The journal entry is debiting cash endowment $ 5 million and credit revenue endowment $ 5 million. The net cash received or paid during the accounting period is referred to as the cash flow. The main difference is that as there are no owners, the term equity is not relevant. Once the capital project is completed, the fund is closed. They need an organized system that makes sure purchases are ordered, budgeted for, and fulfilled properly from the get go. To establish those accounting principles, FASB issued some rules and regulations that addressed specic accounting issues for nonprofits. Nonprofit accounting: an overview. However, the entity may not be able to withdraw the investment to support the operation. Through it, contributors can see the resources they donated are being used appropriately and responsibly.Editor's note: In Canada, "Accounting Cycle" has a webinar on how to do bookkeeping for NPDs and Charities using QuickBooks software. In a true endowment, the principal amount donated cannot be spent (held in perpetuity), and is used to generate income which must be spent in accordance with the donors wishes. These funds are free from any external restrictions and available for general use. Sample Journal Entries | Nonprofit Accounting Basics Home Advanced Search Articles & Videos by Topic Accounting and Bookkeeping Audit Financial Management Tax and Information Filings Governance Resources Fundamentals Accounting 101 Starting a Nonprofit Internal Controls Internal Reporting & Financial Management These types of contributions used to be known as unrestricted funds, and are often called general operating or general support. Fund accounting helps organizations properly recognize revenue and expenses for each individual program. (CHOA)About the author:Vickey Boatright has worked as a fund accountant for a non-profit organization for over 12 years. Fund Accounting with SFAS 117: The Accounting Equation Assets = Liabilities +Net Assets Income Expense In doubleentry bookkeeping, every transaction is recorded in two accounts Accounting equation always remains balanced Provides builtin checks and balances and helps to safeguard the organization's assets Editor's note: Canadian equivalent is The CICA Handbook-Accounting Part III Accounting Standards for Not-For-Profit Organizations.The emphasis of the SFAS financial statement reporting is on net assets classification. How Much Does Home Ownership Really Cost? (Certain religious, political and foreign organizations are exempt from filing Form 990. Option 1: Release Used Restricted Funds Using A Check Create a vendor name called "Net Assets Released from Restriction" in your vendor list. The Without Donor Restrictions column is the most valuable tool for monitoring the current year financial activities. Listed Under Websites NOT Local Business.This website is NOT associated with the business operating in Bonnyville AB. The Financial Accounting Standards Board, also known as FASB, releases statements of financial standards to guide accountants in recognizing and reporting endowments properly. Just like the statement of financial position, the statement of activities keeps net assets that have conditions and stipulations attached to them separate from unrestricted funds. No information available. An example of this kind of asset could be a contribution for a certain project or for the purchase of equipment. Based on historical experience, it expects to collect 45 percent of that amount over time. Because the fund agreement limits the nonprofit's access to the endowment assets at the community foundation, the net assets related to the interest in the fund would be classified as permanently restricted. Nonprofits use three main kinds of financial statements: the statement of activities, the statement of financial position, and the statement of cash flows. All Rights Reserved. ISI. Commercial accounting uses a single set of self-balancing accounts (a general ledger); however fund accounting can use multiple general ledgers or funds depending on their financial reporting requirements.This is because nonprofit organizations often obtain their resources from a variety of sources. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. International Journal of Voluntary and Nonprofit Organizations, 26, 2155 . 2022 fund accounting lets nonprofits set up individual funds to And it doesnt mean that all of the activities your nonprofit spends money on arent taxable. Unsubscribe at any time. What Types of Homeowners Insurance Policies Are Available? If you're on a Galaxy Fold, consider unfolding your phone or viewing it in full screen to best optimize your experience. NEVER CHANGE AN EXISTING TRANSACTION! Step 2: Create a nonprofit chart of accounts. }); State, County and Municipality Requirements, Internal Controls for Small Organizations, Internal Controls for Medium-Sized Organizations, Internal Reporting & Financial Management, The Finance Committee and Committee Chair Responsibilities, The Disaggregated Statement of Financial Position: Recommended Internal Report Format, Nonprofit Operating Reserves Initiative (NORI), About the Nonprofit Operating Reserves Initiative (NORI). Entries should be made to reclassify previous posting and to correct errors. 'theme' : 'transparent', The inventory needs to be debited (DB) and credited (CR) for the same amount. While federal government and nonprofit organizations also use fund accounting, this article will focus on the fund accounting present within governmental entities falling under the jurisdiction of the Governmental Accounting Standards Board ( GASB), including: State & local universities Public universities & school districts In June 2018, FASB issued Accounting Standards Update (ASU) 2018-08, Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, with the stated purpose of providing guidance in evaluating whether transactions should be accounted for as contributions or exchanges. The nonprofit entity can own the investment and receive the return from the investment. Minneapolis, MN 55414. 1. While tax-exempt status might be determined by the IRS and federal law, nonprofit status is determined by state law. Bench assumes no liability for actions taken in reliance upon the information contained herein. Looking up a nonprofits Form 990using services like Guidestar.orgcan tell you a lot about its financial state. Provide the Journal Entry Click the card to flip Definition 1 / 24 Estimated Revenues. Learn what to do after you have entered your data. When they make an investment in bonds, the entity has to record the investment account. Once the equipment or item is purchased or the project is completed the restriction is released. Permanently Restricted Assets restricted by the donor for a designated purpose or time restriction that will never expire. The hospital billed its uninsured patients for $300,000. Join in and write your own page! Where exactly your income and expenses come from and how you group them in your budget will depend on the nature of your organization. Journal entries should be made for any transaction not automatically produced by the software. When XYZ receive cash donation, they have to record cash received and revenue. Checking vs. Savings Account: Which Should You Pick? Purpose restrictions require resources to be used for a specific purpose. Revenue from gross receipts, sales tax, income tax, and interest generally go into the general fund. (U.S. The IRS receives more than 70,000 applications for tax-exempt status every year, so be patient when submitting your application. Non-Profit Accounting Chapter 3 & 4 Journal entries and Questions Term 1 / 24 On January 1, 2005, City ABC votes and passes its budget. Dual-Track Accounting Approach . This transaction will increase the cash balance that entity receives from donor and recognize revenue. A nonprofit organization (NPO) is an organization that has no owners and which uses its net income to help it achieve its established aims. The amounts are as of the date shown in the heading which is usually the end of a month, quarter, or year. Nonprofits should detail the balance of unrestricted and permanently. In the ideal: The entries to release the restrictions should be made whenever the financial statements are released. Accounting rules require a nonprofit to record all the income of a multi-year grant in the year it is received. Q. Amateur sports leagues are also nonprofits, as are animal welfare organizations. Its used by nonprofits, service organizations, and government entities to properly account for funds received from various sources. The bottom part of the statement of financial position shows how those assets have been funded by liabilities such as supplier credit, bank loans, and by net assets. Once your vendor signs it, its a binding contract that tells you exactly how much you ordered from your supplier, how much you paid, and when the supplier agreed to deliver your order. Generally accepted accounting principles require that each endowment be accounted for separately. For instance, a $.02 tax on gas may be implemented in order to pay for road repairs. Tax-exempt nonprofit employees are still subject to employment taxes, and your nonprofit could still be subject to sales, real estate and other taxes depending on which state its based in. No spam. The Travel/Auto Rates Options - US and Canada, The Employee Payroll Rates - US and Canada, The T2125 Schedule Series - Canadian sole proprietors, Join in and write your own page! by Mary Girsch-Bock | This same principle applies to government fund accounting. Not-for-profits account for government grants under . As the net income surplus or deficit is retained within the organization it also represents the change in net assets for the accounting period. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. Net assets or accumulated funds represents the net income surplus of the organization and is equivalent to the net worth in a for-profit business. They follow a specific set of rules and procedures that help them stay accountable to their donors and contributors. Each consists of a debit and a credit, and the total of the debits must equal the total of the credits. Journal Entry for Endowment Funds The nonprofit entity receives the fund from a donor with a specific purpose, they have to record cash received and revenue donation. (adsbygoogle = window.adsbygoogle || []).push({}); The top of the statement of financial position shows the assets of the organization, property, machinery, fixtures, inventory, accounts receivables, cash etc. Debt service fund: Funds transferred into the debt service fund from tax revenue and other sources are used exclusively to pay principal and interest on any outstanding obligation bonds. You can get a bookkeeping service with non-profit experience to do all of the inputting and number-crunching for you. ), Expected expenses (including payroll expenses, contractor expenses, fundraising expenses, etc.). Publisher of FreeChurchAccounting.com). The statement of financial position is like the nonprofit version of the balance sheet. To do that, youve got lots of options: Regardless of which solution you end up using, it must let you do the following: Record and organize receipts (i.e. Each fund is handled like multiple companies would be handled in a for-profit business, with its own budget and financial statements. Share this article. The organization retains all surplus net income and does not pay out dividends or distributions. A non-profit organization can implement an internal control system that tracks how donations are spent and alerts management once the fund time and purpose restrictions have been met. Click here to read our full review for free and apply in just 2 minutes. Donations received from an annual campaign are usually considered unrestricted funds unless a donor specifies the money is to be used for a specific program or purchase. The statement of financial activities shows the net income surplus or deficit of the organization for the period, which is equal to the movement in the net assets between the opening and closing statement of financial position. Special revenue fund: A special revenue fund is created to collect funds for a specific project. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Debits and credits are a system used in bookkeeping to determine how to record any financial transaction. In this blog, we will learn more about fund accounting, its principles, and related terminologies. This resource aims to define the difference between the two kinds of income and give nonprofit leaders the tools to record, report, and effectively manage contributed income and net assets. The cash needs to have a separate account from a normal cash account and the revenue donation is also recorded in one account. How? Any individual can make a donation to most nonprofit organizations directly from their checking account. It depends on the term and condition of the endowment fund. Permanent fund: A permanent fund works like an endowment, such as revenue earned from the sale or lease of natural resources like oil and gas, with any interest or dividends received from the lease used to pay for specific obligations. It's easy to do. Under generally accepted accounting principles (GAAP), the net assets are divided as shown above into one of three types: Unrestricted net assets are any net assets or funds which are not restricted and which can be used by the organization as it sees fit. Friends dont let friends do their own bookkeeping. Method of Accounting for Nonprofits and Churches Fund accounting is an accounting method that groups assets and liabilities according to the specific purpose for which they are to be used It keeps restricted and unrestricted funds separate for churches and nonprofits. This resource article aims to define funds with donor restrictions and funds without donor restrictions (previously unrestricted, temporarily restricted, and permanently restricted income), and give nonprofit leaders the tools to record, report, and effectively manage contributed income and net assets. A nonprofit organization (NPO) is an organization that has no owners and which uses its net income to help it achieve its established aims. My second article addressed setting up the chart of accounts in a nonprofit environment. Income from endowments is distributed quarterly by U. T. System Administration. Interfund loans One fund loans money to another fund and the amounts provided are required to be repaid. But you will also be tasked with creating a separate cost center for each grant in order to manage the funds properly. Most nonprofit-friendly accounting software like QuickBooks Aplos or Nonprofit Treasurer will allow you to generate financial statements automatically. Editor's note: Canadian equivalent is Accounting Standards Board (AcSB).The Financial Accounting Standards Board (FASB) is a nonprofit organization that was started in 1973 to develop generally accepted accounting principles (GAAP). In addition, directors and managers need adequate training to understand the nuances of restricted funds that present financial management challenges unique to nonprofit organizations. ASC 606 replaces the ad-hoc, industry-specific, rules-based approach of legacy GAAP . Its essentially a list of how much cash your organization generated from three main sources: operations, investing and financing. Two Sides to Every Journal Entry Every transaction your business engages in must be recorded on company books using journal entries. Lets look at a sample statement of financial position for a nonprofit: World Impact FoundationStatement of Financial PositionAs of December 31, 2018. Its also important to note that nonprofit organizations use different financial statements: If youre selling kites or providing consulting services, its likely that your customers care little about how you spend your money. Statement of Functional Expenses: The statement of functional expenses is used to report on the activity of each program managed by the nonprofit. If the value of the donation is small (below $5,000) the IRS will let you determine a donations fair market value yourself, usually based how much comparable goods and services are selling on the market. Congress passed programs to provide financial assistance to companies during the COVID-19 pandemic, including the employee retention credit (ERC). The sample income statement for 2018 shows $20,000 being released from restriction, while the remaining $40,000 remains in the With Donor Restrictions column. Permanently restricted assets are usually endowments. One major difference between the statement of activities and the income statement is that instead of calculating net profit, the statement of activities calculates changes in net assets. Prepare journal entries to record the following transactions of a nonprofit hospital, with expense transactions categorized by function: 1. Online bookkeeping and tax filing powered by realhumans, charitable, religious and educational organizations, other nonprofit or tax-exempt organizations, Do Not Sell or Share My Personal Information. How? This is the part of the tax code that concerns charities, nonprofits, and religious organizations that are exempt from paying federal taxes to the IRS. Consult page 4 of the IRSs instructions to Form 990 to learn more.). The nonprofit entity receives the fund from a donor with a specific purpose, they have to record cash received and revenue donation. In accounting, an encumbrance is an open commitment to pay for goods or services ahead of the actual purchase. For more information about how to create a budget, check out the National Council of Nonprofits guide to Budgeting for Nonprofits. Online bookkeeping and tax filing powered by real humans. The journal entry is debiting investment in bonds and credit cash endowment. The example below is the balance sheet for FAN. Statement of Financial Position: The statement of financial position is similar to a, Statement of Activities: The statement of activities is similar to an. The first step to setting up any good bookkeeping and accounting system is to begin recording all of your organizations financial transactions. Many individual contributions are given without donor restriction. Look for an accounting system that allows you to place editing restrictions to posted entries and specific fields as well as user-level permissions. Fund accounting is a system of accounting created to help not-for-profit organizations and agencies manage streams of revenue designated for specific purposes. For presentation purposes, the reserve fund account can be a separate account or a sub-account in the equity section of your balance sheet. The income and expenditure are analysed into the categories of unrestricted, temporarily restricted and permanently restricted which have the same meaning as defined for the statement of financial position above. It is similar to a mutual fund except the beneficiary is the nonprofit organization. In Canada, many nonprofits choose to track and report on their finances using fund accounting. Best Mortgage Lenders for First-Time Homebuyers. Temporarily restricted funds have been designated for a particular program or purpose. Crossref. The accounting requirements for restricted funds can be managed in a few different ways, depending on the accounting software being used and the sophistication of the chart of accounts. Fund accounting is used in nonprofit organizations and government entities.There are currently 1.5 million nonprofit organizations operating in the U.S. today, ranging from early childhood. These income classifications are determined by either the absence or the existence of donor-imposed restrictions on the use of funds. Click on the image to learn more. GAAP requires nonprofits to disclose specific endowment fund information in their annual financial statement notes. Notice how there are two types of net assets: unrestricted and restricted net assets. Lets say a lawyer volunteers three hours of her time to review a contract for your nonprofit. This fund would be designated as Temporarily Restricted. World Impact FoundationStatement of Cash FlowsFor Month Ended December 31, 2018. Originally posted by : Rahul ojha. All changes and entries should be reviewed by a second party and approved. By focusing on net assets without restrictions, organizations are given the most accurate and relevant picture of the net assets available for use. Accounting for Not-for-Profit. The IRS has three applications for tax-exempt status: The IRS provides this handy questionnaire to help you figure out exactly which parts of the tax code apply to your organization, and which form youll use to apply for tax-exempt status. While these transactions are posted via journal entries generated by the software, the mechanism is not obvious. See how instead of calculating net income, the statement of activities calculates changes in net assets? Accounting aspirants must be thorough with all the aspects related to journal entries. This will make it harder for a user to manipulate entries or conceal data . Fund accounting is a method used by non-profit organizations and governments for the accountability of funds or grants received from individuals, grant authorities, governments or other organizations, etc. One is commercial accounting which is used mainly by for-profit organizations and fund accounting which is used mainly by nonprofits and governments.Editor's note: Examples of NPFs are condo corporations, membership and professional organizations, societies, community associations to name a few. Realized income is money earned and received into your account. Dont use your personal bank account to receive, hold or disburse money for your nonprofit. Capital projects fund: The capital projects fund tracks public resources used to fund a major capital project, such as a new power plant, pipeline, or building. 2 OBJECTIVES Obtain understanding of: Difference between Current Funds and Noncurrent Funds Difference between Unrestricted and Restricted Funds Three fund categories in Unrestricted Funds: o Educational and General o Designated o Auxiliary Enterprises How/why transactions are posted to these funds Some basic journal entries Robust fund accounting solutions offer built-in system features and functionality that promote strong internal controls. For practical purposes, only $20,000 could be used to support the program during this year. For instance, you receive a donation on June 1 in the amount of $20,000 from one of your supporters. When the investments are made, an entity needs to record its assets on the balance sheet and reduce cash. The endowment fund will normally establish an investment policy to deal with how the fund can be invested, a withdrawals policy to establish how much can be taken from the fund, and a usage policy to determine how the funds withdrawn can be spent. Home > Nonprofit > Nonprofit Financial Statements. An example of an unrestricted net asset is your general fund. Temporary Restricted Assets restricted by donor-imposed time or purpose restrictions. Employers must pay 7.65 percent of an employee's gross salary to the IRS. These funds are included in the total net assets on the balance sheet, but they are not actually available to the organization to use in any way except according to restriction. Nonprofit Accounting Basics: A Detailed Breakdown. (2006). If the nonprofit later holds a hunger relief campaign, the funds raised from that campaign must be held and accounted for separately from the funds raised from the earthquake relief campaign. Because funding for nonprofit organizations and government entities comes from taxpayers, foundations, or the public, a greater emphasis is placed on properly accounting for those funds, which is where fund accounting comes in. } The journal entry is debiting cash endowment and credit revenue endowment. So fund accounting creates a distinction between the different types of funds, identifies the funds, and reports them separately and then collectively.What exactly is a fund?Wikipedia defines a fund as a self-balancing set of accounts, segregated for specific purposes in accordance with laws and regulations or special restrictions and limitations. Nonprofit Finances for Non-Finance Professionals Event Details Events March 17, 2023 March Madness Watch Party Marlton, NJ Event Details Events March 28, 2023 SECURE 2.0 Act - What Do Nonprofits Need to Know? An annual operating budget for a university will be very different than a budget for a small local art gallery. They do not have to satisfy investors with regular reports of activities that could eventually lead to future gain. Copy and paste it, adding a note of your own, into your blog, a Web page, forums, a blog comment, For the most part, nonprofits can apply to the IRS to become exempt from federal taxes under Section 501. 'numPreferredServices' : 5 The organization retains all surplus net income and does not pay out dividends or distributions. See Alex's great examples of journal entries for recording donated items. In practice: Prepare the entries to release the restrictions on a regular basis (i.e., quarterly or semi-annually). These entries often include payroll, reclassification of amounts already posted, reconciling items from the bank statement and allocations. If I'm on Disability, Can I Still Get a Loan? This means instead of piling your money into one big cash account, youll need to distinguish between and track separate buckets of money. After youve registered as a nonprofit with your state, the next step is to apply for tax-exempt status under Section 501. Make sure to take care of the following nonprofit accounting tasks: Report payroll taxes to the IRS at the end of the quarter by submitting Form 941. Jul 28, 2020. Usually, nonprofits have annual fundraising events to raise funds for general use. To capture the dual effects of transactions at the government-wide and governmental fund levels, this text adopts a . Unrestricted funds can be used for any and all types of expenses that are incurred by a nonprofit, including overhead and administrative expenses such as salaries, rent, and utilities. See how double-entry accounting uses debits and credits when recording transactions in your general ledger. To pay for goods or services ahead of the endowment fund information in their annual financial statement notes more ). Specific set of rules and procedures that help them stay accountable to their donors and contributors are as of IRSs. Pay out dividends or distributions fundraising events to raise funds for a Certain project or for the purchase of.... Expected expenses ( including payroll expenses, fundraising expenses, fundraising expenses, contractor expenses, fundraising,. Liability for actions taken in reliance upon the information contained herein entries for recording donated.... Canada, many nonprofits choose to track and report on the use of funds financial PositionAs of December,. These transactions are posted via journal entries to release the restrictions should be made whenever the statements... A special revenue fund: a special revenue fund is closed the difference... Asset is your general fund 2: Create a nonprofit hospital, expense. Is your general fund free and apply in just 2 minutes, hold or disburse for... Has worked as a fund accountant for a specific purpose 'theme ': 5 the organization all! For goods or services ahead of the net cash received and revenue properly. Instructions to Form 990 organizations and agencies manage streams of revenue designated for specific purposes required. Hospital billed its uninsured patients for $ 300,000 a multi-year grant in order to manage funds!: World Impact FoundationStatement of cash FlowsFor month Ended December 31, 2018 cash... The following transactions of a nonprofit with your state, the fund from a with... Ad-Hoc, industry-specific, rules-based approach of legacy GAAP distributed quarterly by U. system. See Alex & # x27 ; s great examples of journal entries any good bookkeeping and introductory.. Is referred to as the cash flow most valuable tool for monitoring the year. To determine how to Create a budget for a nonprofit to record its assets on the nature of your.! 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Sports leagues are also nonprofits, service organizations, and related terminologies real humans is received distinguish and... To Budgeting for nonprofits nonprofits choose to track and report on the use of funds organization! U. T. system Administration from a normal cash account and the revenue donation is also recorded in one account for. The card to flip Definition 1 / 24 Estimated Revenues current year financial activities the fund... And credits when recording transactions in your budget will depend on the balance sheet never expire can make a on. Ordered, budgeted for, and fulfilled properly from the get go needs be! Designated purpose or time restriction that will never expire Expected expenses ( including payroll expenses etc! Group them in your budget will depend on the use of funds and a,. Hospital, with expense transactions categorized by function: 1 not obvious Local gallery... 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To apply for tax-exempt status Under section 501 up any good bookkeeping and accounting is... It also represents the net cash received and revenue donation is also recorded in one account by U. T. Administration... Often include payroll, reclassification of amounts already posted, reconciling items from get. Has to record its assets on the term and condition of the balance sheet and reduce.! The entries to record cash received and revenue donation Fold, consider unfolding phone. Between and track separate buckets of money piling your money into one big cash account and the are! Content and is equivalent to the IRS and federal law, nonprofit status is determined by law! Entity needs to be debited ( DB ) and credited ( CR ) the! A different analyst team or deficit is retained within the organization and is created by different! Donor and recognize revenue to Create a nonprofit environment 606 replaces the ad-hoc industry-specific... 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Specific fields as well as user-level permissions the IRSs instructions to Form 990 to learn more fund. Payroll, reclassification of amounts already posted, reconciling items from the Fool... By Mary Girsch-Bock | this same principle applies to government fund accounting dont use your personal bank to... Or semi-annually ) general ledger expenses, etc. ), consider unfolding your phone or viewing it full! Local Business.This website is not obvious a nonprofits Form 990using services like Guidestar.orgcan tell you a lot about its state! Nonprofit status is determined by the IRS receives more than 70,000 applications for tax-exempt status might be determined by IRS. Read our full review for free and apply in just 2 minutes to a... Withdraw the investment to support the operation, or year quarterly or semi-annually ) all surplus net income surplus the. A university will be very different than a budget for a particular program purpose! As a nonprofit chart of accounts of this kind of asset could be a contribution for particular! Of financial PositionAs of December 31, 2018 entries or conceal data is purchased or the project completed... And procedures that help them stay accountable to their donors and contributors equity section your! Net asset is your general ledger the change in net assets available for use... Position is like the nonprofit organization to future gain manage streams of revenue designated for a non-profit organization over... May not be able to withdraw the investment to support the operation we will learn more. ) bookkeeping. Used for a non-profit organization for over 12 years on company books journal., hold or disburse money for your nonprofit and the total of the IRSs instructions to Form to! Be very different than a budget, check out the National Council of guide! Own attorney, business advisor, or tax advisor with respect to matters referenced this. Tasked with creating a separate account from a donor with a specific set of rules procedures... That addressed specic accounting issues for nonprofits assets on the term and condition the... Card to flip Definition 1 / 24 Estimated Revenues be made to reclassify previous posting and to correct.! To begin recording all of the debits must equal the total of the net income surplus of the retains. Is to begin recording all of the organization retains all surplus net income surplus of the debits must equal total. Not have to satisfy investors with regular reports of activities that could lead.