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2015
WHAT NOT-FOR-PROFIT
ORGANIZATIONS SHOULD EXPECT IN
A Publication of RubinBrown LLP
INTRODUCTION
2015 brings changes, and the potential for additional changes, to not-for-profit organizations including the
implementation of the new Uniform Grant Guidance for organizations receiving federal funds, as well as the release of
a new FASB exposure draft regarding financial statement presentation for all not-for-profit organizations. In addition, notfor-profit organizations are reacting to overall economic conditions as well as to industry specific trends. The following
publication highlights some of these changes and trends that not-for-profit organizations should expect to see and
react to during 2015.
Please contact us if you have questions about any of the topics covered in this publication.
RubinBrown Not-For-Profit Services Group
Judy Murphy, CPA
Partner-In-Charge
314.290.3496
[email protected]
Amy Altholz, CPA
Partner & Vice Chair
314.290.3369
[email protected]
Sharon Latimer, CPA
Partner
913.499.4407
[email protected]
Contents
FASB Exposure Draft
p3
Uniform Grant Guidance p4
Economic Update
p6
Trends for 2015
p7
Evelyn Law, CPA
Partner
303.952.1245
[email protected]
Mary Kay Lofgren, CPA
Partner
314.290.3475
[email protected]
Jim Ritts, CPA
Partner
314.290.3268
[email protected]
Brent Stevens, CPA
Partner
314.290.3428
[email protected]
Ted Williamson, CPA
Partner
314.678.3534
[email protected]
2 | What Not-For-Profit Organizations Should Expect in 2015
FASB EXPOSURE DRAFT
On April 22, 2015, the Financial Accounting Standards Board (FASB) issued an
exposure draft, Presentation of Financial Statements of Not-for-Profit Entities, the
accumulation of almost three years of work by the FASB. The objective of the original
project was to reexamine existing standards for financial statement presentation
by not-for-profit organizations, focusing on improving net asset classification
requirements and information provided in the financial statements and notes about
liquidity, financial performance and cash flows. As the existing standards have been
around for more than twenty years, this fresh evaluation is being closely monitored
by the sector.
This exposure draft does not change how an organization accounts for transactions
but proposes changes to the look of an organization’s financial statements,
providing increased understandability and transparency to financial statement
users. Key changes include:
∙ Reducing the number of net asset classes from three to two: 1) net assets without
donor restrictions and 2) net assets with donor restrictions. This streamlines the
presentation on the face of the financial statements but does not eliminate the
requirement to track permanently and temporarily restricted net assets, which will
still be disclosed in the notes to the financial statements.
∙ Revamping the statement of activities to include required operating measures
based on mission and availability of resources. Giving each organization flexibility,
a one or two page statement approach will be allowed.
∙ Requiring operating expenses to be presented by both nature and function. This
can be done on the statement of activities, as a separate statement, or as a note
disclosure. Additional footnote disclosures will be required describing the method
used to allocate costs among program and supporting activities.
∙ Including information within the footnotes regarding the organization’s liquidity,
including quantitative information about the availability of the organization’s
financial assets to meet cash needs and when financial liabilities will be due, as
well as qualitative information about how the organization manages liquidity.
∙ Requiring the statement of cash flows to be presented on the direct method.
In addition, certain items will be recategorized to better align operations on
this statement with the statement of activities. These recategorizations include
reporting purchases and proceeds from the sale of property and equipment as
well as any cash restricted for capital projects within operating activities, reporting
cash received from interest and dividends within investing activities, and reporting
interest paid on debt within financing activities.
The exposure draft is open for comments until August 20, 2015 – all are welcomed
and encouraged to share their thoughts, both good and bad, with the FASB. When
the final standard will be issued and when implementation will start is still being
determined by the FASB.
www.RubinBrown.com | 3
UNIFORM GRANT GUIDANCE
On December 26, 2014, the Office of Management and Budget issued Uniform
Administrative Requirements, Costs Principles, and Audit Requirements for Federal
Awards, which is codified into Title 2, Part 200, of the Code of Federal Regulations.
This pronouncement, generally referred to as the "Uniform Grant Guidance" (UGG),
replaces or modifies existing circulars such as A-21 Cost Principles for Educational
Institutions, A-50 Audit Follow-up, A-87 Cost Principles for State, Local, and Indian
Tribal Governments, A-89 Catalog of Federal Domestic Assistance, A-102 Grants
and Cooperative Agreements with State and Local Governments, A-110 Uniform
Administrative Requirements for Grants and Other Agreements with Institutions of
Higher Education, Hospitals, and Other Nonprofit Organizations, A-122 Cost Principles
for Non-Profit Organizations, and A-133 Audits of States, Local Governments, and
Non-Profit Organizations.
These modifications were designed to streamline the federal grant-making process,
increase the efficiency and effectiveness of federal programs, ease the administrative
burden for grant applicants, eliminate unnecessary and duplicative requirements,
focus on areas that achieve better outcomes at a lower cost, and reduce the risk of
waste, fraud and abuse. Highlights of the UGG include the following:
Changes to streamline the single audit process, designed to reduce the number
of single audits required, the number of programs audited, and the required audit
procedures. These changes are effective for years ending on or after December 15,
2015. Key changes include:
∙ Increasing the single audit threshold to $750,000 (effective for fiscal years
beginning on or after December 31, 2014).
∙ Expanding the requirements to be a low-risk auditee to also include the timely
submission of the previous data collection form and that there is no substantial
doubt about the entity's ability to continue as a going concern indicated within
the previous auditor report.
∙ Modifying the major program determination including:
– Increasing the Type A program threshold to the greater of $750,000
(from $300,000) OR 3% of the entity’s total federal expenditures
– Changing the requirements determining what constitutes a high-risk
Type A program
– Increasing the Type B risk assessment threshold to 25% of the Type A threshold
– Decreasing the percentage of federal dollars required to be audited as
major programs to 40% (from 50%) for high-risk entities and 20% (from 25%) for
low-risk entities
Changes to indirect cost rates to allow all entities that receive less than $35 million
in federal funding per year to request a minimum flat rate of 10%, if they have
never had a previously negotiated indirect cost rate. Non-federal entities also have
the option to extend their negotiated indirect cost rate for up to four years. These
changes were effective December 26, 2014.
Changes to time and effort reporting requirements to allow for greater flexibility.
Personnel activity reports are encouraged but no longer required; rather, the
emphasis will be on having internal controls in place to justify salaries and wages.
These changes were effective December 26, 2014.
4 | What Not-For-Profit Organizations Should Expect in 2015
Changes to various administrative requirements such as procurement,
contractor versus subrecipient determination and internal control. These
changes were effective December 26, 2014. Highlights include:
∙ The definition of five methods of procurement to be used:
– Micro purchases – less than $3,000 (or $2,000 for construction subject to
the Davis Bacon Act)
– Small purchases – $3,000 to $150,000 (the Simplified Acquisition
Threshold)
– Sealed bid purchases – over $150,000 (and preferred for construction)
– Competitive proposal purchases – over $150,000 when a sealed bid is
not appropriate
– Noncompetitive purchases – special circumstances applicable to all
levels.
∙ Additional guidance to differentiate between a contractor (previously
referred to as a vendor) and a subrecipient.
∙ Explicitly requiring the establishment and maintenance of effective
internal controls that provide assurance that an entity is managing federal
awards in compliance with federal statutes, regulations and the terms and
conditions of federal awards.
KEY ACTIONS TO PREPARE FOR IMPLEMENTATION
1. DETERMINE COMPLIANCE OF CURRENT PROCUREMENT PROCEDURES AND
TIME & EFFORT REPORTING SYSTEM WITH NEW REQUIREMENTS
2. EVALUATE WHETHER TO REQUEST AN INDIRECT COST RATE EXTENSION
OR THE 10% DE MINIMIS RATE
3. USE THE NEW CRITERIA TO MAKE THE CONTRACTOR VS. SUBRECIPIENT
DETERMINATION
4. EVALUATE YOUR INTERNAL CONTROL STRUCTURE
5. EVALUATE THE IMPACT OF THE UGG CHANGES ON YOUR UPCOMING AUDIT
AND DETERMINE THE STATUS OF PRIOR YEAR AUDIT FINDINGS
www.RubinBrown.com | 5
ECONOMIC UPDATE
From an economic perspective, 2014 had many highlights – low inflation and interest
rates, low gas prices and gradually increasing home prices. With consumer spending
making up approximately 70% of the economy, low inflation and gas prices
allowed consumers to spend less at the pump and more elsewhere, thus stimulating
economic growth.
Strong equity market conditions were present in 2014 and are expected to continue
through 2015. Investment markets are expected to generate returns on equity
securities approximating 5-8%, strong performance but below historical averages.
However, as was the case in 2014, in the context of an improving economy, capital
market volatility is expected to occur and to be short-term in nature as evidenced
by recent market activity. Organizations should not be distracted by this short-term
volatility and should focus on “staying the course.”
Returns on fixed income securities are expected to only approximate 1-3%. Currently,
there is speculation that interest rates may rise in late 2015 but this rise is expected
to be very slow, unless inflation becomes a concern, economic recovery really
accelerates, or the global economic recovery catches up with the U.S. dollar (which
is currently strong). The global demand for U.S. Treasuries should also keep long-term
rates down.
Inflation is not expected to be a concern having only increased 0.8% in 2014 after a
1.5% increase in 2013, according to the Bureau of Labor Statistics. This is the secondsmallest December-December increase in 50 years. Only modest increases in inflation
are expected in future years – the long-term average expected for 2015 to 2019 is only
2% per the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters.
More positive news is expected in 2015 with regard to consumer confidence,
which rebounded in May 2015 per the Conference Board. Consumer confidence is
expected to continue to rise to 95% in 2015. Optimistic people tend to make more
purchases. Increased spending stimulates the economy and often translates into
increased consumption and discretionary income. This is good news for many notfor-profit organizations that are impacted by constituents' discretionary incomes.
Moderate unemployment and low GDP growth are expected to remain consistent
in 2015. During 2014, unemployment decreased from 6.6% in January to 5.6% in
December. Unemployment rates are expected to improve gradually, dropping to
5.4% in 2015 and 5.1% in 2016 per the Federal Reserve Bank of Philadelphia’s Survey
of Professional Forecasters. As a result, labor shortages are anticipated to worsen
and more emphasis may be placed on wage issues and employment. Per this same
survey, real GDP growth increased 2.4% in 2014 and is projected to gain moderate
momentum over the next four years – growing 3.2% in 2015, 2.9% in 2016, and 2.7%
in 2017. While this growth rate is less than desired, it exceeds expected global
economic growth compared to Japan and Europe per projections from the Bank
of Canada. Global GDP growth has been lagging, with forecasted growth rates
between only 1.0% and 1.5% expected in upcoming years.
For the remainder of 2015, not-for-profit organizations should be optimistic that
continued strong financial market conditions and increased consumer confidence
and discretionary income will translate into positive revenue increases. However,
labor demands and potentially increasing interest rates may cause moderate
volatility in an organization’s expenses.
6 | What Not-For-Profit Organizations Should Expect in 2015
CRUCIAL TREND TAKEAWAYS
✔ REVIEWING & EVALUATING ORGANIZATIONS BASED ON IMPACT METRICS
IS GAINING POPULARITY
✔ OBTAINING FINANCIAL RESOURCES FOR OPERATING SUPPORT
& CAPACITY BUILDING IS IMPROVING
✔ DECLINES IN GOVERNMENT SUPPORT, DONOR LOYALTY & CORPORATE FUNDING
STILL POSE CHALLENGES
✔ MORE THAN 70% OF ORGANIZATIONS EXPECT A CONTINUED INCREASE IN
COMMUNITY NEED
✔ OVERCOMING THE RESOURCE GAP TO MEET INCREASED COMMUNITY NEED IS A
PREVAILING CONCERN
✔ ORGANIZATIONS ARE OPTIMIZING HUMAN CAPITAL, SERVICES/PROGRAMING
& FINANCE & OPERATIONS TO RESPOND TO CURRENT CHALLENGES
www.RubinBrown.com | 7
TRENDS FOR 2015
Impact
Impact is the new buzzword for not-for-profits. In Nonprofit Finance Fund’s “2015
State of the Nonprofit Sector” (RubinBrown.com/2015-NFP-State), more than 60%
of respondents said 50% or more of their funders are asking for impact metrics in
their reports. However, 71% said funders rarely or never fund the costs associated
with impact measures, leaving organizations with challenges such as staff lacking
technical expertise or having a shortage of resources needed to collect the
requested data.
Although this emphasis on impact measurement can be burdensome, it is fueling
momentum away from evaluating organizations based on overhead ratios and
starting positive dialogues among donors, grantmakers and governments regarding
transparency, accomplishments and necessities to achieve missions.
Fundraising
Fundraising is always of key importance to not-for-profit organizations. Overall,
there are positive expectations for charitable giving in 2015, with speculation that
annual charitable giving could top its pre-recession peak of $350 billion. The National
Council for Nonprofits published their fundraising trends for 2015 noting the following:
What’s Up
Ç
Ç
Ç
GENERAL OPERATING
SUPPORT
MULTI-YEAR
SUPPORT
SUPPORT FOR
CAPACITY BUILDING
What’s Down
È
È
È
GOVERNMENT
DOLLARS
DONOR
LOYALTY
CORPORATE
SUPPORT
The positive trends are supported by the Grantmakers for Effective Organizations’ 2014
“National Study of Philanthropic Practice” (RubinBrown.com/2014-Grantmakers). This
study reflected marked improvement in the proportion of grants going to general
operating support (25% of the grant dollars awarded, up from 20% in 2011 and
2008), the frequency of multi-year support (which rebounded to pre-recession levels
last seen in 2008 of almost 60%) and support for capacity building (27% of funders
increased their support in this area).
Government Funding
The less positive trends include a decline in government funding. Per the Nonprofit
Finance Fund’s 2014 and 2015 surveys, over 70% of responding organizations receive
federal, state or local government funding; however, over the last five years, more
than 45% reported a decline in federal and state funding and more than 40%
reported a decline in local funding. This illustrates a trend within the industry that
organizations feel the government is shifting programs and responsibilities to them.
8 | What Not-For-Profit Organizations Should Expect in 2015
In addition to funding shortfalls, almost 50% of organizations are challenged by
payment delays, 27% of organizations report spending upwards of 100 hours per
month managing government awards which includes burdensome reporting
requirements and more than 50% of organizations report an average indirect cost
rate of less than 10%. The good news is the UGG raises the minimum indirect cost
rate that can be requested to at least 10% for all federal fund recipients.
Donor Loyalty
Organizations are also experiencing challenges maintaining donor loyalty. According
to the “2014 Fundraising Effectiveness Support Report” issued by the Association
of Fundraising Professionals and the Center on Nonprofits and Philanthropy at the
Urban Institute (RubinBrown.com/2014-FEP), over the last nine years, donor and gift/
dollar retention rates have been consistently weak, averaging below 50%.
Some positive momentum in the last year has been noted, with median donor
retention rates increasing from 39% in 2012 to 43% in 2013 and the median gift/dollar
retention rates increasing from 40% in 2012 to 46% in 2013. Although organizations
have experienced an overall positive dollar gain with regard to overall fundraising
dollars raised, every $100 gain in 2013 was offset by $92 in losses due to gift
attribution. In addition, for every 100 donors gained in 2013, 102 donors were lost
through attrition. This illustrates the challenge organizations face in responding to
a changing donor demographic and achieving donor engagement. Just saying
social media is the answer is no longer enough. Organizations need to segment their
messages and strategize communications across multiple channels and devices as
well as look at messaging targeted at specific generations and demographics.
Corporate Giving
Corporate support has been a strong component of the fundraising strategy of
many not-for-profit organizations. Led by a coalition of CEOs, the Committee
Encouraging Corporate Philanthropy (CECP) publishes an annual evaluation of
trends in corporate societal engagement. In their “Giving in Numbers 2014 Edition”
(RubinBrown.com/2014-CECP), there were some positive trends noted. Notably,
64% of corporations increased their total contributions from 2010 to 2013, which
is understandable given the overall business growth during that period. A total of
$17.55 billion was given by corporations in 2013, up from $17.30 billion contributed in
2012 and $16.30 billion in 2011.
Certain segments within the not-for-profit sector are favored by corporations in
terms of dollars given including health and social services (27% of corporate dollars),
education (higher – 12% and K-12 – 16% of corporate dollars) and community and
economic development (14% of corporate dollars). However, when looking at the
overall ~15% increase in corporate support over the past four years, it is interesting to
note that cash contributions by corporations have only grown about 4% while noncash contributions (including both pro-bono services and donated goods/products)
have grown almost 23%.
In addition, corporations are being conservative regarding their expected giving in
the upcoming year with 13% expecting a decrease in giving and 48% expecting no
change. It is also worth noting that corporate giving has been historically skewed
with the occurrence of major national and local events such as Superstorm Sandy in
2012 and the Ferguson unrest in late 2014.
www.RubinBrown.com | 9
TRENDS FOR 2015
Community Need
In addition to economic conditions, organizations are responding to other trends
impacting the industry. Above all, not-for-profit organizations react to the needs
within the communities they serve. According to Nonprofit Finance Fund’s 2015
survey, the need continues to increase.
Over recent years, there has been an increase in demand for services with 76%
of responding organizations expecting an increase in need in 2015. This creates a
“resource gap” as organizations struggle to keep up with the increasing demand.
The survey reveals 52% of responding organizations are unsure if they can bridge
this gap in 2015. Some of the most prevalent community needs identified included
affordable housing, job availability and youth development programs.
Organizational Challenges
In the same Nonprofit Finance Fund surveys, organizations were asked about their
top challenges for the upcoming year. The most popular responses were:
Achieving long-term financial sustainability – Organizations know how difficult it can
be to build operating reserves given the increase in community demand. Other
fundraising challenges such as loss of government funding and lack of unrestricted
operating contributions can prove daunting when trying to fund reserves and
endowment campaigns.
Diversifying funding sources – Organizations are striving to find new earned revenue
opportunities while still remaining true to their missions.
Offering competitive pay and/or retaining staff – As economic conditions improve
and competition for talent increases, hiring and retaining highly-qualified talent
often means offering more competitive salaries and benefits. An organization will
have to balance protecting its greatest resource – employees – and straining its
budget.
Responding to cuts in government funding – The need for diversified funding sources
and operating reserves is even more prevalent as organizations continue to see
local, state and federal government funding reduced.
Marketing, outreach and community engagement – Organizations are constantly
challenged to attract donors, volunteers, users of services, patrons, etc. in a
competitive environment.
10 | What Not-For-Profit Organizations Should Expect in 2015
Organizational Responses
In response to these challenges, organizations were asked to respond with their
planned actions in the following key areas: human capital, services/programming
and finance and operations.
Human Capital
Retain existing personnel but not necessarily look to expand – Fewer organizations
were planning to hire staff for new positions (only 39% compared to 44% in the prior
year) or make replacement hires (only 31% compared to 37% in the prior year).
Remain conservative with salary costs – Only 17% (down from 18% in the prior year)
of organizations are anticipating giving raises beyond cost of living adjustments.
Invest in talent – This positive trend illustrates organizations' commitment to devoting
time and resources to professional development of their staff.
Start thinking of the future in terms of leadership succession planning – Up from 19% in
the prior year, 34% of organizations were planning to focus on succession planning.
Services/Programming
Add or expand program/services and increase the number of people served – Not
surprisingly, organizations are aiming to meet the increased community need.
Collaborate with another organization to improve/increase programs or services
offered – It is interesting to note that per the Grantmakers for Effective Organizations’
study, 80% of funders reported it was important for organizations to coordinate
resources; however, more than 50% of funders never or rarely offered financial
support for these grantee collaborations. This illustrates the disconnect organizations
experience when trying to plan these collaborations.
Upgrade hard/software to improve services or programs – This is of particular
importance to organizations as the tracking and measuring of outcomes continues
to be emphasized.
Finance and Operations
Conduct long-term strategic or financial planning – Along with proactive succession
planning, organizations are also ensuring the appropriate long-term strategic and
financial plans are in place.
Review the organization’s finances – This includes changing how the organization
raises or spends money, pursuing earned revenue ventures and evaluating future
growth/expansion. Of responding organizations, 16% were considering launching a
capital campaign, up from 8% in the prior year.
Build the organization’s reserve – Best practices recommend at least 25% of an
organization’s expenses be maintained in an operating reserve. Although more than
35% of responding organizations report having less than this recommended amount
of cash on hand, a positive trend was noted with only 12% anticipating utilizing these
reserve funds in the future, down from 16% in the prior year.
Collaborate with another organization to reduce administrative costs – “Sharing”
among organization is on the rise, whether that is sharing back-office operations,
space or employees.
www.RubinBrown.com | 11
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