There is a saying in Texas that, “when the Legislature is in session no one is safe.” I think that statement may also apply to the 111th. U.S. Congress. With the flurry of tax legislation passed this year (some of it very late in the year) and the Democrats and Republicans engaged in guerilla warfare it looks like both the IRS and tax practitioners are going to be facing a very challenging tax season. For example, two bills in particular created some unfortunate consequences:
1. Affordable Health Care for America Act
2. Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 –better known as the 2010 Tax Relief Act.
Hidden deep in the 2,409-page Affordable Health Care for America Act was an onerous provision that will require businesses to significantly expand the number of 1099 tax forms they must file each year. Almost everyone agrees that this is bad legislation but congress has been unable to agree on a bill to repeal the provision.
The 2010 Tax Relief Act was passed so late in the year that the IRS is now saying that some final 2010 tax forms may not be available until as late as February.
Add to the two items mentioned above the IRS’s Unenrolled Tax Preparers initiative and the new Preparer Tax Identification Number (PTIN) registration regulations and I am sure that you will agree that 2011 is going to be interesting. I think what both tax practitioners and the IRS are facing in 2011 can be summed up in a quote from actress Mae West; “Hang on boys, it’s going to be a bumpy ride.”
HAPPY NEW YEAR
Thursday, December 30, 2010
Wednesday, December 8, 2010
12 Common Nonprofit Financial Statement Disclosure Omissions
The holiday season is upon us and with it thoughts often turn to the local charity or nonprofit organization. When I think about nonprofit organizations I am reminded of the financial statement disclosure omissions I see in their financial statements. Following is list of the 12 common disclosure omissions in nonprofit organization financial statements:
1. Organization’s capitalization policy.
The failure to disclose the organization’s capitalization policy— basically, the minimum dollar amount for capitalizing and depreciating an asset—is a common financial statement omission. In addition, the financial statements should include the organization’s policy on implying time restrictions on gifts of long-lived assets.
2. Subsequent events review.
Sometimes nonprofit organizations fail to disclose the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued or were available to be issued. It doesn’t matter if there weren’t any subsequent events disclosed in the financial statements; the financials still need to disclose the information about the review.
3. Uncertain tax positions.
ASU 2009-06 provides guidance on uncertainty in income taxes for tax-exempt organizations. FASB ASC 740-10 requires certain disclosures of those positions that are often overlooked:
a. Policy for classifying interest and penalties recognized in the financial statements that are associated with its tax positions.
b. Total amount of interest and penalties recognized in the statement of activities and the statement of financial position.
c. Information about positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date,
d. The tax years that remain subject to examination by major tax jurisdictions.
4. Long-term promises to give.
If a nonprofit organization has long-term promises to give that are measured at present value, then the resulting discount should be disclosed either on the face of the statement of financial position or in the notes to the financial statements. A related disclosure that is often missed is the amounts of promises receivable in less than one year, in one to five years, and in more than five years.
5. Interest paid.
FASB ASC 230-10-50-2 requires the financial statements to disclose interest paid (net of amounts capitalized). This disclosure is often omitted.
6. Summarized financial information.
Summarized prior period financial information does not always include all the detail required by GAAP. FASB ASC 958-205-45-8 and FASB ASC 958-205-50-4 require the financial statement titles to indicate that the prior year information is summarized and to see the financial statement notes that describe the nature of the summarized financial information.
7. Contributed services not properly disclosed.
FASB ASC 958-605-50-1 requires the disclosure of the following items that are sometimes omitted:
a. The activities or programs for which contributed services were used.
b. The nature and extend of those services.
c. The amount recognized as revenue during the period.
d. If practical, the fair value of contributed services received but not recognized in the financial statements.
8. Fund raising expenses.
Any nonprofit organization that has fund raising expenses is required to disclose the following items that are often over looked:
a. Total cost of all fund-raising activities.
b. The method used to compute the ratio of fund-raising expenses to funds raised, if such ratios is disclosed in the organization’s financial statements.
9. Concentrations of risk.
FASB ASC 275-10-50 includes the disclosure requirements related to risks and uncertainties. One that is often overlooked is the requirement to consider whether to disclose concentrations in the market or geographic area in which the nonprofit organization operates.
10. Endowment funds.
All nonprofit organizations that have endowment funds are subject to the disclosure requirements of FASB ASC 958-205-50-1B. The disclosures include organization policies related to endowments, a reconciliation of beginning and ending balances, and information about deficiencies in individual endowments. These are often missed.
11. Trade receivables.
For nonprofit organizations that have trade receivables, FASB ASC 310-10-50-2 through 50-8 includes disclosures related to these receivables. (They do not apply to promises to give.) These disclosures are sometimes overlooked when preparing year-end statements.
12. Restrictions on net assets.
Nonprofit organizations must disclose the total of temporarily and permanently restricted net assets either on the face of the statement of financial position or in the notes to the financial statements. Where the disclosures can sometimes fall short is FASB ASC 958-210-50-3’s requirement to also disclose information about the amount and types of the different restrictions.
In order to prepare nonprofit financial statements in accordance with GAAP and not inadvertently leave out a required disclosure, consider using a disclosure checklist such as the one included in PPC’s Guide to Preparing Nonprofit Financial Statements.
1. Organization’s capitalization policy.
The failure to disclose the organization’s capitalization policy— basically, the minimum dollar amount for capitalizing and depreciating an asset—is a common financial statement omission. In addition, the financial statements should include the organization’s policy on implying time restrictions on gifts of long-lived assets.
2. Subsequent events review.
Sometimes nonprofit organizations fail to disclose the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued or were available to be issued. It doesn’t matter if there weren’t any subsequent events disclosed in the financial statements; the financials still need to disclose the information about the review.
3. Uncertain tax positions.
ASU 2009-06 provides guidance on uncertainty in income taxes for tax-exempt organizations. FASB ASC 740-10 requires certain disclosures of those positions that are often overlooked:
a. Policy for classifying interest and penalties recognized in the financial statements that are associated with its tax positions.
b. Total amount of interest and penalties recognized in the statement of activities and the statement of financial position.
c. Information about positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date,
d. The tax years that remain subject to examination by major tax jurisdictions.
4. Long-term promises to give.
If a nonprofit organization has long-term promises to give that are measured at present value, then the resulting discount should be disclosed either on the face of the statement of financial position or in the notes to the financial statements. A related disclosure that is often missed is the amounts of promises receivable in less than one year, in one to five years, and in more than five years.
5. Interest paid.
FASB ASC 230-10-50-2 requires the financial statements to disclose interest paid (net of amounts capitalized). This disclosure is often omitted.
6. Summarized financial information.
Summarized prior period financial information does not always include all the detail required by GAAP. FASB ASC 958-205-45-8 and FASB ASC 958-205-50-4 require the financial statement titles to indicate that the prior year information is summarized and to see the financial statement notes that describe the nature of the summarized financial information.
7. Contributed services not properly disclosed.
FASB ASC 958-605-50-1 requires the disclosure of the following items that are sometimes omitted:
a. The activities or programs for which contributed services were used.
b. The nature and extend of those services.
c. The amount recognized as revenue during the period.
d. If practical, the fair value of contributed services received but not recognized in the financial statements.
8. Fund raising expenses.
Any nonprofit organization that has fund raising expenses is required to disclose the following items that are often over looked:
a. Total cost of all fund-raising activities.
b. The method used to compute the ratio of fund-raising expenses to funds raised, if such ratios is disclosed in the organization’s financial statements.
9. Concentrations of risk.
FASB ASC 275-10-50 includes the disclosure requirements related to risks and uncertainties. One that is often overlooked is the requirement to consider whether to disclose concentrations in the market or geographic area in which the nonprofit organization operates.
10. Endowment funds.
All nonprofit organizations that have endowment funds are subject to the disclosure requirements of FASB ASC 958-205-50-1B. The disclosures include organization policies related to endowments, a reconciliation of beginning and ending balances, and information about deficiencies in individual endowments. These are often missed.
11. Trade receivables.
For nonprofit organizations that have trade receivables, FASB ASC 310-10-50-2 through 50-8 includes disclosures related to these receivables. (They do not apply to promises to give.) These disclosures are sometimes overlooked when preparing year-end statements.
12. Restrictions on net assets.
Nonprofit organizations must disclose the total of temporarily and permanently restricted net assets either on the face of the statement of financial position or in the notes to the financial statements. Where the disclosures can sometimes fall short is FASB ASC 958-210-50-3’s requirement to also disclose information about the amount and types of the different restrictions.
In order to prepare nonprofit financial statements in accordance with GAAP and not inadvertently leave out a required disclosure, consider using a disclosure checklist such as the one included in PPC’s Guide to Preparing Nonprofit Financial Statements.
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