Nonprofit & Government Times Q3 2019

Nonprofit & Government Times



Welcome. We’ve all heard the saying, “The only thing that is constant is change.” As we transition from the more relaxed days of summer to the busyness of fall, I can’t help but think about how true this is for nonprofits as they have to constantly adapt to new challenges and opportunities in every season. It’s no surprise that the results of our 2019 Nonprofit Pulse Survey reflect this landscape of change – and the need for innovative ways to manage it. We’re excited to unveil the findings of the survey, Change Management for a New Era , at our annual Nonprofit Industry Update on October 3. I encourage all of you to join us for this full day of learning and networking. In the meantime, I hope you enjoy this issue of Nonprofit & Government Times , which is always aimed at helping organizations succeed among all the changes and uncertainties. In this issue, you’ll learn about accepting cryptocurrency donations, using predictive data in your fundraising initiatives and dealing with recent changes from the IRS. If you have any questions about these topics or other matters of importance to your nonprofit organization, please reach out to me or another member of our Nonprofit, Government & Healthcare Group.

2 CRYPTOCURRENCY : Considerations for Accepting Gifts of Virtual Currency Sibi Thomas & Matthew Estersohn 5 FORM 990-T FISCAL YEAR FILERS : Why Did I Get This Notice? Magdalena M. Czerniawski & Robert Lyons 7 THE TAXPAYER FIRST ACT OF 2019 : What Exempt Organizations Need to Know Magdalena M. Czerniawski 9 Improving FUNDRAISING Efficiency with DATA ANALYTICS Xixi Dong 12 Is it Time to UPDATE YOUR FORM 990 Compensation Study? Magdalena M. Czerniawski 15 GASB STATEMENTS 88 & 89 Philip Marciano 17 Meet the MARKS PANETH TEAM

Best regards,



Cryptocurrency: Considerations for Accepting Gifts of


B itcoin was invented in 2009 and saw limited use for the first few years of its existence, with transactions lim- ited mostly to novelty purchases and early adopters. The past few years, however, have seen increased growth, with bitcoin trans- actions now in the hundreds of thousands per day and price volatility that has made national news. According to data from, at one point in late 2017, bitcoin had a market capitalization of over $300 billion. In February 2019, that value dropped to under $60 billion and as of August 31, it had increased again to approx- imately $172 billion.

Bitcoin has also drawn a number of competing crypto- currencies – and while there are only a few that see widespread usage, there are thousands of different currencies in existence. As usage becomes more commonly accepted, nonprofits should consider if and how they will accept cryptocurrency as either a donation or payment for services. While a detailed description of the blockchain technol- ogy underpinning bitcoin and other cryptocurrencies is outside the scope of this article, it is helpful to have a basic understanding of the mechanics. Bitcoin is not regulated or backed by a central bank – in order for the system to work, transactions are recorded in a decentralized, publicly distributed ledger. An owner of bitcoin can access the ledger to spend their bitcoin with a private key, a private digital code. If this code is THE LOGISTICS


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Nonprofit organizations that choose to accept cryptocurrency donations should consider liquidating the cryp- tocurrency immediately upon receipt.

lost, the cryptocurrency cannot be accessed and is effectively lost.

Management of Institutional Funds Act, organizations that choose to hold cryptocurrency should ensure that their boards acknowledge the associated risks to justify holding cryptocurrency in relation to their entire asset portfolio. If these mechanics are too burdensome for an organiza- tion, sophisticated donors may seek out other methods of converting their cryptocurrency into charitable donations. For example, many of the largest donor advised fund sponsors accept gifts of cryptocurrency. Nonprofit organizations should update their existing gift acceptance and investment policies to address crypto- currency donations. Before accepting any cryptocurren- cy donations, organizations must understand the risks associated with such donations. There are pros and cons to accepting cryptocurrency donations that must be considered while developing the gift acceptance policy. In addition, the planning and designing of internal controls surrounding the safeguarding, valuation and monitoring of cryptocurrency donations is very import- ant for proper financial reporting. Organizations must consider the type of wallet in which the cryptocurrency will be held as well as the access controls to the digital key, and should implement a two-step verification process. Organizations should also update the signifi- cant accounting policies reported in their financial statements to reflect the valuation and reporting of cryptocurrency donations.

In practice, private keys are stored in software called a wallet, the closest analog to a bank account. If a nonprofit organization chooses to consider cryptocur- rency further, it is important to investigate the different types of wallets available and ensure that appropriate access controls are put in place once one is selected. As with a bank account, any individual with access to the wallet can spend the cryptocurrency, so particular care should be given to this access. While there are multiple ways to hold wallets, extreme caution should be used. Currency exchanges are not regulated, and there have been some high-profile incidents. In late January, the founder of the largest cryptocurrency exchange in Canada suddenly passed away and access to the exchange’s offline, or “cold” wallet, which contained almost $200 million of users’ cryptocurrency, was lost. Wallets that are connected to the internet have been targets for hackers. In 2014, bitcoin was stolen from the largest exchange at the time – the theft was estimated at $460 million.


Given these risks, nonprofit organizations that choose to accept cryptocurrency donations should consider liquidating the cryptocurrency immediately upon receipt. However, there is no legal requirement to do so. Under state laws such as the New York Prudent

Another factor for organizations to consider is the reporting of cryptocurrency donations for tax purposes.


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Cryptocurrency donations are treated as noncash contributions for tax purposes and the organizations may likely sign a Form 8283, Noncash Charitable Contributions, to acknowledge the receipt of the donation. In addition to the signed Form 8283, a donor acknowledgement letter is also required to comply with Internal Revenue Service rules.

If received as a donation, a nonprofit would record the associated revenue and asset at the fair value of the cryptocurrency on the date of the donation. All other conventions for donations of non-cash property should be followed – for example, the nonprofit should ac- knowledge the gift based on the actual assets received and not provide a cash estimate in its communication to the donor. Currently, there is a Digital Assets Working Group formed by members of Assurance Services Executive Committee, Financial Reporting Executive Committee and the Auditing Standards Board that is in the process of developing guidance for the accounting of cryptocurrencies and other digital assets. The professionals in Marks Paneth’s Nonprofit, Government & Healthcare Group are closely monitoring developments related to the accounting of cryptocurrency donations and will continue providing important updates.


Currently, U.S. Generally Accepted Accounting Princi- ples does not address accounting for cryptocurrency. Despite the name, cryptocurrency doesn’t share the characteristics of cash as defined in Financial Account- ing Standards Board’s Master Glossary, and so is most commonly recorded as an intangible asset.

Sibi Thomas, CPA, CFE, CGMA , is a Partner in the Nonprof- it, Government & Healthcare Group at Marks Paneth LLP. He specializes in providing auditing, tax and advisory services to large social service organiza- tions, educational institutions, fundraising and membership organizations and other tax-exempt entities. Mr. Thomas leads the Data Team at Marks Paneth, serves on the AICPA’s Not-for-Profit Entities Expert Panel and has been recognized by the CPA Practice Advisor as a 40 under 40 honoree for his leadership in the accounting profession. Sibi can be reached at or 212.201.3004.

Matthew Estersohn, CPA , is a Senior Manager with the firm’s Nonprofit, Government & Healthcare Group. To this role, he brings more than 10 years of experience planning, coordinating and conducting audits of nonprofit organizations – including social service organizations, health and welfare orga- nizations, educational institutions, private foundations, membership organiza- tions and Single Audits for nonprofit organizations that receive federal funding. Matthew can be reached via email at or at 212.201.3145.


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M any organizations that fell under the category of 2017 fiscal year filer are receiving unexpected balance due or refund notices. A 2017 fiscal year filer is an organization with a year beginning in 2017 and ending in 2018. By far, most of these or- ganizations file on a June 30, 2018 year end. With the automatic six-month extensions, the June 2018 returns would have a final due date of May 15, 2019. The Tax Cuts and Jobs Act (TCJA) introduced a flat 21% corporate tax rate for tax years beginning after Decem- ber 31, 2017. While this is simpler than the graduated rate that would have been applicable to periods before January 1, 2018, it caused a problem for fiscal year filers. Code section 15 of the Internal Revenue Code of 1986

provides that when the rate changes during the year, the tax should be calculated using a blended rate based on the applicable number of days the rates were in effect. This is applicable to income earned throughout the year. However, the TCJA added Code Section 512(a) (7), which increased an exempt organization’s unrelated business income by any amount paid or incurred after December 31, 2017, for any qualified transportation fringe, any parking facility used in connection with qualified parking or any on-premises athletic facility for which a deduction is not allowed. Herein lies the problem with the refunds or balance due notices: the income was not taxable for the part of the year prior to January 1, 2018, so how could a blended rate apply? Practitioners were left at a loss because the IRS did not provide guidance until June 5, 2019, 21 days after the final due date for June 30, 2018 returns. On that day, the IRS issued a bulletin that stated, “The IRS reminds Form 990-T Corporate Filers of new tax law provisions


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tions that timely filed and timely paid the amount reported for the taxable year for which relief is granted. However, even in light of this Notice, the IRS is still sending out penalty notices - including for quarters where the tax did not apply. The matter is further complicated by the IRS being selective about who is receiving the notices. While due to the lack of IRS guidance penalties can be abated, interest cannot since it is statutory. It is unlikely that the IRS will offer any further guidance on this matter unless it is litigated, which seems unlikely since the amounts are generally small. The desire to request an abatement of the penalties depends on the tolerance level of the organization. If your organization has received an unexpected notice from the IRS, the tax professionals in Marks Paneth’s Nonprofit, Government & Healthcare Group recom- mend consulting with your tax advisor.

that . . . corporate filers should apply a blended rate to their UBTI for the entire 2017 taxable year. . .” This applies a blended rate to income that was not taxable. The pre-2018 corporate tax rate was 15% on the first $50,000 of income, 25% on the next $25,000 and 34–39% on income over $75,000. The post-2017 rate, as noted above, was 21%. If your UBTI was (for example) $48,000, then your tax would be $7,050 and at 21%, $9,870 — generating a refund of $2,820. The breakeven between the two rates at 21% is approximately $91,500. If your transportation benefit was below $91,500, your organization would have gotten a refund; if your transportation benefit was over $91,500, a balance due. Notice 2018-100 was issued at the end of 2018 to provide limited relief from penalties in cases where estimated payments were not timely made and there was no Form 990-T filed for the prior year. The relief only applies to Form 990-Ts of tax-exempt organiza-

Magdalena M. Czerniawski, CPA, MBA , is a Tax Director in the firm’s Nonprofit, Government & Healthcare Group, where she provides tax services to a wide array of nonprofits, including charitable organizations, so- cial welfare organizations, professional associations and private foundations. She specializes in matters related to ASC 740-10 (FIN 48), the reporting requirements that govern contributions, compensation, unrelated business taxable income, lobbying costs, and public support testing. Magdalena can be reached via email at or at 212.324.7026.

Robert Lyons, CPA, MST , is a Tax Director with the firm’s Nonprofit, Government & Healthcare Group. He brings more than 30 years’ experience providing tax and consulting services to the nonprofit, higher education and public sector industries. Rob can be reached via email at or at 212.710.1736.


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The Taxpayer First Act of 2019: What Exempt Organizations Need to Know MAGDALENA M. CZERNIAWSKI, CPA, MBA DIRECTOR, NONPROFIT, GOVERNMENT & HEALTHCARE GROUP

T he Taxpayer First Act of 2019 (“Act”) was signed into law by President Trump on July 1, 2019. It includes several provisions that are important to exempt organizations, as they will bring about filing changes. Under the Act, all organizations are required to e-file their Form 990 Return of Organization Exempt from Income Tax. This is a change from the current law, which only requires organizations that file more than 250 informational returns with the IRS and have more than $10 million in assets to e-file their tax returns. The new law drops the threshold to 100 informational returns in calendar year 2021 and down to 10 in calen- dar years after 2021, closing the gap between larger nonprofits and smaller ones. Form 990-N is required to be electronically filled already, therefore, this provision will require substantially all organizations to e-file. Private foundations, which, under current law are only

required to e-file if they have more than 250 returns filed with the IRS regardless of the asset size, will also be required to e-file under the new law, as will orga- nizations required to file Form 8872 Political Organi- zation Report on Contributions and Expenditures. It is worth noting that the new law also includes a provision that requires exempt organizations to make their tax returns available to general public, “in a machine-read- able format as soon as practicable.” The Act provides transitional relief for organizations with gross receipts less than $200,000 and gross assets of $500,000 or less who currently file Form 990-EZ. The relief is granted for years beginning after July 1, 2021. This e-filing requirement is also extended for Form 990-T Unrelated Business Taxable Income, which previ- ously could only be paper filed. The Act has also brought much needed change for Form 990-N. Under the current provisions, if an or- ganization that files Form 990-N (has gross receipts under $50,000) fails to file the information returns for


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While most nonprofits already choose to e-file their tax returns, it’s important to keep in mind that going forward, this option is mandatory.

three consecutive years, it automatically loses tax-ex- empt status. The new law gives organizations a chance to comply with filing obligations, requiring that if the organization fails to file Form 990-N for two consecu- tive years, the IRS must reach out with a notice stating that if the organization doesn’t file for another year, tax-exempt status will be revoked.

While most nonprofits already choose to e-file their tax returns, it’s important to keep in mind that going forward, this option is mandatory. Should you or your organization have any questions regarding e-filing, consult with your tax advisor or a member of Marks Paneth’s Nonprofit, Government & Healthcare Group .

Magdalena M. Czerniawski, CPA, MBA , is a Tax Director in the firm’s Nonprofit, Government & Healthcare Group, where she provides tax services to a wide array of nonprofits, including charitable organizations, so- cial welfare organizations, professional associations and private foundations. She specializes in matters related to ASC 740-10 (FIN 48), the reporting requirements that govern contributions, compensation, unrelated business taxable income, lobbying costs, and public support testing. Magdalena can be reached via email at or at 212.324.7026.


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Improving Fundraising Efficiency with Data Analytics


H ave you ever wondered how Amazon knows what you want before you buy it? The answer is data analytics! Amazon has built a forecasting model that uses data from your previous Amazon activi- ty— including time on site, duration of views, links clicked and hovered over, shopping cart activity and wish lists— to predict what you want. Using predictive analytics for target- ed marketing enables Amazon to increase customer satisfaction and build stronger, more profitable relationships. This type of analytics, which uses a variety of techniques like data mining, modeling, machine learning and artificial intelligence to analyze data and make predictions about future, is now widely

used in the for-profit sector and has prov- en to be very useful in the acquisition and retention of customers. However, the use of data analytics is not currently widespread in the nonprofit sector. A recent research study conducted by Blackbaud Target Analytics across thousands of nonprofit organizations determined that the average nonprofit is missing out on $3,781,461 in untapped giving potential - with the potential to increase annual donors’ contributions by an average of $52 and increase major donors’ gifts by $1,197. 1 This information suggests that non- profit organizations could certainly stand to benefit from the use of data analytics.


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future behavior by finding patterns and trends in that data. Once the donor database is classified into different groups, nonprofits can identify the ideal donor segment, predict the likelihood of donations and predict the actions that are most likely to build long term relationships with donors. Predictive analytics help nonprofits predict when, how and how much a donor is likely to give, what fundraising method generates the most return and what is the best way to reach out to each donor segment. Combining the results from descriptive analytics and predictive analytics, prescriptive analytics involves looking forward and determining what must be done next to help you plan your fundraising strategy. This is the step that customizes an organization’s fund- raising strategy to target the right donors and creates an individualized outreach plan to desired donors. Using prescriptive analytics, nonprofits can significantly increase the effectiveness of donor campaigns and strategies. The use of data analytics in nonprofit storytelling (which I discussed in my last article ) can also help strengthen donor relations and increase donor retention. With greater access to information, nonprof- its can incorporate the quantitative impact of gifts into their storytelling, making their stories more compelling to their donors and keeping them engaged. Donor markets are competitive and utilizing data analytics helps make an organization stand out. Descriptive, predictive and prescriptive analytics can work together to create a high-quality donor engage- ment experience. They can save time and resources while creating a more customized donor experience. Understanding donor history increases a nonprofit’s knowledge of its donors, while predicting what will happen in the future and recommending potential action items helps the nonprofit achieve its desired outcome. Used in this way, data analytics tools can improve nonprofit organizations’ fundraising capabili- ties and help them become as efficient and effective as possible.

Nonprofits don’t typically have a lot of unrestricted resources to allocate towards fundraising, and they are rated by charity watchdogs for their fundraising efficiency - the amount a charity spends to raise $1. This makes it crucial for nonprofits to utilize their resources wisely and efficiently. Nonprofits must carefully direct their outreach resources towards those most likely to give and keep them engaged after their first donation. Data analytics tools, including predictive analytics, can help nonprofits target donors, conduct better outreach and determine the most effective fundraising strategies. If your nonprofit is thinking about incorporating data analytics into your fundraising efforts, you may start by considering the following. • What system does your organization have in place for a first-time donor? • What donor communications system have you im- plemented? • What system do you have in place for turning an event attendee into a donor? • What is your system for turning a loyal donor into a monthly donor? Data analytics tools can help organizations establish processes (or optimize existing processes) that will improve overall fundraising efficiency. To get started, it’s important to know that data analytics can be broken down into three key areas: descriptive analytics, prescriptive analytics and predictive analytics. Descriptive analytics are used to describe the behavior of donors and classify them into groups. Many nonprof- its maintain a large donor database that they can utilize. Descriptive analytics is especially helpful for donor database management. The database can be analyzed using descriptive analytics and characterized into different groups based on donor giving history, demographics, giving habitats, communication prefer- ences and giving capacity, etc. Descriptive analytics help nonprofits understand who their donors are, therefore establishing a basis for predictive analytics.


While predictive analytics used to seem out of reach in the nonprofit world, that is no longer the case today. Besides improving fundraising efficiency, nonprofits can

Predictive analytics tools review the data you have collected from donors and attempt to predict their


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Using data analytics is a smart way to use scarce resources to the fullest, especially for target fundraising.

• IBM SPSS Predictive Analytics for Non-Profits is a product developed to improve program effec- tiveness, increase donations and reduce costs. • Tableau has launched a free software program for nonprofits (provided certain criterion are met).

utilize data analytics to measure mission specific goals, evaluate program efficiency, forecast budget and cost and optimize operations. Below are some of the many data analytics tools that have been developed specifi- cally for nonprofits to use. • Alteryx for Good has developed data analytics tools specifically for nonprofits, with discount programs available. They also created Alteryx for Good Co-Lab, which is a volunteer network of Alteryx experts providing their analytic expertise to nonprofits and educators. • ExactAsk by Arjuna uses machine learning algo- rithms to provide nonprofits with individually opti- mized ask amounts for donor solicitation campaigns executed through direct mail or email.


Just as for-profit businesses have embraced data analytics as a tool to improve performance and increase revenues, so too can a nonprofit organization utilize data analytics to improve their fundraising efficiency. Data analytics tools can help nonprofits maximize their resources and increase donations and engage and retain donors. In the competitive nonprofit landscape, using data analytics is a smart way to use scarce resources to the fullest, especially for target fundraising.


Xixi Dong, CPA , is a Senior Manager in the firm’s Nonprofit, Govern- ment & Healthcare Group, where she plans and supervises audit engage- ments for a variety of nonprofit organizations, including large social service organizations, third party funded organizations, educational institutions, charitable, fundraising and membership organizations including those re- quiring audits pursuant to Uniform Guidance (Single Audit). Xixi can be reached via email at or 212.710.1828.


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I n 2018, the Tax Cuts and Jobs Act (“TCJA”) brought parts of Form 990 Return of Organization Exempt From Tax into the spotlight – 11 years since the IRS originally issued the redesigned form. This is because one of the laws enacted by the TCJA, IRS Code Section 4960, impos- es an excise tax of 21% on renumeration in excess of $1 million paid to a covered employee. While most nonprofits do not pay compensation in excess of $1 million, the organization might still be subject to tax under this code section during the year when the compensation is paid out of 457(f) retirement plan or there is an excess parachute payment.

In 2008, the redesigned Form 990 added additional questions and schedules that organizations had not been asked to provide before. Among those changes was Part VI, known as Governance, Management and Disclosure. Section B of this part, “Policies,” specifical- ly states, “This Section B requests information about policies not required by Internal Revenue Code.” Inter- estingly, even though the information is not “required,” it is open for public inspection and monitored closely, whether by donors, the government or board members. Therefore, from a good governance perspective, almost all organizations answer these questions and provide additional information where necessary. Considering the provisions in the TCJA together with Form 990 presents a challenge. Form 990 Part VI in- cludes questions 15a and 15b, which most donors are fa- miliar with. They ask the following, in two parts: “Did the process for determining compensation of the following


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Reviewing and updating policies for compensation as well as compensation studies that may be a decade old by now is a wise decision for organizations of all types.

persons include a review and approval by independent persons, comparability data, and contemporaneous sub- stantiation of the deliberation and decision?” One part of the question applies to the top management official, such as Executive Director, CEO or President. Then the same question is asked for all other officers or key em- ployees of the organization. In practice, answering “no” to the two questions is not beneficial to the organization, as it signals poor governance. When the updated Form 990 was first released, many organizations were faced with a dilemma of how to an- swer questions 15a and b correctly. Answering yes or no is just small fraction of the task—once the organization answers the question “yes,” it is then required to de- scribe the process. Given the sensitivity of the question, and with the disclosure of personal compensation on the informational tax return, there was a significant amount of time spent on these questions. Furthermore, organiza- tions that don’t document and determine the amount of

reasonable compensation could fall under “excess ben- efit transaction,” which essentially translates to paying more for services than the organization is receiving. The IRS also took it a step further on Schedule J Additional Compensation Information, where it asks the question again, for the top management official only: “Indicate which, if any, of the following the filing organization used to establish the compensation of the organization’s CEO/Executive Director.” The similarity of the questions almost makes it appear as if the IRS wants to trip up organizations that don’t line up their answers. As a result, many organizations, especially those with large amounts of compensation or a combination of compensation and retirement plans, took a close look at their practices and raced to put policies in place that would allow them to answer the questions “yes” and have enough substance to formulate an accurate description of the process. Since determining reason- able compensation is a very time-consuming process,


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Question 15b, which refers to other officers and key employees, can also present challenges. First, the or- ganization needs to look at who on Part VII, the listing of Officers, Directors, Trustees, Key Employees and highest compensated, is reporting as an officer or key employee. Once it determines who falls under those designations, then it needs to ensure that same process is followed for all. Meaning, that if a compensation study is done for one role, let’s say the CFO, but not others, then the question is answered “no.” Additionally, the persons approving that compensation and having the deliberation and discussion need to be independent. Therefore, if the CEO or Executive Director is directing that discussion, they should recuse themselves from the discussion or the organization will be forced to answer the question “no.” Considering both the “old” Form 990 and the new tax law, it’s time for organizations to review their policies for establishing compensation and also ensure that the basis for that compensation is still relevant. The 21% tax imposed by the TCJA is a new issue for organizations and the calculations of it are cumbersome. (More on that can be found in our first quarter newsletter .) Organiza- tions with compensation that is not going to fall under the provisions of the TCJA still fall under the provisions of reasonable compensation – and consequences for those not being adequate are far more than the 21% tax. Reviewing and updating policies for compensation as well as compensation studies that may be a decade old by now is a wise decision for organizations of all types.

many organizations outsourced the study of compen- sation to third parties. These third-party compensa- tion studies helped organizations determine the right amount to fall under reasonable compensation and pro- tect the organization and the board from the potential of excess compensation. You may ask: Why is this important now? The right answer is that it is always important—but the practical answer is that now, with added TCJA tax as a “penalty,” it is more important than ever to pay nonprofit execu- tives just the right amount. Most of the compensation studies previously mentioned were conducted between 2008 and 2010, and not many have been updated since. Even when an organization hasn’t substantially changed its methodology, it’s important to have either an update or full study done every 3 - 5 years, or when the cir- cumstances change. In addition, with market conditions changing and constant fluctuations in the stock market, it’s critical to have relevant information to ensure ade- quate compensation for top management. It’s important to note that outsourcing a compensation study and latter Board approval of compensation pack- ages for executives is not enough to answer questions 15 a and b "yes." There has to be deliberation and discussion. This should be done on yearly basis and reflected in the minutes, though often, it is only done when the executive is hired and is subsequently forgotten. Approval of a budget that lists the compensation for executives is not considered approval in light of these questions.

Magdalena M. Czerniawski, CPA, MBA , is a Tax Director in the firm’s Nonprofit, Government & Healthcare Group, where she provides tax services to a wide array of nonprofits, including charitable organizations, so- cial welfare organizations, professional associations and private foundations. She specializes in matters related to ASC 740-10 (FIN 48), the reporting requirements that govern contributions, compensation, unrelated business taxable income, lobbying costs, and public support testing. Magdalena can be reached via email at or at 212.324.7026.


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GASB STATEMENT 88 T he Governmental Accounting Stan- dards Board (“GASB”) issued state- ment 88, Certain Disclosures Related to Debt , including Direct Borrowings and Direct Placements , which is effective for reporting periods beginning after June 15, 2018 (in other words, fiscal years ending June 30, 2019 and thereafter). Earlier appli- cation is allowed and encouraged. There are two main provisions of this statement: • Define debt for purposes of disclosure • Require additional disclosures for debt GASB 88 defines debt as “a liability that arises from a contractual obligation to pay cash (or other assets that may be used in lieu of cash) in one or more payments to settle an amount that is fixed at the date the contractual obligation is established.” What is not included, you ask? Leases are not included (except for those reported as a financed purchase of an asset), and neither are accounts payable. Accounts payable, although it may be stated at

a fixed amount, is generally short-term in nature. Notice the definition is specific enough to state that a fixed amount be established when the debt is contractually obligated. Compare this to a liability for pollution remediation or defined benefit postemployment obligation, where those items are not fixed amounts. The statement does include direct borrowings (govern- ment entering into a loan agreement with a lender) and direct placements (government issues a debt security directly to an investor). These types of borrowings allow for terms of to be negotiated directly with the investor or lender and are not offered for public sale. The statement also requires that the notes to the financial statements disclose summarized information about the amounts of any unused lines of credit or assets pledged as collateral for debt. Also, governments should disclose terms specified in their debt agreements related to significant – 1) events of default with finance-related consequences, 2) termination events with finance-related consequences, and 3) subjective acceleration clauses. Disclosures of summarized information related to direct borrowings and direct placements of debt should be presented separately from information related to other types of debt, because of the


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different process the government goes through to incur the debt.

those costs should be recognized as an expense or expenditure in the period incurred, depending on the measurement focus. Why the change? First, GASB agreed that the capital- ized costs would not meet the definition of an asset when separated from a capital asset. Second, GASB agreed that interest cost is not an acquisition cost that is inseparable from the capital asset, but instead is a financing activity, and that the asset being financed will have the same ability to provide service regardless of whether interest is incurred. GASB also considered whether the interest costs should be a deferred outflow of resources (a catego- ry unique to government financial statements). Just in case you forgot, I’ll remind you what that is – “a consumption of net assets by the government that is applicable to a future reporting period.” GASB agreed that interest costs are a cost applicable to the current reporting period, therefore not a deferred outflow of resources. The good news is that this change is applied prospec- tively. For construction-in-progress, interest costs incurred after the beginning of the first reporting period that this statement is applied should not be capitalized. For example, if you applied this statement for the year ending December 31, 2020, interest incurred for construction-in-progress after January 1, 2020 should not be capitalized.

This statement was generally issued in response to the diversity in practice and confusion regarding the definition of debt and the related required disclosures that are found within other GASB Statements. GASB STATEMENT 89 T he Governmental Accounting Stan- dards Board (“GASB”) issued state- ment 89, Accounting for Interest Cost Incurred before the End of a Construction Period , which is effective for reporting pe- riods beginning after December 15, 2019 (in other words, calendar or fiscal years ending December 31, 2020 and thereafter). Earlier application is allowed and encouraged. This statement may be one of the shortest GASB has issued, at just six paragraphs long. The provisions of this statement establish the accounting for interest costs incurred before the end of a construction period. Prior to the issuance of this statement, interest costs were capitalized as part of the historical cost of a capital asset. Under GASB statement 89, however,

Philip Marciano, CPA , is a Manager in the firm’s Professional Standards Group, where he works with the Nonprofit, Government & Healthcare Group to ensure quality control of attest engagements, includ- ing governmental audits. Philip can be reached via email at or 516.992.5841.


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MARKS PANETH’S ANNUAL Nonprofit Industry Update Seminar OCTOBER 3, 2019 Join Charity Navigator, Marks Paneth and your nonprofit peers at the 4th Annual Nonprofit Industry Update seminar! This year’s lineup features presentations from top industry leaders as well as the unveiling of our findings from the 2019 Nonprofit Pulse survey, which gauges the current conditions and outlooks in the nonprofit industry.

Co-sponsored by 501(c) Services and Nonprofits Insurance Alliance , this event offers nonprofit executives and board members a full day of networking and learning from top industry leaders.


Leverage Our Expertise Marks Paneth LLP is ranked among the top 50 largest accounting firms in the U.S. and the top 10 in the Mid-Atlantic region by Accounting Today . We have a long history of serving the not-for-profit community. Today, we work with more than 150 tax- exempt clients and proudly serve 20% of New York’s 25 largest charitable organizations, as ranked by Crain’s New York Business.

Our Nonprofit, Government and Healthcare Group consists of approximately 65 people including our Partners and Direc- tors listed below. If you have questions, please contact one of us. More information can be found at .

Nonprofit, Government & Healthcare Leadership Team



Joseph J. Kanjamala PARTNER

Alan Becker DIRECTOR

Magdalena M. Czerniawski TAX DIRECTOR



David Bolton DIRECTOR


Raymond M. Blake DIRECTOR

Sibi Thomas PARTNER

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