Financial Literacy & Bookkeeping

1. Grants Central Station presents theFundamental Five Nonprofit Training Series Financial Literacy & Bookkeeping November 16, 2010

2. Mahalo to our Sponsors! • Office of Hawaiian Affairs – Community Based Economic Development Grant • Tri-Isle Resource Conservation & Development – Fiscal Sponsor • County of Maui Department of Health & Human Concerns - Volunteer Services • Our Board: Anna K. Ribucan, Richard Kehoe, Keith Wolter, Faye Cummings, Susie Thieman

3. Today’s Speaker • Robert S. Kawahara, CPA • Managing Member, Kawahara & Company, CPAs, LLC • Vice President, Ronald A. Kawahara & Co., CPA’s, Inc. • Treasurer, Maui Humane Society • Treasurer, Lahaina Intermediate School Educational Foundation • Treasurer, Rotary Club of Kahului • Treasurer, Angus McKelvey for State House Committee • Director, Hawaii Association of Certified Public Accountants • Director, Hawaii Association of Public Accountants, Maui Chapter • Supervisory Committee Chairperson, Maui County Federal Credit Union

4. Agenda

5. Who’s in attendance??

6. Today’s Objective • Establish your baseline knowledge of financial literacy with regards to nonprofit organizations • Establish which areas of financial literacy that you need to work on • Obtain information regarding current issues affecting nonprofits

7. Financial Literacy • Class Participation

8. Financial Literacy The ability to read, analyze, manage and write about the financial conditions that affect material financial health. It includes the ability to discern financial choices, discuss money and financial issues without (or despite) discomfort, plan for the future, and respond competently to events that affect everyday financial decisions, including events in the general economy.1 1Goodbye to Complacency Financial Literacy Education in the U.S. 2000-2005

9. Let’s break it down • The ability to read, analyze, manage and write about the financial conditions that affect material financial health. . . • How do I gain that ability? • Foundation, Foundation, Foundation

10. Foundation

11. Foundation - Entity • Gain an understanding of: • Mission Statement • What type of nonprofit • Employees • Organizational Chart • Funding Sources • Programs

12. Foundation - Legal • Gain an understanding of: • Grant Compliance • Tax Compliance • Human Resource Compliance • Hawaii Revised Statutes • HRS Chapter 414D – Hawaii Nonprofit Corporation Act

13. Foundation - Environment • Gain an understanding of: • Resources Available • Who are your Competitors • Who are you Servicing • Marketing

14. Foundation - Accounting • Financial Statements • Internal Control • Bookkeeping • Recordkeeping • Budget • Basis of Accounting • Nonprofit accounting differences

15. Financial Statements • Statement of Financial Position • Statement of Activities • Statement of Functional Expenses • Statement of Cash Flows • Notes to Financial Statements

16. Types of Transactions • Agency • No recognition of income • Contribution • Record at promise to give • Gives rise to Temporarily Restricted Net Assets • Exchange • A service is rendered • Gives rise to Deferred Revenue

17. Using Financial Statements • Vs. Budget • Vs. Prior Period • Historical vs. Projection • Financial Ratios • Revenue Ratios • Identify % of revenue stream • Defensive Interval • Identify how many months the organization could operate • Program Service Expense • Recommend minimum 65%

18. Internal Controls • Why do we need Internal Controls • What is Fraud? • Black’s Law Dictionary fraud is defined as follows: “b Law. Any deliberate misrepresentation of the truth or a fact used to take money, rights, or other privilege or property away from a person or persons.”

19. Fraud • 3 Categories of fraud • Corruption • Asset Misappropriation • Fraudulent Statements • Conditions present when fraud occurs • Incentive • Opportunity • Rationalization

20. Internal Control • 5 Components of Internal Control • Control Environment • Risk Assessment • Control Activities • Information and Communication • Monitoring • 3 Objective of Internal Control • Operations • Financial Reporting • Compliance

21. COSO Framework Diagram Image from http://www.theiia.org/CSA/index.cfm?iid=435&catid=0&aid=2051

22. Internal Control • COSO defines internal control as a process, effected by an entity’s board of directors, management and other personnel. This process is designed to provide reasonable assurance regarding the achievement of objectives in effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations. • Internal control is a process. It is a means to an end, not an end in itself. • Internal control is not merely documented by policy manuals and forms. Rather, it is put in by people at every level of an organization. • Internal control can provide only reasonable assurance, not absolute assurance, to an entity’s management and board. • Internal control is geared to the achievement of objectives in one or more separate but overlapping categories.

23. Question • Can internal controls prevent fraud? • What is the relationship between principle based vs. rules with regards to polices and procedures • List types of Fraud to Internal Control

24. Bookkeeping • Basis of Accounting • Cash • Tax • Modified • Accrual • Fund Accounting • GAAP • Generally Accepted Accounting Principles

25. Recordkeeping • Elements of a good recordkeeping system • Organized • Permanent File • Relevant • Leverage available software • Quickbooks • MIP • MAS 90

26. Budgets • How many of you do a budget? • Why do a budget? • How effective has it been?

27. Audits • What is an audit? • An audit is a formalized process designed to obtain reasonable assurance that a financial statement(s) is free of any material misstatements whether caused by errors, frauds, and/or direct legal acts with respect to the management assertions embodied in the financial statement(s).

28. Audit • Financial Statement Audit • Single Audit

29. Sample Audit Checklist • Lease agreements • Bank statements & reconciliation • Grant reports • Year-end investment summary • Physical inventory • Fixed asset and depreciation schedule • Year-end accounts payable & accrued expenses • General Ledger • Schedule of grant awards • Grant contracts • Board of Directors & Committee Meeting Minutes • Personnel manual • Accounting manual • Payroll tax reports, W-2’s, 1099’s

30. Question • Who is responsible for the financial statements of an organization?

31. Elements of a Good Bookkeeper • Well organized • Questions • Strong communication skills • Able to problem solve • Double-entry bookkeeping • Financial statement presentation • 3 years of experience

32. Question • Who does the bookkeeper work for? • Who does the accountant work for? • Who does the auditor report to?

33. BREAK15 minutes

34. More Free Workshops! Upcoming Fundamental Five workshops from Grants Central Station

35. Form 990 • Why the fuss all of a sudden? • In 2008, the Form 990 was completely redesigned by the IRS • Last revision 1979 • The purpose was to: • Increase transparency • Good governance • Reduced burden (total opposite) • Replaced with increased accountability

36. Form 990 • It’s not all that bad . . . • The Form 990 is a publicly disclosed document. • Provides organizations the opportunity to: • Tell the organization’s story by effectively stating its mission and program service accomplishments • Market and development tool

37. Form 990 • Types of Form 990 • Form 990 • Return of Organization Exempt from Income Tax • Form 990-EZ • Short Form of Organization Exempt from Income Tax • Form 990-N • Electronic Notice (e-postcard) • Churches are exempt

38. Form 990 FAQs • All nonprofit organizations can file a Form 990, but not all nonprofit organizations can file a Form 990-N • Unlike most income tax returns that are quantitative in nature, Form 990 is heavily qualitative

39. Form 990 • Most Siginificant Changes • Front page summary that provides a snapshot of key financial and operating information • A governance section (page 6 of Form 990) • Revised compensation and related organization reporting (page 7 of Form 990)

40. Form 990 – Filing Thresholds • Form 990 • Gross receipts of $500,000 or more (2009) • Gross receipts of $200,000 or more (2010) AND • Total assets of $1.25 million or more (2009) • Total assets of $500,000 or more (2010)

41. Form 990-EZ Filing Thresholds • Form 990-EZ • Gross receipts of $500,000 or less (2009) • Gross receipts of $200,000 or less (2010) AND • Total assets of $1.25 million or less (2009) • Total assets of $500,000 or less (2010)

42. Form 990-N Filing Threshold • Form 990-N • Gross receipts of $25,000 or less (2009) • Gross receipts of $25,000 or less (2010)

43. Question • Are there any other IRS filing that a nonprofit must file?

44. Answer • Yes, besides the Form 990 or equivalent a nonprofit must still file: • Payroll returns • Unrelated business income tax return (UBIT) return: Form 990-T

45. Form 990-T • Exempt Organization Business Income Tax Return • To report unrelated trade or business income. • An unrelated trade or business is any trade or business, the conduct of which is not substantially related to the exercise or performance by the organization of its exempt purpose. • The fact that an organization needs or uses the profits from a business activity to support its program services has no bearing on the determination of whether the activity is unrelated.

46. UBTI • Unrelated Business Taxable Income • See IRS Publication 598 – “Tax on Unrelated Business Income of Exempt Organizations” • There are a lot of exceptions to the rule and is considered to be a fairly “gray” area with a lot of room for interpretation. • Be conservative and remember your fiduciary responsibility

47. Form N70-NP • State of Hawaii – Exempt Organization Business Income Tax Return • By the way, the State of Hawaii wants their cut too.

48. Questions on UBTI

49. Current Issues Affecting Nonprofits • Hawaii’s Charity Registration • General Excise Tax • Sarbanes-Oxley Act of 2002 • Concentration of Funds

50. Hawaii’s Charity Registration • Chapter 467B, HRS requires charities that solicit contributions to register with the Attorney General unless exempted from the registration requirement. • Effective January 1, 2009 • Purpose is to protect donors from fraud and promote donor confidence in and an accountable transparent charitable sector.