Wednesday, March 14, 2012

Risk with donor pledges

In the white paper Measurement of Fair Value for Certain Transactions of Not-For-Profit Entities, the AICPA’s Financial Reporting Executive Committee (FinREC) provides guidance to not-for-profits on considering risk when determining the fair value of a donor’s unconditional promise to give. Considerations may include:
  Assess the donor’s ability to pay. Check published credit ratings, financial analysis (such as cash flow and ratio analysis) or credit reports.
  Determine the donor’s commitment to honor the promise. Consider the extent of the donor’s involvement with the not-for-profit; the donor’s history of charitable involvement and giving; the donor’s financial circumstances; and the donor’s personal circumstances such as family situation, age and health.
  Study risk factors that affect certain groups of donors. Examples include economic conditions in certain geographical areas or industries.
 Assess the not-for-profit’s prior experience. Consider the extent to which the not-for-profit has enforced previous promises to give.
 Determine whether the underlying asset is held in an irrevocable trust or escrow. This may reduce default risk.
To account for risk, not-for-profits can use the discount rate adjustment (DRA) method or one of two expected present value (EPV) methods.
DRA discounts the projected cash flows by a risk-adjusted rate derived from rates of return for comparable assets or liabilities traded in the market. FinREC’s guidance for determining the discount rate includes:
  If the donor is an individual, consider using unsecured consumer lending rates. These generally are available from published sources such as major financial institutions. FinREC advises using those rates when the credit characteristics of the donor and borrowers of unsecured debt are similar.
  If the donor is a corporation, consider using the yield on its publicly traded debt. Look to the yield on debt issued by the corporation or by a comparable corporation. FinREC advises using that yield when the promise to give is similar to the publicly traded debt. If the donor is a private foundation, FinREC advises using the yield on publicly traded debt, whether issued by the foundation, a comparable foundation or a comparable corporation.
  Whether the donor is an individual or a corporation, consider factors specific to the promise. This information, including the payment terms and risk of the promise, will help assess the extent to which the promise to give is similar to publicly traded debt.
The EPV methods also account for risk:
  With EPV Method 1, discount the risk-adjusted expected cash flows by the risk-free interest rate. This rate may be indicated by the yield to maturity on U.S. Treasurys. The risk-free interest rate is appropriate because all risk is built into the expected cash flows. EPV Method 1 adjusts the expected cash flows for the systematic risk by subtracting a cash risk premium, resulting in a certainty-equivalent cash flow. Challenges in determining an adjustment for systematic risk can make EPV Method 1 impractical.
  With EPV Method 2, discount the expected cash flows by a risk-adjusted rate. This rate is based on the risk-free interest rate, adjusted for general market risk by adding a risk premium. The risk premium is necessary because not all risk is built into the expected cash flows in EPV Method 2. Journal Of Accountancy

Friday, March 9, 2012

Unemployment rate was flat at 8.3% in February

The unemployment rate held steady in February as 227,000 jobs were added to employer payrolls, the Department of Labor announced today. The unemployment rate is at a three-year low of 8.3%.Smart Brief

Monday, March 5, 2012

2012 Tax Notes

44 days left to file tax returns

  • IRS issues 2012 automobile depreciation limitations
    The Internal Revenue Service on Friday released the 2012 inflation-adjusted depreciation limits and lease income inclusion amounts for passenger automobiles, trucks and vans. The 2012 tables include amounts for vehicles placed in service in 2012 for which bonus depreciation applies as well as limits for those for which bonus depreciation does not

Today's Accounting News from Neikirk, Mahoney & Company

Fed officials aim to assess economic outlook
Officials at the Federal Reserve are not expected to take any new measures to bolster economic growth, but will try to assess the outlook. The central bank has taken a number of steps in recent months to spur growth. The Wall Street Journal 

CFOs point to risk management as a growing area of concern
Risk management has become a growing responsibility for chief financial officers, with more than half of finance executives responding to CFO's Deep Dive Survey saying their risk management responsibility has gone up over the past two years. Two-thirds of CFOs cite customer demand and profitability as one of their biggest areas of concern. Learn how you can strengthen your company's ERM strategy at this AICPA workshop March 29 in New York City. CFO Magazine 

COSO explores six judgment "traps" and how to avoid them
Failing to consider opposing points of view and improperly defining problems are two key traps that lead to poor business judgment, according to a new white paper by the Committee of Sponsoring Organizations of the Treadway Commission. The paper defines six key judgment "traps" and offers advice on how to avoid them, and also outlines a five-step process for decision making. CGMA Magazine 

AIG is set to raise $6 billion from sale of Asian insurance unit
American International Group, the insurance company bailed out by the U.S. government, said it expects to raise $6 billion from the sale of shares in its AIA Group unit, which sells insurance in Asia. AIG said it will use the proceeds to pay off some of its $182.3 billion debt.Bloomberg (3/5), Reuters (3/5)

- The American Institute of CPAs