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The Unique Alternative to the Big Four ® Bridging the GAAP Between the Development and Accounting Departments Joanne Charles, Shawnee State University.

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Presentation on theme: "The Unique Alternative to the Big Four ® Bridging the GAAP Between the Development and Accounting Departments Joanne Charles, Shawnee State University."— Presentation transcript:

1 The Unique Alternative to the Big Four ® Bridging the GAAP Between the Development and Accounting Departments Joanne Charles, Shawnee State University Angie Lewis, CPA, Crowe Horwath LLP Pete Ugo, CPA, Crowe Horwath LLP

2 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 2 Audit | Tax | Advisory | Risk | Performance Speaker Introductions  Joanne Charles Shawnee State University  Angie Lewis Crowe Horwath  Pete Ugo Crowe Horwath

3 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 3 Audit | Tax | Advisory | Risk | Performance Objectives  What is the Issue?  Why is it a Problem?  Suggestions for “Bridging the ‘GAAP’”  Examples of Gift Instruments with a Potential “GAAP” between Development and Accounting

4 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 4 Audit | Tax | Advisory | Risk | Performance What is the Issue?

5 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 5 Audit | Tax | Advisory | Risk | Performance Board of Directors Meeting  Foundation / Development Department’s Portion of the Meeting

6 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 6 Audit | Tax | Advisory | Risk | Performance Board of Directors Meeting  Accounting Department’s Portion of the Meeting Accounting - GAAP Development/ Foundation

7 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 7 Audit | Tax | Advisory | Risk | Performance Do You Think Like The Accounting or Development Department?  Assessment test (yes or no) - “Yes” answers are strong indicators of “accounting”

8 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 8 Audit | Tax | Advisory | Risk | Performance What is the Issue?  Development “Counting” vs. Accounting “Recognition”  Multi-year pledges  Promises  Grants  Intent vs. promise/pledge  In-kind contributions  Discounted goods and services  Bequests  Remainder trusts  Lead trusts  Estate trusts  Perpetual trusts  Life insurance  Publicly traded stock  Private stock  Conditions  Naming rights  Goods/services received by donor

9 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 9 Audit | Tax | Advisory | Risk | Performance Examples of Different “Languages”  What Development/Foundation May Hear from Donors:  “The University is in my Will!”  “My intention is to set up a scholarship endowment in my family’s name.”  “As soon as the College opens the new School of Fine Arts, I will donate $1 million.”  “I will donate $500 for a table at the upcoming dinner gala.”  “My company will provide a 20% discount on construction management services in relation to your upcoming capital project.”  What Accounting WANTS to Hear:  Irrevocable  Promise to Give  Unconditional  Nonrecipirocal  CASH

10 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 10 Audit | Tax | Advisory | Risk | Performance GAAP Contribution Definition  ASC (formerly known as FASB Statement #116)  An unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner.  Those characteristics distinguish contributions from exchange transactions, which are reciprocal transfers in which each party receives and sacrifices approximately equal value; from investments by owners and distributions to owners, which are nonreciprocal transfers between an entity and its owners; and from other nonreciprocal transfers, such as impositions of taxes or legal judgments, fines, and thefts, which are not voluntary transfers.  In a contribution transaction, the value, if any, returned to the resource provider is incidental to potential public benefits. In an exchange transaction, the potential public benefits are secondary to the potential proprietary benefits to the resource provider. The term contribution revenue is used to apply to transactions that are part of the entity's ongoing major or central activities (revenues), or are peripheral or incidental to the entity (gains).

11 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 11 Audit | Tax | Advisory | Risk | Performance GAAP Contribution Definition  ASC (formerly known as FASB Statement #116)  An unconditional promise to give shall be recognized when it is received. However, to be recognized there must be sufficient evidence in the form of verifiable documentation that a promise was made and received.  A communication that does not indicate clearly whether it is a promise is considered an unconditional promise to give if it indicates an unconditional intention to give that is legally enforceable. Legal enforceability refers to the availability of legal remedies, not the intent to use them.  Solicitations for donations that clearly include wording such as “information to be used for budget purposes only,” or that clearly and explicitly allow resource providers to rescind their indications that they will give, are intentions to give rather than promises to give and shall not be reported as contributions.

12 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 12 Audit | Tax | Advisory | Risk | Performance Why is it a Problem?

13 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 13 Audit | Tax | Advisory | Risk | Performance Why is the Development/Accounting “GAAP” a Problem?  Management and staff confusion  Board of Directors confusion  Have we met our goal?  Audited financial statements may be inconsistent with internal reports  Audit adjustments and management letter comments  May lead to distrust of internal reports  When to give naming rights in a capital campaign?  When to awards scholarships or fund program activities?

14 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 14 Audit | Tax | Advisory | Risk | Performance Why is the Development/Accounting “GAAP” a Problem?  When to start construction?  Accounting not involved enough in key decisions  Campaign goals and planning  Gift counting decisions  Complex donor agreements – gift annuity rates, payment terms, etc.  Public acknowledgement of gifts before any cash received – what if donor does not pay?  Budget grows to match development amounts…but accounting can’t make it “balance.”  Donor relationship issues – what if your XYZ Building is open, and XYZ donor hasn’t paid a dime?!

15 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 15 Audit | Tax | Advisory | Risk | Performance Suggestions for “Bridging the GAAP”

16 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 16 Audit | Tax | Advisory | Risk | Performance Suggestion #1 – Understand the Fundraising Goal and What Will Actually Be Available to Spend  Comprehensive Campaign (in millions):  Major Gifts – silent phase$ 245  Alumni appeal 95  Faculty/employee appeal 15  Outside foundations 25  Government grants 15  Miscellaneous 5 $400  Conclusion – We have a $400 million campaign!  So if we meet our goal….we will have $400 million to spend!! Right???

17 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 17 Audit | Tax | Advisory | Risk | Performance Suggestion #1 Example  “Bridging the GAAP” on Campaign’s Financials We Exceeded Our Goal!! Accounting – “Or did we?”

18 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 18 Audit | Tax | Advisory | Risk | Performance Suggestion #1 Example  Sources and Uses Financials% of $465M Actual Current Cash $ 242 Uses Fundraising costs327% Administrative costs82% 40 Left over to spend now$ 20243%

19 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 19 Audit | Tax | Advisory | Risk | Performance Suggestion #1 Example  Lessons Learned From Campaign  The accountants should be involved in planning for any fundraising campaign  Reconcile the future rather than report the past - cash flow projections  Share accounting information and concerns with development  Make sure your “sources” have identified “uses” (so that others don’t think excessive spending is OK)  Ensure that everyone knows what the balance sheet impact will be

20 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 20 Audit | Tax | Advisory | Risk | Performance Suggestion #2 - Divide and Conquer Your Size  How big is your institution acting?

21 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 21 Audit | Tax | Advisory | Risk | Performance Suggestion #2 - Divide and Conquer Your Size  Breakdown of Philanthropic $$ - Gross to Net  Philanthropic revenue $ 25,000,000  Fundraising costs (5,000,000)  Direct mail costs (2,000,000)  Net philanthropy $ 18,000,000  Use of $18 Million Net Philanthropic $$  New faculty endowment$ 5,000,000  Administration/Support 3,500,000  Information systems upgrade 2,500,000  Current scholarships / programs 5,000,000 Application of net philanthropic $ to Operational Support * $ 2,000,000 *Need to clearly communicate the operational support to all parties early… easy to overspend when others are thinking at the gross level of $25M.

22 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 22 Audit | Tax | Advisory | Risk | Performance Suggestion #3 – Divide and Conquer Your Development How much money is development really raising – and when (if ever) can it be used?

23 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 23 Audit | Tax | Advisory | Risk | Performance Suggestion #4 – Keep the Board Informed (And remind everyone that it only “counts” once!) Temporarily Restricted Commitments and pledges - Time Restricted What are our prior commitments and pledges? $ 35,000,000 What will be the new commitments? 15,000,000 What prior commitments will be paid? (10,000,000) What will be our balance at year end (time restricted) $ 40,000,000 Restricted cash (Deferred gifts) – Purpose Restricted What is our prior total of deferred gifts (cash) $ 28,000,000 What Cash will we receive 10,000,000 What Deferred gifts will we use (24,000,000) $ 14,000,000 Unrestricted Uses of Development dollars Total Deferred gifts we will use $ 24,000,000 Unrestricted cash we receive 2,000,000 “Maturity” of planned gifts? 5,000,000 $ 31,000,000

24 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 24 Audit | Tax | Advisory | Risk | Performance Suggestion #5 – Benchmark Against Other Institutions  Realizing the Power of Numbers  NACUBO studies  Other __ACUBO groups  US News & World Report  iPeds  Form 990 – Guidestar  Ask your peers  What to look at?  Contribution revenue  Endowment size  Fundraising expense %  Pledges receivable balance & fluctuations  Net assets by classification (UR, TR, PR)  Reserves (Unrestricted net assets less Board designated)

25 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 25 Audit | Tax | Advisory | Risk | Performance Suggestion #6 – Reconcile Often Periodic reconciliation of development records vs. accounting records  Validates completeness and existence of recorded contributions  Tests the effectiveness of internal controls / segregation of duties  Allows team to address issues in advance – don’t wait for the audit! AGREE

26 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 26 Audit | Tax | Advisory | Risk | Performance Suggestion #7 – Develop and Document a Gift Counting Policy  Establish parameters for determining if fundraising goal has been met  How are revocable gifts “counted”?  Endowment vs. capital or other temporarily restricted purposes  Impact of planned gifts  Other items that could be included:  Certain types of gifts count toward specific fundraising categories  Limit on number of years over which pledges may be paid  Example

27 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 27 Audit | Tax | Advisory | Risk | Performance Suggestion #8 – Develop and Document a Gift Acceptance Policy  One of the most important reasons – it allows an organization to say “no thanks” to donor  Provides consistency  Removes case-by-case decision process and accompanying emotion/pressure  Does your organization want to accept donor’s “gently used car” or “wonderful second home”

28 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 28 Audit | Tax | Advisory | Risk | Performance Suggestion #9 – Consistent and Thorough Documentation  Clear (and consistent) wording on all Pledge Cards and Donor Agreements  Payment timing  Restrictions (if any)  Irrevocable? (regarding planned gifts)  Promise rather than “intent”  Donor’s signature  Obtain review/input from both Accounting and Development  Establish a process for reviewing deviations requested by donors

29 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 29 Audit | Tax | Advisory | Risk | Performance Suggestion #10 – Communicate Often  Frequent and scheduled interaction between Development and Accounting  Keep the Board and other members of management informed  Talk to your auditor throughout the year as complex gift transactions arise

30 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 30 Audit | Tax | Advisory | Risk | Performance Examples of Gift Instruments with a Potential “GAAP” between Development and Accounting

31 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 31 Audit | Tax | Advisory | Risk | Performance Example #1 – Bequest for Capital Campaign  Mr. and Mrs. Generous are wealthy philanthropists who have made annual contributions to XYZ University for many years.  XYZ is in the early stages of a $50 million capital campaign for a new classroom building.  Mr. and Mrs. Generous met with XYZ’s VP of Development, and stated that they are updating their will to include a $35 million bequest to XYZ!  VP of Development and President of XYZ want to name the new building in donor’s honor.  Reactions and concerns from Accounting Department??

32 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 32 Audit | Tax | Advisory | Risk | Performance Example #1 – Bequest (Accounting Concerns)  Bequest = not recordable as a pledge under GAAP  Revocable  Mrs. & Mrs. Generous are only 50 years old!  Would you feel differently if they were 90 years old?  How to fund the classroom building’s construction?  Loans…and interest expense  What if we rename the building, but never receive a dime?  Main concern  Development says XYZ has met 70% of the capital campaign goal  Accounting says that XYZ has received no cash and has $0 GAAP contribution revenue $0 in cash vs. $50 million message?

33 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 33 Audit | Tax | Advisory | Risk | Performance Example #1 – Bequest (What is next?)  Consider an irrevocable trust  Written documentation – maybe a “promise to give that is funded through estate?”  Include building naming plans in written documentation, including impact if future payment not received  Consult with Board of Directors  Donor considerations  History of previous pledge payments  Stability of business/income  Relationships  Gift counting policy is an important part of campaign!

34 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 34 Audit | Tax | Advisory | Risk | Performance Example #2 – Undocumented Pledges  Mr. Donor met with President of ABC College, and informed President of Mr. Donor’s recent inheritance windfall.  Mr. Donor (who has never donated to the College before) wants to direct several million dollars of his new found wealth to the College.  Mr. Donor requests that gift be noted as “anonymous,” and indicates that his attorney will contact the College soon to work out a written agreement.  Development’s position: record as a pledge in fundraising system, and publicity of large gift  Why would this wealthy individual not pay his pledge?  Accounting’s position: $0 of GAAP contribution revenue  No history with this donor  No written pledge agreement  Accused of “raining on the parade,” as usual!  Check presentation meetings cancelled

35 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 35 Audit | Tax | Advisory | Risk | Performance

36 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 36 Audit | Tax | Advisory | Risk | Performance Example #3 – Matching/Challenge Grant  Outstanding University is running a fundraising campaign to increase its scholarship endowments  University applied for a contribution from the Big Money Foundation (which is the private foundation of an alumni family)  Big Money Foundation approved the request in the form of a matching grant  To receive the $5 million gift from Big Money Foundation, the University must raise $5 million for this campaign from other sources (with restrictions on amount from any one individual donor, or from Board members and management)  Development’s position: record in fundraising system and set scholarship criteria  Accounting’s position: record as the required $5 million is raised  Recognition = dollar for dollar  What if one of the matching pledges is later deemed to be uncollectible?  No scholarships awarded until funds are received and have earned an investment return

37 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 37 Audit | Tax | Advisory | Risk | Performance Example #3 – Matching/Challenge Grant  Conditional promise to give  A promise to give that depends on the occurrence of a specified future and uncertain event to bind the promisor.  ASC : Determining Whether a Promise Is Conditional or Unconditional 25-14: Determining whether a promise is conditional or unconditional can be difficult if it contains donor stipulations that do not clearly state whether the right to receive payment or delivery of the promised assets depends on meeting those stipulations. It may be difficult to determine whether those stipulations are conditions or restrictions. In cases of ambiguous donor stipulations, a promise containing stipulations that are not clearly unconditional shall be presumed to be a conditional promise.  A conditional promise to give is considered unconditional if the possibility that the condition will not be met is remote. (See paragraph for examples.)  ASC :Implementation Guidance – Distinguishing Between Donor-Imposed Conditions and Donor-Imposed Restrictions 55-16: If the possibility that the condition will not be met is remote, a conditional promise to give is considered unconditional. For example, a stipulation that an annual report must be provided by the donee to receive subsequent annual payments on a multiyear promise is not a condition if the possibility of not meeting that administrative requirement is remote.

38 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 38 Audit | Tax | Advisory | Risk | Performance Example #4 – Conditional Pledge  Ms. Nice is a long-time supporter of ABC University.  Ms. Nice sold her business for several million dollars a few years ago, and has been the University’s largest annual donor since then.  She wants to support the expansion of University’s enrollment by contributing $20 million toward the cost of a new dormitory.  $20 million will be contributed once the land for this new facility is purchased…as long as the University doesn’t pay “an arm and a leg” for the land.  Concerns:  Not recordable under GAAP until condition is met.  How do you value “an arm and a leg?”

39 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 39 Audit | Tax | Advisory | Risk | Performance Example #4 – Conditional Pledge (What is next?)  Communicate with the donor about purchase price expectations  Consider including a range of acceptable land purchase prices in the written pledge agreement  Consult with Board of Directors  Keep in contact with donor  Documentation  Other common examples of conditions:  Matching/Challenge grant  Installment payments contingent upon submission of satisfactory progress reports  Pledge based on future event (i.e., college admission, graduation, new program started, etc.)  Gift will be made after construction has started * Be careful to not confuse conditional pledges with exchange transactions

40 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 40 Audit | Tax | Advisory | Risk | Performance Example #5 – Perpetual Trust  XYZ College has been notified that it is a 50% beneficiary of a perpetual trust.  Fair value of perpetual trust when XYZ was notified = $80 million (permanently restricted)  Accounting and Development likely agree on the amount of contribution revenue (and beneficial interest asset) recorded = $40 million  Accounting and Development disagreement likely relates to the fact that XYZ has $0 cash in hand today!  Issues:  Acknowledgement and publicity  Don’t spend it all yet  Annual distributions from trust’s earnings = revenue when received  Changes in fair value of beneficial interest are recorded periodically

41 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 41 Audit | Tax | Advisory | Risk | Performance Example #6 – In-Kind Contributions  ASC : Contributions of services shall be recognized if the services received meet any of the following criteria: a) They create or enhance nonfinancial assets. b) They require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. Services requiring specialized skills are provided by accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers, and other professionals and craftsmen.  Contributed services and promises to give services that do not meet these criteria shall not be recognized.  Examples of conflicting Development/Accounting in-kinds:  Unskilled volunteer services  Board of Directors and Committee members’ volunteer time  Pledge of future services (construction management, utilities, etc.) – record when received  Free/discounted rent (may be recorded when pledged in some cases – written, term, etc.) *Items like those listed above are sometimes allowable for grant matching purposes, even if not recordable under GAAP.

42 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 42 Audit | Tax | Advisory | Risk | Performance Other Examples of Accounting/Development Disagreements  Pledged PTO from employees  Forfeited PTO from management  CRATs, CRUTs, CLATs, CLUTs  Life estate trusts  Timing limitations on when donated stock may be sold  Private company stock  Donated coupons  Donated collections  Retained variance power  Multi-year pledge from supporting foundation that exists solely to support the institution  Multi-year pledge with “intent” to extend into additional years  Distributions from donor advised funds  Questionable dates on contributions:  Tax considerations  Development has already hit goal, so “saving toward next year’s goal”  None of these items are inherently “bad”  Need to determine when and how they are counted  Cash flow impact

43 The Unique Alternative to the Big Four ® © 2012 Crowe Horwath LLP 43 Audit | Tax | Advisory | Risk | Performance QUESTIONS? Angie Lewis, CPA Crowe Horwath LLP Joanne Charles Shawnee State University Pete Ugo, CPA Crowe Horwath LLP


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