© 2009 Grants Central Station Financial Literacy & Bookkeeping 1 presents the Fundamental Five Nonprofit Training Series Grants Central Station November 16, 2010

© 2009 Grants Central Stationwww.GrantsCentralStation.org Mahalo to our Sponsors! Office of Hawaiian Affairs – Community Based Economic Development Grant Tri-Isle Resource Conservation & Development – Fiscal Sponsor County of Maui Department of Health & Human Concerns - Volunteer Services Our Board: Anna K. Ribucan, Richard Kehoe, Keith Wolter, Faye Cummings, Susie Thieman 2

© 2009 Grants Central Stationwww.GrantsCentralStation.org Today’s Speaker Robert S. Kawahara, CPA Managing Member, Kawahara & Company, CPAs, LLC Vice President, Ronald A. Kawahara & Co., CPA’s, Inc. Treasurer, Maui Humane Society Treasurer, Lahaina Intermediate School Educational Foundation Treasurer, Rotary Club of Kahului Treasurer, Angus McKelvey for State House Committee Director, Hawaii Association of Certified Public Accountants Director, Hawaii Association of Public Accountants, Maui Chapter Supervisory Committee Chairperson, Maui County Federal Credit Union 3

© 2009 Grants Central Stationwww.GrantsCentralStation.org Agenda 4 8:30 amWelcome & Introductions 8:45 amFinancial Literacy 101 for Nonprofits 9:45 amBreak & Network 10:00 amIn & Out of Form :30 amCurrent Issues Affecting Nonprofits 11:00 amBreak & Network 11:15 amReview 11:30 amPanel 12:15 pmClosing Remarks, Conclusion

© 2009 Grants Central Station Who’s in attendance?? 5

© 2009 Grants Central Stationwww.GrantsCentralStation.org Today’s Objective Establish your baseline knowledge of financial literacy with regards to nonprofit organizations Establish which areas of financial literacy that you need to work on Obtain information regarding current issues affecting nonprofits 6

© 2009 Grants Central Stationwww.GrantsCentralStation.org Financial Literacy Class Participation 7

© 2009 Grants Central Stationwww.GrantsCentralStation.org Financial Literacy The ability to read, analyze, manage and write about the financial conditions that affect material financial health. It includes the ability to discern financial choices, discuss money and financial issues without (or despite) discomfort, plan for the future, and respond competently to events that affect everyday financial decisions, including events in the general economy. 1 1 Goodbye to Complacency Financial Literacy Education in the U.S

© 2009 Grants Central Stationwww.GrantsCentralStation.org Let’s break it down The ability to read, analyze, manage and write about the financial conditions that affect material financial health... How do I gain that ability? Foundation, Foundation, Foundation 9

© 2009 Grants Central Stationwww.GrantsCentralStation.org Foundation 10 EntityLegalAccountingEnvironment

© 2009 Grants Central Stationwww.GrantsCentralStation.org Foundation - Entity Gain an understanding of: Mission Statement What type of nonprofit Employees Organizational Chart Funding Sources Programs 11

© 2009 Grants Central Stationwww.GrantsCentralStation.org Foundation - Legal Gain an understanding of: Grant Compliance Tax Compliance Human Resource Compliance Hawaii Revised Statutes HRS Chapter 414D – Hawaii Nonprofit Corporation Act 12

© 2009 Grants Central Stationwww.GrantsCentralStation.org Foundation - Environment Gain an understanding of: Resources Available Who are your Competitors Who are you Servicing Marketing 13

© 2009 Grants Central Stationwww.GrantsCentralStation.org Foundation - Accounting Financial Statements Internal Control Bookkeeping Recordkeeping Budget Basis of Accounting Nonprofit accounting differences 14

© 2009 Grants Central Stationwww.GrantsCentralStation.org Financial Statements Statement of Financial Position Statement of Activities Statement of Functional Expenses Statement of Cash Flows Notes to Financial Statements 15

© 2009 Grants Central Stationwww.GrantsCentralStation.org Types of Transactions Agency No recognition of income Contribution Record at promise to give Gives rise to Temporarily Restricted Net Assets Exchange A service is rendered Gives rise to Deferred Revenue 16

© 2009 Grants Central Stationwww.GrantsCentralStation.org Using Financial Statements Vs. Budget Vs. Prior Period Historical vs. Projection Financial Ratios Revenue Ratios Identify % of revenue stream Defensive Interval Identify how many months the organization could operate Program Service Expense Recommend minimum 65% 17

© 2009 Grants Central Stationwww.GrantsCentralStation.org Internal Controls Why do we need Internal Controls What is Fraud? Black’s Law Dictionary fraud is defined as follows: “b Law. Any deliberate misrepresentation of the truth or a fact used to take money, rights, or other privilege or property away from a person or persons.” 18

© 2009 Grants Central Stationwww.GrantsCentralStation.org Fraud 3 Categories of fraud Corruption Asset Misappropriation Fraudulent Statements Conditions present when fraud occurs Incentive Opportunity Rationalization 19

© 2009 Grants Central Stationwww.GrantsCentralStation.org Internal Control 5 Components of Internal Control Control Environment Risk Assessment Control Activities Information and Communication Monitoring 3 Objective of Internal Control Operations Financial Reporting Compliance 20

© 2009 Grants Central Stationwww.GrantsCentralStation.org COSO Framework Diagram 21 Image from

© 2009 Grants Central Stationwww.GrantsCentralStation.org Internal Control COSO defines internal control as a process, effected by an entity’s board of directors, management and other personnel. This process is designed to provide reasonable assurance regarding the achievement of objectives in effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations. Internal control is a process. It is a means to an end, not an end in itself. Internal control is not merely documented by policy manuals and forms. Rather, it is put in by people at every level of an organization. Internal control can provide only reasonable assurance, not absolute assurance, to an entity’s management and board. Internal control is geared to the achievement of objectives in one or more separate but overlapping categories. 22

© 2009 Grants Central Stationwww.GrantsCentralStation.org Question Can internal controls prevent fraud? What is the relationship between principle based vs. rules with regards to polices and procedures List types of Fraud to Internal Control 23

© 2009 Grants Central Stationwww.GrantsCentralStation.org Bookkeeping Basis of Accounting Cash Tax Modified Accrual Fund Accounting GAAP Generally Accepted Accounting Principles 24

© 2009 Grants Central Stationwww.GrantsCentralStation.org Recordkeeping Elements of a good recordkeeping system Organized Permanent File Relevant Leverage available software Quickbooks MIP MAS 90 25

© 2009 Grants Central Stationwww.GrantsCentralStation.org Budgets How many of you do a budget? Why do a budget? How effective has it been? 26

© 2009 Grants Central Stationwww.GrantsCentralStation.org Audits What is an audit? An audit is a formalized process designed to obtain reasonable assurance that a financial statement(s) is free of any material misstatements whether caused by errors, frauds, and/or direct legal acts with respect to the management assertions embodied in the financial statement(s). 27

© 2009 Grants Central Stationwww.GrantsCentralStation.org Audit Financial Statement Audit Single Audit 28

© 2009 Grants Central Stationwww.GrantsCentralStation.org 29 Sample Audit Checklist General Ledger Schedule of grant awards Grant contracts Board of Directors & Committee Meeting Minutes Personnel manual Accounting manual Payroll tax reports, W- 2’s, 1099’s Lease agreements Bank statements & reconciliation Grant reports Year-end investment summary Physical inventory Fixed asset and depreciation schedule Year-end accounts payable & accrued expenses

© 2009 Grants Central Stationwww.GrantsCentralStation.org Question Who is responsible for the financial statements of an organization? 30

© 2009 Grants Central Stationwww.GrantsCentralStation.org Elements of a Good Bookkeeper Well organized Questions Strong communication skills Able to problem solve Double-entry bookkeeping Financial statement presentation 3 years of experience 31

© 2009 Grants Central Stationwww.GrantsCentralStation.org Question Who does the bookkeeper work for? Who does the accountant work for? Who does the auditor report to? 32

© 2009 Grants Central Station 33 BREAK 15 minutes

© 2009 Grants Central Stationwww.GrantsCentralStation.org 34 More Free Workshops! Oct 27Volunteer Management Nov 16Financial Literacy & Bookkeeping Dec 7Strategic Planning Jan 11Board Development & Training Feb 22Legal & Insurance Issues Mar 8Fundraising & Development AprGrant Strategy & Writing Upcoming Fundamental Five workshops from Grants Central Station

© 2009 Grants Central Stationwww.GrantsCentralStation.org Form 990 Why the fuss all of a sudden? In 2008, the Form 990 was completely redesigned by the IRS Last revision 1979 The purpose was to: Increase transparency Good governance Reduced burden (total opposite) Replaced with increased accountability 35

© 2009 Grants Central Stationwww.GrantsCentralStation.org Form 990 It’s not all that bad... The Form 990 is a publicly disclosed document. Provides organizations the opportunity to: Tell the organization’s story by effectively stating its mission and program service accomplishments Market and development tool 36

© 2009 Grants Central Stationwww.GrantsCentralStation.org Form 990 Types of Form 990 Form 990 Return of Organization Exempt from Income Tax Form 990-EZ Short Form of Organization Exempt from Income Tax Form 990-N Electronic Notice (e-postcard) Churches are exempt 37

© 2009 Grants Central Stationwww.GrantsCentralStation.org Form 990 FAQs All nonprofit organizations can file a Form 990, but not all nonprofit organizations can file a Form 990-N Unlike most income tax returns that are quantitative in nature, Form 990 is heavily qualitative 38

© 2009 Grants Central Stationwww.GrantsCentralStation.org Form 990 Most Siginificant Changes Front page summary that provides a snapshot of key financial and operating information A governance section (page 6 of Form 990) Revised compensation and related organization reporting (page 7 of Form 990) 39

© 2009 Grants Central Stationwww.GrantsCentralStation.org Form 990 – Filing Thresholds Form 990 Gross receipts of $500,000 or more (2009) Gross receipts of $200,000 or more (2010 ) AND Total assets of $1.25 million or more (2009) Total assets of $500,000 or more (2010) 40

© 2009 Grants Central Stationwww.GrantsCentralStation.org Form 990-EZ Filing Thresholds Form 990-EZ Gross receipts of $500,000 or less (2009) Gross receipts of $200,000 or less (2010 ) AND Total assets of $1.25 million or less (2009) Total assets of $500,000 or less (2010) 41

© 2009 Grants Central Stationwww.GrantsCentralStation.org Form 990-N Filing Threshold Form 990-N Gross receipts of $25,000 or less (2009) Gross receipts of $25,000 or less (2010 ) 42

© 2009 Grants Central Stationwww.GrantsCentralStation.org Question Are there any other IRS filing that a nonprofit must file? 43

© 2009 Grants Central Stationwww.GrantsCentralStation.org Answer Yes, besides the Form 990 or equivalent a nonprofit must still file: Payroll returns Unrelated business income tax return (UBIT) return: Form 990-T 44

© 2009 Grants Central Stationwww.GrantsCentralStation.org Form 990-T Exempt Organization Business Income Tax Return To report unrelated trade or business income. An unrelated trade or business is any trade or business, the conduct of which is not substantially related to the exercise or performance by the organization of its exempt purpose. The fact that an organization needs or uses the profits from a business activity to support its program services has no bearing on the determination of whether the activity is unrelated. 45

© 2009 Grants Central Stationwww.GrantsCentralStation.org UBTI Unrelated Business Taxable Income See IRS Publication 598 – “Tax on Unrelated Business Income of Exempt Organizations” There are a lot of exceptions to the rule and is considered to be a fairly “gray” area with a lot of room for interpretation. Be conservative and remember your fiduciary responsibility 46

© 2009 Grants Central Stationwww.GrantsCentralStation.org Form N70-NP State of Hawaii – Exempt Organization Business Income Tax Return By the way, the State of Hawaii wants their cut too. 47

© 2009 Grants Central Stationwww.GrantsCentralStation.org Questions on UBTI 48

© 2009 Grants Central Stationwww.GrantsCentralStation.org Current Issues Affecting Nonprofits Hawaii’s Charity Registration General Excise Tax Sarbanes-Oxley Act of 2002 Concentration of Funds 49

© 2009 Grants Central Stationwww.GrantsCentralStation.org Hawaii’s Charity Registration Chapter 467B, HRS requires charities that solicit contributions to register with the Attorney General unless exempted from the registration requirement. Effective January 1, 2009 Purpose is to protect donors from fraud and promote donor confidence in and an accountable transparent charitable sector. 50

© 2009 Grants Central Stationwww.GrantsCentralStation.org Hawaii’s Charity Registration Covers your traditional nonprofits as well as any other organization that employs a charitable appeal as the basis of any solicitation or an appeal that has a tendency to suggest there is a charitable purpose to the solicitiation 51

© 2009 Grants Central Stationwww.GrantsCentralStation.org Hawaii’s Charity Registration A grant received from the government, or another 501(c)(3) charity or private foundation is not a contribution. Membership dues and assessments are also not deemed to be contributions. 52

© 2009 Grants Central Stationwww.GrantsCentralStation.org Hawaii’s Charity Registration Filing requirements: Annual filing Audited financial statements if the charity has gross revenues over $500,000, or where the charity prepares an audited financial statement pursuant to a requirement by a governmental authority or third party. Fees From $10.00 to $

© 2009 Grants Central Stationwww.GrantsCentralStation.org Hawaii’s Charity Registration Exempt from requirements: Churches PTAs Hospitals Government or instrumentality of any state or the United States Charities with less than $25,000 annually, and does not compensate person responsible for solicitations Prohibits charities from contracting with un- registered professional solicitors and professional fundraising counsels. 54

© 2009 Grants Central Stationwww.GrantsCentralStation.org General Excise Tax Form G-6, Application for Exemption from General Excise Taxes If you don’t file the form all forms of revenue are taxable. 55

© 2009 Grants Central Stationwww.GrantsCentralStation.org General Excise Tax Tax Information Release (TIR) No Act 155, Session Laws of Hawaii 2010, Relating to General Excise Tax; The General Excise Tax Protection Act Two Sections Denial of General Excise Tax Benefits Trust Fund Liability Prospective July 1,

© 2009 Grants Central Stationwww.GrantsCentralStation.org General Excise Tax Denial of General Excise Tax Benefits Obtain a GET License File annual reconciliation If Form G-49, is not filed within 12 months from the due date for the return, the business may lose the benefit 57

© 2009 Grants Central Stationwww.GrantsCentralStation.org General Excise Tax Trust Fund Liability Creates liability for certain key individuals involved in the financial management of taxpayer Liability is prospective from July 1,

© 2009 Grants Central Stationwww.GrantsCentralStation.org Sarbanes-Oxley Act of 2002 Two provisions that affect nonprofits It is illegal for any corporate entity to punish whistleblowers or retaliate against any employee who reports suspected cases of fraud or abuse It is a crime to alter, cover up, falsify, or destroy any document that may be relevant to an official investigation The Act has many practices that may become best practices for governance of nonprofits 59

© 2009 Grants Central Stationwww.GrantsCentralStation.org Concentration of Funds Today’s economic climate will force many nonprofits to reevaluate their past reliance on funding sources Specifically, nonprofits that do little fundraising due to grant awards 60

© 2009 Grants Central Station 61 BREAK 15 minutes

© 2009 Grants Central Stationwww.GrantsCentralStation.org 62 More Free Workshops! Oct 27Volunteer Management Nov 16Financial Literacy & Bookkeeping Dec 7Strategic Planning Jan 11Board Development & Training Feb 22Legal & Insurance Issues Mar 8Fundraising & Development AprGrant Strategy & Writing Upcoming Fundamental Five workshops from Grants Central Station

© 2009 Grants Central Stationwww.GrantsCentralStation.org Resources Internal Revenue Service (IRS) Tax information for Charities & Nonprofits Publication 526, Charitable Contributions Publication 557, Tax-Exempt Status for Your Organization Publication 598, Tax on Unrelated Business Income of Exempt Organizations 63

© 2009 Grants Central Stationwww.GrantsCentralStation.org Resources State of Hawaii Tax Facts Tax Facts No. 96-1, General Excise vs. Sales Tax Tax Facts No. 98-3, Tax Issues for Hawaii Nonprofit Organizations Tax Information Releases TIR No , Application for Exemption from the General Excise Taxes for Nonprofit Organizations TIR No. 91-2, Taxability of Gross Proceeds Received by a Nonprofit Organization from the Sale of Donated Services or Tangible Personal Property TIR No. 91-4, Hawaii Tax Obligations of Nonprofit Organizations 64

© 2009 Grants Central Stationwww.GrantsCentralStation.org Resources Accounting Generally Accepted Accounting Principles Financial Accounting Standards Board (FASB) Accounting Standards Codification AICPA Audit and Accounting Guide, Not- for-Profit Entities Amazon.com Wealth of material on nonprofit financial management 65

© 2009 Grants Central Stationwww.GrantsCentralStation.org Review Section 1 Section 1: What is your Organization’s basis of accounting? When is your Organization’s fiscal year end? Does your Organization prepare compliant financial statements? 66

© 2009 Grants Central Stationwww.GrantsCentralStation.org Review Section 2 Section 2: What type of Form 990 does my Organization file? Does our Organization have Unrelated Business Taxable Income (UBTI)? I will read my Organization’s Form 990 and I will look at another relevant organization’s Form 990 on Guidestar 67

© 2009 Grants Central Stationwww.GrantsCentralStation.org Review Section 3 Section 3 I will check to see if my Organization has a GET number I will check to see if my Organization has filed it’s G-6 exemption I will check to see if my Organization is current with registration with the DCCA 68

© 2009 Grants Central Stationwww.GrantsCentralStation.org Panel Robert Kawahara Mark Moser Kerry Cullins 69

© 2009 Grants Central Stationwww.GrantsCentralStation.org Mark Moser Mr. Moser was most recently the Director of Finance for the Ritz Carlton Kapalua. Prior to that, he was the Director of Finance for the Washington Dulles Airport Marriott. He holds a bachelors of science in Business Administration with Distinction, from the George Mason University in Virginia. He has been a licensed Certified Public Accountant since

© 2009 Grants Central Stationwww.GrantsCentralStation.org Kerry Cullins Kerry Cullins moved to Maui in 1996 and founded Maui Bookkeeping Consultants in Maui Bookkeeping Consultants services a wide variety of clients including restaurants, contractors, non-profit organizations, retail, realtors and more. Kerry is the president of the company and specializes in consulting, training and forensic bookkeeping as well as overseeing the day to day operations. Kerry has worked with many different non-profit organizations in professional and voluntary roles by helping to set up and clean up bookkeeping systems, organize silent auctions and acting as Treasurer. 71

© 2009 Grants Central Stationwww.GrantsCentralStation.org Panel Robert Kawahara Mark Moser Kerry Cullins 72

© 2009 Grants Central Station 73 Wrap-Up

© 2009 Grants Central Stationwww.GrantsCentralStation.org 74 Test Your Knowledge  Our funder (and we!) want to know how effective this workshop was for you.  This 5-minute Post-Workshop Quiz helps us gauge your progress and our success. Mahalo.

© 2009 Grants Central Stationwww.GrantsCentralStation.org 75 Help Us Serve You Better! Please take 5 more minutes to complete the Workshop Evaluation so that we can improve this and future offerings from Grants Central Station Mahalo.

© 2009 Grants Central Stationwww.GrantsCentralStation.org 76 More Free Workshops! Oct 27Volunteer Management Nov 16Financial Literacy & Bookkeeping Dec 7Strategic Planning Jan 11Board Development & Training Feb 22Legal & Insurance Issues Mar 8Fundraising & Development AprGrant Strategy & Writing Upcoming Fundamental Five workshops from Grants Central Station

© 2009 Grants Central Stationwww.GrantsCentralStation.org 77 Questions? Robert Kawahara, CPA Kawahara & Company, CPAs, LLC (808)

© 2009 Grants Central Station 78 Mahalo For More Information or to Register for an Upcoming Workshop on Lana`i or Moloka`i Leslie Mullens (808) or Grants Central Station