By Cheryl R. Olson, CPA, CGMA
The numbers provided by the finance and development departments at not-for-profits often do not match 100 percent – and they don’t have to. However, the data must be reconcilable from one department to the other, especially if two separate reports are being provided to the Board of Directors and/or the leadership team. Organizational practices are intended to benefit the organization as a whole and not just one department. While many finance and development departments work well together, here are four areas to collaboratively focus on for better data, compliance, and communication.
1. Year-end Cut Off
Establish a collaborative process for proper donation cut-off to ensure recording in the correct year for both the organization and the donor, as well as sending timely acknowledgement letters. If the organization’s fiscal year-end is different than 12/31, the two departments will need to work together on this issue twice a year.
While acknowledgement letters are often the responsibility of development and compliance with IRS regulations is often the responsibility of finance, both departments can re-read IRS Publication 1771 Charitable Contributions Substantiation and Disclosure Requirements. Don’t forget that the IRS has disallowed donor contributions when the taxpayer doesn’t have the contemporaneous donor acknowledgement letter required by IRC Section 170 or when the letter fails to include the required information. This is a good refresher and an opportunity for both departments to meet and discuss the impact on current organizational practices.
First, ensure both departments are working off the same definition of pledges and, secondly, that there is clarity on the information the organization requires from the donor. Remember, there are requirements under Generally Accepted Accounting Principles (GAAP) that dictate whether the pledge and allowance can be recorded in the organization’s financial statements. This is a good opportunity for finance and development to discuss the impact of the requirements on organizational practices. For a comprehensive resource on the accounting requirements under generally accepted accounting principles (GAAP), the AICPA has developed the Not-for-Profit Entities – Audit and Accounting Guide. This would be a worthwhile investment for any finance department. Clark Nuber also offers a training, Not-for-Profit “Basics” Workshop twice a year that discusses the nuances of these requirements.
3. In-kind Contributions
The widest area of differences we see between the two departments is in recording and valuing in-kind contributions. Collaboratively determine the approach each department will take in evaluating and documenting these special contributions. This is a good opportunity for finance to educate development on the types of in-kind contributions that are reported in financial statements and the different requirements for reporting on the IRS Form 990. A methodology can be developed for reconciling between the departments for these differences. IRS Publication 1771 and Accounting Standards Update No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made are both helpful resources in preparing appropriate acknowledgment letters and for accurately reporting non-cash contributions.
4. Special Events
Ultimately, management wants to know if the amount of money and staff/volunteer time spent in planning and executing a special event supported the accomplishment of organizational goals (not just financial goals). The financial information is important to ensure events are properly recorded in the financial statements and on the IRS Form 990. There are significant differences between the reporting in the financials and the Form 990 that could be confusing to the development department. Use this as an opportunity to achieve clarity on these different reporting models. Also, keep in mind that raffles, sponsorships, auctions, etc. associated with special events can have federal and state tax or regulatory ramifications if not handled appropriately. Clarity surrounding the purpose for having the event and the results of the event need to be communicated and this can become a great discussion topic for finance and development.
If finance and development are only reconciling their information annually in preparation for the audit and IRS Form 990 preparation, this is a good time to establish a plan for quarterly reviews. If the two departments are already reconciling quarterly, this is a good time to establish a plan for monthly reviews. Regardless of the timing, consider revisiting and documenting the overall lifecycle of a donor process to ensure there are common definitions for both departments and each understands the other’s piece. This process discussion usually results in an improvement in communication, efficiencies, and potential automation by only entering donor related data once.
To discuss the processes or technology used in integrating finance and development, contact Cheryl R. Olson. For additional assistance or consulting on any of the tax or GAAP matters discussed, please ask your Clark Nuber service team or contact us.
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