CPA & Advisory Services BeyondYour Numbers Keys to Successful Financial Management of Grant & Contribution Funding Scott W. Gold, CPA BKD, LLP October 12, 2006

Beyond Your Numbers Today’s Agenda Grants and contributions defined Contents of the grant/contribution file Tracking revenues and expenditures Cash draw procedures Proper financial accounting treatment Compliance and reporting Financial status report issues Strategic planning opportunities

CPA & Advisory Services BeyondYour Numbers Grants and Contributions Defined

Beyond Your Numbers Grants vs Contributions Exchange vs Non-exchange transactions  Guidance in FASB No 116 on distinguishing contributions from other transactions  Generally governmental funding awards are considered exchange transactions (grants), however there are exceptions  The first step is to determine grant vs contribution for all types of awards you have

Beyond Your Numbers Grants vs Contributions Get it in writing  Notice of Award  Letter from Donor Importance of the original source of the funding  Inquiry to knowledgeable person Grants defined  Federal  State  Local government

Beyond Your Numbers Grants vs Contributions Contributions defined  Private source foundations Many private foundations use the term “grant” in their agreements  Donors Why do we care about the distinction?  Proper accounting  Restrictions on use of funds

CPA & Advisory Services BeyondYour Numbers Contents of the Grant/Contribution File

Beyond Your Numbers Documentation is King It is important to maintain detailed files for each grant or contribution your organization receives These files should be maintained for at least three years after the acceptance of the award It is important to be able to identify specific expenditures that were charged to each grant or contribution

Beyond Your Numbers Contents of File Copy of original signed application, if applicable Notice of grant/contribution award (all copies, all pages) Copies of all correspondence Copies of required reporting (UDS, FSR, other) Copy of audited financial statements Detail record of all revenues and expenditures (including inventory of fixed assets purchased)

CPA & Advisory Services BeyondYour Numbers Tracking Grant Revenues and Expenditures

Beyond Your Numbers General Ledger Maintenance Multiple grants should be tracked independently  Tracking for grants with specific restrictions Important to ensure that enough specific expenditures have been incurred to justify grant funding Consider if indirect costs can be allocated  Tracking for grants that have similar purposes (“double-dipping” issue)

CPA & Advisory Services BeyondYour Numbers Cash Draw Down Procedures

Beyond Your Numbers Grant Draw Processes & Procedures Important to establish consistent methodology for conducting grant draws Advance drawing of grants is generally negative absent a unique financial situation Federal CHC grant is a reimbursement grant  Grant funds must be expended within 3 business days of federal cash receipt  Grant funds requested must be supported by known incurred expenditures

Beyond Your Numbers Contribution Cash Processes & Procedures Advance basis  Cash is restricted until used for specific purpose Reimbursement basis  Submission of expenditures for reimbursement

CPA & Advisory Services BeyondYour Numbers Proper Financial Accounting Treatment

Beyond Your Numbers Revenue & Expenditure Recognition Revenue should be recognized only as qualified expenditures are incurred Grant funds drawn in advance of qualified expenditures is recorded as deferred revenue (liability) Contribution revenue received in advance is recorded as temporarily restricted net assets (equity)

Beyond Your Numbers Revenue & Expenditure Recognition Expenditures include operating expenses, capital asset transactions & other OMB Circular A-122 rules only apply to federal cash expenditures

Beyond Your Numbers Accounts Receivable and Cash Recording Restricted Cash when received in advance Grants receivable booked when expenditures have been incurred before cash receipt Contribution receivable booked when promise is made

Beyond Your Numbers Grant Example We have received a federal grant for HIV. Revenue and expenditure recognition:  At the time the expenditure is incurred Debit expense or capital asset Credit accounts payable or cash Debit grants receivable if cash has not yet been drawn or deferred revenue if cash was drawn in advance Credit grant revenue  At the receipt of the cash Debit cash Credit grants receivable if expenditure has been made or deferred revenue if drawn in advance

Beyond Your Numbers Contribution Example We have received a grant from a private source foundation for a restricted purpose Revenue and expenditure recognition:  At the time of the notice of award Debit contribution receivable Credit temporarily restricted net assets  At the time of the expenditure is incurred Debit expense or capital asset Credit accounts payable or cash Debit temporarily restricted net assets (TRNA) Credit TRNA released from restriction (contribution revenue)  At the receipt of the cash Debit cash Credit grants receivable

Beyond Your Numbers Contribution Example What if the private source contribution is unrestricted?  Implied restriction of time until it is expended  Same accounting as for restricted contribution (previous example)  Many times contributions are received and expended in the same fiscal period

CPA & Advisory Services BeyondYour Numbers Compliance and Reporting

Beyond Your Numbers PIN Financial System Expectations  Accounting & Internal Controls  Budget  Billing & Collections  Independent Financial Audit

Beyond Your Numbers Budget Reflects the level & scope of services to be provided within the constraints of the health center’s resources Should reflect available resources & required expenditures Should be approved by the health center’s governing body Particular emphasis on health center revenue streams

Beyond Your Numbers Grant Funds: No Strings Attached? If you accept the grant, accept the rules It is the responsibility of health center management to understand the set of rules that accompanies each grant award Noncompliance with any grant rules could result in significant risk to those with fiduciary responsibilities at the health center

Beyond Your Numbers Applicable Rules & Regulations Governing federal regulations - most of which are available on the internet  OMB Circulars A-110, A-122 & A-133 A Management of federal grant funds A Cost principles A Audit requirements  Section 330 of the Public Health Services Act  Code of Federal Regulations  Policy Information Notices (PIN) & Program Assistance Letters (PAL)

Beyond Your Numbers Scope of Project Important to know what activities are included & excluded from your scope of project as defined by the BPHC Changes in the scope of project should be communicated to & approved by the BPHC in writing Important to designate management level position to monitor compliance

Beyond Your Numbers Scope of Project Risks of not including qualified health center activities in the scope of project  FTCA Coverage  Medicare & Medicaid FQHC reimbursement  Pharmacy benefits  Other

Beyond Your Numbers Grant Reporting Required reports to be filed under the community health center grant include:  FSR (annually)  UDS (annually)  Federal Cash Transactions Report (quarterly)  Other Federal reporting accomplished through submission of an annual FSR

CPA & Advisory Services BeyondYour Numbers Financial Status Report (FSR) Issues

Beyond Your Numbers FSR – A General Overview The FSR is an official claim of expenditures submitted to the federal granting agency It is a comprehensive report of all financial transactions relative to the approved project It identifies allowable total outlays & the revenue sources utilized to satisfy such outlays

Beyond Your Numbers FSR – A General Overview Upon completion, the amount, if any, of unobligated federal grant funds, and/or undisbursed (“excess”) program income will be determined Section 330 programs are generally “last dollar” programs - necessary to understand & monitor spending order of health center funds

Beyond Your Numbers FSR Terminology Total outlays Program Income State, local & other operational funding Unobligated balance of federal grant funds Undisbursed (“excess”) program income

Beyond Your Numbers Total Outlays Total outlays represent expenditures incurred for the budget period prepared on the “modified” accrual basis of accounting Generally begins with total expenses reported in the audited financial statements on the “full” accrual basis of accounting Reconciliation from “full” to “modified” accrual basis is required

Beyond Your Numbers Program Income Represents the amount of fees, premiums & third-party reimbursements accrued from health center operations during the budget period Generally, will be net patient service revenue less provision for bad debts Comparison will be made to expected program income included on the NGA

Beyond Your Numbers State, Local & Other Operational Funding Represents all resources from the approved project that are not program income or Section 330 federal grant funds Resources from state, local & other sources (other than net patient service revenue) that are not designated for the approved project may be excluded from the FSR

Beyond Your Numbers Unobligated Balance of Federal Funds Represents grant funds authorized for the budget period not required to satisfy allowable outlays (unspent grant funds) What should I do if this situation occurs?

Beyond Your Numbers Undisbursed (“Excess”) Program Income Represents the amount of fees, premiums & third-party reimbursements, after adjustments for uncollectible accounts, which exceeds the amount of expected program income identified on the NGA What implication does this have for my health center?

Beyond Your Numbers FSR Issues Appropriate budgeting of program income is critical (best advice - be realistic, but conservative) Interim planning is important for management of program revenues Financial statement audit should reconcile with the FSR

Beyond Your Numbers FSR Example ABC Community Health Center  Total allowable outlays = $7,000,000  Program income = $4,000,000  Budgeted program income = $3,000,000  Other sources of revenue = $1,000,000  Federal CHC grant = $3,000,000 In above circumstance, ABC CHC would have excess program income of $1,000,000 & $0 of unobligated federal funds

Beyond Your Numbers FSR Example ABC Community Health Center  Total allowable outlays = $7,000,000  Program income = $4,000,000  Budgeted program income = $4,000,000  Other sources of revenue = $1,000,000  Federal CHC grant = $3,000,000 In above circumstance, ABC CHC would have excess program income of $0 & $1,000,000 of unobligated federal funds

Beyond Your Numbers FSR Issues Strategies for avoiding unobligated federal funds  Establishment of authorized reserve funds  Accurate assessment of net realizable value of accounts receivable  Accurate recording of cost report settlements  Accrual of expenses in accordance with generally accepted accounting principles  Prepayment of known recurring non-salary costs

CPA & Advisory Services BeyondYour Numbers Strategic Planning Opportunities

Beyond Your Numbers Current Financial Issues Increased pressure to grow & expand services without increasing reimbursements Increased scrutiny of financial results by the federal granting agency & other external users of audited financial statements  Recent BPHC focus on current ratio, use of federal grant money & overall health center financial viability  The President’s initiative is over – now what?

Beyond Your Numbers Current Financial Issues Increased tightening of state budgets resulting in reduced services and/or payments Strategic financial planning is now more important than ever before

Beyond Your Numbers Opportunities What do we want funded?  Current operations -  Expanded services -  Defined service Medical, Dental, Mental Health, Pharmacy  Capital needs

Beyond Your Numbers Opportunities Would we do this without the funding? Will the money continue into the future? Are there other revenue streams generated by the funded activity? The compliance trap and opportunity cost Seek funding with less restrictions

CPA & Advisory Services BeyondYour Numbers Best Wishes for Financial Success for Your Health Center! BKD, LLP