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The Unique Alternative to the Big Four Bridging the GAAP Between the Development and Accounting Departments Joanne Charles, Shawnee State University Angie Lewis, CPA, Crowe Horwath LLP Pete Ugo, CPA, Crowe Horwath LLP The Unique Alternative to the Big Four Speaker Introductions Joanne Charles Shawnee State University Angie Lewis Crowe Horwath Pete Ugo Crowe Horwath Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 2

The Unique Alternative to the Big Four Objectives What is the Issue? Why is it a Problem? Suggestions for Bridging the GAAP Examples of Gift Instruments with a Potential GAAP between Development and Accounting Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 3 The Unique Alternative to the Big Four What is the Issue? Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 4

The Unique Alternative to the Big Four Board of Directors Meeting Foundation / Development Departments Portion of the Meeting Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 5 The Unique Alternative to the Big Four Board of Directors Meeting Accounting Departments Portion of the Meeting Accounting - GAAP Audit | Tax | Advisory | Risk | Performance Development/ Foundation

2012 Crowe Horwath LLP 6 The Unique Alternative to the Big Four Do You Think Like The Accounting or Development Department? Assessment test (yes or no) - Yes answers are strong indicators of accounting Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 7 The Unique Alternative to the Big Four What is the Issue? Development Counting vs. Accounting Recognition

Multi-year pledges Promises Grants Intent vs. promise/pledge In-kind contributions Discounted goods and services Bequests Remainder trusts Lead trusts

Estate trusts Perpetual trusts Life insurance Publicly traded stock Private stock Conditions Naming rights Goods/services received by donor Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 8 The Unique Alternative to the Big Four Examples of Different Languages What Development/Foundation May Hear from Donors: What Accounting WANTS to Hear: The University is in my Will!

Irrevocable My intention is to set up a scholarship endowment in my familys name. Promise to Give As soon as the College opens the new School of Fine Arts, I will donate $1 million. Unconditional I will donate $500 for a table at the upcoming dinner gala. Nonrecipirocal CASH My company will provide a 20% discount on construction management services in relation to your upcoming

capital project. Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 9 The Unique Alternative to the Big Four GAAP Contribution Definition ASC 958-605-20 (formerly known as FASB Statement #116) An unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner. Those characteristics distinguish contributions from exchange transactions, which are reciprocal transfers in which each party receives and sacrifices approximately equal value; from investments by owners and distributions to owners, which are nonreciprocal transfers between an entity and its owners; and from other nonreciprocal transfers, such as impositions of taxes or legal judgments, fines, and thefts, which are not voluntary transfers. In a contribution transaction, the value, if any, returned to the resource provider is incidental to potential public benefits. In an exchange transaction, the potential public benefits are secondary to the potential proprietary benefits to the resource provider. The term contribution revenue is used to apply to transactions that are part of

the entity's ongoing major or central activities (revenues), or are peripheral or incidental to the entity (gains). Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 10 The Unique Alternative to the Big Four GAAP Contribution Definition ASC 958-605-25 (formerly known as FASB Statement #116) An unconditional promise to give shall be recognized when it is received. However, to be recognized there must be sufficient evidence in the form of verifiable documentation that a promise was made and received. A communication that does not indicate clearly whether it is a promise is considered an unconditional promise to give if it indicates an unconditional intention to give that is legally enforceable. Legal enforceability refers to the availability of legal remedies, not the intent to use them. Solicitations for donations that clearly include wording such as information to be used for budget purposes only, or that clearly and explicitly allow resource providers to rescind their indications that they will give, are intentions to give rather than promises to give and shall not be reported as contributions.

Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 11 The Unique Alternative to the Big Four Why is it a Problem? Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 12 The Unique Alternative to the Big Four Why is the Development/Accounting GAAP a Problem? Management and staff confusion Board of Directors confusion Have we met our goal? Audited financial statements may be inconsistent with internal reports

Audit adjustments and management letter comments May lead to distrust of internal reports When to give naming rights in a capital campaign? When to awards scholarships or fund program activities? Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 13 The Unique Alternative to the Big Four Why is the Development/Accounting GAAP a Problem? When to start construction? Accounting not involved enough in key decisions Campaign goals and planning Gift counting decisions Complex donor agreements gift annuity rates, payment terms, etc. Public acknowledgement of gifts before any cash received what if donor does not pay? Budget grows to match development amountsbut accounting cant make it balance.

Donor relationship issues what if your XYZ Building is open, and XYZ donor hasnt paid a dime?! Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 14 The Unique Alternative to the Big Four Suggestions for Bridging the GAAP Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 15 The Unique Alternative to the Big Four Suggestion #1 Understand the Fundraising Goal and What Will Actually Be Available to Spend Comprehensive Campaign (in millions):

Major Gifts silent phase Alumni appeal Faculty/employee appeal Outside foundations Government grants Miscellaneous $ 245 95 15 25 15 5 $400 Conclusion We have a $400 million campaign! So if we meet our goal.we will have $400 million to spend!! Right???

Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 16 The Unique Alternative to the Big Four Suggestion #1 Example Bridging the GAAP on Campaigns Financials We Exceeded Our Goal!! Accounting Or did we? Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 17 The Unique Alternative to the Big Four Suggestion #1 Example Sources and Uses

Financials % of $465M Actual $ 242 Current Cash Uses Fundraising costs Administrative costs 32 8 40 Left over to spend now Audit | Tax | Advisory | Risk | Performance 7% 2% $ 202 43% 2012 Crowe Horwath LLP

18 The Unique Alternative to the Big Four Suggestion #1 Example Lessons Learned From Campaign The accountants should be involved in planning for any fundraising campaign Reconcile the future rather than report the past - cash flow projections Share accounting information and concerns with development Make sure your sources have identified uses (so that others dont think excessive spending is OK) Ensure that everyone knows what the balance sheet impact will be Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 19 The Unique Alternative to the Big Four Suggestion #2 - Divide and Conquer Your Size How big is your institution acting? Net tuition revenue

Investment returns $25,000,000 Philanthropy $50,000,000 $10,000,000 Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 20 The Unique Alternative to the Big Four Suggestion #2 - Divide and Conquer Your Size Breakdown of Philanthropic $$ - Gross to Net

Philanthropic revenue Fundraising costs Direct mail costs Net philanthropy $ 25,000,000 (5,000,000) (2,000,000) $ 18,000,000 Use of $18 Million Net Philanthropic $$ New faculty endowment $ 5,000,000 Administration/Support 3,500,000 Information systems upgrade 2,500,000 Current scholarships / programs 5,000,000 Application of net philanthropic $ to Operational Support *

$ 2,000,000 *Need to clearly communicate the operational support to all parties early easy to Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 21 overspend when others are thinking at the gross level of $25M. The Unique Alternative to the Big Four Suggestion #3 Divide and Conquer Your Development How much money is development really raising and when (if ever) can it be used? Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP

22 The Unique Alternative to the Big Four Suggestion #4 Keep the Board Informed (And remind everyone that it only counts once!) Commitments and pledges - Time Restricted What are our prior commitments and pledges? What will be the new commitments? What prior commitments will be paid? What will be our balance at year end (time restricted) Restricted cash (Deferred gifts) Purpose Restricted What is our prior total of deferred gifts (cash) What Cash will we receive What Deferred gifts will we use Temporarily Restricted $ 35,000,000 15,000,000 (10,000,000) $ 40,000,000

$ 28,000,000 10,000,000 (24,000,000) $ 14,000,000 Unrestricted Uses of Development dollars Total Deferred gifts we will use Unrestricted cash we receive Maturity of planned gifts? Audit | Tax | Advisory | Risk | Performance $ 24,000,000 2,000,000 5,000,000 $ 31,000,000 2012 Crowe Horwath LLP 23

The Unique Alternative to the Big Four Suggestion #5 Benchmark Against Other Institutions Realizing the Power of Numbers NACUBO studies Other __ACUBO groups US News & World Report iPeds Form 990 Guidestar Ask your peers What to look at? Contribution revenue Total Revenue 300,000,000 250,000,000 200,000,000 150,000,000 100,000,000

50,000,000 Endowment size - Fundraising expense % Pledges receivable balance & fluctuations Net assets by classification (UR, TR, PR) Reserves (Unrestricted net assets less Board designated) Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 24 The Unique Alternative to the Big Four Suggestion #6 Reconcile Often Periodic reconciliation of development records vs. accounting records

Validates completeness and existence of recorded contributions Tests the effectiveness of internal controls / segregation of duties Allows team to address issues in advance dont wait for the audit! AGREE Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 25 The Unique Alternative to the Big Four Suggestion #7 Develop and Document a Gift Counting Policy Establish parameters for determining if fundraising goal has been met

How are revocable gifts counted? Endowment vs. capital or other temporarily restricted purposes Impact of planned gifts Other items that could be included: Certain types of gifts count toward specific fundraising categories Limit on number of years over which pledges may be paid Example Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 26 The Unique Alternative to the Big Four Suggestion #8 Develop and Document a Gift Acceptance Policy

One of the most important reasons it allows an organization to say no thanks to donor Provides consistency Removes case-by-case decision process and accompanying emotion/pressure Does your organization want to accept donors gently used car or wonderful second home Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 27 The Unique Alternative to the Big Four Suggestion #9 Consistent and Thorough Documentation Clear (and consistent) wording on all Pledge Cards and Donor Agreements Payment timing

Restrictions (if any) Irrevocable? (regarding planned gifts) Promise rather than intent Donors signature Obtain review/input from both Accounting and Development Establish a process for reviewing deviations requested by donors Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 28 The Unique Alternative to the Big Four Suggestion #10 Communicate Often Frequent and scheduled interaction between Development and Accounting Keep the Board and other members of management informed Talk to your auditor throughout the year as complex gift transactions arise Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP

29 The Unique Alternative to the Big Four Examples of Gift Instruments with a Potential GAAP between Development and Accounting Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 30 The Unique Alternative to the Big Four Example #1 Bequest for Capital Campaign Mr. and Mrs. Generous are wealthy philanthropists who have made annual contributions to XYZ University for many years. XYZ is in the early stages of a $50 million capital campaign for a new classroom building. Mr. and Mrs. Generous met with XYZs VP of Development, and stated that they are updating their will to include a $35 million bequest to XYZ! VP of Development and President of XYZ want to name the new building in

donors honor . Reactions and concerns from Accounting Department?? Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 31 The Unique Alternative to the Big Four Example #1 Bequest (Accounting Concerns) Bequest = not recordable as a pledge under GAAP Revocable Mrs. & Mrs. Generous are only 50 years old! Would you feel differently if they were 90 years old? How to fund the classroom buildings construction? Loansand interest expense

What if we rename the building, but never receive a dime? Main concern Development says XYZ has met 70% of the capital campaign goal Accounting says that XYZ has received no cash and has $0 GAAP contribution revenue $0 in cash vs. $50 million message? Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 32 The Unique Alternative to the Big Four Example #1 Bequest (What is next?) Consider an irrevocable trust Written documentation maybe a promise to give that is funded through estate? Include building naming plans in written documentation, including impact if future payment not received Consult with Board of Directors Donor considerations History of previous pledge payments

Stability of business/income Relationships Gift counting policy is an important part of campaign! Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 33 The Unique Alternative to the Big Four Example #2 Undocumented Pledges Mr. Donor met with President of ABC College, and informed President of Mr. Donors recent inheritance windfall. Mr. Donor (who has never donated to the College before) wants to direct several million dollars of his new found wealth to the College. Mr. Donor requests that gift be noted as anonymous, and indicates that his attorney will contact the College soon to work out a written agreement. Developments position: record as a pledge in fundraising system, and publicity of large gift Why would this wealthy individual not pay his pledge?

Accountings position: $0 of GAAP contribution revenue No history with this donor No written pledge agreement Accused of raining on the parade, as usual! Check presentation meetings cancelled Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 34 The Unique Alternative to the Big Four Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 35

The Unique Alternative to the Big Four Example #3 Matching/Challenge Grant Outstanding University is running a fundraising campaign to increase its scholarship endowments University applied for a contribution from the Big Money Foundation (which is the private foundation of an alumni family) Big Money Foundation approved the request in the form of a matching grant To receive the $5 million gift from Big Money Foundation, the University must raise $5 million for this campaign from other sources (with restrictions on amount from any one individual donor, or from Board members and management) Developments position: record in fundraising system and set scholarship criteria Accountings position: record as the required $5 million is raised Recognition = dollar for dollar What if one of the matching pledges is later deemed to be uncollectible? No scholarships awarded until funds are received and have earned an investment return Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 36

The Unique Alternative to the Big Four Example #3 Matching/Challenge Grant Conditional promise to give A promise to give that depends on the occurrence of a specified future and uncertain event to bind the promisor. ASC 958-605-25: Determining Whether a Promise Is Conditional or Unconditional 25-14: Determining whether a promise is conditional or unconditional can be difficult if it contains donor stipulations that do not clearly state whether the right to receive payment or delivery of the promised assets depends on meeting those stipulations. It may be difficult to determine whether those stipulations are conditions or restrictions. In cases of ambiguous donor stipulations, a promise containing stipulations that are not clearly unconditional shall be presumed to be a conditional promise. A conditional promise to give is considered unconditional if the possibility that the condition will not be met is remote. (See paragraph 958-605-55-16 for examples.)

ASC 958-605-55:Implementation Guidance Distinguishing Between Donor-Imposed Conditions and Donor-Imposed Restrictions 55-16: If the possibility that the condition will not be met is remote, a conditional promise to give is considered unconditional. For example, a stipulation that an annual report must be provided by the donee to receive subsequent annual payments on a multiyear promise is not a condition if the Tax | Advisory | Risk | Performance 37 possibility of not meeting that administrative requirement is remote. 2012 Crowe Horwath LLP Audit | The Unique Alternative to the Big Four Example #4 Conditional Pledge Ms. Nice is a long-time supporter of ABC University. Ms. Nice sold her business for several million dollars a few years ago, and has been the Universitys largest annual donor since then. She wants to support the expansion of Universitys enrollment by contributing $20 million toward the cost of a new dormitory. $20 million will be contributed once the land for this new facility is purchasedas long as the University doesnt pay an arm and a leg for the land. Concerns:

Not recordable under GAAP until condition is met. How do you value an arm and a leg? Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 38 The Unique Alternative to the Big Four Example #4 Conditional Pledge (What is next?) Communicate with the donor about purchase price expectations Consider including a range of acceptable land purchase prices in the written pledge agreement Consult with Board of Directors Keep in contact with donor Documentation Other common examples of conditions:

Matching/Challenge grant Installment payments contingent upon submission of satisfactory progress reports Pledge based on future event (i.e., college admission, graduation, new program started, etc.) Gift will be made after construction has started * Be careful to not confuse conditional pledges with exchange transactions Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 39 The Unique Alternative to the Big Four Example #5 Perpetual Trust XYZ College has been notified that it is a 50% beneficiary of a perpetual trust. Fair value of perpetual trust when XYZ was notified = $80 million (permanently restricted) Accounting and Development likely agree on the amount of contribution revenue (and beneficial interest asset) recorded = $40 million Accounting and Development disagreement likely relates to the fact that XYZ has $0 cash in hand today! Issues:

Acknowledgement and publicity Dont spend it all yet Annual distributions from trusts earnings = revenue when received Changes in fair value of beneficial interest are recorded periodically Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 40 The Unique Alternative to the Big Four Example #6 In-Kind Contributions ASC 958-605-25-16: Contributions of services shall be recognized if the services received meet any of the following criteria: a) They create or enhance nonfinancial assets. b) They require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. Services requiring specialized skills are provided by accountants, architects,

carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers, and other professionals and craftsmen. Contributed services and promises to give services that do not meet these criteria shall not be recognized. Examples of conflicting Development/Accounting in-kinds: Unskilled volunteer services Board of Directors and Committee members volunteer time Pledge of future services (construction management, utilities, etc.) record when received Free/discounted rent (may be recorded when pledged in some cases written, term, etc.) *Items like those listed above are sometimes allowable for grant matching purposes, even if not recordable under GAAP. Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 41

The Unique Alternative to the Big Four Other Examples of Accounting/Development Disagreements Pledged PTO from employees Forfeited PTO from management CRATs, CRUTs, CLATs, CLUTs Life estate trusts Timing limitations on when donated stock may be sold Private company stock Donated coupons Donated collections Retained variance power Multi-year pledge from supporting foundation that exists solely to support the institution Multi-year pledge with intent to extend into additional years Distributions from donor advised funds Questionable dates on contributions: Tax considerations

Development has already hit goal, so saving toward next years goal None of these items are inherently bad Need to determine when and how they are counted Cash flow impact Audit | Tax | Advisory | Risk | Performance 2012 Crowe Horwath LLP 42 The Unique Alternative to the Big Four QUESTIONS? Joanne Charles Shawnee State University [email protected] Audit | Tax | Advisory | Risk | Performance Angie Lewis, CPA

Crowe Horwath LLP [email protected] Pete Ugo, CPA Crowe Horwath LLP [email protected] 2012 Crowe Horwath LLP 43

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