Jan 29, 2020
When the Financial Accounting Standards Board (FASB) updated its rules for recognizing revenue from contracts in 2014, it only added to the confusion that nonprofits already had about accounting for grants and similar contracts.
Fortunately, last year, the FASB provided some much-needed clarification with Accounting Standards Update (ASU) No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. Calendar-year nonprofits must follow this guidance when preparing their 2019 year-end financial statements.
Nonprofits traditionally have taken varying approaches when they:
Characterize grants and similar contracts as exchange transactions (also known as reciprocal transactions) or contributions (nonreciprocal transactions), and
Distinguish between conditional and unconditional contributions.
The FASB’s updated revenue recognition guidance — ASU 2014-09, Revenue from Contracts with Customers — eliminated some of the previous guidance for nonprofits and imposed extensive disclosure requirements that didn’t seem relevant to contributions. ASU 2018-08 clarifies matters by laying out rules that will help nonprofits determine whether a grant or similar contract is indeed a contribution — and, if so, when they should recognize the revenue associated with it.
Exchange vs. contribution
To determine how to treat a grant or similar contract, you must assess whether the “provider” receives commensurate value for the assets it’s transferring. If it does, you should treat the grant or contract as an exchange transaction. ASU 2018-08 stresses that the provider (the grantor or other party) in a transaction isn’t synonymous with the general public. So, indirect benefit to the public doesn’t represent commensurate value received. Execution of the provider’s mission or positive sentiment received from donating also doesn’t constitute commensurate value received.
What if the provider doesn’t receive commensurate value? You then must determine if the asset transfer is a payment from a third-party payer for an existing transaction between you and an identified customer (for example, payments made under Medicare or a Pell Grant). If it is such a payment, the transaction won’t be considered a contribution under the ASU, and other accounting guidance would apply. If it isn’t such a payment, the transaction is accounted for as a contribution.
According to ASU 2018-08, a conditional contribution includes:
A barrier the nonprofit must overcome to receive the contribution, and
Either a right of return of assets transferred or a right of release of the promisor’s obligation to transfer assets.
Unconditional contributions are recognized when received. However, conditional contributions aren’t recognized until you overcome the barriers to entitlement.
Is there a barrier to overcome before your organization can receive a contribution? Consider the inclusion of a measurable performance-related barrier, limits on your nonprofit’s discretion over how to conduct an activity or a stipulation that relates to the purpose of the agreement (not including administrative tasks and trivial stipulations such as production of an annual report). Some indicators might prove more important than others, depending on circumstances. And no single indicator is determinative.
As a result of the updated guidance, nonprofits will likely account for more grants and similar contracts as contributions than they did under the previous rules. Check with your CPA to determine what that means for your financial statements, loan covenants and other matters.
Jan 24, 2020
This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business decreased by one-half cent, to 57.5 cents per mile. As a result, you might claim a lower deduction for vehicle-related expense for 2020 than you can for 2019.
Calculating your deduction
Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases depreciation write-offs on vehicles are subject to certain limits that don’t apply to other types of business assets.
The cents-per-mile rate comes into play if you don’t want to keep track of actual vehicle-related expenses. With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date and the destination.
Using the mileage rate is also popular with businesses that reimburse employees for business use of their personal vehicles. Such reimbursements can help attract and retain employees who drive their personal vehicles extensively for business purposes. Why? Under the Tax Cuts and Jobs Act, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.
If you do use the cents-per-mile rate, be aware that you must comply with various rules. If you don’t, the reimbursements could be considered taxable wages to the employees.
The rate for 2020
Beginning on January 1, 2020, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 57.5 cents per mile. It was 58 cents for 2019 and 54.5 cents for 2018.
The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the mileage rate midyear.
Factors to consider
There are some situations when you can’t use the cents-per-mile rate. In some cases, it partly depends on how you’ve claimed deductions for the same vehicle in the past. In other cases, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.
As you can see, there are many factors to consider in deciding whether to use the mileage rate to deduct vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2020 — or claiming them on your 2019 income tax return.
Jan 22, 2020
If your company comes up over budget year after year, you may want to consider cost management. This is a formalized, systematic review of operations and resources with the stated goal of reducing costs at every level and controlling them going forward. As part of this effort, you’ll answer questions such as:
Are we operating efficiently? Cost management can help you clearly differentiate activities that are running smoothly and staying within budget from the ones that are constantly breaking down and consuming extra dollars.
Depending on your industry, there are likely various metrics you can calculate and track to determine which aspects of your operations are inefficient. Sometimes improving efficiency is simply a matter of better scheduling. If you’re constantly missing deadlines or taking too long to fulfill customers’ needs, you’re also probably losing money playing catch-up and placating disappointed buyers.
Can we really see our supply chain? Maybe you’ve bought the same types of materials from the same vendors for many years. Are you really getting the most for your money? A cost management review can help you look for better bargains on the goods and services that make your business run.
A big problem for many businesses is lack of practical data. Without the right information, you may not be fully aware of the key details of your supply chain. There’s a term for this: supply chain visibility. When you can’t “see” everything about the vendors that service your company, you’re much more vulnerable to hidden costs and overspending.
Is technology getting the better of us? At this point, just about every business process has been automated one way or another. But are you managing this technology or is it managing you? Some companies overspend unnecessarily while others miss out on ways to better automate activities. Cost management can help you decide whether to simplify or upgrade.
For example, many businesses have historically taken an ad hoc approach to procuring technology. Different departments or individuals have obtained various software over the years. Some of this technology may still be in regular use but, in many cases, an expensive application sits dormant while the company still pays for licensing or tech support.
Conversely, a paid-for but out-of-date application could be slowing operational or supply chain efficiency. You may have to spend money to save money by getting something that’s up-to-date and fully functional.
The term “cost management” is often applied to specific projects. But you can also apply it to your business, either as an emergency step if your budget is really out of whack or as a regular activity for keeping the numbers in line. Our firm can help you conduct this review and decide what to do about the insights gained.
Jan 17, 2020
You already may have reviewed a preliminary draft of your company’s year-end financial statements. But without a frame of reference, they don’t mean much. That’s why it’s important to compare your company’s performance over time and against competitors.
Conduct a well-rounded evaluation
A comprehensive benchmarking study requires calculating ratios that gauge the following five elements:
1. Growth. Business size is usually stated in terms of annual revenue, total assets or market share. Is your company expanding or contracting? An example of a ratio that targets changes in your company’s size would be its year-over-year increase in market share. Companies generally want to grow, but there may be strategic reasons to downsize and refocus on core operations.
2. Liquidity. Working capital ratios help assess how easily assets can be converted into cash and whether current assets are sufficient to cover current liabilities. For example, the acid-test ratio compares the most liquid current assets (cash and receivables) to current obligations (such as payables, accrued expenses, short-term loans and current portions of long-term debt).
3. Profitability. This evaluates whether the business is making money from operations — before considering changes in working capital accounts, investments in capital expenditures and financing activities. Public companies tend to focus on earnings per share. But smaller ones tend to be more interested in ratios that evaluate earnings before interest, taxes, depreciation and amortization. EBITDA ratios allow for comparisons between companies with different capital structures, tax strategies and business types.
4. Turnover. Such ratios as total asset turnover (revenue divided by total assets) or inventory turnover (cost of sales divided by inventory) show how well the company manages its assets. These ratios also can be stated in terms of average days outstanding.
5. Leverage. Identify how the company finances its operations — through debt or equity. There are pros and cons of both. For example, within limits, debt financing is generally less expensive and interest on debt may be tax deductible. Equity financing, however, can help preserve cash flow for growing the business because equity investors often don’t require an annual return on investment.
Seek input from the pros
Most companies use an outside accounting firm to compile, review or audit their preliminary year-end financial results. This is a prime opportunity to conduct a comprehensive benchmarking study. We can help take your historical financial statements to the next level by identifying comparable companies, providing access to industry benchmarking data and recommending ways to improve performance in 2020 and beyond.
Jan 15, 2020
As you’ve probably heard, a new law was recently passed with a wide range of retirement plan changes for employers and individuals. One of the provisions of the SECURE Act involves a new requirement for employers that sponsor tax-favored defined contribution retirement plans that are subject to ERISA.
Specifically, the law will require that the benefit statements sent to plan participants include a lifetime income disclosure at least once during any 12-month period. The disclosure will need to illustrate the monthly payments that an employee would receive if the total account balance were used to provide lifetime income streams, including a single life annuity and a qualified joint and survivor annuity for the participant and the participant’s surviving spouse.
Under ERISA, a defined contribution plan administrator is required to provide benefit statements to participants. Depending on the situation, these statements must be provided quarterly, annually or upon written request. In 2013, the U.S. Department of Labor (DOL) issued an advance notice of proposed rulemaking providing rules that would have required benefit statements provided to defined contribution plan participants to include an estimated lifetime income stream of payments based on the participant’s account balance.
Some employers began providing this information in these statements — even though it wasn’t required.
But in the near future, employers will have to begin providing information to their employees about lifetime income streams.
Fortunately, the effective date of the requirement has been delayed until after the DOL issues guidance. It won’t go into effect until 12 months after the DOL issues a final rule. The law also directs the DOL to develop a model disclosure.
Plan fiduciaries, plan sponsors, or others won’t have liability under ERISA solely because they provided the lifetime income stream equivalents, so long as the equivalents are derived in accordance with the assumptions and guidance and that they include the explanations contained in the model disclosure.
Critics of the new rules argue the required disclosures will lead to confusion among participants and they question how employers will arrive at the income projections. For now, employers have to wait for the DOL to act. We’ll update you when that happens. Contact us if you have questions about this requirement or other provisions in the SECURE Act.