Nonprofit & Government Times Q2 2019

Nonprofit & Government Times

SECOND QUARTER, 2019

IN THIS ISSUE

The Benefits of Storytelling as a Fundraising Tool CLIENT HIGHLIGHT: NORTH SHORE ANIMAL LEAGUE AMERICA BY: XIXI DONG, CPA SENIOR MANAGER, NONPROFIT, GOVERNMENT & HEALTHCARE GROUP “ A dog is the only thing on earth that loves you more than he loves himself.” – Josh Billings E ach year, approximately 2.7 million dogs and cats are killed because of overcrowding in shelters. 1 One organization working to change that is North Shore Animal League America, which has been saving the lives of defenseless dogs, cats, puppies and kittens since 1944 – over 1,000,000 animals to date. They are the world’s largest no-kill animal rescue and adoption organization, with 2,000 shelter partners across the country and around the globe, and each year, North Shore Animal League America places nearly 18,000 pets into loving homes. In a single year,

4 NYC Introduces HIGHER INDIRECT COST REIMBURSEMENT for City Contracts Joseph Kanjamala 7 What Does the LANDMARK WAY- FAIR RULING Mean to Nonprofits? Magdalena M. Czerniawksi 9 Are You Ready for Your Upcoming Single Audit? The OMB COMPLIANCE SUPPLEMENT Can Help John D’Amico 12 Governmental Accounting Standards Board, STATEMENT 84 – FIDUCIARY ACTIVITIES Philip Marciano 16 Meet the MARKS PANETH TEAM

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A great story motivates donors to act on their emotions and inspires generosity.

their medical staff performs over 58,000 exams and provides crucial vaccines for nearly 65,000 animals.

encourage people to take action based on specific situations.

A great story motivates donors to act on their emotions and inspires generosity. Below are some key consider- ations for all nonprofits to consider when telling a story: • Start with a character: Your story should start with a character - someone who is affected by your cause. Depending on the population that your organization serves, the character could be a victim of crime, a homeless individual, families confronted with crisis, etc. • Introduce the conflict: Conflicts are the challenges and obstacles that the character faces. This could be a need for shelter, emergency assistance, job placement, etc. • Demonstrate the impact: This is where you show- case how your organization’s support made a difference in the character’s life. North Shore Animal League America tells how they provide rescued animals with the urgent medical care they need to grow strong enough to be adopted. • Don’t forget the power of pictures/videos: A picture is worth a thousand words! Visual communication is an effective way to establish an emotional connec-

To continue their mission and operate on such scale, North Shore Animal League America’s funding relies heavily on contributions. Additionally, as a tax-exempt public charity, they are obligated to meet the public support test each year – meaning the organization must receive a substantial part of its income from the general public. This is why fundraising is so important to organizations like North Shore Animal League America. And while there are many ways a charitable nonprofit organization can fundraise, including traditional direct mail, newsletters and appeals, special events, capital campaigns, legacy gifts, social media and more, North Shore Animal League America successfully utilizes one very important tool in all of their fundraising efforts: storytelling . North Shore Animal League America skillfully showcases the great work they do through the stories they tell on their website, in their marketing materials and across their social media channels. These stories, especially stories of animals in need, help to raise awareness of the organization’s mission. Most importantly, they

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tion between the character and the donors. The im- ages of animals in need used by North Shore Animal League America help donors connect to their cause. • Identify the call-to-action: After the story is told, invite donors to participate and make it clear how they can make a difference in the lives of others (such as your story’s main character). For North Shore Animal League America, this means encour- aging pet adoption or donations to the organization to help more animals in need. STORYTELLING AS A TOOL TO MANAGE FUNDRAISING RATIOS An additional benefit of effective storytelling, and one that North Shore Animal League America has been able to successfully employ for their organization, is the ability to use storytelling to manage your organization’s fundraising ratio . Nonprofits are rated by their fundraising ratios and efficiencies by charity watchdogs and are often scrutinized for not spending enough on their mission. Many organizations feel the pressure to minimize their fundraising expenses. However, if some activities serve both purposes (mission and fundraising), the expenses incurred from these activities are “joint costs.” If the following three criteria are met, an organization can allocate the costs of a joint activity between program and fundraising: • Purpose: The joint activity must accomplish the organization’s mission and fundraising purposes.

North Shore Animal League America often sends a direct mail item requesting a donation, but also includes program materials that build awareness of their mission and call for a specific action that will help their mission (other than making a donation) such as opportunities for adoptions, volunteerism within the organization, etc. • Audience: The audience of the activity cannot be selected based on prior donors or based on their ability or likelihood to contribute, but they can be selected based on their need to use (or reasonable potential for use of) the specific action called for in the purpose criteria. • Content: The joint activity must support program or management and general functions. Nonprofit organizations can benefit from joint cost allocations by structuring their fundraising materials accordingly. As North Shore Animal League America demonstrates, incorporating storytelling can be an effective fundraising tactic to both raise funds and further an organization’s mission. This way, nonprofits can accomplish fundraising goals while also effectively managing costs to keep fundraising ratios within an acceptable range.

Learn more about North Shore Animal League America: https://www.animalleague.org/

To adopt a pet, save a life and add to your loving family, visit: https://www.animalleague.org/results/

1 According to “Pet Statistics” published by American Society for the Prevention of Cruelty to Animals.

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 xdong@markspaneth.com or 212.710.1828.

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NYC Introduces Higher Indirect Cost Reimbursement for City Contracts

JOSEPH KANJAMALA, CPA, CGMA PARTNER, NONPROFIT, GOVERNMENT & HEALTHCARE GROUP

I ndirect cost rate (“ICR”), often referred to as management and administrative expenses or overhead, for nonprofit and other organizations (“providers”) contracted under the City of New York (“City”) health and human services contracts has been a significant issue over the years. These in- direct costs typically include salaries and benefits for a provider’s administrative staff (such as executive director, fiscal staff, in- formation technology personnel and human resources) as well as the utilities, facilities, security systems, technology and other expenses associated with administrative of- fices - plus any other activities (such as legal

and audit fees, etc.) not directly related to service provision.

In general, providers were finding that the indirect cost reimbursement for City contracts was significantly lower than the actual expenses incurred while delivering the services. Many providers, especially nonprofit organizations, became hesitant to enter into such contracts with the City due to the resulting loss from the programs. Although the federal Office of Manage- ment and Budget (“OMB”) implemented Uniform Guidance in December 2014, allowing a 10% de minimis ICR or a federally negotiated indirect cost rate (“NICRA”) the City has not implemented the de minimis ICR or NICRA for reimbursement on its contracts. Recently, however, the City released The City of New York Health and Human Services Cost Policies and Procedures Manual (“Cost Manual”), which represents

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The implementation of the Cost Manual may have some challenges; however, it is a bold step towards ensuring a reasonable indirect cost rate for the provider community.

almost two years of research and development in collaboration with the Nonprofit Resiliency Committee. This Cost Manual provides uniform ICR guidance for all City agencies with contracts and it applies to the City’s health and human services contracts. The Cost Manual presents policies and procedures for the preparation and claiming of ICRs, cost definitions and treatments, as well as a methodology for calculating ICRs. It is intended to offer budgeting flexibility for nonprofit providers and streamline administrative processes. By standardizing cost definitions and ICR policies, the manual aims to promote greater accessibility to the City’s contracting by providing clear and comprehen- sive cost guidance. The Cost Manual will apply to all contracts across all the City agencies commencing from July 1, 2019 or afterwards, though providers can apply the Cost Manual to a contract with a start date prior to July 1, 2019 via an amendment to their contract. According to the Cost Manual, a provider can either

claim a City de minimis indirect rate or a rate higher than the City de minimis indirect rate. A City de minimis rate is defined as up to 10% of the direct cost base of the contract, without providing documenta- tion to the City during the budget approval process. However, a provider is not eligible for a City de minimis ratehen the provider is a subrecipient of federal funds and the provider has a NICRA, or when supported with federal or state funds where the federal or state regulations require additional docu- mentation to substantiate indirect rates. Providers could request a higher indirect rate than the City de minimis indirect rate when the provider has a federally approved NICRA that is valid at the time of the reimbursement request or if the provider submits a letter from a CPA verifying that the provider calculat- ed the ICR according to the Cost Manual and based the ICR on the most recent available schedule of functional expenses. The letter is valid for three years

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whether such costs are allowable or not and provides some examples of such costs. The Cost Manual also provides procedures and steps to develop a simplified allocation method. Most providers have a general ledger accounting software package which can capture expenses by function and nature to properly present a statement of functional expenses in accordance with U.S. Generally Accepted Accounting Polices in their financial statements. Considering the guidance included in the Cost Manual, providers may have to revisit their expense categorization in the general ledger, especially to track direct and indirect costs and unallowable costs. If the provider has multi-layer reporting responsibilities such as single audit, cost reports, etc., the expenses categorization should support the requirements of all the funders. The CPA has to perform several additional procedures during annual audit to ensure that the provider’s expense categorization and ICR calculations are in accordance with the Cost Manual. The implementation of the Cost Manual may have some challenges; however, it is a bold step towards ensuring a reasonable ICR for the provider community. This will in turn ensure provider sustainability and solvency while encouraging efficient service delivery for health and human services contracts.

from the date of issuance and a template of the letter is included in the Cost Manual. It appears that a provider can obtain the letter from any CPA, not necessarily their auditors, though it would be prefera- ble to get the verification letter through the provider’s auditor, as they understand the provider’s business and have conducted an audit on its expenses. The City policy allows the City funding agencies to audit the providers, irrespective of whether the provider used a de minimis rate, NICRA or a rate calculated by the provider and verified by the CPA. The audit would cover compliance with the Cost Manual, indirect cost, direct cost base and rate calculation. In addition, the audit could also cover processes, internal controls and appropriate categori- zation of cost as either direct or indirect. Using a de minimis ICR would not protect a provider from substantiation and audit of the cost. If the provider used a de minimis rate, the audit may verify that the rate used is consistent with the rate specified in the human services contract, the rate is applied to the correct direct cost base and that the reimbursed indirect costs are allowable, reasonable and not duplicative. In general, the Cost Manual follows the guidelines outlined in the 2 Code of Federal Regulations (CFR) part 200 in defining what is considered as direct cost, indirect cost, allowable costs and unallowable costs. The manual also discusses the treatment (as direct or indirect) of frequently incurred costs by providers,

The Cost Manual can be found here .

Joseph J. Kanjamala, CPA, CGMA , is a Partner with the firm’s Nonprofit, Government & Healthcare Group. During his more than 20 years of public accounting experience, he has developed deep skills providing audit services to nonprofit organizations and has served numerous charitable organizations, private foundations and educational institutions. Joe can be reached via email at jkanjamala@markspaneth.com or at 212.503.8952.

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What Does the Landmark Wayfair Ruling Mean to Nonprofits? MAGDALENA M.

CZERNIAWKSI, CPA, MBA DIRECTOR, NONPROFIT GOVERNMENT & HEALTHCARE GROUP

O n June 21, 2018, the United States Supreme Court ruled 5-4 in favor of South Dakota in the case South Dako- ta v. Wayfair 1 , overruling prior case Quill Corp. v. North Dakota 2 (the “ Quill case”). In the Quill case, which took place in 1992, the U.S. Supreme Court ruled that a state can only require a business to collect sales and use tax from in-state customers if they have physical presence. The Quill case reaffirmed the prior case of National Bellas Hess v. Department of Revenue 3 (the “ Bellas Hess case”) from 1967 that required physical presence in order for state sales tax rules to apply. Over the years, and with increasing internet and e-commerce sales, states have tried to establish various rules to enforce the collection of sales tax from busi- nesses that didn’t have physical presence in a state but were selling goods to in-state customers. Some states

established that economic nexus was enough to enforce sales tax collection. In fact, in 2016 South Dakota passed Bill 106, which adopted an economic nexus standard. Under the new law, any entity with more than $100,000 in sales or 200 transactions in the state was required to collect sales tax. This was a move away from the physical presence test established by the Quill and Bellas Hess cases, and it was quickly challenged by various internet sellers. However, on June 21, 2018, in South Dakota v. Wayfair , the U.S. Supreme Court concluded that the physical presence rule of Quill was “unsound and incorrect.” The rule requiring retailers to have physical stores in a state in order to necessitate the collection of sales tax was harming states and creating unfair competition in the retail world. The new ruling, based on economic nexus, makes a lot more sense when considering today’s interstate commerce. The South Dakota statute holds that sellers exceeding an annual threshold of $100,000 in sales or 200 separate transactions are required to collect South Dakota sales tax. This law was a prospective enforce- ment, and the state is not going to penalize retailers for

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past sales. It means that the physical presence test is no longer valid, and as long as an entity has enough sales either by dollar threshold or volume, it is required to register, collect and remit sales tax to the state. It’s important to note that in most states, nonprofits themselves are exempt from paying sales tax on purchases that further their exempt mission. However, if nonprofits sell merchandise in the ordinary course of business, they are required to obey the various sales tax rules. Therefore, the many nonprofits who have internet sales of clothing, publications or other merchandise are now required to follow the new Wayfair case rules for their interstate commerce. What makes this even more challenging for nonprofits is that every state has different rules, and the organizations have the burden of tracking their sales in each state. For example: in New York, effective January 1, 2019, if an organization has sales in the immediately preceding four quarters in excess of $300,000 and conducted more than 100 sales of tangible personal property delivered into New York, it has to start collecting sales tax. On the other hand, in New Jersey 5 , the gross revenue number has to be in excess of $100,000 (or 200 separate transactions) and is effective as of November 2, 2018. Pennsylvania passed legislation 6 requiring organizations with economic nexus (defined as having $100,000 of sales in the state) to comply with their sales tax rules. This is effective as of July 1, 2019. Since the Wayfair ruling, a number of states across the

country have started enacting economic nexus rules, which are triggered by various thresholds. Many states use the “$100,000 in gross sales or 200 items sold” rule, but there are some states that have created their own thresholds. The relief is that these rules cannot be applied retroactively. However, once an organization meets the threshold criteria, it must register and start collecting and remitting sales tax to the state. With limited resources at nonprofit organizations and complex rules that vary from state to state, complying with sales tax obligations is becoming a real challenge for nonprofits. In order to ensure compliance, nonprofit organizations should do an analysis of their various sales by state, review the rules of those states which have adopted economic nexus and understand where the thresholds are met. In organizations that do not have the capacity to complete the registrations and filing internally, outsourcing this work to a specialized firm is a consideration, as the registration and compliance processes can be very time-consuming. In addition, organizations should be mindful of potential sales tax audits by various states. Most states have some sort of Voluntary Disclosure Program that organizations should consider and use to their benefit, if needed. In summary, in the wake of the Wayfair ruling, even exempt organizations should be mindful of their sales activities in various states and should aim to know and monitor state sales tax thresholds in order to stay in compliance.

1 https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf 2 https://www.law.cornell.edu/supct/html/91-0194.ZO.html 3 https://supreme.justia.com/cases/federal/us/386/753/ 4 https://www.tax.ny.gov/pdf/notices/n19-1.pdf 5 https://www.state.nj.us/treasury/taxation/remotesellers.shtml 6 https://www.revenue.pa.gov/GeneralTaxInformation/Tax%20Types%20and%20Information/SUT/MarketPlaceSales/Pages/default.aspx

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 mczerniawski@markspaneth.com or at 212.324.7026.

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Are You Ready for Your Upcoming Single Audit? The OMB Compliance Supplement Can Help BY JOHN D’AMICO, CPA DIRECTOR, PROFESSIONAL STANDARDS GROUP

I f your organization receives and expends federal grant funds of $750,000 or more in their fiscal year, either received directly from a federal agency or passed through from either a local government or from an- other nonprofit, it is subject to a Single Audit under Uniform Guidance. Your auditors must use the Office of Management and Budget (“OMB”) Compliance Supplement (“the Supple- ment”) to perform their audit, so why not know ahead of time what they will be looking for and testing? It’s like the teacher giving you the answer key before the test! The Supplement has very useful information that can help recipients of federal grants understand the regu- lations and requirements of the federal program. Most federal programs have a specific Catalog of Federal

Domestic Assistance (“CFDA”) number. CFDA numbers are the system for identifying and sorting the 2,000 plus federal programs. Each CFDA number contains five digits and appears in the following format: ##.### (e.g. 10.001). The first two digits signify the federal agency. When it is time for your audit, the auditors will be testing your compliance with the federal rules and regulations based upon the CFDA number of the federal program. Not all federal programs are included in the Supplement, but many of the large and most com- mon federal programs are included. The Supplement includes specific audit programs for numerous federal programs that auditors must use to perform their Single Audit tests. It details the audit objectives and suggested audit procedures that the auditor should perform.

Your auditors will also be tasked with determining whether your organization has the proper internal

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The information included within the Supplement can assist in ensuring ahead of time that your organization has the proper controls and procedures in place to comply with the federal requirements.

controls over compliance in place, and, by testing those controls, determine if they are working effectively. The information included within the Supplement can assist in ensuring ahead of time that your organization has the proper controls and procedures in place to comply with the federal requirements. The Supplement is updated annually by OMB on behalf of all the federal agencies. It consists of seven parts and nine appendices. The seven parts of the Supple- ment are: • Part 1 – Background, Purpose and Applicability. This part contains general Single Audit information. • Part 2 – Matrix of Compliance Requirements. Part 2 identifies which of the twelve types of compliance requirements are applicable to the federal programs included in this supplement. • Part 3 – Compliance Requirements. Part 3 includes the generic program objectives and audit proce-

dures pertaining to the twelve types of compliance requirements. • Part 4 – Agency Program Requirements. Part 4 contains the specific program objectives and proce- dures by federal agency and CFDA number. When any of these five types of compliance requirements are applicable to a program (Activities Allowed or Unallowed; Eligibility; Matching, Level of Effort, Earmarking; Reporting; and Special Tests and Provi- sions), Part 4 will always provide information specif- ic to the program. The other seven types of require- ments are not specific to a program and therefore not included again in Part 4 as they are in Part 3. • Part 5 – Clusters of Programs. Part 5 identifies those programs that are to be considered clusters of federal programs. • Part 6 – Internal Control. Part 6 describes charac- teristics of internal control relating to each of the five components of internal control.

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• Part 7 – Guidance for Auditing Programs not Included in this Compliance Supplement. Part 7 states that for those programs not covered in the Supplement, the auditor must use the twelve types of compliance requirements described in Part 3. The Supplement contains detailed information about the twelve types of compliance requirements and the suggested audit procedures that your auditors will be performing to determine if your organization is in compliance. The Supplement also contains the following useful infor- mation for organizations receiving federal grant funds: • Activities Allowed or Unallowed – These are the activities that the federal program has determined the funds can be used for or cannot be used for. Since this is very specific to each federal program, it is included in the audit program in Part 4. • Allowable Costs – This describes the types of costs that can be charged to a federal program. Generally, only necessary and reasonable costs can be charged to a federal program. There are, however, certain costs that are unallowed to be charged to a federal program, such as: fines, penalties, bad debt, tobacco and alcohol. Part 3B of the Supplement has an extensive list of selected items of cost and whether they are unallowable, allowable, or allowable with restrictions. • Cash Management – Most federal programs are either funded on a reimbursement basis, advances or a combination of both. For advances, the orga- nization must minimize the time elapsing between the receipt of the funds and the disbursements. For reimbursements, the organization must pay for the program costs with their own funds prior to request- ing reimbursement. See Part 3C for the full details. • Eligibility – This relates to beneficiary eligibility, not organizational eligibility. The specific requirements for eligibility are unique to each federal program. See the eligibility requirements for your federal program in Part 4. • Equipment and Real Property Management – This requirement only applies if equipment or real prop- erty is purchased with federal grant funds of over $5,000 or more, or over the organization’s capital- ization policy. See Part 3F for the requirements.

• Matching, Level of Effort, Earmarking – The specific requirements for these are unique to each federal program. See the specific requirements for your federal program in Part 4. • Period of Performance – Federal grants may specify a time period during which the organiza- tion may use the federal funds. Where a funding period is specified, the organization may charge to the award only costs resulting from obligations incurred during the funding period and any pre- awards authorized by the Federal awarding agency. See Part 3H for the requirements. • Procurement – The new procurement standards included in Uniform Guidance are now in effect for fiscal years beginning after December 26, 2017. Organizations must use their own documented procurement procedures, provided that the procure- ments conform to applicable federal statutes and the procurement requirements identified in Uniform Guidance as set out in Title 2 CFR sections 200.318 through 200.326. The micro-purchase method is for procurements where the aggregate dollar amount does not exceed $3,500 (subsequently increased to $10,000). The small purchase method is for procure- ments that exceed the micro-purchase amount, but do not exceed the simplified acquisition method of $150,000 (subsequently increased to $250,000). For procurements exceeding the simplified acqui- sition threshold, the organization must use one of the following procurement methods: sealed bids, competitive proposal or sole-source. See Part 3I for full details. • Suspension and Debarment – Organizations are prohibited from contracting with or making sub- awards under covered transactions to parties that are suspended or debarred. “Covered transactions” includes contracts awarded under a grant or co- operative agreement that are expected to equal or exceed $25,000. All non-procurement transactions entered into by a pass-through entity, irrespective of award amount, are considered covered transactions. See Part 3I for full details. • Program Income – Program income is the gross income earned by an organization that is directly generated by a supported activity or earned as a result of the federal award. It is generally fees charged to participants in the federal program. It can also be interest earned on loans made with

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federal award funds. Program income does not in- clude interest earned on advances of federal funds or the proceeds from the sale of equipment or real property acquired with federal funds. See Part 3J for full details. • Reporting – This requirement relates to the re- porting required to the federal agency or to the pass-through agency. It includes financial reporting (requests for advances or reimbursements), perfor- mance and special reporting. The specific require- ments for reporting are unique to each federal program. See the reporting requirements for your federal program in Part 4. • Subrecipient Monitoring – This requirement is applicable if an organization passes the federal funds through to another organization that will be running the federal program on their behalf. The organization that passes through the funds must identify the award and applicable requirements to the other entity, evaluate the risk of their noncom- pliance and monitor their activities. See Part 3M for full details. • Special Tests and Provisions – The specific require- ments for Special Tests and Provisions are unique to each federal program. See the specific requirements for your federal program in Part 4. Organizations that wish to use the OMB Compliance Supplement to ensure that their audit goes smooth- ly should first look to see if their specific federal program is included in the Supplement by looking up

the CFDA number in Part 2, the Matrix of Compliance Requirements. If the CFDA number is in Part 2, it means that the federal agency wrote a specific audit program for that program and it is included in either Part 4 or Part 5 of the Supplement. The organization should then access Part 4 for more details on the specific requirements that their auditors will be test- ing and Part 2 to identify the applicable compliance requirements for which their auditors will use Part 3, generic audit procedures. If your federal program is not included in the Supple- ment, you can look up information by CFDA number on https://beta.sam.gov/ . On this website you can obtain the objectives of the program, the use of the assistance information, information of compliance requirements and contact information at the federal agency to ob- tain additional information The 2019 OMB Compliance Supplement has not been issued, however, OMB has advised that there will be significant changes, as they have mandated that for each federal program included in the 2019 Supple- ment, only six out of the twelve compliance require- ments will be subject to audit. The federal agencies have already decided which of the six requirements will be subject to audit for each of their programs; to see this information, click here and select the Part 2 Matrix to find your program(s) by CFDA number. The 2018 Supplement can be accessed here .

John D’Amico, CPA , is a Director with the Professional Standards Group and provides quality control services to the firm’s Nonprofit, Govern- ment & Healthcare Group. He has more than 20 years’ experience provid- ing accounting and audit services to nonprofit organizations and higher education and governmental entities – and brings extensive knowledge of nonprofit accounting and expertise in the performance of Single Audits under OMB Circular A-133 and, now, under the Uniform Guidance. John can be reached via email at jdamico@markspaneth.com or 212.710.1808.

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Governmental Accounting Standards Board, Statement 84: Fiduciary Activities PHILIP MARCIANO, CPA MANAGER, PROFESSIONAL STANDARDS GROUP

WHOSE MONEY IS IT?

private-purpose trust funds, or agency funds (soon to be renamed, as we will see later).

W hen people hear the word fiduciary, they associate several different ac- tivities with it, but mainly money or financial matters. The word, however, applies to any situation where someone places their confidence and trust in someone else. For example: attorneys and clients have a fiducia- ry relationship, since the attorney is always supposed to act in the best interest of their cli- ent. When we think of governmental account- ing, fiduciary activities are reported within a fiduciary fund category, which may include pension trust funds, investment trust funds,

The word “trust” is an integral part of understanding the importance of operating in a fiduciary capacity. Govern- ments who report fiduciary funds act as a trustee and are responsible for handling money that is not theirs. The money reported in these funds is not available for the operating use of the government, and is owed to other governments, agencies or people. For example, an agen- cy fund may collect sales taxes for other governments which are in turn remitted to the appropriate govern- ment. The amount collected is not revenue of the govern- ment, but the government is responsible (and trusted) for remitting those amounts to the proper recipient.

GASB Statement 14, The Financial Reporting Entity , requires governments to include the activities of organi-

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zations that do not meet the requirements for inclu- sion in the financial reporting entity as fiduciary funds “if the primary government has a fiduciary responsibil- ity for them.” The current standards, however, lack the needed guidance outlining the characteristics to be considered when deciding whether a government has a fiduciary responsibility. As a result, there have been many interpretations, limiting comparability between the financial reports of state and local governments. GASB Statement 84, Fiduciary Activities , removes the ambiguity that has existed under the prior definition. Statement 84 provides the criteria for three types of activities: • Fiduciary component units: Pension and Other Pos- temployment Benefits (OPEB) arrangements, and other activities • Pension and OPEB arrangements that are not com- ponent units • Other fiduciary activities FIDUCIARY COMPONENT UNITS An organization that is determined to be a com- ponent unit as characterized by Statement 14, as amended, is a fiduciary activity if it is one of the following arrangements: • Assets from entities that are not part of the report- ing entity and are accumulated for pension purpos- es that are not administered through a trust • Assets from entities that are not part of the report- ing entity and are accumulated for OPEB purposes that are not administered through a trust Let’s take a step back for a moment and review the GASB characteristics of a trust as defined in GASB Statements 67 and 74. The wording used by the Board to describe a trust (or equivalent arrangement, hereaf- ter referred to as trusts) requires three criteria: • Contributions and earnings are irrevocable • Plan assets are dedicated to providing benefits to plan members in accordance with benefit terms • Plan assets are legally protected from the creditors of employers, non-employer contributing entities, the • Pension plan administered through a trust • OPEB plan administered through a trust

plan administrator, and in the case of a defined benefit plan, protected from the creditors of plan members.

How does this apply? For pension and OPEB plans that are administered through trusts under GASB Statements 67 and 74, respectively, the majority will be separate legal entities. If it is determined that the separate legal entity does not meet the definition of a component unit, as defined in Statement 14, the government then needs to determine if they control the assets. WHAT ABOUT COMPONENT UNITS THAT ARE NOT A PENSION OR OPEB ARRANGEMENT? The criteria for determining whether they are fiducia- ry activities requires consideration of the attributes for a trust (as described above) and consideration of whether the assets are: • for the benefit of individuals and the government does not have administrative or direct financial involvement with the assets. • for the benefit of organizations or other governments that are not part of the financial reporting entity. In both criteria above, the assets cannot be derived from the government providing goods or services to those individuals, organization or other governments. In determining whether a component unit is a fiduciary component unit (Pension, OPEB or other activities), control of the assets of the component unit is not a factor to be considered. PENSION AND OPEB ARRANGEMENTS THAT ARE NOT COMPONENT UNITS When considering whether pension and OPEB ar- rangements are fiduciary activities, we must consider whether the government controls the assets. GASB Statement 84 describes control as follows: The government (a) holds the assets or (b) has the ability to direct the use, exchange, or employment of the assets in a manner that provides benefits to the specified or intended recipients. Restrictions from legal or other external restraints that stipulate the assets can be used only for a specific purpose do not negate a government’s control of the assets.

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It is important to note that restrictions placed on the assets do not factor into whether the government has control. Once you have determined that control exists, the following pension and OPEB arrangements are deemed to be fiduciary activities: • Pension plan that is administered through a trust under GASB Statement 67 • OPEB plan that is administered through a trust un- der GASB Statement 74 • Assets from entities that are not part of the report- ing entity and are accumulated for pension purpos- es under GASB Statement 73, paragraph 116 • Assets from entities that are not part of the report- ing entity and are accumulated for OPEB purposes under GASB 74, paragraph 59. In the case of activities that are not for pension or OPEB purposes, the activity is deemed to be a fiducia- ry activity if all the criteria below are met: • Assets associated with the activity are controlled by the government (as described above) • Assets associated with the activity are not derived either: Solely from the government’s own-source revenues From government-mandated nonexchange trans- actions or voluntary nonexchange transactions except for pass-through grants where the gov- ernment does not have administrative or direct financial involvement • Assets associated with the activity have one or more of the following characteristics: Assets are (a) administered through a trust where the government is not a beneficiary, (b) dedicat- ed to providing benefits to recipients in accor- dance with the benefit terms, and (c) legally protected from the creditors of the government (GASB 84, paragraph 11c(1)) Assets are for the benefit of individuals and the government does not have administra- tive or direct financial involvement with the assets, and the assets are not derived from the government’s provision of goods or services to those individuals. OTHER FIDUCIARY ACTIVITIES

Assets are for the benefit of organizations or oth- er governments that are not part of the reporting entity, and the assets are not derived from the government’s provision of goods or services to those organizations or other governments. In reviewing the criteria above, in comparison with the criteria established for pension and OPEB activities, they are similar except for the consideration of the asset’s revenue source. GASB separately defines own- source revenues as revenues generated by the gov- ernment itself. Own-source revenues include exchange and exchange-like revenues (i.e. water and sewer charges) and investment earnings. Tax revenues (i.e. sales and income taxes) and imposed nonexchange revenues (i.e. property taxes) are also included. Now that you have determined whether you have a fi- duciary activity to be reported, the fiduciary fund used to report the activities must be determined. Pension trust funds report fiduciary activities for pension plans and OPEB plans that are administered through a trust, meeting the criteria in paragraph three of GASB 67 and 74, respectively. Pension trust funds will also report fiduciary activities for other employee benefit plans that hold assets meeting the definition of a trust in GASB 84, paragraph 11c(1) and whose contri- butions and earnings are irrevocable. Investment trust funds report fiduciary activities from the external portion of investment pools and individual investment accounts (as defined in GASB Statement 31) that are held in a trust meeting the definition in GASB 84, paragraph 11c(1). Private-purpose trust funds report fiduciary activities that are not required to be in pension trust funds or investment trust funds and are held in trust funds meet- ing the definition in GASB 84, paragraph 11c(1). Custodial funds report fiduciary activities that are not required to be reported in either of the other three categories mentioned above. In addition, the external portion of investment pools not held in a trust meeting the definition in GASB 84, paragraph 11c(1), are reported under this classification but in a separate fund column. HOW TO REPORT

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WHAT IS LIKELY TO CHANGE?

to custodial funds requires the same presentation as the other fiduciary fund types. Therefore, instead of custodial funds recording an offsetting liability each time resources (assets) are received, a liability would only be recorded when the government is compelled to pay. It is important to note that GASB considers events that compel a government to pay to occur when a demand for resources has been made or when no further action, approval or condition is required to be taken or met by the beneficiary (i.e. taxes for other governments). The receipt of the resources would be reported as an addition in the statement of changes in fiduciary net position and reported as a component of fiduciary net position. The statement of changes in fiduciary net position requires additions and deductions to be disaggregated by source and type, respectively. Custodial funds may report resources normally held and disbursed within three months in one line as additions and deductions. The effective date for GASB 84 is for fiscal years be- ginning after December 15, 2018, and earlier imple- mentation is encouraged. In other words, calendar year governments will implement GASB 84 with their 2019 annual statements and fiscal year governments beginning with the first year ending in 2020. By now, all governments should have already started evaluating the impact GASB 84 will have. For those governments that will need to move activities to or from fiduciary funds, consideration will need to be given as to how this will impact the budget process. CONCLUSION

Governments will likely experience a change in how they report other fiduciary activities. It is very likely that, after considering the criteria regarding admin- istrative and direct financial involvement, funds that were previously reported as “agency funds” will be reported as a fund of the government itself. For example, if funds are managed by the government (internally or externally hired), those funds would not be considered fiduciary activities based on the criteria of administrative involvement. The reporting of those funds would move to the government’s own funds (governmental or enterprise). Agency funds have been eliminated and replaced by custodial funds. The four types of funds defined above are combined into one column for each type of fund when reported. The basic fund financial statements of fiduciary activities will include a statement of fiduciary net position and a statement of changes in fiduciary net position, with each statement containing the same elements. The statement of fiduciary net position will report assets, deferred outflows, liabilities, deferred inflows and fiduciary net position. The statement of changes in fiduciary net position will report additions and deductions. Previous guidance only required agency funds to present assets and liabilities, and there was no re- quirement to provide a flows statement. The change FINANCIAL STATEMENT PRESENTATION

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 pmarciano@markspaneth.com or 516.992.5841.

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UPCOMING EVENTS JOIN US AT THESE

Connecticut Society of CPAs JUNE 26-28, 2019 • ROCKY HILL, CT * The New Yellow Book: Government Auditing Standards * Not-for-Profit Financial Reporting: Mastering the Unique Requirements * Applying the Uniform Guidance in Your Single Audits Accounting & Finance Show JUL 10, 2019 • NEW YORK, NY John D’Amico and Xixi Dong present: Data Analytics for Organizations SAVE THE DATE! OCTOBER 3, 2019 Marks Paneth’s Annual Nonprofit Industry Update Seminar

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-ex- empt clients and proudly serve 20% of New York’s 25 largest charitable organizations, as ranked by Crain’s New York Business. Our firm is ranked in the top 1% nationally in pension plan audits and is the 8th largest preparer of Form 990-PFs in the U.S.

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 markspaneth.com .

Nonprofit, Government & Healthcare Leadership Team

Michael McNee CO-PARTNER-IN-CHARGE, NONPROFIT, GOVERNMENT & HEALTHCARE GROUP

Hope Goldstein CO-PARTNER-IN-CHARGE, NONPROFIT, GOVERNMENT & HEALTHCARE GROUP

Joseph J. Kanjamala PARTNER

Alan Becker DIRECTOR

John D’Amico DIRECTOR

Warren Ruppel PARTNER, GOVERNMENT SERVICES PRACTICE LEADER

David Bolton DIRECTOR

Robert Lyons TAX DIRECTOR

Magdalena M. Czerniawski TAX DIRECTOR

Sibi Thomas PARTNER

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