Essential Form 990 Considerations For Auditors GAQC Member Conference Call Presented by Jane M. Searing and Vincent J. Stevens of Clark Nuber P.S. December 10,

Overview Intended for auditors Essential matters to be aware of Ways to gain efficiency through overlap with tax work First major redesign in nearly 30 years FAQ on Governance, Executive Compensation, Foreign Activities, Related Organizations & Attachments Sample Case Study Form 990, Sch A and O Draft of 2009 Form 990 – Now 12 pages! 2

Three Guiding Principles Transparency Compliance Burden Minimization Accountability 3

Revised Form 990 Core Form 11 Pages (12 for 2009) Applies to all organizations filing the form 16 Schedules A through O and R Only file if the organization meets certain criteria 4

Core Form 990 Structure Page 1 – Summary Schedule & Signature blocks Page 2 – Description of Activities Pages 3 & 4 – Questions for Add’l Sch Page 5 – Compliance Questions Page 6 – Governance/Policy/Disclosure Page 7 & 8 – Compensation Page 9 & 10 – Detail Rev & Exp Page 11 – Balance Sheet 5

Schedules  A – Public Charities  B – Donations  C – Political and Lobbying  D – Financial  E – Schools  F – Foreign  G – Events & Gaming  H – Hospitals  I – Domestic Grants  J – Compensation  K – Bonds  L – Interested Persons  M – Non-cash  N – Discontinued  O – Other  R – Related Orgs 6

Fundamentals Materiality is an audit concept – Thresholds are for tax Gross receipts and asset thresholds determine which form is filed (990/990EZ/990N) Each schedule has a threshold Questions within the form or schedule may have a threshold Three “flavors” of Form 990 Public Charities – Form 990 (or variation above) Private Foundations – Form 990PF Both if UBTI – 990T 7

Transition Relief (May File EZ) YearGross ReceiptsTotal Assets 2008 (File in 2009) >$25,000 & < $1 Million < $2.5 Million 2009 (File in 2010) >$25,000 & < $500,000 < $1.25 Million 2010 & Later (File in 2011 & Later) > $50,000 < $200,000 < $500,000 8

Fundamentals Generally no “consolidated” Form 990 Affiliated organizations under a group exemption may file consolidated Must deconsolidate financial information Deconsolidating entries inform Schedule R disclosures Part IV Q 12 Audit Question – Separate vs. Consolidated “Board Questionnaires” Reasonable efforts standard beginning in 2008 May be helpful to auditor with related party transaction disclosures 9

Do Not Prepare In Order 1. Page 1 header except Line G (gross revenue) 2. Schedule R – Need to identify related orgs 3. Identify T/D/O/KE for Part VII – Names only 4. VIII – Revenue, IX – Expense, X Balance Sheet 5. Back to page 1 Line G – we now have gross revenue 6. Part III – program with revenue, expense and grants; Part V – Compliance checklist; Part VII – Compensation; Part XI – Financial statement reporting 7. Schedule L – Transactions with interested persons (if required) Needed to answer Part VI, line 1b – independent board 10

Do Not Prepare In Order – (continued) 8. Complete Part VI – Governance, Policies, Disclosure 9. Carry information forward to Part I 10. Part IV – Determine additional schedules 11. Complete applicable schedules based upon Part IV 12. Complete additional disclosures/explanations on Schedule O 13. Complete Part II – Signature Block 11

Form 990 In Preparation Order Header Form is for the year the tax year began Everything except Line G complete first Type of entity Year of formation State of legal domicile Line 6 Volunteers – Don’t forget Sch O 12

Schedule R – Entities Identification of Disregarded entities, Taxable and Exempt “Related Organizations” & Related and Unrelated Partnerships Threshold reduced to 5% of the organization’s activities in a joint venture (Part VI) No threshold for reporting to 512(b)(13) transactions (interest, rent, royalty, etc) Added check the box section to disclose type of transactions Part V >$50K Threshold (organization or transaction type?) 13

Part VII – Compensation All current trustee, officer, director, and key employee For 990 purposes, top management official and top financial official are officers 5 Highest paid employees >$100K (including related org) W-2 box 5, 1099 box 7, or actual amt paid Former T/D/O/KE/HCE > $100K comp (including related org) Former T/D > $10K as a former T/D (including related org) All on a calendar year basis even if fiscal year organization 14

Who is a Key Employee? Reportable compensation exceeds $150,000 and Manages a discrete segment or activity, or has authority to control 10% or more of activities, assets, income or expenses of the organization Within group of top 20 highest paid employees Note: Even though not a Key Employee may still be a High 5 15

Part IX – Functional Expenses Columns (B) thru (D): (c)(3) & (c)(4) only Q3: separate reporting of foreign grants Q11a – g: non-employee services Q12 – 15, 18 & 23: Added common “other” Advertising/promotion- Office exp Information technology- Royalties Insurance- Gov’t emp. travel UBI tax must be listed on line 24 5% “misc” limit moved to face of form 16

Part VIII – Statement of Revenue All revenue including contributions on one page Elimination of UBI and exempt codes Business code for exempt revenue Q8 & 9 $15K threshold for Sch G filing Memberships split by type Track certain revenue streams (Part III) 17

Public Support Schedule A Splits two types of public support exempt organizations Moves to normal method of accounting Now on a 5 year (including current year) basis Facts and circumstances on face of the form Revenue from activity on face of the form Added prior year support % to make “normally” relevant Directs to try other method before PF status determination 18

Facts and Circumstances 10% minimum public support Continuous bona fide fundraising program Diverse sources of support Public board Ongoing provision of services or facilities to the public Member organizations have dues rates that make the organization accessible to the public Activities of the organization have broad public appeal 19

Part X – Balance Sheet Separates PRI from Program bldg, land, equip, etc. Structured attachments/schedules Sch D provides detail in the aggregate Sch L for related party receivables and liabilities Pay attention to thresholds for Schedule D 20

Schedule D Details previously only in footnotes to audited financial statements Collections of art, historical treasures, etc. Endowments Book to tax reconciliation of net assets, revenue and expenses Fin 48 Disclosures 2008 below Part X 2009 added as a separate line 2 21

What is an Uncertain Tax Position? Whether the organization is still exempt from tax Revenue from related sources Only “insubstantial” UBI No political activity No repeated violations of lobbying rules, or pattern of abusive private inurement or private benefit transactions Aggressive allocation of expenses to offset UBI Organization’s public support is in facts and circumstances 22

FAS 109 Tax Accrual and Disclosure Review Form 990T from prior years NOL carry forwards Passive investments creating federal or state UBTI Quick Calculation 1.Materiality level for the audit ($1M total $10K per) 2.This would be the amount of tax ($10K) 3.Working backwards to taxable income ( Approx. $28K) 4.Assess if there is likely this amount of UBTI from all sources 23

Part III – Programs Activity change – Sch O Codes (do not use for 2008) 3 Largest by expenses Report direct revenue from programs Exempt purpose achievements Still recommend illustrating with data 24

Part V – Compliance List of Yes/No questions: Highlights Q1 & 2: Reporting related to Form 1096, Forms W-2G, Form W-3 Q5b: Notified party to prohibited tax shelter (Form 8886 Careful Review of Investment K-1’s) Q7a – h: Expanded quid pro quo, non-cash and potential donor abuse questions 25

Part VII – Compensation Fiscal year organizations report compensation based on calendar year that ends during the reporting year e.g. FYE 6/30/09 org reports 2008 comp “Current” means served in that role at any time during the reporting year “Former” means (5-year look-back) 1) not a current employee, 2) received $100K+, 3) would be in current top 5 26

Part XI – Financial Statements & Reporting Method of accounting moved from header Compilation/review or audit? Changed for 2009 Audit (review/comp) committee? A-133 audit for federal funds 27

Schedule L “Interested Persons” Transactions with “interested persons” Definitions varies by Part Replaces free-form attachments Schedule O for supplemental explanations Also includes non-loan transactions Excess benefit (listed property risk area) Grants Business transactions: reporting threshold of greater of $10K or 1% of revenue 28

Part VI – Governance - Independence Voting members on governing board on the last day of the tax year Number of independent members (Also on Part I Summary) Not an employee Independent contractor under $10K No reportable Schedule L transactions 29

Part VI – Governance Relationships Clarification on family & business relationships Family member Business relationship Employee/Employer (direct or indirect) > $10K Business transaction – not ordinary course of business Common director, trustee, officer or 10% ownership of business or investment (NOT NFP board positions) Note: Excludes privileged relationships. Describe in Schedule O (FAQ differs from instructions) 30

Part VI – Auditor Considerations Q5 – Material diversion of assets Material = Amount exceeds lesser of $250K or 5% of gross receipts for the tax year or 5% of total year end assets Policies which may be addressed in management letter WhistleblowerForm 990 review process Compensation reviewConflict of interest policy Document retentionJoint venture policy Public disclosure 31

Other Policies to Consider Part XI – Audit Committee Sch D – Conservation easement policies and procedures Sch F – Foreign grant monitoring and oversight Sch H – Hospitals Charity care policy Community benefit Debt collection policy Sch I – Domestic grant monitoring and oversight 32

Other Policies to Consider Sch J – Payment or reimbursement of specific expenses for individuals listed on Part VII Sch K – Tax exempt bond policies and procedures to ensure post issuance compliance Sch M – Gift acceptance policy 33

Summary Be aware of the which form is applicable Evaluate benefits of EZ in transition Track what is new information required Pay attention to increased thresholds Reasonable Efforts Standard Coordinate related party disclosures Action Items – policies and procedures Board education a MUST 34

Thank You Jane M. Searing, CPA Clark Nuber P.S NE 4 th Street, Suite 1700 Bellevue, WA Vincent J. Stevens, CPA Clark Nuber P.S NE 4 th Street, Suite 1700 Bellevue, WA

36 Questions ?????