Colleges & Universities | Dean Dorton Ford

August 17, 2010

The Price is Right? New IRS Rules Lead to Inconsistent Interpretation on Fair Market Value Measurements

Filed under: Colleges & Universities, Not for Profit — Tags: accounting, Accounting Firm, Assurance services, auditor, College and University, CPA, DDF, Dean Dorton Ford, Fair Market Value, Form 990, IRS Rules, Kentucky accounting firm, KY accounting, Lexington CPA, Louisville CPA, Not for Profit — ddf @ 10:56 am

The new Form 990 now requires private colleges and universities to report nontaxable perks as part of total compensation packages. For many college presidents, one of the biggest nontaxable perks to be included is the fair market rental value of presidential housing. This has become a focus area of discussion due to inconsistent interpretation of the requirement by different institutions.

The IRS rules do not specify what portion of presidential housing should be considered compensation. In a review of 10 private institutions, The Boston Globe discovered a wide range of valuation approaches. Some schools conservatively valued the entire home as compensation, while others argued only the personal quarters of the school’s president considered to be private residence would be included as compensation, since many schools use areas of the president’s home for public functions. This has sparked discussion not only in the higher education arena, but the real estate market as well, with many real estate specialists claiming the fair rental value of presidential homes would be worth much more on the open market than what is being reported by the schools.

Other hot button areas of disclosure under the new requirements include maid services, health and social club dues, and first class travel.

The aim of the IRS in requiring these disclosures is to more accurately depict the nature of compensation of top administrators at colleges and universities in an effort to make the school operations more transparent to the public.

Link to Boston Globe article:

http://www.boston.com/news/education/higher/articles/2010/06/13/light_shed_on_housing_for_college_presidents/?p1=Well_MostPop_Emailed4F

For more information please contact,
Rachel Brown
rbrown@ddfky.com

Comments (0)

July 30, 2010

Disbursement Risk in the 21st Century

Filed under: Colleges & Universities, Not for Profit, healthcare — Tags: accounting, Accounting Firm, Assurance services, auditor, business, College and University, CPA, DDF, Dean Dorton Ford, Kentucky accounting firm, Lexington CPA, Louisville CPA, Not for Profit — ddf @ 8:44 am

Over the past ten years we have seen significant changes in the way we pay our bills. Not too long ago, no one would have ever dreamed that we could pay all of our bills without using a mail box or those old fashioned stamps. I now find it a pain when someone gives me a check and I have to go to a bank to put it in to my account. These changing times have also provided all of us with a little extra time in our day because it is easier and faster to pay our bills and review our accounts. However, all of these efficiencies that we have gained have brought significant risks with it. These risks have resulted in significant losses for some companies. I hope to give you some insight in to some of the risks that come along with all of the efficiencies we now take for granted.

The main risk that occurs when employees have access to spend money electronically is obviously theft. Theft of money electronically is much harder to detect than when someone steals cash. We have had significant controls over cash for a long time. We have authorized signers on our checks and some companies even require dual signatures. We have all of these controls over checks and cash but what controls do we have over someone transferring money to their own account. Most executives would say that it would be detected during the reconciliation procedures every month. What if the person stealing the money electronically is also the person in charge of reconciling that account? What if this person transferred small amounts each week or month over several years? It could add up to a significant sum.

Companies need to have more controls/checks and balances over electronic wire transfers and automated clearing house (ACH) payments. The best control I have seen is where an account is set up to only allow electronic transfers to certain payees. There is a specific process with multiple signatures required in order to get a vendor added to this list. If this same company wants to make a single electronic payment to a vendor, then it would require multiple authorizations. Another way to control electronic payments is to employ proper segregation of duties. Even the smallest of companies can segregate duties. Let’s take an example of the company that only has one person in accounting and that person reconciles all accounts and performs all accounting functions. In this case, I would recommend that the president/executive director or maybe the treasurer for the board or even someone from another department should be set up to perform electronic disbursements. Under no circumstances should that accountant be the person in charge of wire transfers.

Another area of concern for electronic payments would be credit cards. Having too many credit cards or a lack of control over credit cards can lead to theft. Credit cards are an easy way to make purchases (business or personal). There are various ways to use a company credit card to personal gain. The easiest is to go to an office store to purchase supplies and then pick up a few personal items. This can be almost impossible to detect. Another way is to buy things online from companies that seem to have a business purpose but are actually for them personally. Another horror story we have all heard about is using a company credit card while on a business trip for excessive expenses (i.e. expensive wine, Broadway shows, etc…).

The key to safeguarding against theft of cash via the use of credit cards is to first limit the number of credit cards your organization has open. The more credit cards that have monthly statements coming in increases the susceptibility for something to slip through the cracks. The next key is to actually review the credit card statements every month. Review each and every transaction and determine their specific business purpose. Transactions should be questioned and receipts should be reviewed. Even if the expense was charged by the chairman of the board – it should be questioned if the business purpose is not evident. I have a client where the treasurer for the board gets a copy of all credit card statements each month and reviews the transactions for reasonableness. This may not be feasible for some companies but is something to be considered. I normally recommend that companies start by limiting the number of credit cards to one or two mainly to be used for office purchases. I recommend that all travel and entertainment expenses go through an expense report process and have all receipts provided with that expense report. Then all you have to do is review these few credit card statements every month.

I hope the information above has provided you with some insight into some of the risks related to electronic payments and ways to mitigate those risks. If you have any questions or would like additional information, please feel free to contact me at lmann@ddfky.com.

Lance R Mann
Manager of Assurance Services

Mann Lance

Comments (0)

July 22, 2010

Scheduled Breaks and Their Effect in the Calculation of the Return of Title IV Funds

Filed under: Colleges & Universities, Not for Profit — Tags: accounting, Accounting Firm, Assurance services, auditor, College and University, CPA, DDF, Dean Dorton Ford, Kentucky accounting firm, KY accounting, Lexington CPA, Louisville CPA, Not for Profit — ddf @ 1:15 pm

In our experience with College and University A-133 audits of Student Financial Aid, the second step in the Return of Title IV calculation could lead to many compliance issues for schools. The calculation is very important because it determines how much money must be returned to the government; as well as who must return the funds. If calculated incorrectly, the school can return too much or not enough federal dollars. If too little is returned, then the school runs the risk of missing the 45 day deadline to return the funds. The calculation of completed calendar days as a percentage of total calendar days in a term is seemingly simple; however, scheduled breaks and their exclusion from the calculation and/or the use of the mid-point cause some confusion. Below is a refresher on how to handle scheduled breaks and the use of mid-point:

A scheduled break is a break of five or more consecutive calendar days that are excluded from the Return calculation. For example, a school has an official break on the calendar that is Monday the 10th – Friday 15^th and does not hold weekend classes. The break starts the first day after the last class is held (prior to the break) or in our example Saturday the 8^th. The last day of the break would be the Sunday before classes resume or in our example Sunday the 17^th. This causes for nine days to be excluded from the calculation (Saturday 8^th to Sunday 17^th). Scheduled breaks for five or more days are excluded from both the earned days and days in the term.

If a school cannot determine a student’s official date of withdrawal, then they can utilize the mid-point method of returning funds. The mid-point should not be confused with mid-term. For mid-point, you calculate the total number of calendar days in the semester and find the mid-point or the number of days earned to make the calculation equal 50%. For example, a school has 108 days in the term excluding scheduled breaks, when mid-point is used the numerator (number of days earned) would be 54 days or 50%.

For more information, visit http://ifap.ed.gov or contact Megan Herde, MHerde@ddfky.com

Herde Megan

Comments (0)

July 6, 2010

Form 990 – Schedule H

During the re-design process of the new Form 990, the IRS placed more emphasis on tax exempt hospitals’ reporting requirements through Schedule H of the new form. For 2008, Schedule H was optional except for information in Part V regarding the hospital’s facility information. However, for 2009, the form is required to be completed in its entirety for all applicable activities pertaining to each hospital. Substantially more documentation will be required by the filing organization.

Part I of the new schedule is designed to provide information regarding charity care and community benefit activities. Information is requested on whether the hospital has a charity care policy and the criteria surrounding the policy. Hospitals are required to show a detailed analysis of their charity care and community benefit amounts at cost.

Part II is designed to detail any community building activities that the hospital completed during the year that helped to protect or improve the community’s health or safety. Examples of community health and safety activities could be improvements to housing buildings for vulnerable populations, creating new employment opportunities for community residents, mentoring programs, support groups and disaster readiness programs.

Part III is designed to report the hospital’s bad debt, medicare and collection practices. The hospital will be asked to report on costing methodologies and rationale for bad debt and medicare policies. The hospital will also have to describe the collection policies utilized for patients who qualify for charity care and financial assistance.

Part IV is designed to describe activities associated with management companies and joint ventures in which the hospital is a partner or shareholder.

Part V was the only section that was required to be completed with the 2008 return. Within this section, the hospital describes the types of services the hospital provides, such as whether it is a licensed hospital, a critical access facility, a research facility, etc.

Part VI of the schedule, Supplemental Information, allows the hospital more room to describe information listed in other parts of the schedule. The hospital will also be asked to provide information on how the hospital assesses the health care needs of the community, how the hospital educates and informs patients and persons about their eligibility for financial assistance, information about the community it serves, and how the hospital furthers its exempt purpose.

While the new Schedule H appears cumbersome, it allows the hospital an opportunity to describe the good things it is doing for the community it serves.

With state governments considering whether to implement minimum amounts of charity care and the federal government considering whether hospitals should lose their tax exempt status, it is becoming increasingly important for tax-exempt hospitals to place a greater emphasis on their community benefit activities.

Please see the following link for Schedule H: http://www.irs.gov/pub/irs-pdf/f990sh.pdf

Allison Carter�
alcarter@ddfky.com

Carter Allison

Comments (0)

May 3, 2010

The Congressional Budget Office (CBO) has released a study on tax arbitrage

Filed under: Colleges & Universities, Not for Profit — Tags: Accounting Firm, Assurance services, College and University, CPA, DDF, Dean Dorton Ford, Kentucky accounting firm, KY accounting, Louisville CPA, Not for Profit — ddf @ 11:42 am

The Congressional Budget Office (CBO) has released a study on tax arbitrage – the earning of tax exempt income on the proceeds of tax exempt bonds – by colleges and universities. The study was requested by Senator Grassley and uses several measures of tax arbitrage that are broader than the definition in the current statute and concludes that if Congress were to broaden the definition of tax arbitrage, colleges and universities would likely reduce their use of exempt bonds, decreasing the cost to the federal government for this tax preference. By one of the broadened measures, nearly all of the tax-exempt bonds issued in 2003 would be classified as earning profits from tax arbitrage. Under a narrower, but still expanded definition, 75% of those bonds would have tax arbitrage. The incidence of tax arbitrage in the study is high because it includes investment earnings from endowment funds, including those held in separate foundations and the thinking behind it is that perhaps colleges and universities should sell some of their assets or use non-exempt financing for capital projects. Read the entire report at http://www.cbo.gov/doc.cfm?index=11226.

For more information contact:

Leigh McKee
lmckee@ddfky.com

McKee Leigh

Comments (1)

April 1, 2010

Unraveling the Uniform Prudent Management of Institutional Funds Act

Filed under: Colleges & Universities, Not for Profit — Tags: accounting, Accounting Firm, Assurance services, business, College and University, CPA, DDF, Dean Dorton Ford, Kentucky accounting firm, KY accounting, Louisville CPA, Not for Profit, tax — ddf @ 3:02 pm

On March 25, 2010, the Commonwealth of Kentucky adopted the provisions of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). This is designed to replace to existing Uniform Management of Institutional Funds Act (UMIFA). What does this mean for you?

In 1972, UMIFA was adopted. UMIFA was the first act of its kind and was designed to provide uniform and fundamental rules for investment of funds held by charitable institutions and the expenditure of funds donated as “endowments” to those institutions. Essentially UMIFA supported two general principles: 1) that assets would be invested prudently in diversified investments that sought growth as well as income, and 2) that appreciation of assets could prudently be spent for the purposes of any endowment fund held by a charitable institution. UPMIFA was enacted to build on those principles based on the experience gained in managing endowments over the past 35 years.

Investing Funds

UMIFA allowed endowments to invest in any kind of assets, to pool endowment funds for investment purposes, and to delegate investment management to other persons, as long as the governing board of the institution exercised ordinary business care and prudence in the investment related decisions. UPMIFA builds on that original principle and provides stronger guidance for investment management to these governing boards. It requires each person responsible for managing and investing an institutional fund to make investment related decisions “in good faith and with the care an ordinary prudent person in a like position would exercise under similar circumstances.” It requires prudence in incurring investment costs. Factors to consider in making investment decisions are expanded to include the following:

general economic conditions;
possible effects of inflation or deflation;
tax consequences;
how each decision plays into the entire portfolio strategy;
the expected total return from income and appreciation;
other resources of the institution; and
current and future needs of the institution

UPMIFA requires that an investment portfolio be diversified, unless special circumstances dictate otherwise.

Expending Funds

UMIFA brought about the concept of total return expenditure of endowment assets for charitable program purposes. It permitted prudent expenditure of both appreciation and income. In essence, asset growth and income could be appropriated for program purposes, subject to maintaining the “historical dollar value” of the fund. Again, UPMIFA has built upon this concept and has eliminated the “historical dollar value” rule. Because UPMIFA provides better guidance on the concept of prudent spending, it makes the need for a spending floor unnecessary. UPMIFA states that “an institution may appropriate for expenditure or accumulate so much of an endowment fund as the institution determines is prudent for the uses, benefits, purposes and duration for which the endowment fund is established”. UPMIFA set forth the following criteria to guide an institution in its yearly expenditure:

the duration and preservation of the endowment fund;
the purposes of the institution and the endowment fund;
general economic conditions;
the possible effect of inflation or deflation;
the expected total return from income and the appreciation of investments;
other resources of the institution; and
the investment policy of the institution

As you can see, these criteria mirror the criteria discussed in the “expending funds” section above. The purpose of this is to unify investment and spending policies and decisions.

Release or Modification of Restrictions

The provisions of UMIFA only allowed for the release of restrictions on donations. UPMIFA recognizes that donor intent exists and protects that intent more broadly than UMIFA. UPMIFA provides a more comprehensive treatment of modification or release of restrictions on donated funds. The reason for this is that history has shown us that sometimes restrictions imposed by a donor can become impracticable or wasteful or may impair the management of the fund. UPMIFA allows multiple avenues to release or modify these restrictions. The first and most obvious would be to have the donor consent to this release or modification. UPMIFA also authorizes a modification that a court determines to be in accordance with the “donor’s probable intent”. If a charitable institution in Kentucky has endowment funds that fall into this situation, you must file an application with the courts and the Attorney General must be notified and they may participate in the proceedings.

In the Commonwealth of Kentucky, if an institution determines that a restriction contained in a gift instrument on the management, investment, or purpose of an institutional fund is unlawful, impracticable, impossible to achieve, or wasteful, the institution, 60 days after notification of the Attorney General, may release or modify the restriction, in whole or part if the following criteria are met:

the fund subject to the restriction has a total value less than $50,000;
more than 20 years have elapsed since the fund was established; and
the institution uses the property in a manner consistent with the charitable purposes expressed in the gift instrument

As you can see above, UPMIFA has brought about significant changes in how endowment funds are to be managed, invested and expended. It should greatly assist governing boards in successfully managing these funds and properly expending in accordance with their institutions mission and donor intentions. The enactment of UPMIFA also has brought about new reporting requirements for those institutions that issue annual financial statements. Please discuss these changes with your accountant. If you are interested in reading more about UPMIFA you can visit www.UPMIFA.org.

Sources for this article: www.upmifa.org and “KY SB 76 – AN ACT relating to management of institutional funds”.

For more information please contact,
Lance Mann, CPA
lmann@ddfky.com
859.425.6705

Mann Lance

Comments (9)

March 29, 2010

403(b) Plan Audit – Are You Ready?

Filed under: Colleges & Universities, Not for Profit, Uncategorized — Tags: accounting, Accounting Firm, Assurance services, College and University, CPA, DDF, Dean Dorton Ford, Kentucky accounting firm, KY accounting, Louisville CPA, Not for Profit — ddf @ 10:44 am

Beginning with 2009 Form 5500 filings, employee benefit plans under section 403(b) of the IRC will be subject to the same reporting and audit requirements that currently exist for 401(k) plans. Is your organization ready?

The major new requirement is the presence of a Plan Document. The Plan Document will have the same required elements as a 401(k) plan (eligibility, investment options, contribution limitations, vesting schedules, distribution guidelines, provisions for compliance testing, etc). Your plan record keeper should have the ability to help draw up a plan that meets IRS guidelines.

Another large provision relates to the audit requirement – if your organization has over 100 eligible participants, your 403(b) plan will have to be audited for any plan years beginning on or after January 1, 2009. Audits can be quite time-consuming on any organization, especially in the first year. Beginning balances will have to be audited in addition to 2009 amounts. It may be difficult to gather complete and accurate investment information from all third party administrators (TPAs) that have been associated with the plan. Records may not be readily available and may come from multiple sources. It may also be difficult to collect information related to former employees who continue to have holdings in the plan. You should begin discussing your needs with all applicable TPAs as soon as possible so that it will be clear what they will be able to provide. As the information is being gathered, the plan sponsor (usually your organization) will need to carefully and thoroughly document its approach for the data collection.

There are several other new requirements that may also impact your plan. If you have any questions related to what information you’ll need to be prepared for these requirements, feel free to give us a call.

Morgan Daulton
mdaulton@ddfky.com
Daulton Morgan

Comments (1)

March 18, 2010

GASB 53 is here. Will you be affected?

Filed under: Colleges & Universities, Not for Profit — Tags: accounting, Accounting Firm, business, College and University, CPA, DDF, Dean Dorton Ford, Kentucky accounting firm, KY accounting, Lexington CPA, Louisville CPA — ddf @ 3:54 pm

In order to improve how state and local governments report information about derivative instruments in their financial statements, the Governmental Accounting Standards Board (GASB) issued GASB Statement 53, Accounting for Financial Reporting for Derivative Instruments. It is meant to give additional transparency to derivative transactions and provide users of the financial statements of government entities a better understanding of the risks that governments may be exposed to when they enter into these types of arrangements.

Governments sometimes enter into derivatives instruments as a hedge to mitigate financial risks that may be associated with specific assets or liabilities. For instance, one of the most common examples of a derivative instrument entered into by a government is an interest rate swap. This is usually done when a government has variable interest rate debt and wants to mitigate the risk associated with interest rates rising. When effective, the interest rate swap causes the interest paid by government to, in effect, become fixed.

Statement 53 requires that the fair value of a derivative instrument be reported in the financial statements. It gives specific guidance that governments must follow to determine whether a derivative instrument is an effective hedge. Changes in the fair value of these derivative instruments that result in an effective hedge will be reported in the period in which the change occurred. However, the changes in fair value do not affect current investment income or loss. Instead, they are reported as a deferral in the statement of net assets (balance sheet). For those derivative instruments that do not qualify as an effective hedge or are associated with investments that are already being reported at fair value, the government entity should report them as investment derivative instruments. Changes in the fair value of these derivative instruments are reported as part of investment income or loss in the current reporting period. The fair value of the agreement is recorded on the statement of net assets as either an asset or a liability depending.

Statement 53 also requires a note disclosure that summarizes a government’s derivative instruments. The note disclosure must provide a summary of the government’s derivative instrument activity, its objectives for entering into derivative instruments, and their significant terms and risks.

This statement is effective for reporting periods beginning after June 15, 2009. Please contact Dean Dorton Ford if you have any questions or need assistance in implementing this new standard.

Please contact Anthony Allen
aallen@ddfky.com

Allen Anthony

Comments (0)

March 11, 2010

Are You Prepared for the Requirements Relating to the

Filed under: Colleges & Universities, Not for Profit — Tags: accounting, Accounting Firm, Assurance services, College and University, CPA, DDF, Dean Dorton Ford, Kentucky accounting firm, KY accounting, Lexington CPA, Louisville CPA, Not for Profit — ddf @ 2:15 pm

I participated in a recent AICPA conference call which discussed the impact of more than $300 billion of American Recovery and Reinvestment Act of 2009 (Recovery Act) funds being disbursed to not-for-profits, states and local governments. The government has mandated an exceptional amount of accountability and transparency for these funds. Some items that you should prepare for if you have or will receive Recovery Act funds are:

Single Audit – if your entity expends more than $500,000 of federal funds, you will be required to have an audit in accordance with OMB A-133. Many organizations that have not been subject to this audit requirement before will now be subject to it. Also in recurring A-133 audits, there will be an increased number of major programs to be audited due to the nature of the Recovery Act funds.
Reporting – there will be quarterly reporting requirements for Recovery Act fund recipients. Also, Recovery Act funds will have to be separately identified on the Schedule of Expenditures of Federal Awards and the Data Collection Form. Additionally, the Federal Audit Clearinghouse will be required to make publicly available on the internet all single audit reports filed with them for fiscal years ending September 30, 2009, and later.
Capacity/Internal Controls – it will be imperative for organizations to have adequate staff and internal controls in place to be able to ensure that the Recovery Act funds are being spent appropriately, the more stringent reporting requirements are being met, and their system can track activity properly.

We recommend your organization consider all the requirements for your Recovery Act funds and implement any necessary changes as early as possible to ensure a smooth transition into compliance. Please contact us if you have questions or need assistance.

For more information please contact, Jaclyn Badeau

jbadeau@ddfky.com

Badeau Jaclyn 2

Comments (0)

October 19, 2009

Crit Luallen

Filed under: Colleges & Universities, Not for Profit — Tags: accounting, Assurance services, auditor, College and University, CPA, credit card expenses, Crit Luallen, DDF, Dean Dorton Ford, expenses, KY accounting, Lexington CPA, Louisville CPA, Not for Profit, Travel expenses — ddf @ 1:09 pm

On Monday, August 10, I attended a luncheon in Georgetown sponsored by the Scott County Chamber of Commerce. The speaker was Auditor of Public Accounts Crit Luallen. Of course, during her remarks, she touched on the recent credit card/travel and entertainment expenses issues covered in several spring and summer Herald-Leader articles. Our collective hindsight can see that times have changed and I think most of us realize that most organizations would benefit from increased transparency, internal controls and appropriate supervision and review. Ms. Luallen reminded the luncheon crowd of her document, “Recommendations for Public and Nonprofit Boards, Lessons learned from the Lexington Blue Grass Airport Investigation”. A copy of it can be obtained at http://www.auditor.ky.gov/Public/Audit_Reports/Archive/2009AuditorsAlert-BoardRecommendations.pdf . The document has 28 recommendations. In my opinion, even smaller not-for-profit entities would benefit from implementing most of the recommendations. Yes, the cost/benefit of adding internal controls or even more accounting personnel should be evaluated; but, most of the recommendations can be implemented at minimal cost.

Dean Dorton Ford, PSC has a substantial not-for-profit practice offering services in several functions including: audit and assurance, tax compliance and consulting, technology and employee benefits consulting. We’d be very pleased to work with you toward a goal of strengthening your organization’s internal control culture.

David Richard
Director of Assurance Services
drichard@ddfky.com

Richard David

Comments (0)