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January 11, 2013
Nonprofit Organization Update:
2012 in Review and Hot Topics for 2013
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Agenda
9:0010:15 amExempt Organizations in the News A Retrospective of What MadeHeadlines in 2012
Doug Boedeker, CPA, CMA, Audit Partner; Katrina Henderson, CPA, Audit
Manager
10:1510:25 am: Break
10:2511:15 amAccounting & Audit Update Looking Back at 2012
Jeffrey Stefan, CPA, Audit Partner; Rich Banner, CPA, Senior Audit Manager
11:1512:30 pmRevisi ting Executive Compensation Reporting on the Form 990
Subrina Wood, CPA, Tax Manager; Sara Smith, Senior EO Tax Specialist
12:30 pm1:15 pm: Lunch
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Exempt Organizations in the News A Retrospective of What Made Headlines
in 2012
Douglas Boedeker, CPA, CMA
Audit Partner
Katrina Henderson, CPA
Audit Manager
January 11, 2013
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Course Outline
Introduction
Charity Fundraising Issues
Super-PACs & Campaign Activities
Governance Issues
Disaster Relief Issues
General Scrutiny of Exempt Organizations
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Charity Fundraising Issues
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Bloomberg Takes Notice
Charities Deceive Donors Unaware Money Goesto a Telemarketer and Telemarketers Lying forCharities Prompts Call for U.S. Probe David Evans; Bloomberg Markets Magazine; September
12, 2012 and December 4, 2012, respectively. InfoCision Management Group handles telemarketing for the
American Cancer Society (ACS) and other major nonprofits Questioning scripts used by telemarketers deceptive tactics used
to say one percentage went to charities but actually another
Ex. the agreement with them states 44% will go to ACS
but the script says 70% Another mistake telemarketers saying they were volunteers when
actual employees of InfoCision InfoCision has provided a response to this article and it is posted on
their website http://www.infocision.com
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Senators Are Taking Notice
Dont Be Taken In by Bogus Charities Senator Blumenthal;
www.blumenthal.senate.gov/blog/dont-be-taken-in-
by-bogus-charities; May 25, 2012.
Be aware when making donations
Veterans Support Organization hired paid solicitors to serve
as volunteers to solicit contributions Several complaints of similar tactics
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The Senate Committee on Finance RemainsActive
Baucus, Burr Investigate Nonprofit ForExploit ing Veterans, Taxpayers, Abusing
Tax-exempt Status
Senator Richard Burr; Committee On Finance NewsRelease; May 23, 2012.
Press release discussing whether tax-exempt organizations
are being used for financial/political gain Letter issued to the Disabled Veterans National Foundation
requesting revenue information, the fundraising expense and
other information
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An Interesting Take on Grant Proposals
Guarding Against Grant Fraud Barbara Floersch; The NonProfit Times; December 3,
2012.
Grant writing is susceptible to fraud
Policies and procedures should be set in place to protect the
organizations
Examples include:
Having a grant development project leader
Verify all data presented
Perform an accuracy ethics review prior to signing
Monitor consultants timely
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Fighting the Fiscal Cliff
Charitable-Deduction Limit Would HurtPoor, Say Nonprofit Leaders
Doug Donovan; The Chronicle of Philanthropy;
November 13, 2012.
Cap on deductions will reduce the amount of donations
received by nonprofits as the additional tax will be taken from
their overall donation
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.and still Fighting the Fiscal Cliff
In Fine Print of Fiscal Debate, Charit iesUnite to Defend Deductions
Annie Lowrey; The New York Times; December 5,
2012. Nonprofits uniting for the tax deduction on donations
Normally, every nonprofit is focused on its own particular
mission, whether saving the environment, or helping children,
or imbuing a greater appreciation for art. For the first time,
Ive seen the sector coming together. Were like Rip Van
Winkle waking up and saying, This is not O.K. said Diana
Aviv, Chief Executive of Independent Sector
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New Fundraising Initiatives Keep Popping Up
Organizers launch Giving Tuesday to helpcharities
Annie Gowen; The Washington Post; November 27, 2012.
National Day of Giving
Beyond the consumer focus of Cyber Monday and Black Friday, I
think people are a little anxious to do something more this holiday
said Allyson Burs, Vice President of Communication for the
foundation of AOL founder Steve Case and his wife, J ean Everybody talks about the giving seasonWe thought it would be
great to give the giving season an opening day said Henry Timms,
Deputy Executive Director of 92nd Street Y
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Scrutiny of Cause Related Marketing
Breast Cancer Awareness Month Criticizedfor Little Pink Lies
Rick Cohen; Nonprofit Quarterly; October 18, 2012.
Pink Ribbon campaign may be deceptive as the money raised
may not actually go to the cause
Are nonprofits really benefiting more from the cause related
marketing?
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Super-PACs & CampaignActivities
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Super-PAC Spending
Rove Biggest Super-PAC Loser, Trump SaysWaste of Money
J ulie Bykowicz & Alison Fitzgerald; Bloomberg L.P.;
November 8, 2012.
Are Super-PACs productive?
How will future donations be impacted?
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Super-PAC Governance
Post-Campaign Super-PAC Cash Stil l Flowingto Consultants
J ulie Bykowicz; Bloomberg L.P.; December 3, 2012.
Administration vs. Program Expense Ratios for
some Super-PACs are shockingly high.
An amazing lack of governance and oversight.
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Campaign Disclosures
States Crack Down on CampaigningNonprofits
Matea Gold & Chris Megerian; Los Angeles Times;
November 26, 2012.
Political activities of 501(c)(4) entities are
drawing scrutiny at the state level. (Amid
frustration of the Federal reporting rules.)
Fears of nonprofits participating in campaign
money laundering.
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Governance Issues
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BoardSource Governance Index
Nonprofit Governance Index 2012 Suggests SomePositive Trends and Continued Concerns
Philanthropy J ournal Staff Report; Philanthropy Journal;
October 3, 2012.
BoardSource Nonprofit Governance Index 2012can
be obtained via www.Boardsource.org
Fundraising is singled out as the area where Board
members perform most poorly.
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Governance Factors
The Role of the Nonprofit Board: FourEssential Factors for Effective Governance
Alice Korngold; The Huffington Post; September 9,
2012.
Achievement
Accountability
Ownership
Oversight
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Call to Strengthen NFP Oversight
Improve Oversight of Nonprofits Nicholas P. Carardi; Pittsburgh Post-Gazette; April 8,
2012.
Editorial in the wake of the Penn State scandal.
Questions effectiveness of Boards
Advocates a Private Attorney General statute
a charitys stakeholders could sue for
mismanagement.
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The University of Maryland
Legality of University System of MarylandsBig Ten Vote Questioned
J enna J ohnson; The Washington Post; November 20,2012.
Concern over state sunshine laws in conjunctionwith decision to leave the ACC.
Does process kill the offer? University issued a statement on December 7,
2012 expressing regret about not following thesunshine laws.
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The University of Virginia
Anatomy of a Campus Coup Andrew Rice; The New York Times; September 11, 2012.
Tension over strategic direction of UVA was there
even a strategy?
Did the Board listen too much to mid-level
management (professors)?
Board composition came under scrutiny. Avoidance of sunshine laws?
Back-end involvement by former Board members?
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Dartmouth College
Leon Black Investing Dartmouth Money StirsEthics Debate
Gillian Wee; Bloomberg Markets Magazine;J anuary
7, 2013.
Basic conflict of interest issue.
Can safeguards overcome perception?
But, what if the conflict is profitable?
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The Corcoran Gallery of Art
Corcoran Gallery of Art to Remain in HistoricWashington Home
David Montgomery; The Washington Post; December
10, 2012.
Capped a six-month period of public exploration
about the Corcorans future.
Public discussion appears to have been fruitful.
A fascinating story to follow as it unfolded.
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Disaster Relief
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Hurricane Sandy Funds
N.Y. Sandy Fund Scrutinized Laura Nahmias; The Wall Street Journal; December
9, 2012.
Use of a state agency to oversee fund distribution and a
board of political fundraisers Contrary to what other states have done as other states have used large
nonprofits with disaster relief experience such as United Way
Approach is problematic because of state regulations thatmust be followed RESULT, delays in aid
Daniel Borochoff, president of CharityWatch says It isinteresting that they are raising money in direct competitionwith the charities
Their defense every dollar raised will go to N.Y. citizensrather than cover overhead expenses
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Contingency Plans in the Wake of Sandy
Charities Strike Back After SandysKnockdown Punch
Mark Hrywna; The NonProfitTimes; December 3,
2012.
Raised over a $100M for aid within 1 week of the storm
Contingency plans initiated for relief agencies impacted
Ex. moving departments to other states, learning from past situations
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Hurricane Katrinas Impact
Lessons Learned From Katrina Ann Silverberg Williamson; The NonProfitTimes;
December 3, 2012.
The needs of organization may be larger than those currently
served
Principles to help maintain balance
Stick to the mission
Use all means of communication
Take care of service providers
Maintain strong systems for accountability
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General Scrutiny of ExemptOrganizations
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Bloombergs Expose
Tax-Exempt Firm Gets $600 Million ProfitFlying First Class
David Evans; Bloomberg Markets Magazine;
November 14, 2012.
A must-read article for association executives!
Questions the U.S. practice of allowing
associations to self-declare exempt status.
Should royalties be tax-exempt?
Executive compensation always draws scrutiny!
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Bloombergs Editorial
Making Sure Nonprofits Arent All AboutProfit
Editors; Bloomberg View; November 14, 2012.
Dovetails off of the Bloombergs various articlesexamining exempt organizations.
Calls for increased Federal and state
enforcement of exempt organizations. Interesting discussion of the Tax Reform Act of
1969s excise tax on the investment income ofprivate foundations.
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College Athletics
Football-Ticket Tax Break Helps Colleges GetMillions
Curtis Eichelberger & Charles Babcock, BloombergL.P.; October 25, 2012.
Part of the debate over what constitutes acharitable deduction.
History of the authorizing legislation is a funread.
Should a colleges television, sponsorship, androyalty revenue be tax exempt?
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Charities as Fraud Conduits
Bronx Councilman is Convicted of Fraud andLoses Seat
Benjamin Weiser; The New York Times;J uly 26,2012.
Ex-D.C. Council member Harry Thomas Jr.gets 3-year sentence Tim Craig & Mike DeBonis; The Washington Post;
May 3, 2012
Both stories involve local officials stealinggovernment money through charities.
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Thank you for your time!
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Speaker Biography
Douglas Boedeker , is a partner within Tate & Tryons Audit andAssurance Services unit and is also actively involved in the Firm's
exempt organization tax services group. He has more than 20
years of experience providing an array of audit, tax, and consulting
services to a variety of nonprofit organizations and employee
benefit plans. He takes particular pride that his family has
contained at least one CPA every year since 1923.
Doug graduated summa cum laude from Susquehanna University
in Selinsgrove, Pennsylvania with a Bachelor of Science degree in
accounting while simultaneously completing the coursework for a
second major in arts administration.
Known for an enthusiastic and entertaining style, he is a frequentspeaker on a variety of exempt organization audit, accounting, and
tax issues. Doug is also a coauthor to Guide to the Newest IRS
Form 990: Interpreting and Complying with the New Tax Reporting
Requirements for Transparency and Accountability, (published by
ASAE).
Doug Boedeker, CPA, CMA
Audit Partner
Tate & Tryon
202-419-5106
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Speaker Biography
Katrina Henderson, CPA, is a manager within Tate & TryonsAudit and Assurance Services unit. She has more than 12 years
of experience providing an array of audit services to a variety of
nonprofit organizations and employee benefit plans.
Katrina graduated cum laude from the University of Maryland in
College Park, Maryland with a Bachelor of Science degree in
accounting and marketing.
Katrina Henderson, CPA
Audit Manager
Tate & Tryon
202-419-5121
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Revisiting Executive CompensationReporting on the Form 990
January 11, 2013
Subrina Wood, CPA
Tax Manger
Tate & Tryon
Sara Smith
Senior Exempt Organization Tax Specialist
Tate & Tryon
Speakers:
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Agenda
General Overview of CompensationReporting
Voting members and independence
Definitions and time periods
Common paymaster treatment
Reporting on the Statement of Functional Expenses
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Agenda
Schedule J and Compensation Information
Special Topics
Accountable plans and Cash Advances
Severance, non-qualified plans, and equity basedpayments
Miscellaneous topics
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Overview
Board of Directors/Trustees
Voting members
Officers - By-laws
Independence Conflict of interest
Officers
Board Officers
Organization Officers
DeemedOfficers CEO and CFO
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Overview
Key Employee
Authority broad based or quantified by control overat least 10% of the total assets, expenses, revenue
or program.
Salary threshold - $150,000 reportable (W-2 Box 1or5 whichever is higher or 1099 Box 7) compensation
Must be one of the top 20 employees who satisfy theresponsibility and $150,000 test
Five Highest Paid
Salary threshold - $100,000 in reportablecompensation
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Overview
Officers, Trustees and Key Employees areseparately reported on Line 5.
Amount includes salary,pension, and non taxablebenefits
Fiscal year organizations must provide an additionalcalculations for Line 5.
Allocation differences of key and officer salaries
Amounts are based on the fiscal year of organization Amounts will not tie to the totals found in Part VII due
to the $10,000 exception rules.
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Overview
Common paymaster treatment
Method of allocation between organization is timebased and is only for the reportable compensation.
Reportable Compensation allocated to relatedorganizations and reported as if paid by thatorganization
Columns (D) and (E) of Part VII equal the total amount
of reportable compensation. Column E Other
compensation is not allocated and does not change.
Amounts reported in Part V for the number of W-2sfiled is based on the EIN of the organization thatactually filed the W-2s.
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Schedule J Compensation Information
Special Topics
First class travel and travel for companions
Not business class or bumps to first class
Any guest or family member not on bona fide businesspurpose
Health or social clubs dues or initiation fees
Does not include on premise facilities
Does not include athletic facilities provided by a school
Tax indemnifications and gross ups
Any reimbursement of any tax obligation paid by theorganization.
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Schedule J Compensation Information
Special Topics
Business use of personal residence
Payment for use of all or any part of a listed personsresidence for any purpose of the organization.
Discretionary spending accounts
Any sum of money controlled by a listed personscontrol that is not under an accountable plan, whetheror not used for any personal expense.
Personal services
Babysitter, bodyguard, chauffeur, chef, tax preparer,pet sitter, financial planner, lawyer, personal assistant.
S C f
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Schedule J Compensation Information
Expense reimbursements
Accountable plans require substantiation
Method is not material: credit card, reimbursement orcash advances are permitted by these plans
Payments to employees that were not substantiated orallowances for more than spent are compensation
Directors and trustee are considered employees forpurposes fringe benefits and can be reimbursedsubstantially identically as employees under the plan.
Outstanding salary advances that are not under anaccountable plan are considered loans and reportedon Schedule L, Part II.
S h d l J C ti I f ti
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Schedule J Compensation Information
Severance payments
Report if amount paid by reporting or relatedorganization
Includes payments for wrongful termination ordemotion
Payments resulting in termination or change ofemployment made under a change-of-control
Report name, amount and any terms in SupplementalInformation section of Schedule J
S h d l J C ti I f ti
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Schedule J Compensation Information
Participation in supplemental non-qualifiedplans
Does not include 457(b) plans or split-dollar life
insurance plans, but does include 457(f) plans.
All plans that are not generally available to allemployees, but only to highly paid ones
Disclose name, amount, and description of plan in theSupplemental Information section of Schedule J
S h d l J C ti I f ti
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Schedule J Compensation Information
Participation in equity based plans
Paid by organization or related organization
Includes stock, stock options, stock appreciationrights, restricted stock or shadow stock.
Includes payments determined by reference to equity
in a partnership, limited liability company, orcorporation
S h d l J C ti I f ti
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Schedule J Compensation Information
Special compensation considerations forpublic charities 501(c)(3) and social welfare501(c)(4) organizations
Compensation contingent of net earnings or revenue
Bonuses and non-fixed payments rules
Contracts and employment agreements
Initial contract exception and the
rebuttable presumption procedure
Mi ll T i
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Miscellaneous Topics
Insurance policies
Form 8925 Report of Employer Owned LifeInsurance Polices
Only for contracts issued after 8/17/06 and in force atthe end of the tax year
Insured must be a US citizen or resident
Answer YES to payment of premium of personal benefitcontract on page 5
Mi ll T i
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Miscellaneous Topics
Payments to Owners of Single Member LLCs
Form W-9 indicates if the payment is to thecorporation of the individual
Payments made to the corporation appear onSchedule L, Part IV if over the reporting threshold.
Consider additional disclosure on Schedule O
Payments made to the individual are reported on a
1099-MISC. The amount in Box 7 should be reportedin Part VII
Mi ll T i
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Miscellaneous Topics
Management companies
Report payments as Independent Contractors in PartVII, Section B
Check question about delegating control overmanagement duties in Governance and Managementsection YES.
Report top management or financial person from themanagement company in Part VII with full disclosure
Leased employees
Professional employer organization (PEO)
Reporting is the same as above, if appropriate.
R f M t i l d W b it
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Reference Material and Website
Interpreting and Complyingwith the New Tax ReportingRequirements forTransparency and
AccountabilityBy:
Charles F. Tate, CPA
Deborah G. Kosnett, CPA
Douglas A. Boedeker, CPA
Subrina L. Wood, CPA
Frederick U. Longwood, CPA
ASAEcenter.org/bookstore
Speaker Biography
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Speaker Biography
Subrina Wood, CPA, is a Tax Manager in the Firms ExemptOrganization Tax department with more than 25 years of exempt-
organization tax experience. Previously, Ms. Wood worked in the
tax departments of the Boston offices of KPMG, Mellon Bank, and
Thompson Reuters.
Ms. Wood has extensive experience establishing and maintaining
private foundations and charitable gift strategies, and has worked
with organizations such as Carnegie Mellon University, Virginia
Military Institute, and Smith College. In addition, she has
considerable experience with the following exempt organization
tax specialty areas: Form 990 reporting; tax reporting for
nonprofits holding alternative investments; preparing entities for
electronic filing and payment options; accounting and reporting forspecial events and fundraisers; and handling nonresident alien tax
issues.
Ms. Wood has presented on a variety of exempt organization tax
issues at nonprofit industry conferences such as the AICPA
National Not-For-Profit Industry Conference and ASAEs Annual
Association Law Symposium.
Subrina Wood, CPA
Tax Manager
Tate & Tryon
202-419-5129
Speaker Biography
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Speaker Biography
Sara Smith, is a senior exempt organization tax specialist with theFirm. She has extensive experience in dealing with a variety of
exempt organization tax areas such as governance policies, nexus
issues, functional allocation of expenses, non-cash contributions,
and foreign reporting requirements on the Form 990. Ms. Smith
also recently published an article in the Firms newsletter titled,
The Value of Good Governance Policies, in which she discusses
the importance of establishing good governance policies and how
this information should be disclosed on the Form 990.
Ms. Smith is involved in the oversight of the tax engagements
such as American Society of Association Executives (ASAE);
American Society of Cataract and Refractive Surgery; American
Association of Justice, American Association of Universities;Common Cause; Council of Better Business Bureaus;
Pharmaceutical Research & Manufacturers of America; United
States Capitol Historical Society; and Washington DC Economic
Partnership.
Sara Smith
Senior Exempt Organization
Tax Specialist
Tate & Tryon
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Form 990 (2012) Page 5
Part V Statements Regarding Other IRS Filings and Tax Compliance
Check if Schedule O contains a response to any question in this Part V . . . . . . . . . . . . . .Yes No
1a Enter the number reported in Box 3 of Form 1096. Enter -0- if not applicable . . . . 1a
b Enter the number of Forms W-2G included in line 1a. Enter -0- if not applicable . . . . 1b
c Did the organization comply with backup withholding rules for reportable payments to vendors andreportable gaming (gambling) winnings to prize winners? . . . . . . . . . . . . . . . . . 1c
2a Enter the number of employees reported on Form W-3, Transmittal of Wage and Tax
Statements, filed for the calendar year ending with or within the year covered by this return 2a
b If at least one is reported on line 2a, did the organization file all required federal employment tax returns? . 2b
Note. If the sum of lines 1a and 2a is greater than 250, you may be required to e-file (seeinstructions) . .3a Did the organization have unrelated business gross income of $1,000 or more during the year? . . . . 3a
b If Yes, has it filed a Form 990-T for this year? I f No, provide an explanation in Schedule O . . . . . 3b
4a At any time during the calendar year, did the organization have an interest in, or a signature or other authority
over, a financial account in a foreign country (such as a bank account, securities account, or other financialaccount)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4a
b If Yes, enter the name of the foreign country: a
See instructions for filing requirements for Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts.
5a Was the organization a party to a prohibited tax shelter transaction at any time during the tax year? . . . 5a
b Did any taxable party notify the organization that it was or is a party to a prohibited tax shelter transaction? 5bc If Yes to line 5a or 5b, did the organization file Form 8886-T? . . . . . . . . . . . . . . . 5c
6a Does the organization have annual gross receipts that are normally greater than $100,000, and did the
organization solicit any contributions that were not tax deductible as charitable contributions? . . . . . 6a
b If Yes, did the organization include with every solicitation an express statement that such contributions orgifts were not tax deductible? . . . . . . . . . . . . . . . . . . . . . . . . . . 6b
7 Organizations that may receive deductible contributions under section 170(c).a Did the organization receive a payment in excess of $75 made partly as a contribution and partly for goods
and services provided to the payor? . . . . . . . . . . . . . . . . . . . . . . . . 7a
b If Yes, did the organization notify the donor of the value of the goods or services provided? . . . . . 7bc Did the organization sell, exchange, or otherwise dispose of tangible personal property for which it was
required to file Form 8282? . . . . . . . . . . . . . . . . . . . . . . . . . . . 7c
d If Yes, indicate the number of Forms 8282 filed during the year . . . . . . . . 7d
e Did the organization receive any funds, directly or indirectly, to pay premiums on a personal benefit contract? 7ef Did the organization, during the year, pay premiums, directly or indirectly, on a personal benefit contract? . 7f
If th i ti i d t ib ti f lifi d i t ll t l t did th i ti fil F 8899 i d? 7
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Form 990 (2012) Page 6
Part VI Governance, Management, and Disclosure For each Yes response to lines 2 through 7b below, and for a No
response to line 8a, 8b, or 10b below, describe the circumstances, processes, or changes inSchedule O. See instructions.
Check if Schedule O contains a response to any question in this Part VI . . . . . . . . . . . . . .Section A. Governing Body and Management
Yes No
1a Enter the number of voting members of the governing body at the end of the tax year . . 1aIf there are material differences in voting rights among members of the governing body, orif the governing body delegated broad authority to an executive committee or similarcommittee, explain in Schedule O.
b Enter the number of voting members included in line 1a, above, who are independent . 1b2 Did any officer, director, trustee, or key employee have a family relationship or a business relationship with
any other officer, director, trustee, or key employee? . . . . . . . . . . . . . . . . . . 23 Did the organization delegate control over management duties customarily performed by or under the direct
supervision of officers, directors, or trustees, or key employees to a management company or other person? . 3
4 Did the organization make any significant changes to its governing documents since the prior Form 990 was filed? 45 Did the organization become aware during the year of a significant diversion of the organizations assets? . 5
6 Did the organization have members or stockholders? . . . . . . . . . . . . . . . . . . 67a Did the organization have members, stockholders, or other persons who had the power to elect or appoint
one or more members of the governing body? . . . . . . . . . . . . . . . . . . . . 7a
b Are any governance decisions of the organization reserved to (or subject to approval by) members,stockholders, or persons other than the governing body? . . . . . . . . . . . . . . . . . 7b
8 Did the organization contemporaneously document the meetings held or written actions undertaken duringthe year by the following:
a The governing body? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8ab Each committee with authority to act on behalf of the governing body? . . . . . . . . . . . . 8b
9 Is there any officer, director, trustee, or key employee listed in Part VII, Section A, who cannot be reached atthe organizations mailing address? If Yes, provide the names and addresses in Schedule O . . . . . 9
Section B. Policies (This Section B requests information about policies not required by the InternalRevenue Code.)Yes No
10a Did the organization have local chapters, branches, or affiliates? . . . . . . . . . . . . . . 10ab If Yes, did the organization have written policies and procedures governing the activities of such chapters,
affiliates, and branches to ensure their operations are consistent with the organization's exempt purposes? 10b
11a Has the organization provided a complete copy of this Form 990 to all members of its governing body before filing the form? 11ab Describe in Schedule O the process, if any, used by the organization to review this Form 990.
12 Did th i ti h itt fli t f i t t li ? If N t li 13 12
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Form 990 (2012) Page 7
Part VII Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and
Independent Contractors
Check if Schedule O contains a response to any question in this Part VII . . . . . . . . . . . . . .
Section A. Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees
1a Complete this table for all persons required to be listed. Report compensation for the calendar year ending with or within the
organizations tax year. List all of the organizations current officers, directors, trustees (whether individuals or organizations), regardless of amount of
compensation. Enter -0- in columns (D), (E), and (F) if no compensation was paid.
List all of the organizations current key employees, if any. See instructions for definition of key employee.
List the organizations five current highest compensated employees (other than an officer, director, trustee, or key employee)who received reportable compensation (Box 5 of Form W-2 and/or Box 7 of Form 1099-MISC) of more than $100,000 from theorganization and any related organizations.
List all of the organizations former officers, key employees, and highest compensated employees who received more than$100,000 of reportable compensation from the organization and any related organizations.
List all of the organizations former directors or trustees that received, in the capacity as a former director or trustee of theorganization, more than $10,000 of reportable compensation from the organization and any related organizations.
List persons in the following order: individual trustees or directors; institutional trustees; officers; key employees; highestcompensated employees; and former such persons.
Check this box if neither the organization nor any related organization compensated any current officer, director, or trustee.
(A)
Name and Title
(B)
Averagehours per
week (list anyhours forrelated
organizationsbelow dotted
line)
(C)
Position(do not check more than onebox, unless person is both anofficer and a director/trustee)
Individualtrustee
ordirector
Institutionaltrustee
Officer
Keyemployee
Highestcompensated
employee
Former
(D)
Reportablecompensation
fromthe
organization(W-2/1099-MISC)
(E)
Reportablecompensation from
relatedorganizations
(W-2/1099-MISC)
(F)
Estimatedamount of
othercompensation
from theorganizationand related
organizations
(1)
(2)
(3)
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Form 990 (2012) Page 8
Part VII Section A. Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees (continued)
(A)
Name and title
(B)
Averagehours per
week (list any
hours forrelated
organizationsbelow dotted
line)
(C)
Position(do not check more than onebox, unless person is both anofficer and a director/trustee)
Individualtrustee
ordirector
Institutionaltrustee
Officer
Keyemployee
Highestcompensated
employee
Former
(D)
Reportablecompensation
from
theorganization
(W-2/1099-MISC)
(E)
Reportablecompensationfrom
related
organizations(W-2/1099-MISC)
(F)
Estimatedamount of
other
compensationfrom the
organizationand related
organizations
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
1b Sub-total . . . . . . . . . . . . . . . . . . . . . a
T t l f ti ti h t t P t VII S ti A a
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Form 990 (2012) Page 9
Part VIII Statement of Revenue
Check if Schedule O contains a response to any question in this Part VIII. . . . . . . . . . . . . . . .
Contributions,
Gifts,
Grants
andOtherSimilarAmounts
(A)Total revenue
(B)Related or
exemptfunctionrevenue
(C)Unrelatedbusinessrevenue
(D)Revenue
excluded from taxunder sections
512, 513, or 514
1a Federated campaigns . . . 1ab Membership dues . . . . 1b
c Fundraising events . . . . 1c
d Related organizations . . . 1d
e Government grants (contributions) 1e
f All other contributions, gifts, grants,
and similar amounts not included above 1f
g Noncash contributions included in lines 1a-1f: $
h Total.Add lines 1a1f . . . . . . . . . a
ProgramS
erviceRevenue
Business Code 2a
b
c
d
e
f All other program service revenue .g Total.Add lines 2a2f . . . . . . . . . a
3 Investment income (including dividends, interest,
and other similar amounts) . . . . . . . a4 Income from investment of tax-exempt bond proceedsa
5 Royalties . . . . . . . . . . . . . a
6a Gross rents . .
(i) Real (ii) Personal
b Less: rental expenses
c Rental income or (loss)
d Net rental income or (loss) . . . . . . . a
7a Gross amount from sales of
assets other than inventory
(i) Securities (ii) Other
b Less: cost or other basis
and sales expenses
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Form 990 (2012) Page 10
Part IX Statement of Functional ExpensesSection 501(c)(3) and 501(c)(4) organizations must complete all columns. All other organizations must complete column (A).
Check if Schedule O contains a response to any question in this Part IX . . . . . . . . . . . . . .Do not include amounts reported on lines 6b, 7b,8b, 9b, and 10b of Part VIII.
(A)Total expenses
(B)Program service
expenses
(C)Management andgeneral expenses
(D)Fundraisingexpenses
1 Grants and other assistance to governments andorganizations in the United States. See Part IV, line 21
2 Grants and other assistance to individuals inthe United States. See Part IV, line 22 . . .
3 Grants and other assistance to governments,organizations, and individuals outside theUnited States. See Part IV, lines 15 and 16 . .
4 Benefits paid to or for members . . . .5 Compensation of current officers, directors,
trustees, and key employees . . . . .6 Compensation not included above, to disqualified
persons (as defined under section 4958(f)(1)) andpersons described in section 4958(c)(3)(B) . .
7 Other salaries and wages . . . . . .8 Pension plan accruals and contributions (include
section 401(k) and 403(b) employer contributions)
9 Other employee benefits . . . . . . .
10 Payroll taxes . . . . . . . . . . .
11 Fees for services (non-employees):a Management . . . . . . . . . .
b Legal . . . . . . . . . . . . .
c Accounting . . . . . . . . . . .
d Lobbying . . . . . . . . . . . .
e Professional fundraising services. See Part IV, line 17
f Investment management fees . . . . .
g Other. (If line 11g amount exceeds 10% of line 25, column
(A) amount, list line 11g expenses on Schedule O.) . .
12 Advertising and promotion . . . . . .13 Office expenses . . . . . . . . .
14 I f ti t h l
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SCHEDULE J(Form 990)
Department of the TreasuryInternal Revenue Service
Compensation InformationFor certain Officers, Directors, Trustees, Key Employees, and Highest
Compensated EmployeesaComplete if the organization answered "Yes" to Form 990,
Part IV, line 23.aAttach to Form 990. aSee separate instructions.
OMB No. 1545-0047
2012Open to Public
InspectionName of the organization Employer identification number
Part I Questions Regarding CompensationYes No
1a Check the appropriate box(es) if the organization provided any of the following to or for a person listed in Form
990, Part VII, Section A, line 1a. Complete Part III to provide any relevant information regarding these items.
First-class or charter travel Housing allowance or residence for personal use
Travel for companions Payments for business use of personal residence
Tax indemnification and gross-up payments Health or social club dues or initiation fees
Discretionary spending account Personal services (e.g., maid, chauffeur, chef)
b If any of the boxes on line 1a are checked, did the organization follow a written policy regarding payment
or reimbursement or provision of all of the expenses described above? If No, complete Part III to
explain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1b
2 Did the organization require substantiation prior to reimbursing or allowing expenses incurred by all officers,
directors, trustees, and the CEO/Executive Director, regarding the items checked in line 1a? . . . . . 2
3 Indicate which, if any, of the following the filing organization used to establish the compensation of the
organizations CEO/Executive Director. Check all that apply. Do not check any boxes for methods used by arelated organization to establish compensation of the CEO/Executive Director, but explain in Part III.
Compensation committee Written employment contract
Independent compensation consultant Compensation survey or study
Form 990 of other organizations Approval by the board or compensation committee
4 During the year, did any person listed in Form 990, Part VII, Section A, line 1a, with respect to the filing
organization or a related organization:
a Receive a severance payment or change-of-control payment? . . . . . . . . . . . . . . . 4a
b Participate in, or receive payment from, a supplemental nonqualified retirement plan? . . . . . . . 4bc Participate in, or receive payment from, an equity-based compensation arrangement? . . . . . . . 4c
If Y t f li 4 li t th d id th li bl t f h it i P t III
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Schedule J (Form 990) 2012
Part II Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees. Use duplicate copies if add
For each individual whose compensation must be reported in Schedule J, report compensation from the organization on row (i) and from rela
instructions, on row (ii). Do not list any individuals that are not listed on Form 990, Part VII.
Note. The sum of columns (B)(i)(iii) for each listed individual must equal the total amount of Form 990, Part VII, Section A, line 1a, applicable column (D(B) Breakdown of W-2 and/or 1099-MISC compensation
(A) Name and Title (i) Basecompensation
(ii) Bonus & incentivecompensation
(iii) Otherreportable
compensation
(C) Retirement and
other deferredcompensation
(D) Nontaxable
benefits
(E
1
(i)
(ii)
2
(i)
(ii)
3
(i)
(ii)
4(i)
(ii)
5
(i)
(ii)
6
(i)
(ii)
7
(i)
(ii)
8
(i)
(ii)
9
(i)
(ii)
10
(i)
(ii)
11
(i)
(ii)
12
(i)
(ii)
13
(i)
(ii)
(i)
3 . 2
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Page
3
criptionsrequ
ire
dfor
Part
I,lines
1a,
1b
,3
,4a,
4b
,4c
,5a,
5b
,6a,
6b
,7
,and
8,
an
dfor
Part
II.
ScheduleJ(Form9
90)2012
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Accounting & Audit Update LookingBack at 2012
January 11, 2013
J effrey Stefan, CPA
Audit Partner
Tate & Tryon
Rich Banner, CPA
Senior Audit Manager
Tate & Tryon
Speakers:
Agenda
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Agenda
Not-for-Profit Advisory Committee
Accounting Standards Update
Clarity Project
FASB Not-for-Profit Advisory Committee
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FASB Not-for-Profit Advisory Committee
Established in 2009 to be a resource for theFASB in obtaining input from the NFP sectoron existing guidance, current and proposedtechnical agenda projects, and longer-term
issues affecting NFPs.
In 2011, the NAC began a standard-settingproject to reexamine the existing standards
for financial statement presentation by NFPs.The project has three goals:
Not-for-Profit Advisory Committee cont
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Not for Profit Advisory Committee cont.
1. Improve the current net asset classificationscheme.
2. Improve statements of activities and cash
flows to more clearly communicate financialperformance.
3. Review existing NFP-specific disclosurerequirements to improve relevance andunderstandability.
In May 2012, the NAC recommendations toFASB.
Not-for-Profit Advisory Committee cont
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Not for Profit Advisory Committee cont.
Revising the net asset classification to have onlytwo general net asset classes:
1. Donor-restricted
2. Other net assets
NAC believes that the distinction betweentemporarily and permanently restricted netassets has outlived its usefulness.
Net Asset recommendations
Not-for-Profit Advisory Committee cont
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Not for Profit Advisory Committee cont.
Prefers the termOther Net Assets rather thanUnrestricted. The termUnrestrictedcan confuse
and perhaps mislead stakeholders to believethat those net assets are without anyrestrictions. They can be subject to limitationsthat result from laws, regulations, debt
covenants, and other contractual restrictions.
Focus on liquidity of net assets.
Net Asset recommendations cont.
Not-for-Profit Advisory Committee cont
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Not for Profit Advisory Committee cont.
Supports requiring presentation of an operatingmeasure in the statement of activities.
Suggested the FASB consider extending therequirement of a statement of functionalexpenses for all NFPs except those with aninsignificant percentage of revenue fromcontributions. Currently only required for VH&Worganizations.
Presentation recommendations
Not-for-Profit Advisory Committee cont
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Not for Profit Advisory Committee cont.
Highlights the need for cross-referencing the fairvalue disclosures with the endowment
disclosures to provide clarity about the extent towhich investments represent restricted netassets and restricted asset.
Wants to better depict financial risks throughdisclosure requirement.
Notes to f inancial statements recommendations
Not-for-Profit Advisory Committee cont.
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Not for Profit Advisory Committee cont.
Recommends a management commentary thatis presented as supplemental information placed
before the financial statements and notes. (Seehandout)
The NAC staff projects that a final statementshould be issued in 2014.
Communications other than financial statements
Lease Accounting Changes (again)
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Lease Accounting Changes (again)
Right of Use ModelControl of the use of the leased asset
ROU asset
Consumption of ROU Asset
Significant portion of ROU asset
Other than property
Amortization expense and interest expense
Insignificant portion of ROU asset
Property (land and/or buildings)
Lease expense
Lease Accounting Changes
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Lease Accounting Changes
Schedule for the Proposed New StandardSecond Exposure Draft
due in the first quarter of 2013
After Exposure Draft
Consultations and outreach
Final Standard Released
TBD
Intangibles Topic 350 (ASU 2012-2)
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Intangibles Topic 350 (ASU 2012 2)
Testing Indefinite-Lived Intangible Assets for ImpairmentWhy was the standard changed?
Cost and complexity of recurring quantitative impairment testing
What changed?
Permits assessment of qualitative factors to determine if it is more likelythan not that the asset has been impaired
Qualitative assessment determines necessity of quantitativeassessment
What does more likely than not mean?
Likelihood of more than 50%
Statement of Cash Flows
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S a e e o Cas o s
Donated Securities exposure draft
If directed for immediate sale, then operatingactivity.
If donor restricted for long-term purposes,then financing activity.
Otherwise, investing activity.
Contributed Services from an Affiliate
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The proposal in the exposure draft wouldrequire a recipient NFP to recognize in itsstandalone financial statements all personnelservices received from an affil iate that
directly benefit the recipient NFP. Thoseservices would be measured at the costrecognized by the affil iate for the personnel
providing those services.
OMB Update
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p
Increase audit threshold to $1,000,000.
Creation of a new type of audit for auditeesbetween $1M - $3M.
Change criteria for testing compliancerequirements.
Making federal agencies more responsible
for audit follow-up and audit resolution.
Audit Clarity Project SAS 122
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y j
Changes to Auditing Standards 58 AU sections 47 new AU-C sections
3 withdrawn
37 redrafted to corresponding SAS
7 combined into 1 new SAS 11 combined/split into 9 SASs
AU section numbers changed to converge with ISA numbering
Effective for audits of periods ending on or after 12/15/2012
Audit Clarity Project SAS 122 (continued)
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y j ( )
Examples of Impact of Selected StandardsAuditor Reports
Opinion(Basis for qualified, adverse, ordisclaimer)
Emphasis of Matter Matters appropriately presented or
disclosed
Other Matter To understand audit matters
Headings and Subheadings
Other auditor reportingresponsibilities
Managements Responsibilities
Audit Clarity Project Group Audits
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y j p
Special ConsiderationsAudit of Group FinancialStatements (AU 600)
Acceptance and continuance - group auditor;identify components; preconditions
Understanding - group; components;component auditors; make reference?
Materiality decisions and responding to risksof material misstatement
Other procedures - consolidation process;subsequent events; evaluating evidence
Communications - with component auditors;
with group governance and management
Audit Clarity Project SAS 122
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y j
Impact of Selected StandardsGroup Audits
Understanding ofentity includescomponents
Extent group auditorwill be able to be
involved withcomponent auditor
Decision to make
reference
Obtainingmisstatements above
trivial noted bycomponent auditor
Communicationsbetween group andcomponent auditor
increased
Group auditorsreporting of
component auditorsMW and SD
Speaker Biography
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p g p y
Jeff Stefan, is the partner in charge of Tate & Tryons auditing practiceand has more than 25 years of experience serving the nonprofit sector.
In addition to his extensive audit and tax experience, he has provided
consulting services to organizations such as The World Bank, Public
Company Accounting Oversight Board, and ASAE & The Center for
Association Leadership in a variety of areas, including grant
compliance, merger due diligence, and internal controls. He has also
been called upon to consult on a variety of complex issues such as fairvalue accounting (FAS 157), accounting for alternative investments
(FAS 133), split interest agreements, endowment accounting (UPMIFA
/ FSP 117-1), single member limited liability corporations, uncertain tax
positions (FIN 48), and interest rate swap agreements.
Mr. Stefan has presented and authored articles on many recent
accounting and auditing issues including : FASB Staff Position (FSP)FAS 117-1, Endowments of Not-for-Profit Organizations, Educating
Your Board About Audits, Understanding Statement of Auditing
Standards (SAS) 103, Audit Documentation, SAS112,
Communicating Internal Control Matters Identified in an Audit, and A
Summary of the new Audit Risk Standards. Jeff is a member of the
American Institute of CPAs (AICPA), the Greater Washington Society
of CPAs (GWSCPA), and ASAE.
Jeff Stefan, CPA
Audit Partner
Tate & Tryon
202-419-5104
Speaker Biography
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g y
Rich Banner, CPA, is a senior audit manager with the Firm andhas been working with nonprofits for the past 15 years. Prior to
joining Tate & Tryon, Mr. Banner was an internal auditor with a
national labor organization based in Washington, DC.
Mr. Banner has extensive experience managing and performing
audits of various types of nonprofit organizations including trade
and membership associations, related for-profit subsidiaries,charitable organizations, and Section 527(f) political action
committees. Mr. Banner has experience with a variety of complex
auditing issues such as Federal awards and OMB A133
requirements, alternative investments and fair value accounting,
and bond financing. He also has extensive experience with
restricted contributions, trade shows, exhibits, and sponsorship
arrangements.
Rich Banner, CPA
Audit Manager
Tate & Tryon
202-419-5183
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10.5%Other
10.3%Professional
Examinations
6.3%Organization &Membership
Development 4CoPu
10%Regulation &
Legislation
6.6%
Technical
9 5%8Ot
50.7%Membership Dues
9.8%Publications
18.7%Professional Development &Member Service Conferences
9.2%Investment &Other Income
11.6%ProfessionalExaminations
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How to Effectively Facilitate theInvestment Manager Selection Process
January 11, 2013
Lisa Swatkoski, Investment Consultant
Vanguard Institutional Advisory Services
Camille Alexander, CFA, Institutional ConsultingDirector
Graystone Consulting
Charles Tate, CPA
Managing Partner
Tate & Tryon
Speakers: Moderator:
Graystone Consulting a business of Morgan Stanley
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January 2013
Introduction to Alternative Investments
Camille M. Alexander, CFA Institutional Consulting Director
Graystone Consulting
12505 Park Potomac Avenue | Suite 420
Potomac, Maryland 20854
301-279-6411
GRAYSTONE CONSULTING
Introduction to Alternative Investments
January 2013
T bl f C
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SECTION 1 Introduction
SECTION 2 Hedge Funds
SECTION 3 Commodities
SECTION 4 Real Estate
Table of Contents
2
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Section 1Introduction to Alternative Investments
GRAYSTONE CONSULTING
Introduction to Alternative Investments
January 2013
I t d ti t Alt ti I t t
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Introduction to Alternative Investments
What is an Alternative Investment?
Alternative investments typically utilize traditional investment instruments such as equities and bonds, but
may approach investing in different ways.
May involve holding both long and short positions in publicly traded investments as well as holding
private securities
May use derivatives or hedging strategies
Benefits:
Potential to enhance the risk and/or return characteristics of an investment portfolio as low correlation to
traditional investments may improve diversification and produce lower portfolio volatility.
Ability to be more flexible and invest in a wider opportunity set
Can hedge certain portfolio exposures, reducing concentration risk
Considerations:
Long-term investment horizon
Lack of liquidity and limitations on transferability
Limited access to performance and investment information
4
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Section 2Hedge Funds
GRAYSTONE CONSULTING
Introduction to Alternative Investments
January 2013
What Is A Hedge Fund?
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What Is A Hedge Fund?
No standard definition term mostly describes the vehicle
Typically seek an absolute return
Unlike traditional vehicles which manage relative to a market oriented benchmark
Primarily invest in publicly traded securities
Stocks, Bonds, Commodities, Currencies
Employ return enhancement tools such as leverage and derivatives
Typically treated as a limited-partnership for US taxable investors, and as a corporation domiciled in a low-tax or
no-tax jurisdiction for US tax-exempt investors and non-US persons
6
GRAYSTONE CONSULTING
Introduction to Alternative Investments
January 2013
Available Hedge Fund Strategies
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7
Available Hedge Fund Strategies
Strategy Definition Sources of Value
Equity Market Neutral Equal-weighted long and short equity portfolioswith similar risk characteristics Relative changes in value of long and shortportfolios
Arbitrage Typically a two-sided strategy involving
purchase and sale of related securities.
Depending on strategy, includes equity,
convertible, and bond instruments
Mispricing of related securities
Distressed Investing in securities that have been or areexpected to be affected by a situation such as
bankruptcy, distressed sale, or reorganization
Value appreciation as companies arerestructured
Global Macro Leveraged, directional investing in global
currency, equity, bond, and commodity markets
Directional price movements
Long/Short Equity Long and short equity investments generallywith a long bias
Directional price movements
GRAYSTONE CONSULTING
Introduction to Alternative Investments
January 2013
Potential Advantages of Hedge Fund Investing
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Alpha
Skill-based returns
Seek absolutereturns
May exceed returns generated from risky asset exposures
Controlled beta exposure
Hedge fund beta tends to come from relative value properties rather than the market properties that are
contained in asset classes themselves, resulting in lower correlations in relation to traditional asset classes.
Hedge fund managers tend to manage direct market exposures whereas fully invested strategies attempt
to track market risk and manage returns.
Use risk management techniques to help reduce volatility
Important note: Lower beta exposure tends to outperform during declining markets
Dynamic beta exposure
Hedge fund managers may increase risk exposures to increase market participation while still managing
downside risks.
Evaluate risk/reward opportunistically
Potential Advantages of Hedge Fund Investing
8
GRAYSTONE CONSULTING
Introduction to Alternative Investments
January 2013
Hedge Fund Managers Generally Have Increased Investment Flexibility
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9
Hedge Fund Managers Generally Have Increased Investment Flexibility
Hedge Fund Managers Traditional Money Managers
Have the flexibility to invest opportunistically where they seevalue May be constrained to invest in certain pre-defined markets
Can short-sell securities they believe will fall in value and
thereby may profit from declining markets
Face limits on short-selling and may be required to be invested even if
they believe markets are in a declining trend
Can use derivatives and leverage to hedge or magnify returns Are limited in their use of derivatives and leverage
GRAYSTONE CONSULTING
Introduction to Alternative Investments
January 2013
Risk and Return Diversification Benefits from Broadening the Opportunity Set
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Risk and Return Diversification Benefits from Broadening the Opportunity Set
10
GRAYSTONE CONSULTING
Introduction to Alternative Investments
January 2013
Liquidity Characteristics Vary
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Liquidity Characteristics Vary
Bonds
Equities
Managed Futures
Private Equity
Real Estate
Convertible Arbitrage
Fixed Income Arbitrage
Statistical Arbitrage
Equity Market Neutral
Long/Short Equity
Global Macro
Merger Arbitrage
Distressed Debt
Liquid Illiquid
11
GRAYSTONE CONSULTING
Introduction to Alternative Investments
January 2013
Despite Attraction Hedge Funds Have Unique Risks
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12
Despite Attraction, Hedge Funds Have Unique Risks
Risk Description
Valuation Risk Certain alternative investment funds trade in esoteric or illiquid securities. In normalmarkets, it is sometimes difficult to price these instruments, causing managers to
estimate market values.
Specialized Trading Special investment techniques such as leveraging, short-selling and investing in
derivatives, including options and futures, require unique skills and are associated with
additional risk.
Manager Risk In alternative investment strategies, idiosyncratic risk is much greater than traditional
investments which derive more of their return from market direction than from
manager strategy and/or decision .
Liquidity Risk Investments in Hedge Funds are not readily marketable and often entail lock-up
periods.
GRAYSTONE CONSULTING
Introduction to Alternative Investments
January 2013
Some Hedge Fund Myths
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13
Some Hedge Fund Myths
Myths Facts
Hedge funds are a new investment product Hedge funds have been around since the late 1940s.
Hedge funds are risky Different hedge fund strategies have widely different risk characteristics that can be
diversified.
Hedge funds are unregulated Hedge funds are regulated, however, regulation differs with respect to other forms of
investing as it relates to disclosure requirements and reporting. Most hedge fundsare registered with the Securities Exchange Commission, and pending legislation may
cause all remaining funds to register.
Hedge funds generate strong returns in all
market conditions
Different hedge fund strategies are exposed to different risk factors, such as market
risk, mergers and acquisitions activity, credit spreads, and volatility.
Hedge funds are always hedged Not all hedge funds are hedged. However, some funds are always hedged againstmarket risk.
Hedge funds do not invest, they trade The range of hedge funds varies from extremely short-term (trading) to extremely
long term (distressed securities).
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Section 3Commodities
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Introduction to Alternative Investments
January 2013
Two Broad Groups of Commodities
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Two Broad Groups of Commodities
15
The first is characterized by its relatively fixed supply and low degree of perishability and includes:
Energy (such as crude oil, heating oil, natural gas and unleaded gasoline)
Base metals (such as copper, aluminum, lead, nickel, zinc and tin)
Precious metals (such as gold, silver, platinum, palladium and rhodium)
The second may be characterized as perishable, consumable and affected by weather and includes:
Grains(such as corn, soybeans and wheat)
Softs (such as coffee, sugar, cocoa, orange juice and cotton)
Livestock (such as live cattle, feeder cattle and lean hogs).
Spot market indices also track the prices of basic materials such as scrap metals; selected textiles and fibers,
fats, oils and foodstuffs; and raw industrials.
GRAYSTONE CONSULTING
Introduction to Alternative Investments
January 2013
Choices for Investing in Commodities
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Physical form
Returns determined by the commoditys upward or downward price movements, less any applicable
storage, financing, insurance and other costs.
Collateralized commodity futures
Returns are determined by:
the price performance of the underlying commodity
the return derived from the continuous rolling of near-term commodity contracts into more deferred
lower-priced contracts or higher-priced contracts
the interest earned from the investment of any excess margin collateral used to secure the overall
unleveraged futures position.
Regulated Commodity Trading Advisors (CTAs)
Employ highly leveraged, trend-focused high-turnover trading strategies in commodity futures markets and
in financial futures involving currencies, interest rates and stock indexes.
Exchange-traded funds (ETFs), exchange-traded notes (ETNs), and commodity mutual funds may also be used to
provide exposure to commodities.
Choices for Investing in Commodities
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GRAYSTONE CONSULTING
Introduction to Alternative Investments
January 2013
Advantages and Disadvantages of Commodities Investing
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17
g g g
Advantages Disadvantages
Tend to lower the overall volatility of a portfolio by functioning as a
diversifying, countercyclical asset relative to many other asset
classes.
May involve leverage in the form of futures and/or be commission-
turnover- and fee-intensive investment vehicles, many of which
tend to be tax-inefficient.
In their original form and/or after some form of processing,
commodities offer intrinsic utility to fulfill basic human needs.
Commodities price trends may often reflect a magnified degree of
exposure to upward or downward movements in the global
economy.
May serve as an effective hedge against inflation, generallypreceding upward moves in consumer prices by 9 to 12 months.
Commodities borrowing and lending activity may exacerbatesupply-demand imbalances and exaggerate price movements.
Returns generally have negative correlations with US equity, bonds,
cash, high-yield bonds, real estate and emerging markets debt and
equity. Modestly positive correlations with non-US equity and
bonds, hedge funds, private equity and inflation-indexed bonds.
Although producer prices, consumer prices and commodity futures
prices tend to move upward together during periods of
accelerating inflation, they do not necessarily move together
during periods of disinflation.
Different kinds of commodities tend to be subject to different kinds
of economic influences and may have low correlations with each
other.
Sometimes viewed as illiquid, volatile assets that exhibit intense
and somewhat transient price movements in response to
economic or other developments.
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Section 4Real Estate
GRAYSTONE CONSULTING
Introduction to Alternative Investments
January 2013
Broad Groups of Real Estate
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Real Estate (Commercial and Residential)
Real estate is a traditional asset that is perceived to offer significant inflation protection.
Private real estate has a positive correlation with inflation
REITs have sometimes demonstrated negative correlation in inflationary environments when
inflation is relatively high and rising. Conversely, during quarters when inflation was lower than
average, REITs substantially outperformed other inflation hedges, TIPS, commodities as well as the
S&P 500.
Real estate is likely to offer its best performance during a time of rising inflation from low and moderate
absolute levels or high and persistent inflation. Income returns do not seem to have a positive correlation
with inflation, whereas capital returns are positively correlated with inflation in some countries.
Timber
Farmland
19
p
GRAYSTONE CONSULTING
Introduction to Alternative Investments
January 2013
Access to the Real Estate Markets
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Public securities markets exposure to real estate and other real assets is available through direct or mutual fund
investment in:
REITs dedicated to the apartment, office/industrial, hotel, retail, and other sectors in the US, Europe and
Asia
Non-REIT real estate operating companies
Equities with significant real estate assets, in the hotels, gaming, and healthcare industries
Real estate-related companies such as homebuilders, construction firms and title insurers
The non-public markets for US and non-US real estate and other real assets are many times larger than the publicmarkets and include leveraged or unleveraged exposure to:
Owner occupied residential homes, second homes, single-family rental properties, and smaller commercial
assets
Outright ownership of real estate properties, participation in real estate opportunity funds, core funds, and
other types of funds that focus on underperforming assets, or co-investment with partnership sponsors
Farmland, forestry and timber, and oil and gas properties
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Introduction to Alternative Investments
January 2013
Advantages and Disadvantages of Real Estate Investing
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Advantages Disadvantages
Can possess important defensive characteristics. Increasing cash
flows may also allow real estate to prosper in favorable economic
and demographic environments.
May not be a good investment in credit constrained,
disinflationary, or deflationary global, national or local economic
environments.
May have low correlations of returns with US and developed non-
US equities, and slightly negative correlations of returns with US
and non-US bonds, high yield bonds, and emerging markets equity.
May at times, be subject to feast-or-famine prices and returns,
with substantial divergences between property prices and
replacement values; and share prices and per share net asset
values.
A tangible asset whose supply is reasonably fixed and whose
income generating ability and/or capital values respond to such
forces as employment trends, immigration, new household
formation and long-term inflation.
Often not divisible and are characterized by illiquidity, high
transactions costs, lengthy time periods to effect the sale or
purchase of a property, and significant price discounts associated
with distressed sales.
Standard deviation of real estate returns tends to be lower than
the standard deviation of equity returns, and for REITs, tends to be
higher than the standard deviation of bond returns.
May be expensive and/or complicated to locate, research, value,
finance, maintain, manage, lease, pay taxes on, recapitalize,
improve, transfer, calculate returns and identify exit strategies.
Skilled participants may be able to identify and capture value
through understanding the structure and potential of specific
properties, financial and operating expertise, market knowledge
and access to relationships.
May be subject to a number of special considerations, including
bubble-like price movements, environmental laws and claims
relating to the property itself or its building materials,
depreciation, depletion or obsolescence, and the quality of funds
from operations (FFO).
GRAYSTONE CONSULTING
Introduction to Alternative Investments
January 2013
Disclaimers
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This document is confidential and solely for the use of Graystone Consulting and the clients of Graystone Consulting to whom it has
been delivered. By accepting delivery of this presentation, each recipient undertakes not to reproduce or distribute this presentation in
whole or in part, nor to disclose any of its contents (except to its professional advisers), without the prior written consent of GraystoneConsulting .
The sole purpose of this document is to inform, and it is not intended to be an offer or solicitation to purchase or sell any security,
other investment or service. Investments mentioned in this document may not be suitable for all investors. Before making any
investment, each investor should carefully consider the risks associated with the investment and make a determination based upon the
investor's own particular circumstances, that the investment is consistent with the investor's investment objectives. Although
information in this document has been obtained from sources believed to be reliable, Graystone Consulting and its affiliates do not
guarantee its accuracy or completeness and accept no liability for any direct or consequential losses arising from its use.
Although the statements of fact and data in this presentation have been obtained from, and are based upon, sources that the Firm
believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed, and is subject
to change without notice. This presentation is for informational purposes only and is not intended as an offer or solicitation with
respect to the purchase or sale of any security.
Graystone Consulting and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns
tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed
by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.
2011 Morgan Stanley Smith Barney LLC. Member SIPC. Graystone Consulting is a business of Morgan Stanley Smith Barney LLC.
22
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summary
Investment Policy Statements
for Nonprofi t Organizationsa template for prudent investment decisions
online report
As a nonprofit trustee, keeping your or-
ganizations portolio on track through
the markets ups and downs can be a
challenging proposition. To help withthis process, many institutions benefit
Through their philanthropic e-orts, oundations rom Maineto Maui have been making a lasting
impact on their region, nation and
the world. Taking on the responsibil-ity or a nonprofit organization, such
the Association o Small Foundations
ound that more than a third (34%) o
its members surveyed were operating
without a ormal written investment
policy.
1
the importance of
C P
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Define strategic and tactical asset
allocation strategies
Guide the evaluation and selection
o investment managers and advi-
sors
Discourage random or emotional
investment decisions inconsistent
with prudent management prin-
ciples
Promote long-term investment
decision-making
Provide written documentation
against allegations o fiduciary
imprudence.
Studies have illustrated that non-
profit fiduciaries and directors do
indeed spend a significant amount o
time (21.5%) during board meetings
on investment oversight and that they
review their investment perormance
on average our times per year.2 Writ-
ten investment policy statements pro-
vide committees and board members
with the structure to conduct these
regular discussions.
whats in the investmentpolicy statement?
Typical investment policy state-
ment eatures may include: Investment objectives o the insti-
Perormance benchmarks
How endowment earnings or
returns relate to spending policy
The degree o risk permitted in the
investment portolio
Portolio rebalancing strategies
and requency o rebalancing
Considerations relevant to the hir-
ing, retaining and firing o invest-
ment managers
Use o social investing criteria and/
or mission-related investing and
related investment restrictions
Endowment sustainability as an
influence on investment decision
making
The degree o liquidity required in
the investment portolio
Definitions o roles and responsi-
bilities o members involved in the
investment process
Frequency o investment policy
statement review
The ollowing sections describe
some common components o an
investment policy statement in more
detail.
statement of purpose
The statement o purpose shoulddefine your entity, its mission and
Define and assign the responsibili-
ties o all involved parties
Establish a clear understanding o
the overall investment goals and
objectives
Discuss how the investment
policy statement will meld with
the spending policy statement
Establish the relevant investment
horizon or which the oundations
assets will be managed
In general, this section will outline
your philosophy governing the man-
agement o assets. It is intended to
be suf ciently specific to be meaning-
ul, yet flexible enough to be practical
and eectively implemented.
statement of responsibilityYour oundation most likely has
a board that oversees your mission,
guides operations, makes invest-
ment decisions and ensures ethical
conduct. Members o your govern-
ing board should be involved with
the creation o the investment policy
statement and possess the knowledge
and experience to make inormed
investment decisions.
The statement o responsibilitysection should clearly define who is
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the delegation o responsibilities to
investment consultants, investment
firms and custodians.
Additional specialists such as
attorneys, auditors and actuaries
should have their responsibilities and
obligations outlined in this section.
general investmentprinciples and objectives
In general, this section should
define liquidity needs, investment
time horizon, investment restrictions
and unique circumstances. It should
include general guidelines or:
Adherence to prudent investor
standards
The overall investment goals o the
oundation
Allowable assets including the use
o alternative investments
Definition o annual spending
policy and liquidity requirements
Asset allocation and diversification
requirements
The selection, hiring and monitor-
ing o investment managers
General guidelines or investment
management might cover:
Preservation o capital Risk aversion
on certain assets such as fixed income
investments (e.g., only investment
grade bonds rated BBB [or equiva-
lent] or better).
Some o these stipulations would
in turn govern the selection o invest-
ment managers, a process that must
be based on prudent due diligence
procedures. These procedures could
include a review o key qualitative
actors such as the overall financial
health o the firm, the depth o its
portolio management and research
team, its technological capabilities
and the strength o its investment
process. Other key actors could be
quantitative, such as a review o past
perormance results and levels o
investment risk.
The specific investment guide-
lines section should also include the
market benchmarks that will be used
to evaluate the perormance o each
asset class, investment style and the
investment manager responsible or
each portion.
sta