Question

Safety Net (SN) is a not-for-profit organization operating in Big Town, Canada. SN runs a shelter for the homeless, operates a soup kitchen, and provides counseling services to run-away teenagers and street kids. The demand for SN’s services has expanded rapidly over the last few years, as has its operating budget. Exhibit H describes SN’s operations.
SN’s operations have changed substantially in the past year (Exhibit H). Fundraising has been much more aggressive, two government grants have been obtained, and the “bequest on death” campaign begun several years ago yielded one large bequest during the year. In dealing with these changes, the board of directors of SN realized that they need financial advice to ensure they are making informed business decisions. Accordingly, they recently approached your firm, Fortin & Larose, Public Accountants, to advise them on the reporting requests they should be making of management to provide relevant information. Where appropriate, the board would like advice on the selection of accounting policies and on financial statement disclosure and other matters of importance. In the past, SN has recorded revenue and expenses on a cash basis.
The board has asked your firm to perform an audit to meet the requirements of one of the government grants and to provide the certified documentation for both grants, for the year ended March 31, 20X8 (see Exhibit I).
It is now January 22, 20X8. The senior partner of Fortin & Larose has asked you to draft a report to the board of directors of SN providing them with the requested information. The partner has also requested a memo highlighting the various engagement issues. He believes that there are additional service opportunities, and he wants you to note in the memo the services that the firm could perform for SN.

Required
Prepare the report and the memo.
Exhibit H Description of Safety Net’s Operations
SN has three core operations: a shelter for the homeless, a soup kitchen for the needy, and a drop- in counseling service for runaways and street kids. There are also administrative and fundraising activities.

SHELTER FOR THE HOMELESS
The shelter operates out of a former university residence. The residence was donated to SN several years ago when the university was closed as part of the provincial government’s plan to rationalize higher education. No amount was recorded on SN’s books for the donated residence. The shelter is run by a very small number of staff.

SOUP KITCHEN
The soup kitchen operates out of leased facilities: a former church in a rundown part of town. The signing of a 20- year lease on this property resulted in the dismissal of the previous executive director of SN after the board discovered the lease costs exceeded the fair market- value rent for similar properties and that the remain-ing useful life of the church, at the signing of the lease, was only 15 years.
Paid staff and volunteers prepare two meals a day. Volunteers include chefs from local restaurants, university food- service providers, and students from a local university’s food sciences program.
Donated food supplies are a major component of operations, and the level of donations remains relatively constant. Corporations make donations throughout the year, and individuals donate large volumes of fresh produce in the summer and fall months. None of these donated goods or services is currently recorded.

COUNSELLING SERVICES FOR RUNAWAYS AND STREET KIDS
The drop-in centre has two paid counselors who work closely with the kids and provide referrals to other pro-grams, such as drug rehabilitation.
The centre has entered into several innovative arrangements to provide assistance to runaways needing transportation back home. A major airline has begun a frequent-flyer grant program whereby the members of its frequent- flyer program are asked to donate some or all of their frequent-flyer points to the drop- in centre. The centre can then use the donated points to acquire a plane ticket. Counselors attempt to identify the kids most likely to benefit from free transportation back home.

ADMINISTRATION
The administrative staff consists of the executive director, a full- time fundraiser, a manager for each of the three operating areas, a bookkeeper, and an accounting clerk/ receptionist. There is a relatively large number of volunteer fundraisers. In the past, fundraising consisted mainly of a door- to- door campaign by volunteers seeking donations and selling “I care” SN memberships. In SN’s financial statements, the costs of the campaign are netted against total funds raised to present a single door-to-door fundraising total.
The bookkeeper handles all accounting and banking duties except for verifying accounts payable invoices for accuracy and filing documents. The two tasks are handled by a receptionist. The bookkeeper has a desktop computer system and uses an off- the- shelf computerized accounting package.
The executive director orally promised the full- time fundraiser a bonus of 10% of funds raised in excess of $ 500,000.
Exhibit I Changes to Safety Net’s Operations

FUNDRAISING
The full-time fundraiser aggressively pursued fundraising opportunities. Among the new fundraising efforts was a Safety Net charity golf tournament put on by a local golf club. The net proceeds of the tournament received from the golf club were recorded on SN’s books.
SN’s annual telethon was held on a local cable television station during December 20X7. Its success was greatly enhanced when a country music superstar, in town for a series of concerts, saw the broadcast and volunteered to do a one- and volunteered to do a one-hour and volunteered to do a one-hour personal appearance as soon as five companies pledged $ 20,000 each. Five local car dealers responded by making pledges, although payment has yet to be received. News of this commitment increased the number of personal pledges by viewers. Even though the number of personal pledges increased, only a small percentage of them have been honored to date. As a result, the bookkeeper is not sure how to record the pledges.
The “bequest on death” program began several years ago. There was one large bequest during the year, which left SN with a cash fund to be used for capital acquisitions only. During the years some of the money from the fund was used to acquire furniture for the shelter, at a cost substantially below fair market value.
Two grants were negotiated during the year. The first provides for the recovery of 50% of operating costs for the shelter and soup kitchen and 30% of other operating costs. The second government grant was a lump sum contribution of $ 200,000 to assist with capital costs related to the shelter for the next five years. SN must provide a minimum number of beds at the shelter during that period and create at least one full- time position or 33% of the grant becomes payable. Both grants include a clause that states, “Safety Net will provide certified documentation annually to support its claim of government funds.” The second grant also requires annual audited financial statements to be submitted to the government.
During the year, SN began a campaign to raise funds to build a new shelter for runaway children. The shelter is expected to begin operations in three years. Thus far, $ 2 million in pledges has been raised, and construction of the building is scheduled to begin sometime in July 20X8. SN plans to apply most of the $ 200,000 grant from the government to the capital costs of the new shelter. The funds



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  • CreatedMarch 13, 2015
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