-circulating-among-the-cardinals-here-it-is/

2. https://angelusnews.com/news/vatican/peters-pence-donations-stable-in-2021-u-s-leads-giving-vatican-says/)

January 27, 2023January 3, 2023 Mark Koscinski NFP

Lessons From the New IRS Mileage Rates

Each year the IRS updates its allowable mileage rates. It recently announced the following rates for 2023:

65.5 cents per mile for business use;

22 cents per mile for medical purposes; and

14 cents per mile for charitable purposes.

The latter two rates are unchanged from 2022. The new business mileage rate has increased by three cents per mile from the previous year. The IRS claims the business rate is based on the fixed and variable costs of operating a vehicle and the medical reimbursement rate is based only on variable costs. Finally, the charitable contribution rates are determined by statute. How do the new rates impact NFP managers?

Right off the bat, it means costs will rise. If your employees are using their vehicles for work purposes and you reimburse them at the IRS mileage rate you will need to pay them three cents per mile more than you did last year. However, that is not the real impact of these rates. The true impact may be far more subtle.

Let’s dig beneath the surface of these numbers. If we accept the IRS computations at face value, 22 cents per mile is the variable cost ( fuel, maintenance, etc.) of operating a vehicle. An additional 43.5 cents per mile then is the fixed cost of vehicle operation. In short, the fixed costs or overhead application rate is about twice that of the variable cost. The largest component of the fixed cost is the depreciation of the car, which one source claims to be about 40% of the entire cost of operating the vehicle.

This is just one example of a trend in the American economy. The percentage of fixed to total costs of providing products and services is rising. This is no less true in the NFP sector than in other industries. There are many reasons for this, including the expanded use and cost of technology to conserve on personnel costs by improving productivity. NFP managers need to keep this principle in mind when they are applying for grants and costing out services. Yes, we are not in the business of making a profit, but we do need cash flow to keep the doors open, provide a living wage for our employees, and fulfill the organization’s vision and mission. Not taking into consideration fixed costs is a losing proposition in the long run and will lead to the eventual demise of the organization. Some of you may respond by saying many funders will not provide for overhead. My answer to that is to take a look at activity based costing, a topic previously discussed in this blog…

The second takeaway is the impact on volunteers and donors. The charitable mileage rate is about two-thirds of the variable cost of operating a vehicle. So, the volunteer who can itemize on their tax returns (admittedly, few and far between these days because of the higher standard deduction on the federal income tax return) actually “lose” money driving to your facility to volunteer. The deductible amount of charitable driving doesn’t even cover the variable cost of operating the car. Using this math, it might be better for the volunteer to simply write a check that is completely deductible than to drive down to your facility and volunteer. Obviously, this is not a perfect substitute for actual volunteering, but this problem is something NFP managers need to be aware of. Some strategies for helping defray costs would be to allow volunteers to do as much as possible remotely so they can “bunch” their physical travel time to minimize expenses and to consider paying small stipends for actual time spent on premises. This will increase costs but the stipend says yes, we know it costs money for you to come here but we want to show our appreciation.

It is troubling that Congress and the states are so stingy with the charitable mileage rates. In two scant years (2025) the Trump era tax changes will lapse and the higher standard deduction will disappear. If this is the case, more and more people will begin itemizing again. Consider contacting your federal and state legislators to push for higher deductible mileage rates. The NFP sector does a great job helping out those in need. It is also vital to the health of the economy but very few people talk about this. It is time we did. Let our legislators know how much the charitable contribution deduction and the charitable mileage deductions mean to our volunteers and donors. Perhaps this will increase the volunteer participation in NFP organizations.

Cost of operating a vehicle: https://companymileage.com/howmileageratedetermined/

December 23, 2022December 17, 2022 Mark Koscinski NFP

Hail And Farewell!

The holidays are always a joyful season for me, given I have five grandchildren. They are a true blessing in life. This year though, the holiday season will be a little bittersweet. The end of this year will also see a wonderful and well known professor retire from Moravian University (“Moravian” or “the University”). Dr. James West is an economist who also writes some very good poetry and I daresay, is a dear colleague of mine on the faculty of the School of Business and Economics. He has been a mainstay of the faculty at Moravian since 1989 and will be leaving the classroom at the end of this semester for a sabbatical semester and then onto retirement.

One of Dr. West’s articles is named Attaining Prosperity: A 9 “P” Economic Model. Jim has successfully used this model to teach budding new economics majors at Moravian. He postulates Prosperity is the result of four microeconomic P’s (Production, Property, Prices and Profits) and four macroeconomic P’s (Public Sector, Private Sector, Philosophy, and Philanthropy). Combined, these eight factors result in the final P: Prosperity.

As this is a blog about Not For Profit (“NFP”) management, I want to focus on the philanthropic factor. This is often omitted in a discussion of economic prosperity. Jim makes it an explicit part of a sound economy. Philanthropy is derived from the Greek work philanthropos, which means humanely or kindly, terms many do not connect to a capitalist society. Jim states the philanthropic sector of the economy “…depends on the voluntary support of individuals, largely in the private sector, to support a myriad of humanitarian activities, in education, health, the arts, and many more quality of life components essential to the society’s definition of prosperity”.

This is certainly a valuable insight. One recent report states NFP organizations contribute on average 5.7% of the U.S. GDP in recent years. It also claimed the NFP sector contributed $1.4 trillion dollars to the economy in the second quarter of 2022 alone (1). This number is certainly dwarfed by both the public and private sectors, but nevertheless stands as a significant contribution to American economic life. Of course, the quality of life issues generated by the NFP sector are not so easy to quantify. Who can deny a symphony orchestra playing a piece by Beethoven doesn’t improve our quality of life? The orchestra is largely supported by donations and subscriptions. That is the economic part of the equation. The utility (to use an economic term) generated by listening to the music largely goes unmeasured. In short, beyond the quantitative measures (the impact on GDP) there are the qualitative aspects as well, enhancing human enjoyment and existence.

He further points out, “ A society that promotes honesty and trustworthiness will support stable institutions in the private, public, and philanthropic sectors”. These values will provide a solid economic structure for society. I would like to expound on this insight. They are in fact critical to economic growth, but we always have to be concerned with the moral dimensions of the underlying Philosophy as well. For instance, my profession (accounting) has always emphasized the importance of “giving back” to the community. This can be done by donating your time, talent, or treasure. We need to always keep that in our mind when we talk about what makes a strong economy, and to even more forcefully argue for greater participation by all in the NFP sector. The “9 P” argument provides another reason why everyone’s participation is necessary: it is part of a strong economy. NFP directors, managers, and employees can all be proud of their cumulative efforts and their contribution to our economy.

So, in closing, let me wish all of you a wonderful holiday season, a happy New year, and a well deserved retirement to my friend! May you have a healthy, and dare I say, prosperous New Year!

https://independentsector.org/resource/health-of-the-u-s-nonprofit-sector/#:~:text=Value%20of%20Sector,the%20sector%20in%20recent%20years.

Dr. James West working with a student at Moravian University

December 16, 2022December 9, 2022 Mark Koscinski decision analysis, NFP

SBF, FTX and NFPs

FTX, SBF, and NFPs

Unless you are living in a bubble, you know all about the crash and bankruptcy of FTX, Sam Bankman-Fried (known as SBF), and “effective altruism”. What can NFP managers learn from this sad episode? Without going into all of the intricacies of this case, here are some takeaways for managers of any organization:

Beware of Groupthink. One of the venture capitalists (Anthony Scaramucci, briefly Donald Trump’s communications director) was asked why the due diligence on FTX did not catch the alleged fraud. His answer was very revealing. First, FTX was a real business, unlike that of Bernie Madoff. His contention was that the subsequent operation of the business was the genesis of the fraud. Fair enough. But again, why didn’t the investigation of the business disclose any red flags? The venture capitalist’s answer: Groupthink. Paraphrasing, he said everyone who looked at the enterprise, including the lawyers and the accountants conducting the due diligence, wanted to see a good business. NFP managers, beware of groupthink. Make sure you get diverse opinions before you make a critical decision. Tolerate opinions different from your own. Even outlandish points of view may sharpen your thinking supporting your decision.
Beware of the Halo Effect. The halo effect occurs when your positive feelings about someone or something overflows into another, often unconnected area. For instance FTX used some influential figures such as Shaquille O’Neal and Tom Brady as spokespeople. Their knowledge of cryptocurrency might be questionable, but their star power brought a lot of positive publicity to FTX. Some of them are now being sued by investors. Additionally, SBF was a big contributor to political causes. We are all prone to the influence of the halo effect. How should NFP managers deal with it? Slow down to analyze before making a decision. Be aware of your intuition. A big decision or a big investment requires a lot of thought and analysis. Don’t shortcut it because of someone’s halo.
Risk Management is essential! Risk is the obverse side of the return coin. SBF’s significant other, who managed some of the FTX funds, basically admitted there were no risk management controls in place. This is a stunning revelation from a financial organization. Scaramucci said the rising interest rate environment was the cause of the FTX collapse. There are many risks any enterprise incurs (such as hazard risk, credit risk, economic downturn, etc.) but any financial organization should be keenly aware of this risk. Small NFPs don’t necessarily have to worry about such things as bond duration and asset liability management, but a good risk control management program is essential to any enterprise. Catalog the risks your organization is facing and design an effective risk control program.

Don’t abandon technology and cryptocurrency because of this disaster. Cryptocurrency may not be forever, but it will be around for at least a while. Your NFP might consider taking cryptocurrency as a donation. Many major companies allow customers to pay their bills with cryptocurrency already. Make contributing easy for your donors. Don’t make them convert their crypto-assets to cash before they donate it to you. NFPs will often accept all kinds of assets, including real and tangible property. Why not crypto? Continue to monitor developments in this field. Be on the lookout for opportunities for donors to send your organization cryptocurrency. To do this you will need to have at least a rudimentary understanding of the crypto-world.

December 10, 2022December 1, 2022 Mark Koscinski Uncategorized

For the Good of the Profession

This blog is usually devoted to not-for-profit organization management issues, but today I would like to deviate from that subject and talk about some developments in my beloved accounting profession. As many of you are aware, the regulators in virtually all jurisdictions require 150 credits (five years of college education) for professional licensing as a certified public accountant (CPA). This has been the norm for almost four decades now. For instance, Florida was one of the first states to require a fifth year of college to qualify for a CPA license back in 1983. Other states fell into line until today only the U.S. Virgin Islands does not require 150 credits for licensure.

Interestingly enough, the extra 30 credits do not have to be taken at the graduate level or in a business related subject at all. Students can satisfy the requirements by taking classes in any academic subject as long as the additional credits appear on a college transcript. In recent years one of my students completed a second bachelor’s degree in music and that qualified her to become a CPA when she passed the Uniform CPA Examination. Other students will complete their bachelor’s degree and then take additional courses at a community college.

What was the purpose of requiring another year of college education? Presumably the business world was becoming and still is becoming) more and more complex and the profession recognized it over forty years ago. As the American Institute of Certified Public Accountants (AICPA) website (1) notes: “A certified public accountant (CPA) in today’s environment must not only have a high level of technical competence and a sense of commitment to service, but must also have good communications and analytical skills, and the ability to work well with people. Employers are looking for individuals who have the ability to analyze and evaluate complex business problems and the interpersonal skills and maturity to make decisions in a client- and customer-service environment.”

Why were business subjects or additional accounting courses not required? I think a close reading of the above quote puts everything into perspective. At the time the profession seemed to believe there were several deficiencies in the training of accountants, including communication skills. Therefore, even more liberal arts courses would help an accountant become a more critical thinker and better business person. I also believe the profession wished to have well-rounded professionals who could function not only as a CPA but as an informed member of society. As I tell my students, accounting firms can hire computers to do accurate accounting. However, the firms are looking to hire interesting people who can relate well with the clients, stakeholders, and other employees of the firm. I believe this has happened but I also think it is time to rethink the 150 hour requirement.

To be sure I don’t want the 150 hour requirement to be abolished. That would be a step backwards in my opinion. State Boards of Accountancy are not inclined to do that either since there is reciprocity and portability among the various states. CPAs licensed in one State can temporarily work or be licensed in another State since each has similar educational requirements. Removing the 150 credit hour requirement would need to be done by all jurisdictions or there would be mass confusion as CPAs from one state tried to work in another. No one wishes to see that.

The requirement does have several serious implications though. First, the extra cost has increased the barrier to entry. While the AICPA disputes this, the actual results seem to tell a different story. Minority groups are underrepresented at the professional level in accounting firms (2) and some believe the 150 hour requirement is a cause.The total number of accounting graduates seems to be dropping (4) and firms are afraid they will not be able to secure sufficient talent in the near future. The latter concerns were expressed at a meeting of the State Board of Accountancy of NJ during its May 2022 meeting (4) During the same meeting the State Board took direct aim at the fact the additional credits did not have to be in a business related subject, saying this requirement “…makes little sense.” It should be noted that even the AICPA believed most students would pick up the additional education through graduate programs such as a Master’s of Accountancy degree. The NJ State Board also noted there seems to be very little correlation between the extra year of college education and success as a CPA.

As a result of these concerns, the NJ Board approved a “Work for Credit” program where students can earn 30 credits by working in a co-op program with an accounting firm. Students will work for nearly a year with a sponsoring accounting firm to achieve the extra 30 credits. Since the students will be paid, there will be significantly less financial burden on them. Hopefully, this will also increase minority participation within the profession. I am very much inclined to agree with this approach to solving some of the problems in the accounting profession. Afterall, who can disagree with better trained CPAs and greater opportunity and participation in the profession?

November 25, 2022 Mark Koscinski NFP

Final Fundraising Campaigns of the Year

As the Thanksgiving Day holiday fades into the rearview mirror and Giving Tuesday (five days after Thanksgiving) looms, it is time for smaller NFP organizations to think about making final fundraising campaigns for the year.

It is definitely worthwhile to make the last minute pitch for contributions for both Giving Tuesday and for year end. While an email blast is definitely in order (and maybe all you can do prior to Giving Tuesday) , your organization might think of a little more personal message, such as a video of your staff. People react better to seeing other people and identifying with them rather than getting a more impersonal email request.
Make sure your website has a very visible donation button as the website opens. Do not make potential donors hunt for ways to make a contribution. Make it easy for them.
Stay away from saying “Your contribution is tax deductible!”. Yes, it is but only if the donor itemizes their charitable contributions on Schedule A of Form 1040. Remember, the standard deduction is $25,900 for a married couple filing jointly in 2022 and will be even higher in 2023. Since state tax deductions (both income and property tax) and mortgage interest deductions are capped, it is extremely difficult for couples to itemize deductions unless they make large charitable contributions or have extraordinary medical expenses. It is even tougher in 2022 since the limited “above the line” charitable contribution deduction has been eliminated. This was an expedient that was adopted during the COVID crisis and was never intended to be permanent. Instead of focusing on the tax deductibility, NFPs should focus on the intrinsic value of contributing. Making a charitable deduction is a great good in itself. Economists even have a name for this phenomenon: other regarding preferences. People attach value to the well being of others as an end in itself. That should be your main selling point.
Have your year end forecast ready. Knowing what the contributions will be used for will be helpful when answering questions from donors about why your organization needs the funds.
Time to do winter cleaning. This is a great time to reconcile all of your general ledger asset and liability accounts to the subsidiary ledgers. Why is that important? There are a couple of reasons. First, any unrecorded donations hung up in suspense accounts or as a reconciling item in a bank reconciliation can be appropriately recorded before year end. We will come back to the importance of this in a moment. Second, these unreconciled transactions can often be the result of fraud or losses resulting from poor accounting controls. You do not want to be embarrassed by announcing an unanticipated loss midway through a contribution campaign. Third, reconciling accounts now and taking care of any issues will assist in closing the books at year end as the accounts will be clean through calendar year end.
Make sure you are ready to provide charitable contribution information to your donors at year end. While your organization may use a fiscal year for bookkeeping purposes, your donors will be filing their tax returns on a calendar year basis. Even though the odds of actually using a charitable contribution deduction have been greatly reduced, a few of your larger donors might still be able to use their deduction. This is why going through your general ledger before year end and reconciling the accounts is of such importance. You want to make sure all of your donors’ contributions have been appropriately accounted for. Large donors may be scared away from contributing in subsequent years by the appearance of poor controls over donations. Remember, the IRS requires an organization to provide adequate contemporaneous documentation of charitable contributions for donors. This is a complex topic when it comes to noncash contributions so you may need help on the required reporting. Also, remember that volunteer services are not deductible.

November 11, 2022 Mark Koscinski NFP

Remembering What is Important

As the fervor and fevered pitch of Election Day recedes into the rear view mirror, we inexorably move towards Thanksgiving and the subsequent holiday season. During this time, we have a duty to kindly remember those less fortunate than us and those in the Not-For-Profit (NFP) world who help the disadvantaged as best they can. How can we help? You know the formula: donate your time, talent and treasure. Please consider volunteering at your local charity, whether it is a church, synagogue or any other NFP organization. Give generously to your local food bank, particularly at Thanksgiving time. Make a donation to your favorite NFP organization to help it defray its operating costs. If the economy slips into a recession as many project, funds for NFP organizations begin to dwindle. will

Look around you to see where you can help. The needy are often hiding in plain sight. I work at a major university. Several years ago faculty lunches were disappearing from the kitchen refrigerator. It took us a day or two to figure out a student who couldn’t afford to eat had to resort to taking food to survive. We simply didn’t comprehend that students at a major university could be in such desperate straits. We weren’t looking around and were oblivious to the plight of our fellow man. After leaving a message about the food bank in the refrigerator the lunches were left alone.

I can’t even begin to tell you how amazed I am at how many students visit the college food bank. For them, it is often a choice of skipping meals or buying a textbook. To their credit (no pun intended), these students choose to sacrifice their current needs for the prospect of doing well in class. Yes, I understand about the cost of college but I do have a soft spot for those who are working to improve themselves even at the cost of going hungry. They deserve our support

We often get so caught up in our lives that we need to step back and revisit our duty to our fellow man. To paraphrase a great literary character, “Mankind is our business”. And we all know what happened to that fellow when he didn’t heed his own advice.

September 16, 2022July 18, 2022 Mark Koscinski NFP

Some Modest Accounting Suggestions for the NFP World

As the haze of the Spring semester has sufficiently dissipated, I’ve had a little time to ponder the content of my Not For Profit Accounting class. Transparency is the watchword of the era, and I think NFP accounting standards are not as helpful as they would be. As a result I have a few, mostly radical suggestions for the Financial Accounting Standards Board and the regulation of NFP accounting:

Allow fund accounting for NFP entities. Yes, you heard me right, but don’t make it mandatory. Make it an election if the organization meets certain requirements. For instance, take a small church congregation. At the beginning of the year the minister distributes pledge cards. The members of the congregation complete the cards and in my experience do make the contributions as pledged. Some don’t but this is easily handled within the framework of the modified accrual basis of accounting. Wouldn’t the use of fund accounting be more meaningful in this context than the current accounting? Additionally, the reconciliation of actual results to the budget municipalities must do in their Annual Comprehensive Financial Report would be of great interest to many stakeholders of a NFP organization. Wouldn’t it be great to have a management discussion and analysis section of the annual report just like municipalities do? How about the statistical section municipalities are required to report? I know I would find all of this information interesting.
Allow the use of the old classification of net assets. The current classification on the statement of financial position divides net assets into donor restricted net assets and net assets without donor restriction. I liked the previous disclosure that split net assets into unrestricted, temporarily restricted and permanently restricted net assets. Additionally, I like the idea of including assets restricted by board of directors or trustees in restricted net assets, with the appropriate disclosures of course. Finally, net assets with a purpose designated by management should be allowed on the face of the statement of financial position. Yes, this would be a little more complicated but I believe it is much more meaningful than the current schema. The current disclosures hide the intent of management and the board somewhere deep in the footnotes. Why not be “upfront” about intentions? Wouldn’t stakeholders be interested in that as well?
Use activity based costing and management. Yes, I know this is difficult as well. However, Gary Cokins, the guru of activity based costing has developed a rapid prototyping model for ABC that even smaller organizations can use. Why would an NFP organization want to put itself through such a strenuous introspective exercise? Well, there are a lot of reasons including forming a basis for enterprise performance management. Also, think about what happens when your organization is applying for a grant. Donors are loath to fund overhead. Since ABC traces costs rather than allocating them, your organization would be on a much firmer footing and have a more convincing argument when applying for a grant.

Yes, these suggestions could complicate the lives of many NFP managers and accountants, but they also would make your organization’s finances much more transparent to stakeholders. Your organization would become more competitive finding the allusive donation dollar.

August 12, 2022August 11, 2022 Mark Koscinski NFP

Watch Out! The IRS is Just Around the Corner

The IRS issued some interesting rulings lately, denying tax-exempt status to some organizations in several private letter rulings (PLRs). PLRs are not considered to be precedents that can be used in other cases because they are often very fact based. Nevertheless, they can provide some insight into the IRS organizational thinking and provide guidelines for future action. This outstanding article by Cory Halliburton of Freeman Law provides analyses of these PLRs.

At the same time, one has to wonder about how NFP organizations will fare in the future as the IRS plans to add 80,000 new employees. The Treasury Department has estimated the tax gap (tax revenue lost due to noncompliance) is $600 billion per year. One can see how additional IRS resources could have a meaningful impact on closing the federal budget deficit. At the same time, it is only prudent for NFP organizations to review their operations and documentation to ensure they are in fact an NFP organization for tax purposes. Larger donors receive tax deductions for charitable contributions. Losing those tax deductions by losing NFP status would be catastrophic for NFPs.