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Summer 2012profitable solutionsfor nonprofitsThe Financial Side of the Nonprofit IndustryIN THIS ISSUE2Disclosure of Uncertain Tax Positions:Are Nonprofits in Compliance?3The Benefits of Benchmarking4Improving Nonprofit Board Diversity6Newsbits8KSM Not-for-Profit NewsKatz, Sapper & Miller, LLPCertified Public Accountants

profitable solutionsfor nonprofitsDisclosure of Uncertain Tax Positions:Are Nonprofits in Compliance?As a not-for-profit, tax-exemptorganization, one might think that thesubject of “uncertain tax positions” doesnot apply to his or her organization.Think again — some of the basics ofoperations, including the organization’stax-exempt status, could createuncertain tax positions that triggercritical reporting obligations.By Casse Tate, CPA, MSManagerctate@ksmcpa.comFIN 48 in a NutshellFor several years now, the FinancialAccounting Standards Board (FASB) hasrequired taxpayers that prepare financialstatements according to GenerallyAccepted Accounting Principles (GAAP)to adhere to Accounting StandardsCodification Topic 740, Income Taxes,Subtopic 740-10 — more commonlyknown as FIN 48. Under FIN 48,taxpayers must disclose information onuncertain tax positions (UTPs).While FIN 48 applies only to positionsrelated to income taxes, the practicesof some nonprofits could trigger thedisclosure requirement. To determinewhether an organization has UTPs underFIN 48, the organization must engagein a two-step process: recognition andmeasurement.1. Recognition – First, identify the taxpositions and determine whether,based on their technical merits,it is more likely than not (morethan 50 percent likely) that thepositions will be sustained uponexamination by taxing authorities.Assume that the organization will2be audited by authorities who haveall relevant information on theposition.2. Measurement – For each positionthat fails to meet the more-likelythan-not threshold, measure theamount of potential tax liability,including taxes, interest andpenalties. If the aggregate amountof all UTPs is material (that is,the omission or misstatementof the amount could influencethe economic decision ofusers taken on the basis of thefinancial statements), it mustbe disclosed in the financialstatement footnotes (and, in turn,on Schedule D of IRS Form 990).Where financial statements areconsolidated, FIN 48 applies toeach of the consolidated entities,and the UTPs are aggregated forthe consolidated group to see ifdisclosure is required.Remember — FIN 48 applies only toincome tax positions. Positions relatedto sales, use, payroll, excise and othertypes of taxes are not part of theanalysis.The Exemption IssueIt may seem surprising that a taxexempt organization could have anuncertain tax position, but uncertaintymay exist.Continued on page 7. See “Disclosure.”Summer 2012

THE FINANCIAL SIDE OF THE NONPROFIT INDUSTRYThe Benefits of BenchmarkingThe word “benchmark” may strikesome as organizational lingo, but thepractice of benchmarking often provesvaluable for nonprofits. Nonprofits thatincorporate financial benchmarks intotheir operations are better at anticipatingnegative financial trends and may evensee revenues climb, expenses drop andefficiencies improve.By Kirk Taylor, CPAManagerktaylor@ksmcpa.comWhat is Benchmarking?Benchmarking is an ongoing processof measuring an organization againstexpectations, past experience or industrynorms for productivity and profitabilityand then making adjustments to improveperformance in relation to those metrics.Ideally, nonprofits will consider both: Internal benchmarks — to monitorand detect trends, based on theorganization’s historical results andstatistics, as well as expectations,and External benchmarks — to ascertainwhere it is thriving and where it lagsbehind, based on data from peers.Benchmarkingprovidesessentialinformationfor effectivelydeveloping andimplementingstrategic plans.Katz, Sapper & MillerBenchmarking provides essentialinformation for effectively developingand implementing strategic plans. It helpsan organization keep a watchful eye onits financial health and determine wherecosts can be cut and revenues increased.Nonprofits can use benchmarks todemonstrate their efficiency to internalstakeholders such as managementand board of directors, and externalstakeholders such as donors andgrantors.Benchmarks for NonprofitsThe first step is to define what metricsthe nonprofit needs to measure. Focuson the metrics that are most critical tothe success of the mission and the keyindicators of the organization’s financialhealth and operational effectiveness.For many nonprofits, those metrics willinclude: Program efficiency (programservice expenses / total expenses)– This ratio identifies the amountspent on the primary mission, asopposed to administrative andfundraising costs. This ratio is ofutmost importance to stakeholders. Fundraising efficiency (unrestrictedcontributions / unrestrictedfundraising expenses) – Howmany dollars does the organizationcollect for every dollar spent onfundraising? The higher this ratio,the more efficient the fundraising.What qualifies as a good ratiodepends on the organization’s size,its types of fundraising activities,etc. Operating reliance (programservice revenue / total expenses)– This ratio indicates whetherthe nonprofit could pay all of itsexpenses solely from programrevenues. Organizational liquidity(expendable net assets / totalexpenses) – How much of theyear’s total expenses are consideredexpendable equity or reserves?The higher the ratio, the better theliquidity.Continued on page 6. See “Benchmarking.”3

profitable solutionsfor nonprofitsImproving Nonprofit Board DiversityBy Pete Buck, CPADirectorpbuck@ksmcpa.comNonprofit board members areambassadors for the organization.However, a lack of diversity can signalan underlying problem: a disconnectfrom the community. A nonprofit canimprove its funding and programeffectiveness when board membersreflect the population served, as well asthe community. How can a nonprofitevaluate the board for diversity, improveboard diversity, and what other optionsmay be available to consider?Mixing Things UpThe definition of “healthy” diversity willvary from organization to organization,but think of it like this: the more diversea board is in attributes, the more diverseit will be in thoughts and ideas. Thisdiversity can come in various forms suchas: physical, societal or economic. Thegoal is to mirror the population served inappointees to the board.If a nonprofit’s bylaws limit the numberof board members who can serve atany given time, the organization shouldconsider amending the bylaws to includeits commitment to board diversity. Bevery careful that the size of the boarddoes not become unwieldy. There areother ways to commit to well-balancedleadership and community input thatwill be discussed later.Assessing Skills and DemographicsThe first step to a great mix is to askboard members to write their ownprofiles. In the instructions given (or onthe form provided) include the attributesthe organization considers important,such as skill sets and a particular4demographic. From this information, itwill be clearer what the board may lack.Look at the group as a whole and assesswhere the organization lies on thediversity continuum. Imagine a scalefrom “1” to “5” with “5” displaying thenonprofit’s ideal diversity. Assess themembers and give a score. The diversity,or lack thereof, should be obvious.For example, the board may beunderrepresented by females, a certainrace, young adults or individuals with afinancial background.Getting the Word OutIdentifying the need for diversity iseasy. Figuring out what to do about itcan be more difficult. Start with currentboard members. Communicate the needfor diversity (if the need has not beenvocalized already). Ask members todip into their personal and professionalnetworks to help find the rightindividual(s) for the board.Also gather input from the communityand the organizations that serve it. Thechamber of commerce might be a placeto start, but there are many options.If a nonprofit lacks the perspective ofyoung professionals, contact a local“young professionals” group in thearea or recent college graduates. Doesthe organization need diversity via afinancial perspective? If so, expressneeds to a local CPA firm.Continued on page 5. See “Diversity.”Summer 2012

THE FINANCIAL SIDE OF THE NONPROFIT INDUSTRYDiversity(continued from page 4)Seeking External HelpIf it is difficult to find qualified board members, try a board placement service. Somecommunities have board training programs for professionals. At the completion of theprogram, the “graduates” are invited to meet with organizations seeking new boardmembers. This is a great service for both the new board member and the nonprofit.Professional associations also can be a good recruitment resource. Some state CPAorganizations help match accountants with nonprofits that need volunteers. A nonprofitconsultant that assists with board placement may also be able to help.Other Paths to DiversityIf a nonprofit wants to add diversity to its leadership to better mirror the communityor communities it serves, but does not want to increase the board size for fear oflosing efficiency, rather than waiting until a member of the board ends his or her term,nonprofits can increase diversity by appointing new people to these structures now: An advisory board – Often considered an “informal” board, an advisory board canbring additional qualifications and demographics to a nonprofit organization. Anadvisory board is also the perfect training ground for potential leaders. Board committees or subcommittees – Special projects or areas of interest maywarrant recruiting more volunteers to donate time and energy to an organization.If a nonprofit is national, for example, board committees might serve the interestsof particular regions or chapters. Focus groups – Although not a standing structure, focus groups are extremelyuseful in collecting the opinions of particular demographic groups on targetedtopics.Opportunities, OpportunitiesBuilding an effective board of directors should be a challenge that nonprofits happilyface. Every time a board member resigns, an opportunity to continually considerdiversity emerges.Katz,Sapper& MillerKatz,Sapper& Miller5 5