PART ONE OF THE NOT FOR PROFIT CONFERENCE 06.10.2020 - … · [email protected] Partner Memphis, TN 901‐259‐3647 [email protected] Partner Tysons, VA 703‐970‐0482

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PART ONE - NOT FOR PROFIT CONFERENCE

‐ PPP Loan Forgiveness

‐ASU 2018‐08 – Revenue Recognition

‐Yellow Book update

‐ Payroll Tax Considerations & UBIT

‐ Financial Statement Presentation (ASU 2016‐14): Lessons Learned

June 10th, 2020

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Agenda

• PPP Loan Forgiveness• ASU 2018‐08 – Revenue Recognition• Yellow Book Update• Payroll Tax Considerations & UBIT• Financial Statement Presentation (ASU 2016‐14): Lessons Learned

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Speakers

Mark NicolasAssurance Partner

Tamara VineyardAssurance Partner

Matthew JonesAssuranceSr. Associate

DrewPowerAssurance Manager

LaKrishaWatsonTax Manager

Deneen KeeganAssurance Sr. Manager

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Speaker Contact Information

[email protected]

Partner

Memphis, TN

901‐259‐3647

[email protected]

Partner

Tysons, VA

703‐970‐0482

[email protected]

Senior Associate

Memphis, TN

901‐259‐3658

[email protected]

Manager

Asheville, NC

770‐241‐4007

[email protected]

Manager

Richmond, VA

804‐474‐1288

[email protected]

Senior Manager

Norfolk, VA

757‐457‐8460

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PPP Loan Forgiveness – Tamara Vineyard

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Paycheck Protection Program

•What is it?+ The CARES Act allocated $349 billion and the Enhancement Act

allocated an additional $321 billion to provide 100% Federally guaranteed loans to small businesses, with potential for forgiveness•Small businesses include:

– Businesses with less than 500 employees– charitable nonprofits (501(c)(3) organizations) and veteran organizations

(501(c)(19) organizations) with less than 500 employees– Sole proprietors, independent contractors and self-employed individuals– Businesses with more than 500 employees if meet the SBA industry-size

standards– Small business concern alternative size standard per the SBA on March 27, 2020

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SBA Payroll Protection Program (PPP)

Potential Loan Forgiveness

• Loans under the PPP forgiven if:

+ the proceeds are used at least 75% for payroll costs

+ up to 25% for eligible rent, mortgage interest, lease obligations and utilities

+ Full-time employee (FTE) headcount is not reduced

+ Salaries for employees are not reduced by more than 25% for any individual employee whose comp is less than $100k

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What are considered payroll costs?

• Includes salaries and wages, paid vacation, parental, family, medical or sick leave, allowance for dismissal or separation, group health and retirement benefits, and state and local taxes

• Up to $100,000 cash compensation per employee on an annualized basis PLUS:

+ Employer contributions to defined-benefit and defined comp retirement plans

+ Payments for EE benefits : Group health care coverage including premiums

+ State and local taxes assessed on employee comp

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Payroll Costs (continued)

• Excludes employees whose principle residence is outside of the U.S.

• Excludes 1099 payments to independent contractors

• Application permits using calendar year 2019 or trailing 12 months for “previous one year”

• Reduction of payroll costs for FICA and Fed Withholding during covered period (February 15, 2020- June 30, 2020)

+ Borrowers using calendar year 2019 to compute base = no adjustment for FICA and Federal Withholding

+ Borrowers using 1 year period ending with loan application date = reduce portion of wages relating to these dates for FICA and Federal Withholding

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Affiliation Standards

• SBA affiliation standards to aggregate # of employees for 500 or less employees

+ Still in effect for non-profits

+ Loosened only for hotel and food industry businesses, franchises, and those businesses that receive financial assistance from the SBA licensed SBICs

Repayment terms

• Loans not forgiven to be repaid over 2 years

• 1% interest rate

• Following six- month deferral from date of loan

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The Loan has been received, now what?

• 8 week covered period –

+ Begins on date lender makes first disbursement of PPP loan to borrower

+ Lender must make first disbursement within ten calendar days of loan approval

• Track expenses – record keeping will be essential

• 75% / 25% test consideration

+ Per Interim Final Ruling: 75% of the loan proceeds must be for payroll costs

• Begin forgiveness calculations

+ Full Time Equivalent (FTE)

+ Forgiveness may not exceed principal

+ Reductions:

• FTE Reduction

• Compensation Expense Reduction

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Comparison of Allowable and Forgivable Uses

Allowable Forgivable

Payroll Included Included

Mortgage Interest Included Included

Rent Included Included

Utilities Included Included

Other Debt Interest Included N/A

• Rent/Utilities/Loan Documents:

+ In Writing

+ Already in effect as of February 15, 2020

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Comparison: Eligibility vs Forgiveness

Eligibility Forgiveness

Number of Employees

• Full-time

• Part-Time

• Other basis

• Full Time Equivalent (“FTE”)

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What is a Full-Time Equivalent (FTE)?

•FTEs per SBA guidance:

+ Person working 40 hours a week

+ Employees working <40 hours per week can be combined to achieve a full FTE

+ Compute average monthly FTE for dates required

Example: 30 full‐time employees

6 part‐time employees

144 part‐time hours worked

Calculation: Full‐time personnel 30

Part‐time hours worked in a week 144.00

Divide by weekly hourly equivalent 40.00 3.6

FTEs per the week 33.6

FTE Calculation (1 week)

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How Much of the Loan is Forgiven?

• Loan forgiveness calculation:

+ During 8-week covered period for the following:

• Payroll costs (paid or incurred)- guidance from SBA on 5/22/20

– Paid during 8 week covered period on day paychecks distributed

– Incurred during covered period and paid on/before next billing cycle

– Covered period = 56 day period following receipt of loan funds

• May use alternative payroll period

– Coincide with payroll schedule

– Bi-weekly or more frequent payroll only

– Begins first day of first pay period following date borrower receives PPP loan funds and extends 56 days

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+ If using alternative payroll period, other payroll costs (i.e. retirement plan contributions, employee health insurance, state and local taxes) must be calculated on same alternative period

+ Consider adjusting payroll period to every 2 weeks if monthly if want to use alternative payroll period

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+ For non-payroll costs during 8-week covered period for the following:

• Interest portion of mortgage

• Rent

• Utilities (electricity, gas, water, transportation, telephone, internet)

– Mortgage, rent and utilities must be in writing and in force by Feb. 15, 2020

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Forgiveness Calculation – Starting Point

Sum of payments made on allowable costs during the 8‐week covered period beginning on loan origination date

Payroll costs:

Salary, wage, comm., vacation, sick leave, parental (capped at $100,000/EE) 625,000

Payments for provision of group health benefits, including premiums 24,000

Retirement benefits 15,000

State and local taxes on compensation of employees 8,000

Total Payroll 672,000

Interest on covered mortgage ‐

Covered rent 140,000

Covered utilities 100,000

Total Non‐payroll 240,000

Potential loan forgiven 912,000

Potential loan amount 1,250,000

Remaining loan to be repaid 338,000

PPP Loan Forgiveness Calculation

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Step 1: Forgiveness Reduction – 75/25 split

•75/25 requirement not in original CARES Act•Interim Final Rule – “not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs”+Non-payroll portion of the forgivable loan amount should

be limited to effectuate the core purpose of the statute and ensure finite program resources are devoted primarily to payroll

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Step 2: Forgiveness Reduction – FTE Test

• Loan forgiveness reduced by a reduction in number of employees

+ Calculation of average number of employees – average number of FTEs is determined by calculating the average number of FTEs for each pay period falling within a month

Source: US Chamber

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Step 2: Forgiveness Reduction – FTE Test

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Restore by June 30, 2020!

•Reductions in employment or wages that occur between February 15, 2020 and April 26, 2020 (as compared to February 15, 2019) shall not reduce the amount of loan forgiveness IF by June 30, 2020 the borrower eliminates the reduction in employees and/or reduction in wages.

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Step 3: Forgiveness Reduction - Compensation

•Loan forgiveness reduced by a decrease of more than 25% in compensation to employees making less than $100,000 on annualized basis

+ Exclude: any employee who received, during ANY SINGLE PAY PERIOD during 2019, wages or salary at an annualized rate of pay > $100,000.

+ Annualized basis as prorated for the Covered period = $15,385

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Process for Loan Forgiveness

•Borrower completes an application for forgiveness which includes:

+ Documentation verifying the number of FTEs on payroll and pay rates for the periods described above, including—

• payroll tax filings reported to the Internal Revenue Service; and

• state income, payroll, and unemployment insurance filings;

+ Documentation: including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on mortgage, leases, and utilities;

+ A certification from the borrower

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• The SBA issued FAQ #46 on May 13, 2020:

+ “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”

+ Any loan over $2 million will be reviewed for compliance with program requirements.

• If SBA determines that borrower lacked adequate basis for the required certification concerning the need for the loan, SBA will seek repayment of the outstanding PPP loan balance

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•The SBA issued FAQ #47 on May 14, 2020 extending the safe harbor for repaying the PPP loans to May 18, 2020 + To reconsider whether the borrowers truly met the economic

uncertainty in good faith• i.e. does the borrower have access to other funding

– Lines of credit, endowments, reserves, etc.

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Flexibility Act of 2020

•Passed by Congress on June 3, 2020; signed into law by President Trump on June 5, 2020

•Changes to the PPP

+Covered period begins on original date of loan and ends the earlier of:

•24 weeks (previously 8 weeks under the CARES Act)

•December 31, 2020

+Borrowers receiving loans prior to enactment have option to use 8 week period

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•Changes to PPP continued:

+Maturity date for loans:

•Minimum 5 years

•Maturity date for loans received prior to enactment remains 2 years

•Borrowers and lenders permitted to modify existing loans per mutual agreement to extend the 2 year period

•Maturity timeline begins at date borrower applies for forgiveness (NOT loan origination date)

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+FTE Restoration

•Extended to December 31, 2020

•Restore salaries/wages and FTE count per 2/15/20 levels until December 31, 2020

•Under CARES Act- restoration deadline was June 30, 2020

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+FTE Reduction Penalty- 2 new exemptions to avoid penalty to reduce forgiveness:

•Document inability to rehire former EEs employed on 2/15/20 and can’t hire “similarly qualified EEs for unfilled positions on/before 12/31/20

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+FTE Reduction Penalty

•Document that unable to return to same level business activity as prior to 2/15/20 due to compliance with Federal agencies during 3/1/20-12/31/20

–Related to maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19

–Applies to FTE count not salary test

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+Nonpayroll costs

•Under CARES Act- was 25%

•Now 40%

–At least 60% must be payroll costs

–If at least 60% payroll not met, forgiveness may be entirely disallowed

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+Deferral period

•6 months extended to “date in which amount of forgiveness determined under CARES Act remitted to lender”

•If borrower fails to apply within 10 months of last day of covered period, borrower to start making payments after 10 month

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+Payroll tax deferral

•PPP borrowers now permitted to delay payment of ER payroll taxes under the CARES Act

•Previously, borrowers could only defer payroll taxes through date borrower received decision from lender of full or partial forgiveness

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Best Practices

•Deposit loan proceeds into a separate bank account (and GL account)

+ Especially important if your regular operating account sweeps overnight into a common account used by multiple entities

•Use a spreadsheet to track everything and update it regularly

•Model different scenarios – modeling is key

•Retain and document the paper trail – separate shared folder on server

•Consider timing of payments

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Polling Question #1

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Polling Question #2

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ASU 2018-08 – Revenue Recognition – Matt Jones

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Agenda

•In covering ASU 2018-08, we will address the following:

1. Entities affected by the Update

2. Exchange vs. Non-Exchange Transactions

3. Conditional vs. Unconditional Contributions

4. Contributions with and without Donor Restrictions

5. Required financial statement disclosures

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Who is affected?

• All entities that receive or make contributions are impacted by this Update

• This includes for-profit entities, not-for-profit (NFP) entities, and governmental entities

• The amendments, however, do not apply to transfers of assets from governmental entities to business entities

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Summary

ASU 2018‐08 clarifies and improves the scope and accounting guidance for contributions made and contributions received

The three primary factors addressed as part of this Update are:

• Is this an exchange (reciprocal) or non‐exchange (non‐reciprocal) transaction?

• Is the contribution in question conditional or unconditional?

• Does the contribution contain any donor‐imposed restrictions?

Required disclosures under ASU 2018‐08

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Exchange vs. Non-Exchange Transactions

• To determine if a transaction falls under ASU 2018-08, it must be a Non-Exchange Transaction

• An exchange transaction is a reciprocal transfer in which each party receives and sacrifices approximately commensurate value. In an exchange of commensurate value, a reciprocal flow of benefits occurs between parties

• For Exchange Transactions (memberships, ticket sales, etc.), apply relevant GAAP (e.g., ASC 606)

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• The type of resource provider shall not factor into the determination of whether a transaction is exchange or non-exchange (government agency, foundation, corporation, etc.)

• The resource provider (regardless of type of entity) is not synonymous with the general public. If the general public is the primary recipient of the benefit, the transaction is not considered an exchange transaction.

• A recipient executing the provider's mission does not alone constitute a transfer of commensurate value.

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Indicative of Exchange Transaction Indicative of Nonexchange Transaction

Both the resource provider and recipient express intent to exchange goods and/or services that are of

commensurate value

The recipient solicits assets from the resource provider without the intent of exchanging goods and/or services

of commensurate value

The resource provider and recipient agree on the amount of assets transferred in exchange of goods

and/or services

The resource provider has full discretion in determining the amount of the transferred assets for goods and/or

services

Contractual provisions allow for economic forfeiture beyond the amount of assets transferred by the

resource provider as penalty for nonperformance by the recipient

Penalties assessed on the recipient for failure to comply with the agreement are limited to the delivery of assets

or services, and return of the unspent amount.

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individual activity

Polling Question 3

Facts: Not-for-Profit Entity A (NFP A) is a large research university with a cancer research center. NFP A regularly conducts research to discover more effective methods of treating cancer and often receives contributions to support its efforts. NFP A receives resources from a pharmaceutical entity to finance the costs of a clinical trial of an experimental cancer drug the pharmaceutical entity developed. The pharmaceutical entity specifies the protocol of the testing, including the number of participants to be tested, the dosages to be administered, and the frequency and nature of follow-up examinations. The pharmaceutical entity requires a detailed report of the test outcome within two months of the test’s conclusion. Additionally, the rights to the results of the study belong to the pharmaceutical entity.

Question: Is Example 1 an exchange transaction, or a non-exchange transaction?

A. Exchange Transaction

B. Non-Exchange Transaction

- Example: Exchange vs. Non-Exchange Transaction

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Conditional vs. Unconditional Contributions

Once a transaction is determined to be a non‐exchange transaction, it must be determined if the contribution is conditional or unconditional

To be considered a conditional contribution, BOTH of the following must be met:

• One or more barriers must be overcome before a recipient is entitled to the assets transferred or promised

• A right of return to the contributor for assets transferred (or a reduction, settlement, or cancellation of liabilities), or a right of release of the promiser from its obligation to transfer assets (or to reduce, settle, or cancel liabilities)

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• In cases of ambiguous donor stipulations, a contribution containing stipulations that are not clearly unconditional shall be presumed to be a conditional contribution.

• If the stipulation is unrelated to the purpose of the agreement, the stipulation would NOT be indicative of a barrier. This primarily relates to administrative tasks.

• Entities may no longer assess the likelihood of a condition being met in determining if the stipulation constitutes a condition

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The first of the two factors that must be present to have a conditional contribution is:

One or more barriers must be overcome to be entitled to the contribution

When evaluating if stipulations in a contribution constitute a barrier to entitlement, we must consider the following indicators:

• Measurable performance‐related or other barrier

• Limited discretion in how the entity's activities may be performed

• The stipulation must relate to the purpose of the grant

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Measurable Performance-related or other barrier:

• Does the stipulation require performance by the recipient?

+ The recipient must provide a specific level of service (e.g., 1,000 meals per week for a soup kitchen)

+ The recipient's activities must achieve a specific output or outcome (e.g., achieving a minimum standardized test score)

+ The recipient must raise matching contributions in a specified amount or ratio

• Does the stipulation require that an event outside the recipient's control occur?

• A company promises to contribute a certain amount if its net worth or stock price reaches a specified level

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Limited Discretion: Does the stipulation specifically address how the activities are performed, or impose any limitations on how the activity is performed?

Examples of limited

discretion:

• Entity must adhere to a specific research protocol specified by the resource provider

• The entity must incur certain qualifying expenses in accordance with the Office of Management and Budget rules and regulations

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Considerations in stipulations

relating to the purpose of the contribution:

• Submitting a report to the grantor summarizing the research findings DOES relate to the purpose of the contribution

• Stipulations such as providing a report on how funds were spent, or supplying audited financial statements, DO NOT relate to the purpose of the contribution, and are not considered barriers to entitlement.

The stipulation must be related to the purpose carried out by the contribution.

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The second factor that must be present to have a conditional contribution is a right of return (or right of release from obligations). We must consider the following:

• The gift, grant, or contribution agreement indicates that if the recipient does not overcome the barrier, the donor or grantor is released from its obligation to transfer of promised resources (or if assets were advanced, has the right to demand their return)

• Specific wording such as "right of return" or "right of release" is NOT required, but the agreements should be sufficiently clear to be able to support a reasonable conclusion about whether the recipient would be entitled to the assets

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individual activity

Polling Question 4

Facts: Foundation A gives NFP D a grant in the amount of $400,000 to provide specific career training to disabled veterans. The grant requires NFP D to provide training to at least 8,000 disabled veterans during the next fiscal year (2,000 during each quarter), with specific minimum targets that must be met each quarter. Foundation A specifies a right of release from the obligation in the agreement that it will only give NFP D $100,000 each quarter if NFP D demonstrates that those services have been provided to at least 2,000 disabled veterans during the quarter.

Question: Is this a Conditional or Unconditional contribution?

A. Conditional

B. Unconditional

- Example: Conditional vs. Unconditional Contributions

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Donor Restricted Contributions

• Once a contribution is determined to be unconditional (or condition(s) on a conditional contribution have been met), the recipient recognizes revenue and the donor recognizes an expense.

• Once contribution revenue is recognized by the recipient, the recipient must determine if the contribution has any donor-imposed restrictions.

• Do contributions have legally binding restrictions on their use?

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• Donor-imposed restrictions limit the use of a contribution to a specific activity (purpose) or time, but do not necessarily place limitations on how the activity is performed.

+ Time Restricted funds are donor-restricted for use in a certain time period. Time restrictions are only satisfied through the passage of time.

+ Purpose restricted funds are donor-restricted to only be used for a specified purpose. Purpose restrictions are released once the funds are used for the specified purpose.

Note: Donor-imposed restrictions DO NOT affect whether the entity is entitled to the contribution, and DO NOT impact the timing of initial recognition of revenues and expenses.

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• Impact of donor-imposed restrictions on Net Assets:

• Donor-restricted contributions are shown as an increase to Net Assets with Donor Restrictions.

• Once the restriction has been satisfied (through purpose or passage of time), the contribution is "released" from restrictions by a decrease in Net Assets with Donor Restrictions and an increase in Net Assets without Donor Restrictions

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Donor Restricted Contributions – Simultaneous Release

Accounting standards allow for recipients to recognize revenue under the Simultaneous Release Option

Under the Simultaneous Release Option, donor‐imposed restrictions may be reported as Net Assets without Donor Restrictions, as long as all of the following are met:

• The restrictions are satisfied in the same reporting period as the revenue is initially recognized.

• The NFP has a similar policy for reporting investment gains and income (if applicable).

• This policy is reported consistently from period to period

• The accounting policy is disclosed

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Required Disclosures – Grant/Contribution Recipients

Disclosures for unconditional

promises to give:

• Promises receivable less than one year

• Promises receivable in one to five years

• Promises receivable in more than five years

• The amount of the allowance for uncollectible promises receivable

Disclosures for conditional

contributions:

• The total amounts promised

• A description and amount for each group of promises having similar characteristics

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Required Disclosures – Grant/Contribution Providers

Disclosures for unconditional

promises to give:

• Amounts payable in each of the next five years, and the aggregate amount due in over five years

• The unamortized discount (if present value techniques are used for unconditional promises to give)

Disclosures for conditional

promises to give:• Consider the need for ASC 450‐20‐50

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Before we close…

QA

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Yellow Book Update – Drew Power

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Learning Objectives

By the end of this module, you will be

able to:

Identify threats to independence

Describe the Yellow Book CPE requirements

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Management Responsibilities

3.79 …consideration of managements' ability to effectively oversee the nonauditservice to be provided

a. Management is required to have sufficient expertise to oversee the nonaudit service

b. Management is not required to possess the expertise to perform or re-perform the nonaudit service

c. Management must reasonably be able to recognize material error, omission, or misstatement in the results of the nonaudit services to be provided.

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Services Auditors Cannot Perform

3.87 …the following services…impair independence…:

a. determining or changing journal entries, account codes or classifications for transactions, or other accounting records for the entity without obtaining management’s approval;

b. authorizing or approving the entity’s transactions; and

c. preparing or making changes to source documents without management approval

- Poll Everywhere

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Significant Threats to Independence

3.88 …preparing financial statements in their entirety from a client-provided trial balance or underlying accounting records creates significant threats to auditors’ independence…

Required action:

• Document the threats and safeguards applied

OR

• Decline to provide the service

- Poll Everywhere

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Threats to Independence

• 3.89 …threats to independence any services related to preparing accounting records and financial statements…These services include:

+ Recording transactions for which management has determined or approved the appropriate account classification, or posting coded transactions to an audited entity’s general ledger;

+ Preparing certain line items or sections of the financial statements based on information in the trial balance;

+ Posting entries that an audited entity’s management has approved to the entity’s trial balance; and

+ Preparing account reconciliations that identify reconciling items for the audited entity management’s evaluation

- Poll Everywhere

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AICPA and Yellow Book Independence

Key Differences

GAS AICPA

Preparation of accounting records and financial statement services create threats or significant threats to independence and requires analysis and documentation

Preparation of accounting records…does NOT create threats or significant threats…

Services described in ¶3.88-3.89 require application of safeguards and documentation

Services described in ¶3.88-3.89 generally do NOT require application of safeguards and documentation beyond General Requirements for Performing Nonattest Services

https://www.journalofaccountancy.com/news/2019/apr/yellow-book-updates-independence-guidance-201919809.html

HD1

HD2TA58

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Roles in the Engagement

Role & Tasks

Level of ambiguity,

complexity, & uncertainty

Required Level of Proficiency

Nonsupervisory Auditors• Plan or perform engagement procedures

Low Basic

Supervisory Auditors• Plan, perform, or direct engagements

Moderate Intermediate

Partners and Directors• Plan, perform, direct or report on engagements• Review engagement quality prior to issuing/signing the report

High Advanced

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HD1 not sure I agree with AICPA comment the way it is written - preparation of "source documents" would impair independence, proposing journal entries or preparing reconciliations are services that threats would be at an acceptable level if general safeguards are in place.Hinshaw, Dave, 5/14/2019

HD2 add "...beyond General Requirements for Performing Nonattest Services"Hinshaw, Dave, 5/14/2019

TA58 UpdatedTrzebunia-Niebies, Artur, 5/14/2019

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Yellow Book Education

RequirementsYear

0 21

80 CPE Credits

24 CPE Credits: Auditing (Governmental or Client operating environment specific)

56 CPE Credits: All other fields of study recognized by NASBA; directly enhance the auditor professional expertise

• Auditors that do NOT complete the required 80 hours may receive 2 months immediately following the 2-year cycle to complete their CPE requirements

• Excess hours from one 2-year cycle may NOT carry over to the next cycle

Min. 20 CPE Credits

• Auditors that do NOT complete the required 20 hours within year 1 may receive 2 months immediately following the 1-year period to complete their 20 hours

Min. 20 CPE Credits

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Subject Matter Directly Related to Government Auditing

GAGAS and related topics (e.g. Internal Control)

Applicable AICPA Statements on Auditing Standards

Applicable AICPA…for Attestation Engagements and Statements on Standards for

Accounting and Review Services

Applicable standards issued by:• Institute of Internal Auditors• PCAOB• International Auditing and Assurance

Standards Board• GAAP, GASB, FASAB, FASB• …

See GAO-18-568G ¶4.23 for a complete list

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Exemptions

Scenario Exempt from

Auditors who charge less than 20% of your time annually to engagements conducted in accordance with GAGAS, AND…

56-hour CPE requirementAuditors who are only involved in performing engagement procedures, but not involved in planning, directing, or reporting on the engagement.

Nonsupervisory auditors who charge less than 40 hours of their time annually to engagements conducted in accordance with GAGAS

All CPE requirements

College and university students (interns) employed on a temporary basis for a limited period of time

All CPE requirements

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• New employee joins the firm in October 2020 and is assigned a GAGAS engagement.


Prorating CPE Requirements: Example

• Two of four full 6-month intervals remain in the 2-year CPE cycle

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80 ℎ𝑟𝑠 𝟒𝟎 𝒉𝒓𝒔

01/01/20 – 06/30/20

Int. 1

07/01/20 – 12/31/20

Int. 2

01/01/21 – 06/30/20

Int. 3

07/01/20 – 12/31/21

Int. 4

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Polling Question #5

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group discussion

Definitions & Examples

Definition Examples

6.21 Waste is the act of using or expending resources carelessly, extravagantly, or to no purpose

• Making travel choices that are contrary to existing travel policies or are unnecessarily extravagant or expensive

• Making procurement or vendor selections that are contrary to existing policies or are unnecessarily extravagant or expensive

6.23 Abuse is behavior that is deficient or improper when compared with behavior that a prudent person would consider reasonable and necessary business practice given the facts and circumstances, but excludes fraud and noncompliance with provisions of laws, regulations, contracts, and grant agreements.

Abuse also includes misuse of authority or position for personal financial interests or those of an immediate or close family member or business associate.

• Creating unneeded overtime• Requesting staff to perform personal errands or

work tasks for a supervisor or manager

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Required to… NOT required to…

• Report as findings any instances of waste and abuse

• Design audit procedures to detect waste and abuse

Key Takeaways: Waste & Abuse

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Payroll Tax Considerations & UBIT – LaKrisha Watson

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Employee Retention Credit• Refundable credit against payroll tax (Social Security) liability for employers• Initial eligibility determination:

+ Excludes employers receiving SBA 7(a) loans• Eligible recipient:

+ Employer must have partially or fully suspended operations due to orders from the government or experienced a greater than 50% reduction in receipts due to the COVID-19

+ Wages paid March 12, 2020 – December 31, 2020• Maximum credit amount:

+ 50% of qualified wages• Qualified wages for purposes of credit:

+ Cap of $10,000 per employee – Credit of $5,000• Limitation – employers with more than 100 employees are limited to only employees not

working during the qualified period

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Delay of Payment of Employer Payroll Taxes

• Applicable payroll taxes – Employer Social Security (NOT all 941 taxes); and applies to ½ of SECA for self-employed

• Deferral period – March 27, 2020 through December 31, 2020

• Payment dates – 50% December 31, 2021 and 50% December 31, 2022

• More favorably impacts large employers

• Different quarter – different impact (FFCRA & Retention timing interaction – 941 services)

• Now applies to taxpayer that has had any indebtedness forgiven under the PPP loan program

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Polling Question #6

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Unrelated Business Income/Form 990-T

NOL Changes

• Under TCJA, NOL’s arising in 2018 and later tax years could only be carried forward and offset 80% of taxable income

• CARES removes the NOL 80% limitation for tax years beginning before January 1st, 2021

• For NOL’s ARISING in tax years beginning after 12/31/2017 and before 1/1/2021, these NOL’s may be carried back 5 tax years

+ It is important to note that this carryback only applies to losses generated in 2018, 2019, and 2020.

+ Also, a short period would count as a tax year for purposes of the carryback period

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NOL Changes

• Beginning with the 2021 tax year, the old rules are reinstated

+ Any remaining “pre-2018 NOL” can offset 100% of taxable income

+ Any remaining “post-2017 NOL” can only offset 80% of taxable income

• NOL’s generated in 2018, 2019, and 2020 could be used to offset tax at a higher rate if carried back to a “Pre-TCJA” year

• A taxpayer may elect to waive the carryback period for the NOL’s

+ Taxpayer’s should be cautious with carryback and consider all impacts Carrying back an NOL may change several other limitations and/or credits on a return

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Accelerated Refund of Corporate AMT

• TCJA repealed the corporate AMT beginning with the 2018 tax year

• For taxpayer with AMT credits, a credit could be claimed in subsequent years ending with the 2021 tax year when all remaining credit could be claimed

• CARES accelerated these AMT credits

+ A taxpayer may take entire credit amount on a 2018 return and request a refund of the credit

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Proposed Silo Regulations

• Before TCJA

+ Unrelated business taxable income (UBTI) measured on a cumulative basis

• TCJA

+ IRC section 512(a)(6) was added and introduced the concept of “silos”

+ Initial questions related to how to determine separate trades or business

• Post TCJA

+ Interim Temporary Guidance released August 2018 (Notice 2018-67)

• Now

+ Proposed regulations issued April 23, 2020 provided additional clarity in determining separate trades or businesses

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• Trades or Businesses

+ Notice 2018-67

• Use six digit North American Industry Classification System (NAICS) codes

– More than 1,000 NAICS six digit codes

+ Proposed regulations

• Use first two digits of the NAICS code

– 20 different two digit code categories

• There is no de minimis exception based on UBTI gross receipts

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Proposed Silo Regulations• Investment Activities

+ Notice 2018-67• UBTI from partnerships can be aggregated if the de minimis test or control test is met

• De minimis test – no more than 2% profit interest and no more than 2% capital interest

• Control test – no more than 20% capital interest and does not have control or influence over the partnership

• Interests held by board members, supporting organizations, and controlled entities required to be considered when evaluating de minimis and control test

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• Investment Activities

+ Proposed regulations

• When evaluating de minimis test, interests held by board members, supporting organizations, and controlled entities are not required to be considered

• When evaluating control test, interests held by board members are not required to be considered but interests held by supporting organizations and controlled entities are required to be considered

• K-1 received can be used to determine profit and capital ownership %

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Polling Question #7

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Financial Statement Presentation (ASU 2016-14): Lessons Learned – Deneen Keegan

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ASU 2016-14

Quick Refresher

• Accounting Standards Update 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities

Effective 2018 calendar year ends and fiscal year 2019

• Improves financial statement presentation and disclosures by NFPs.

+ More relevant information about their resources to donors, creditors, and other financial statement users

A&A Update 2019-03

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NFP New Reporting Model

Quick Refresher ASU 2016-14

• Without Donor Restrictions• With Donor Restrictions

Statement of Financial Position:

Two classes of Net Assets

• Investment Return presented on a net basisStatement of Activities

• Continue presenting net amount for operating cash flows using direct or indirect method

Statement of Cash Flows

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NFP New Reporting Model

Key Changes

• Nature and amounts of different types of donor-imposed restrictions

• Amounts and purposes of board designated net assets

• Disclosure of the liquidity and available of resources of the NFP – assets able to be converted to cash over the next year to be used for general expenditures

• Disclosure of allocations method for expense by function

Notes to the Financial

Statements

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Functional Expenses

Functional Expense Classification

+ Grouping expenses according to the purpose for which costs are incurred

(program services and supporting services)

• The type and number of program services shown on the financial statements should tell the "story" of the organization (education, health, environment)

+ Too many? Valuable information may get lost in the detail

+ Too few? Users of the financials may not understand how resources are being used

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Functional Expenses

Natural Expense Classification

+ Grouping expenses according to the kinds of economic benefits received in incurring those expenses.

(salaries and wages, employee benefits, supplies, rent, utilities, depreciation)

NFPs should use direct identification (assigning specific expenses) where possible, however, an allocation method is also appropriate in determining functional expense classification.

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Natural Expense Allocation

Occupancy and other overhead costs

Depreciation

Salaries

Benefits

Insurance

Supplies (not directly attributable to one program)

Square footage

Usage of specific items

Time and effort

Proportional to salaries

Headcount

Proportional to time and effort

Natural Expense and Example of Allocation Methods

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Audit Procedures Relating to Statement of Functional Expenses

• Some organizations may have segregated GL codes

• Others may use Excel to allocate across square footage, headcount, etc.

• Consider audit risk and materiality when designing procedures

Examples of audit evidence:

• Square feet – building plans/diagrams or memos and corroborate through observation

•Headcount – corroborate through payroll records or org charts.

• Time and effort– timesheets or memo explaining basis for allocation

•Depreciation – listing of assets and use

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Auditing Functional Expenses

ALLOCATION OF EMPLOYEE DUTIES BY FUNCTION

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Auditing Functional Expenses

TESTING THE REASONABLENESS OF ALLOCATION BASED ON CONSISTENCY AND KNOWN CURRENT YEAR CHANGES

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AICPA – Top 7 Functional Expense Allocation Errors

Lack of expense allocation methodology

Requirement to disclose methods used to allocate costs among program and support functions

Not allocating costs to management and general

Certain costs (such as general recordkeeping, payroll processing, and HR) will be solely allocated to management and general because they benefit the organization as a whole

Not allocating enough costs to programs

For example, if accounting personnel spend a portion of their time delivering program content to recipients, then there is a reasonable basis to allocate some of their wages to program services

In no particular order

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AICPA – Top 7 Functional Expense Allocation Errors (continued)

Ignoring consideration of joint costs (i.e. direct mail campaigns, special events)

If under ASC Subtopic 958‐720, joint costs meet criteria for allocation, there should be a systematic and rational basis for allocation between fundraising and respective programs

Not enough detailed natural expenses

For example, showing fundraising expense as a natural expense instead of breaking out natural costs for postage, printing, event venue, food costs, etc.

Lack of fundraising salaries expense allocation

If an organization has contributions, there likely are salaries associated with generating those contributions

Misclassification of investment‐related activity

All investment‐related expenses are netted with investment return and excluded from the functional expense analysis based on the presentation requirements of ASU 2016‐14.

In no particular order

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Polling Question #8

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Before we close…

QA

THANK YOU TO DIXON HUGHES GOODMAN AND

TO OUR SPEAKERSMark Nicolas

Tamara VineyardMatthew JonesDrew Power

LaKrishaWatsonDeneen Keegan

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