© 2009 Grants Central Station
Financial Literacy & Bookkeeping
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presents the
Fundamental Five Nonprofit Training Series
Grants Central Station
November 16, 2010
© 2009 Grants Central Stationwww.GrantsCentralStation.org
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
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
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
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Agenda
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8:30 am Welcome & Introductions
8:45 am Financial Literacy 101 for Nonprofits
9:45 am Break & Network
10:00 am In & Out of Form 990
10:30 am Current Issues Affecting Nonprofits
11:00 am Break & Network
11:15 am Review
11:30 am Panel
12:15 pm Closing Remarks, Conclusion
© 2009 Grants Central Stationwww.GrantsCentralStation.org
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
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
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
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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
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Foundation - Entity
Gain an understanding of: Mission Statement What type of nonprofit Employees Organizational Chart Funding Sources Programs
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Foundation - Legal
Gain an understanding of: Grant Compliance Tax Compliance Human Resource Compliance Hawaii Revised Statutes
HRS Chapter 414D – Hawaii Nonprofit Corporation Act
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Foundation - Environment
Gain an understanding of: Resources Available Who are your Competitors Who are you Servicing Marketing
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Foundation - Accounting
Financial StatementsInternal ControlBookkeepingRecordkeepingBudgetBasis of AccountingNonprofit accounting differences
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Financial Statements
Statement of Financial PositionStatement of ActivitiesStatement of Functional ExpensesStatement of Cash FlowsNotes to Financial Statements
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Types of Transactions
Agency No recognition of income
Contribution Record at promise to give Gives rise to Temporarily Restricted Net
AssetsExchange
A service is rendered Gives rise to Deferred Revenue
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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%
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Internal Controls
Why do we need Internal ControlsWhat 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.”
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Fraud
3 Categories of fraud Corruption Asset Misappropriation Fraudulent Statements
Conditions present when fraud occurs Incentive Opportunity Rationalization
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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
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COSO Framework Diagram
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Image from http://www.theiia.org/CSA/index.cfm?iid=435&catid=0&aid=2051
© 2009 Grants Central Stationwww.GrantsCentralStation.org
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.
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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
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Bookkeeping
Basis of Accounting Cash Tax Modified Accrual
Fund AccountingGAAP
Generally Accepted Accounting Principles
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Recordkeeping
Elements of a good recordkeeping systemOrganizedPermanent FileRelevantLeverage available software
Quickbooks MIP MAS 90
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Budgets
How many of you do a budget?Why do a budget?How effective has it been?
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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).
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Audit
Financial Statement AuditSingle Audit
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Sample Audit Checklist• 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
• Lease agreements • Bank statements &
reconciliation• Grant reports• Year-end investment
summary • Physical inventory • Fixed asset and
depreciation schedule • Year-end accounts
payable & accrued expenses
© 2009 Grants Central Stationwww.GrantsCentralStation.org
Question
Who is responsible for the financial statements of an organization?
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Elements of a Good Bookkeeper
Well organizedQuestionsStrong communication skillsAble to problem solveDouble-entry bookkeepingFinancial statement presentation3 years of experience
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Question
Who does the bookkeeper work for?Who does the accountant work for?Who does the auditor report to?
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© 2009 Grants Central Stationwww.GrantsCentralStation.org34
More Free Workshops!
Oct 27 Volunteer Management
Nov 16 Financial Literacy & Bookkeeping
Dec 7 Strategic Planning
Jan 11 Board Development & Training
Feb 22 Legal & Insurance Issues
Mar 8 Fundraising & Development
Apr Grant Strategy & Writing
Upcoming Fundamental Five workshops from Grants Central Station
© 2009 Grants Central Stationwww.GrantsCentralStation.org
Form 990
Why the fuss all of a sudden? In 2008, the Form 990 was completely
redesigned by the IRSLast revision 1979
The purpose was to:Increase transparencyGood governanceReduced burden (total opposite)
Replaced with increased accountability
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
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
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Form 990
Types of Form 990 Form 990
Return of Organization Exempt from Income Tax
Form 990-EZShort Form of Organization Exempt from
Income Tax Form 990-N
Electronic Notice (e-postcard)Churches are exempt
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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
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
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)
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
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)
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
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)
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Form 990-N Filing Threshold
Form 990-N Gross receipts of $25,000 or less (2009) Gross receipts of $25,000 or less (2010)
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Question
Are there any other IRS filing that a nonprofit must file?
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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
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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.
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
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
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Form N70-NP
State of Hawaii – Exempt Organization Business Income Tax Return
By the way, the State of Hawaii wants their cut too.
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Current Issues Affecting Nonprofits
Hawaii’s Charity RegistrationGeneral Excise TaxSarbanes-Oxley Act of 2002Concentration of Funds
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
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, 2009Purpose is to protect donors from fraud
and promote donor confidence in and an accountable transparent charitable sector.
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Hawaii’s Charity Registration
Covers your traditional nonprofits as well as any other organization that employs a charitable appeal as the basis of any solicitation or an appeal that has a tendency to suggest there is a charitable purpose to the solicitiation
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Hawaii’s Charity Registration
A grant received from the government, or another 501(c)(3) charity or private foundation is not a contribution.
Membership dues and assessments are also not deemed to be contributions.
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Hawaii’s Charity Registration
Filing requirements: Annual filing Audited financial statements if the charity
has gross revenues over $500,000, or where the charity prepares an audited financial statement pursuant to a requirement by a governmental authority or third party.
FeesFrom $10.00 to $750.00
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Hawaii’s Charity Registration
Exempt from requirements: Churches PTAs Hospitals Government or instrumentality of any state or the
United States Charities with less than $25,000 annually, and does
not compensate person responsible for solicitations Prohibits charities from contracting with un-
registered professional solicitors and professional fundraising counsels.
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
General Excise Tax
Form G-6, Application for Exemption from General Excise Taxes
If you don’t file the form all forms of revenue are taxable.
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
General Excise Tax
Tax Information Release (TIR) No. 2010-05
Act 155, Session Laws of Hawaii 2010, Relating to General Excise Tax; The General Excise Tax Protection Act
Two Sections Denial of General Excise Tax Benefits Trust Fund Liability
Prospective July 1, 2010
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
General Excise Tax
Denial of General Excise Tax Benefits Obtain a GET License File annual reconciliation
If Form G-49, is not filed within 12 months from the due date for the return, the business may lose the benefit
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
General Excise Tax
Trust Fund Liability Creates liability for certain key individuals
involved in the financial management of taxpayer
Liability is prospective from July 1, 2010
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Sarbanes-Oxley Act of 2002
Two provisions that affect nonprofits It is illegal for any corporate entity to
punish whistleblowers or retaliate against any employee who reports suspected cases of fraud or abuse
It is a crime to alter, cover up, falsify, or destroy any document that may be relevant to an official investigation
The Act has many practices that may become best practices for governance of nonprofits
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Concentration of Funds
Today’s economic climate will force many nonprofits to reevaluate their past reliance on funding sources
Specifically, nonprofits that do little fundraising due to grant awards
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© 2009 Grants Central Stationwww.GrantsCentralStation.org62
More Free Workshops!
Oct 27 Volunteer Management
Nov 16 Financial Literacy & Bookkeeping
Dec 7 Strategic Planning
Jan 11 Board Development & Training
Feb 22 Legal & Insurance Issues
Mar 8 Fundraising & Development
Apr Grant Strategy & Writing
Upcoming Fundamental Five workshops from Grants Central Station
© 2009 Grants Central Stationwww.GrantsCentralStation.org
Resources
Internal Revenue Service (IRS)Tax information for Charities &
NonprofitsPublication 526, Charitable
ContributionsPublication 557, Tax-Exempt Status for
Your OrganizationPublication 598, Tax on Unrelated
Business Income of Exempt Organizations
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Resources
State of Hawaii Tax Facts
Tax Facts No. 96-1, General Excise vs. Sales Tax Tax Facts No. 98-3, Tax Issues for Hawaii Nonprofit
Organizations Tax Information Releases
TIR No. 89-13, Application for Exemption from the General Excise Taxes for Nonprofit Organizations
TIR No. 91-2, Taxability of Gross Proceeds Received by a Nonprofit Organization from the Sale of Donated Services or Tangible Personal Property
TIR No. 91-4, Hawaii Tax Obligations of Nonprofit Organizations
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Resources
Accounting Generally Accepted Accounting Principles Financial Accounting Standards Board
(FASB) Accounting Standards Codification AICPA Audit and Accounting Guide, Not-
for-Profit Entities Amazon.com
Wealth of material on nonprofit financial management
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Review Section 1
Section 1: What is your Organization’s basis of
accounting? When is your Organization’s fiscal year
end? Does your Organization prepare compliant
financial statements?
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Review Section 2
Section 2: What type of Form 990 does my
Organization file? Does our Organization have Unrelated
Business Taxable Income (UBTI)? I will read my Organization’s Form 990 and
I will look at another relevant organization’s Form 990 on Guidestar
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Review Section 3
Section 3 I will check to see if my Organization has a
GET number I will check to see if my Organization has
filed it’s G-6 exemption I will check to see if my Organization is
current with registration with the DCCA
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Panel
Robert KawaharaMark MoserKerry Cullins
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Mark Moser
Mr. Moser was most recently the Director of Finance for the Ritz Carlton Kapalua. Prior to that, he was the Director of Finance for the Washington Dulles Airport Marriott. He holds a bachelors of science in Business Administration with Distinction, from the George Mason University in Virginia. He has been a licensed Certified Public Accountant since 1992
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Kerry Cullins
Kerry Cullins moved to Maui in 1996 and founded Maui Bookkeeping Consultants in 2001. Maui Bookkeeping Consultants services a wide variety of clients including restaurants, contractors, non-profit organizations, retail, realtors and more. Kerry is the president of the company and specializes in consulting, training and forensic bookkeeping as well as overseeing the day to day operations. Kerry has worked with many different non-profit organizations in professional and voluntary roles by helping to set up and clean up bookkeeping systems, organize silent auctions and acting as Treasurer.
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© 2009 Grants Central Stationwww.GrantsCentralStation.org
Panel
Robert Kawahara
Mark Moser
Kerry Cullins
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© 2009 Grants Central Stationwww.GrantsCentralStation.org74
Test Your Knowledge
Our funder (and we!) want to know how effective this workshop was for you.
This 5-minute Post-Workshop Quiz helps us gauge your progress and our success.
Mahalo.
© 2009 Grants Central Stationwww.GrantsCentralStation.org75
Help Us Serve You Better!
Please take 5 more minutes to complete the Workshop Evaluation so that we can improve this and future offerings
from Grants Central Station
Mahalo.
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More Free Workshops!
Oct 27 Volunteer Management
Nov 16 Financial Literacy & Bookkeeping
Dec 7 Strategic Planning
Jan 11 Board Development & Training
Feb 22 Legal & Insurance Issues
Mar 8 Fundraising & Development
Apr Grant Strategy & Writing
Upcoming Fundamental Five workshops from Grants Central Station
© 2009 Grants Central Stationwww.GrantsCentralStation.org77
Questions?
Robert Kawahara, CPAKawahara & Company, CPAs, LLC(808) [email protected]
© 2009 Grants Central Station78
Mahalo
For More Information or to Register for an Upcoming Workshop on Lana`i or Moloka`i
Leslie Mullens (808) 875-0500 or [email protected]
Grants Central Station
www.GrantsCentralStation.org