In this edition

November 2023

CECL: A Practical Step to Take Now for Your Upcoming Audit

Segregation of Duties: Common Issues and How to Address Them

Client Feature: The Gateway Collective Brings Socially Inclusive Housing to Green Bay

Payroll and Year-End Reporting Webinar

Accounting Standards Update 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments (CECL) has been in effect for most organizations for several months now, but you may not know it. Organizations with calendar year ends will have the standard implemented for their 2023 audit. In this article we’ll focus on the impact the standard has on receivables and discuss a practical step your organization can take now to prepare for the impact that CECL will have on your organization and its audit. 

Receivables impacted by the new CECL standard will include financing receivables and receivables from exchange transactions. An example of financing receivables includes, but is not limited to, loaning money to local small businesses, and examples of receivables from exchange transactions include, but are not limited to, tuition receivables, patient receivables, and customer receivables. Unconditional promises to give or pledge receivables are not included in the scope of the new standard. 

If your organization has financing receivables or receivables from exchange transactions, Hawkins Ash recommends that you establish a policy that includes (1) what method of estimated credit loss will be used (2) what risk characteristics will define receivable pools.

Methods for Estimated Credit Loss

If your organization already has an Allowance for Doubtful Accounts or Allowance for Doubtful Loans account, the Estimated Credit Loss (ECL) will replace this account under the new standard. CECL does not dictate what method must be used to determine ECL, so your organization can choose a method that best suits the type(s) of receivables that you have. Below are a couple of examples to choose from:

1. Aging Schedule: ECL is based on the percentage of collections expected in each category of the aging schedule 
2. Loss Rate: ECL is calculated using a loss rate (ex: historically, organization bad debt expense is 3% of related revenue) and multiplying the loss rate by the asset’s amortized cost (carrying amount) as of the balance sheet date
3. Roll Rate: ECL is calculated by the percentage of receivables that move from one category of delinquency to the next (ex: percentage moving from 30 days past due to 60 days past due)
4. Discounted cash flow method: ECL is the difference between the asset’s amortized cost (carrying amount) the present value of future cash flows (time value of money)

Pooling of Financial Assets

CECL requires that ECL is measured on a pooled basis when similar risk characteristics between the various individual receivables exist. Again, CECL does not dictate which characteristics should determine how your receivables should be pooled, so you can choose a method that best suits the type(s) of receivables that you have. Below are a couple of examples:

1. Credit score or risk rating
2. Receivable term 
3. Financial asset type (trade receivable vs convertible loan vs forgivable loan vs etc.)
4. Customer type (government vs individual vs business)

If you have any questions regarding CECL or would like to discuss how the standard will impact your organization, please reach out to your Hawkins Ash representative. 

As a not-for-profit organization, ensuring that safeguards are in place to lower the risk of fraud or material misstatement is extremely important so your organization can continue to operate and carry on its mission. One way to do that is to ensure that the various accounting duties within the organization are adequately segregated. 

What is segregation of duties? Segregation of duties is an internal control process meant to prevent error and fraud by ensuring that at least two individuals are responsible for the separate parts of a task including; custody, record keeping, reconciliation, and authorization. 

• Custody: having access to or control over any physical asset such as cash, checks, or supplies.
• Record Keeping: the process of creating and maintaining accounting records These can be manual records or records maintained in computer systems.
• Reconciliation: verifying the processing or recording of transactions to ensure that all transactions are valid, properly authorized, and properly recorded on a timely basis. Including following up on any differences or discrepancies found.
• Authorization: the process of reviewing and approving transactions or operations.

Due to the size of many not-for-profits, a proper segregation of duties can be challenging to adequately identify and implement. Frequently organizations do not think it is possible to adequately segregate their internal controls, but even with a staff of two or three it is possible to have strong controls in place to help mitigate the chance for errors or fraud. Below are some common segregation of duties issues and ways to help strengthen the controls around them.

Cash Disbursement Process

Common audit finding: One individual is responsible for receiving an invoice (custody), approving invoices (authorization), and recording the payable in the general ledger (record keeping). If the organization had the capability to have three different individuals perform each task, that would be the ideal situation. However, even with a staff of two the organization would still be able to provide some separation of duties. With a staff of two it would be important to keep the authorization separate from the record keeping. In addition, for another layer of security the organization could have the board of directors review the invoices periodically.

Cash Receipt Process

Common audit finding: One individual is responsible for preparing the deposit slip (custody), taking the deposit slip to the bank (custody), and recording the receipt in the general ledger (record keeping). In this scenario, it would be advised that the individual that brings the deposit to the bank does not have access to the general ledger. Another control that can be added in the cash receipt process is having two individuals open the mail and document the funds received. That listing would then be used to compare to the amount deposited. 

Financial Close Process

Common audit finding: The individual recording all of the activity in the general ledger is the same individual that prepares the bank reconciliation. It is always best to segregate those responsibilities, but if that is not possible, we recommend having another individual review the reconciliation. 

These are just a few common audit findings we see as auditors, if you have any questions regarding segregation of duties or would like to know how you could strengthen your controls, please contact your Hawkins Ash representative. 

According to the doctoral research conducted by Executive Director Dr. Alexia Wood, social isolation is a leading cause of housing instability and homelessness. To tackle this issue from the root, The Gateway Collective, a new nonprofit started by Wood, the former Executive Director of St.John’s Ministries in Green Bay, WI, is working towards creating a socially inclusive, privately funded housing project named City Center Lofts. The project aims to provide high-quality workforce housing for all socioeconomic levels, with a special focus on social connections to help improve life satisfaction, reduce living costs, and promote civic engagement. The project is currently under construction and will be ready to accept tenants next spring.

"This is a new idea, especially for Green Bay," stated Christian Jensen, Director of Development for the Gateway Collective. "In addition to donors and partners, area employers are keenly aware of the need for affordable housing. Housing instability not only leads to homelessness, it affects a person's ability to perform at work."

Many cities in the US, including Green Bay, do not have enough affordable workforce housing. The City Center Lofts project aims to provide access to housing for people across all income levels and will target young professionals, working families, and aging adults. The development will include 72 apartments of varying sizes. Each unit will feature modern fixtures, appliances, and ample natural light. Additionally, most units will have a second-floor loft. The building will also have several community spaces, such as 16-foot-wide corridors with skylights and a 3,500-square-foot community room. Tenants will have access to indoor bike storage, a fitness center, and grocery delivery services.

In Spring 2024, City Center Lofts will welcome its first tenants of various socioeconomic classes. Thirty percent will be lower-income workers, forty percent will be Asset Limited, Income Constrained, Employed (ALICE) residents, and thirty percent will be market-rate, households desiring to keep the cost of living competitive while still accessing desirable downtown living. 

Those lower-income and ALICE households will have access to programming and support to develop a strong sense of belonging and assistance to upward mobility. They will have access to a Community Resource Advocate (CRA) who is a connector and advocates on behalf of residents, coaches them, and measures the organization's impact.

"As part of the move-in process, our CRA will work with each tenant to set individual goals and personally work to get them warm introductions with community resources." 

A portion of the monthly rent will be automatically deposited into a personal savings account. This Resident Investment Program is an incentive for tenants to grow and attain their goals. The funds can be accessed for goals that may include moving into a different apartment, buying a home, or attending college. Tenants who become at risk of eviction can access low to no-interest loans that need to be paid within a year. 

As the Gateway Collective gathers data and refines its model, the organization aims to develop further sites for socially inclusive housing. "In addition to housing, we are working towards a community revival and broader community investment by facilitating collaboration between nonprofits, the local government, and private and corporate donors."

Learn more about The Gateway Collective and City Center Lofts online.

Dr. Alexia (Lexie) Wood is deeply passionate about impacting change within systemic issues. She offers a wealth of knowledge concerning homelessness, addiction, and mental health, drawing from her 17 years of experience working in the nonprofit sector. Lexie holds a Master of Social Work degree from UW-Milwaukee, and a Doctor of Social Work degree from the University of Southern California, where her research focused on social connectedness as a pathway to overcoming homelessness. As a foster and adoptive mom, she knows the impact of generational poverty and trauma, identifying how early experiences contribute to risk factors later on. This understanding, combined with her extensive doctoral research, serves as the foundation for Socially Inclusive Housing, a proactive, research-based response to the greatest risk factors in the Green Bay community. She provides insight from her depth of nonprofit experience in the following Q&A.

What are some things you know now that you wish you knew when you first started as a nonprofit leader?

I wish I had taken mentors seriously when they talked about boundaries and burnout. I would constantly have individuals telling me the warning signs, and I always thought, “I’m fine. I’m not experiencing any of that!” There was always one more client to serve, one more task to complete. Unfortunately, I had to learn the hard way and by then, I was deep in burnout. It has taken me years to get my health back on track, to find a balance that works between my professional career and my young, growing family, and to be comfortable in my skin regardless of what we’re delivering on in the strategic plan. A lot of that is simply part of growing. And personally, I’ve been blessed with an incredible Board of Directors that have supported me in each season. But if I could go back and talk to my younger self, I’d stress how quickly my kids’ childhoods truly go, and I’d drive home with myself that my identity wasn’t tied to my success. 

What has been your biggest source of pride as executive director?

My greatest source of pride is honestly the group of people I have been able to assemble alongside me. From our donors to staff to clients, I have grown so much as a leader by simply ensuring that I am never the smartest person in the room. By constantly finding opportunities to grow from the wisdom and experiences of those who have walked different paths than mine, I have been able to be part of some incredible work that is transforming our community. A lot of it gets tied back to me as the face of an organization, but I am fully aware that any success I have experienced as a leader in the last 12 years has been the work of a true team of passionate individuals. That I’ve been able to share a board room, a cup of coffee, or a workload with some of these individuals is truly my greatest source of pride. 

What are your three biggest accomplishments in your career as a nonprofit leader?

I’m really proud of the fact that I got my doctorate while balancing a rapidly growing career and young children. That was a lot to balance, but it has completely transformed the way I view challenges and approach innovation. It has opened doors to some really great relationships that are allowing us to implement some incredible initiatives here in Green Bay. I wrapped that up in December 2019 and I promised myself and my family that 2020 would be a year of rest. While that was certainly not the case, I am proud of how I was able to rally and lead a congregate living, shelter of last resort, with vulnerable adults who worked in various settings throughout the community, through a global pandemic. While it’s a weight I’ll never be able to articulate to those who didn’t experience it, I am so incredibly proud of our team and how we led through that season. Third, I’m really proud that I am still growing and embracing new challenges and opportunities. I’m certainly a “senior” leader in the field at this point, and yet the work is so fresh and energizing. We are implementing an innovative approach to address workforce housing that is truly scalable and capable of ending housing instability in our community. The fact I can lead these efforts to become a reality brings me an immense amount of gratitude and pride. 

What are the dominant challenges that you see nonprofit organizations facing and what do you think would be viable solutions?  

I honestly believe two of the greatest challenges facing our field are interconnected: burnout and the health of our homes. Nonprofit organizations are tackling really challenging problems in our community. Regardless of what the nonprofit is addressing (homelessness, children, literacy, etc), there are so many external risk factors that are increasing needs in their areas of expertise or impact. As leaders, how do we lead well when the challenges are growing faster than the solutions? I see so many leaders, myself included, who sacrifice health, wellness, and balance for the “greater good”. In doing so, we’re not leading from a place of abundance but, instead, a place of growing deficit. We will never be as impactful as we hope to be if we are not prioritizing ourselves first (which is really hard for a profession focused on serving others!). Along with that, our culture has certainly transitioned from that mentality that you leave home life at the door. We are one person. Our marriages, our children, our finances, and our lives outside of work, are constantly on our minds. Similarly, the challenges we’re facing at work often bleed into the dinner conversation. Nonprofit leaders need to have a holistic approach where we are supported in making sure our home lives are strong before all else. When we do that, we create stronger leaders who accomplish even more for the mission. But without, we’ll continue to see homes struggle, and we’ll continue to see leaders burn out and leave the field. My organization has incorporated a unique Wellness Initiative that has been tremendous. Instead of bringing work stress home with me, it’s created a pocket for me to focus on health and wellness with the support of my employer. That then lets me go home much more active and present to the needs of my home. As a result, I came back to work the next day much more refreshed and focused. 

What aspects of nonprofit accounting do you find most challenging?

Many nonprofit leaders climb the ranks through education and degrees in fields such as social work. These degrees do not prepare you for accounting at a Bachelor’s or Master’s level. Most of my understanding of accounting came through on-the-job experience with some great mentors along the way. It was a crash course when I was hired as an Executive Director at 26! Fortunately, I was able to grow with a growing organization and pick up a lot along the way. I don’t know that I can speak to what is most ‘challenging’, but I can say what’s most frustrating. When a committed multiyear donation is made and recorded in the books for the year in which the pledge came in, it can be difficult to continue educating the Board from a cash flow perspective year after year. There are always new members, and we are constantly needing to educate when it should (in my brain) be so much easier to record.

What other executive directors or philanthropic leaders do you look up to?

There are so many leaders that I look to. Without sounding too cliché as a social worker, I truly do love Brene Brown’s work. Specifically, I’m drawn to leaders who seamlessly incorporate faith into their work and those who have balanced home life (with little children) and the demands of high-level leadership. If I need to be hyped up for the work, Ryan Leak is a trustworthy leader I look to. 

How do you see the organization changing in the next two years, and how do you see yourself creating that change?

We are so incredibly excited to be introducing an innovative approach to housing! It’s rooted heavily in research and once operational, will generate its own cash to be self-sustaining and scalable. I cannot wait to see and measure its impact over the next 5-10 years! There is so much research showing the impact of housing instability on children: graduation rates, math and reading scores, and future income levels. By serving 5-year-olds with stable, supportive housing we can create a community where they don’t become 25-year-olds in need of shelter in the future. I cannot wait to implement this change, be a leader in the field, and have Green Bay own a model that other communities look to when addressing their own housing challenges. 

Register to attend the Payroll and Year-End Reporting Webinar. Our expert presenter will cover the following key topics:

• Payroll Best Practices: Learn how to avoid common year-end pitfalls and ensure accuracy and compliance.
• Year-End Reporting: Get a comprehensive overview of the year-end reporting requirements, including Form W-2s and Form 1099s, and all the deadlines.
• Tax Updates: Stay up-to-date with the latest tax law changes that may impact your payroll and year-end reporting obligations.
• Q&A: Have your specific questions answered by our team of experienced CPAs.

Date

Tuesday, December 12, 2023

Time

9:00 AM - 11:00 AM CST

Duration

2 Hours

Location

Online via Microsoft Teams (webinar link will be provided by email upon registration)

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