Questions and Concerns Board Members Should Consider in the Current Environment
JAMES G. QUAID, CPA
Congratulations. You and your organization have made it to 2021. Although I am sure it has taken a lot of time, talent and effort, you and your organization have a lot to be proud of.
Recently, we have been asked by various clients' board members if we have any insight as to what their organizations should focus their attention on in 2021. Listed below are some thoughts from an accounting/finance and operation standpoint. We hope to build this article into a series highlighting other professionals serving the not-for-profit sector to offer their ideas and suggestions.
We recommend that boards of directors work with management to make sure the following items or questions have been considered and addressed. If not, these may be some areas to focus time and effort in 2021.
Has the organization assessed its qualification for available funding? With the recently passed Consolidated Appropriations Act of 2021, there are new opportunities with the Paycheck Protection Program and Employee Retention Credit that may be available to your organization. We recommend you review the following ORBA's Client Alerts on these two funding opportunities.
- Paycheck Protection Program Reopening for First and Second Draw Loans
- New Stimulus Package Extends and Expands the Employee Retention Credit
If your organization has received COVID-19 funding, does management understand any additional compliance and reporting responsibilities, if any? Will the organization be subject to single audit testing and reporting? Has the organization properly accounted for the funds? When in doubt, talk to your ORBA engagement team.
New accounting pronouncement - revenue from contracts with customers
One of the most encompassing accounting pronouncements that affects all organizations is ASC 606, Revenue from Contracts with Customers. The standards were originally effective in 2019 (or fiscal years in 2020) for most not-for-profit organizations. Due to COVID-19, the Financial Accounting Standards Board (FASB) allowed organizations the option to defer recognition by one year. If your organization deferred recognition and will be adopting ASC 606 in 2020 (or fiscal years in 2021), we recommend management review all revenue streams, determine which revenue streams are exchange-transactions (contracts with customers), and then analyze those transactions to make sure revenue is properly accounted for per the new standards.
ORBA will host another webinar in mid-April to review the revenue recognition standards and walk through some common examples. Stay tuned for an invitation and more information.
Budgeting for uncertainty
If there is one thing we learned from 2020 is that the only thing that stays the same is change. During 2020, your organization may have experienced a shortfall in earned income or donations and grants due to canceling annual in-person events, while it may have been successful in cultivating new donors or funding opportunities. Ideally, an organization has a diversified funding stream so that it does not rely solely on one donor or funder for an extended period of time. Your organization may have also experienced an increase in costs from pivoting to a new program or from moving your programs to a virtual format. Furthermore, your organization may have been forced to become leaner to save costs during 2020.
Although it is impossible to plan for change, we know it will happen. It may be prudent for your organization to plan a few different budget scenarios for 2021 and beyond that address various "what if" scenarios. We recommend organizations continue to build up their reserves and liquidity for future needs.
Need for space
One significant item that may be part of your budget is occupancy costs. During the COVID-19 pandemic, many organizations have realized that they can operate, at least partially, in a remote or virtual environment. Further, many employees may be considering working from home one or more days as opposed to coming to the office. Organizations will need to consider their need for space going forward. Considerations may include the need for more open space to allow for social distancing as well as whether hoteling or satellite offices may be a better fit for the organization to accommodate its need for flexible space.
Do not forget internal controls
During the pandemic, most employees have been working from home. We recommend organizations review their processes and controls around all significant accounting cycles such as cash reconciliations, receipts, expenses, payroll, investments and financial reporting to ensure proper controls are in place and continue to function as designed. Duties should be segregated so that no one person has the sole control over a transaction including the ability to initiate, approve, record, reconcile and review/approve the transaction.
Your organization has made it to 2021, which in itself is a major accomplishment. We recommend organizations communicate the organization's accomplishments in 2020 and plans for 2021 with their donors, funders, members, volunteers and community. Communication should also include regular dialogue with the organization's professionals including the accounting/audit firm, law firm, bankers, investment manager, insurance broker, etc. - all of whom can be a great resource for your organization.
As a board member, acknowledge all that your management team has done during 2020. Good luck and wishing you continued success in 2021 and beyond.
BARBARA A. MILLER, CPA
Paycheck Protection Program Round Two and the Employee Retention Credit
Did your organization receive a loan through the federal government's Paycheck Protection Program (PPP)? Although many organizations received these forgivable loans, certain organizations did not initially qualify to receive them. In addition, many organizations did not receive these loans because the program ran out of funding before they had the opportunity to apply.
To address this and to provide other COVID-19 related relief, the Consolidated Appropriations Act of 2021 (CAA) was signed into law on December 27, 2020. The CAA provides additional assistance to employers for 2020 and 2021 by adding more funding to the Paycheck Protection Program (PPP) and enhancing and expanding the Employee Retention Credit (ERC).
On January 8, 2021, the U.S. Small Business Administration (SBA) announced that the Paycheck Protection Program (PPP) would reopen. Qualifying businesses that did not receive a PPP loan in the initial round of funding have another opportunity to apply. In addition, certain businesses that received a PPP loan in the first round may qualify for the second round of funding. Certain 501(c)(6) tax-exempt organizations, which previously did not qualify to receive a PPP loan, may now be eligible.
To qualify for the second round of the PPP funding, an organization must demonstrate "necessity." They must have 300 or fewer employees and not receive more than 15% of their gross receipts from lobbying. The organization must also show that they had a 25% reduction in gross receipts for any calendar quarter of 2020 when compared with the same quarter in 2019. The CAA expands the types of expenses that are eligible to be covered by PPP loan proceeds.
In addition, some not-for-profits now qualify to receive an ERC. The ERC is a refundable payroll tax credit for wages and healthcare costs paid by an employer whose operations were fully or partially suspended due to COVID-19-related governmental order or experienced a significant reduction in gross receipts. There are many unanswered questions as to what qualifies as "fully or partially suspended," but more guidance is expected.
Under the original guidelines, an employer who received a PPP loan was not eligible to take the ERC. However, under the recently enacted CAA, an employer may take the ERC even if they received a PPP loan. It is important to note that wages covered by PPP loan proceeds are not eligible for the ERC. The ERC is only available for wages over and above wages covered by the PPP loan proceeds.
Struggle ensues to recruit young diverse boards
Although most not-for-profits are actively recruiting to diversify their governing boards, only 87% have struggled to find the right recruitment channels to do so. And more than half (51%) do not think their boards reflect the communities they serve.
These are the findings from an August 2020 survey conducted by CariClub, a New York City-based online matchmaker for young professionals and not-for-profit boards of directors. It surveyed 1,000 not-for-profits across the nation to better understand the lack of diverse representation on not-for-profit boards.
Respondents also reported that the least represented groups on not-for-profit boards are Hispanic or Latino (77% lacked representation on governing boards and 74% on associate boards), Black or African American (72% on governing boards and 68% on associate boards) and Asian (58% on governing boards and 50% on associate boards).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.