Transparency In Ministry

In our 2 previous posts in the contribution/event series, we have discussed the common scenario of a non-profit solicitating contributions/revenues in exchange for a donor benefit. Donors often receive something in exchange for a contribution. Whether it is a meal, a book, a video, all of these items are treated similarly. Remember the criteria for financial reporting:

What has been communicated to the donor and what is the donor’s intended response?

The Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA) consider these types of items as direct donor benefits. The donor receives a benefit in exchange for the contribution or “event” sponsorship.

The Internal Revenue Service (IRS) refers to this type of contributions as a quid pro quo contribution. The above regulatory agencies have a similar view of how to treat these items, the first two specifically focusing on financial reporting requirements, and the later on tax benefit considerations.

The following is an excerpt from the AICPA’s Not-For-Profit Audit Guide, chapter 13 paragraph 22:
Organizations may report the gross revenues of special events and other fund-raising activities with the cost of direct benefits to donors (for example, meals and facilities rental) displayed either (1) as a line item deducted from the special event revenues or (2) in the same section of the statement of activities as are other programs or supporting services and allocated, if necessary, among those various functions.

Alternatively, the organization could consider revenue from special events and other fund- raising activities as part exchange (for the fair value the participant received) and part contribution (for the excess of the payment over that fair value) and report the two parts separately.

The above guidance by the AICPA is excellent in helping with the financial reporting aspects of this situation. The following are the presentation options discussed above:

Illustration 1
Changes in unrestricted net assets:
Contributions $200
Special event revenue 100
Less: Costs of direct benefits to donors (25)
Net revenues from special events 75

Contributions and net revenues from special events $275

Expenses:
Program 60
Management and general 20
Fund raising 35
Total expenses 115
Increase in unrestricted net assets $160

Illustration 2
Changes in unrestricted net assets:
Revenues:
Contributions $200
Special event revenue 100
Total revenues 300

Expenses:
Program 60
Other program costs relating to
direct donor benefits 25
Management and general 20
Fund raising 35

Total expenses 140

Increase in unrestricted net assets $160

The "net answer" remained the same, just a difference in reporting the expense as "net revenue" or "expense". See post # 4 as we finalize our discussion on these types of contributions.

Posted by Floyd Langley and Becky DaVee

In our two previous posts, we have discussed the different financial statement presentations, GAAP, cash basis and now we will define modified cash basis of reporting.

There must be "substantial support" for reporting under the modified cash basis. Ordinarily, a modification would have substantial support if the method is equivalent to the accrual basis of accounting for the particular item and if the method is not illogical. The modified cash basis is more common than the "pure" cash basis.

Examples include the need to report property and equipment purchased as assets; accumulated depreciation; material amounts of inventory purchased for cash as assets; liabilities arising from the receipt of borrowed cash; and employee withholding taxes not deposited with the IRS.

See our next post that discusses how to disclose these modifications.

Posted by David DuBois

Several religious organizations have created integrated auxiliaries. What are these entitites? How should the information be reported?

According to Publication 1828, Tax Guide for Churches and Religious Organizations an integrated auxiliary of a church refers to a class of organizations that are related to a church or convention or association of churches, but are not such organizations themselves.

In general, the IRS will treat an organization that meets the following three requirements as an integrated auxiliary of a church. The organization must:

** Be described both as an Internal Revenue Code section 501(c)(3) organization and be a public charity under Code section 509(a)(1), (2), or (3),

**Be affiliated with a church or convention or association of churches, and

**Receive financial support primarily from internal church sources as opposed to public or governmental sources.

Men's and women's organizations, seminaries, mission societies, and youth groups that satisfy the first two requirements above are considered integrated auxiliaries whether or not they meet the internal support requirement.

So how does a church report an integrated auxiliary? See post #2...

posted by Becky DaVee

In this series of posts, we have discussed our churches and ministries can prepare for year-end reporting. In our previous post, we discussed reconciling and closing property, plant and equipment (PP&E) accounts at year-end.

In this post we will determine the characteristics of an operating lease and a capital lease. This will assist you in making sure that all capital lease items are posted as an asset and a liability for the funds owed concerning the lease. See Exhibit D for assistance, too.

Financial Accounting Standards Board (FASB) Statement 13 provides the definitions and criteria for deciding whether or not a lease agreement is to be considered a purchase/sale agreement (and, therefore, a capital lease) or a usage agreement (and, therefore, an operating lease). The distinction between capital and operating leases has important financial consequences: it determines who (lessor or lessee) has ownership rights and who takes depreciation for the leased goods, who can treat lease costs as expenses, and other factors.

For proper explanation of FASB 13 criteria and usage, consult a leasing guide or financial textbook. Very briefly, FASB 13 states that a lease will be considered an operating lease (usage agreement) unless one or more of the following four criteria are met. If any of the following applies, the lease is then treated as a capital lease (purchase/sale agreement):

> The lease automatically transfers ownership of the property to the lessee by the end of the lease.

> The lease contains a bargain purchase option.

> The lease term equals 75% or more of the estimated economic life of the property.

> The present value of the minimum lease payments at the beginning of the lease term equals or exceeds 90% of the fair market value of the property.

In our next post, we will conclude this series by addressing how to record and reconcile prepaid expenses and unrecorded liabilities for entities that report information on the accrual basis.

Posted by Michelle Francis

Auditors normally provide a list of items that they will need during the course of the audit. This list is usually prepared and delivered to the client during the planning phase of the engagement. These items normally include reconciliations and support for selected transaction throughout the year. Management should take time to prepare these work papers and have all applicable requests completed before the audit begins. This maximizes the auditor’s efficiency and management’s time required during the fieldwork.

Another great idea for management to perform is a review of the balance sheet accounts starting at the current assets and moving down through net assets (equity). This review includes a general ledger detail and reconciliation with relevant third party information. This helps identify differences and or errors that have been recorded during the year. Based on the new auditing standards, specifically SAS 112, any error above a significant amount is reported as a significant deficiency by the auditors. To eliminate unnecessary comments in the auditor’s report, management should consider making sure reconciliations and supporting documentation is completed before the audit.

Do you have questions about the audit? E-mail or call me.

Posted by Kirk Vanderslice

Contributions may be the most gracious form of expression that a donor can provide a Ministry to aid in its Vision. Yet, with gracious offerings can come many challenges when attempting to account for the funds. The following example is a scenario that most any Ministry will encounter:

A donor purchased an event ticket in advance with the understanding (clearly printed on the ticket) that a portion of the ticket price was a charitable contribution to the church, and the remaining portion of the ticket price was for value received, a meal (therefore not tax-deductible). The ticket price was $125 — $100 charitable gift, $25 value of event. ($25 per person was the church's cost to hold the event.)

In post #1 of this series, we asked the question: Is this a $125, $100, or $90 contribution?

This real “church issue” creates numerous individual challenges, providing a great example of how a simple transaction can turn into an advanced course in not-for-profit accounting.
We will deal with these issues individually, so that we can explore the elements in the equation.

First off, the issue to be analyzed in dealing with donor contributions is the understanding of the donor’s interpretation and intent when giving. How and why did the donor give? What did they intend?

Giving is an intimate aspect of being a Christian, and it’s the Church’s fiduciary responsibility to fulfill the donor’s wishes as long as the purpose is in alignment with the organizations “mission” and “exempt purpose”.

In the scenario described previously, the Church is holding a fundraising event where a donor can prepay for a ticket to an event. The donor’s intent was to make both a charitable contribution of $75 and receive a meal valued at $25. Remember, this was indicated on the ticket the donor purchased. So the first part of the equation is easy, the donor intended to contribute $75 so the Church should record a $75 contribution upon receipt, but what about the $25 purchased meal?

Considering the donor could not attend, does this become an additional $25 contribution? Events subsequent to the contribution (donor’s inability to attend the event) do not affect the donor’s intent at the time of the contribution; therefore no further considerations need to be made.

However, how should the $25 be treated by the Church or non-profit organization? See post #3.

Posted by Floyd Langley and Becky DaVee

In our last post we discussed reconciling cash, investments and the related income and expenditures in our closing procedures.

In our post today, each entity should consider having a capitalization policy for property, plant and equipment, as determined by the Board of Directors or Management. A typical policy could state that all items above $1,500 (amount to be determined by management in accordance with reporting needs of the organization), will need to be capitalized or placed on the balance sheet as a fixed asset, instead of being expensed. Examples of property, plant and equipment (PP&E) would include computers and software, transportation, leasehold improvements, land, furniture and fixtures, computer software and buildings.

Some organizations record all disbursements as expenses; except major land and building purchases. If a capitalization policy exists, the entity may want to review the following accounts to ensure that it does not represents a purchase over $1,500 for any property, plant and equipment.

> Office equipment
> Repairs and maintanance (adds significant value (extension of useful life) to asset)
> Computer supplies and equipment
> Office supplies

These items would be included as your additions to PP&E. Besides additions, most entities should be keeping track of disposed assets each month. Disposed assets may have been discarded, donated or sold. If sold, document the date of sale or date of disposition and proceeds (deposits) from sale. The detail fixed asset list should have the date of original purchase, description of asset and purchase price of the asset that was disposed of. This will help document gain/loss on sale.

In our next post addressing year-end closing procedures, we will discuss the differences between an operating lease and a capital lease. – Stay tuned.

Posted by Michelle Francis

Cash Basis - vs - Modified Cash Basis…What’s the Difference?

Pure cash basis financial presentation is rarely used for businesses. Generally, it is limited to nonbusiness entities with very simple operations. Entities that might use pure cash basis of accounting include school activity funds, fairs, trusts, estates, and political campaigns. Revenues and expenses are recognized based on cash receipts and cash disbursements of cash, hence “cash basis”. It treats all disbursements of cash as an expense. Therefore, the purchase of an asset is recognized as an expense rather than an asset. The balance sheet ends up with only cash and equity and the income statement reflects all cash receipts as revenues and all cash disbursements as expenses.

What is the modified cash basis? See our next post, as we discuss the additional items reflected on the balance sheet.

Posted by David DuBois

I hope our previous post revealed the importance of closing the books monthly/quarterly/yearly. In this post, I will address the closing of the cash accounts and the review of the coding of income and expenses for the closing period for accurateness and reasonableness.

Each month, a reconciliation of the bank accounts should be performed. This will allow you to be aware of any errors in entries made or items on the bank statement that are there in error. Also, it will allow you to record the monthly interest income, if funds are in an interest bearing accounts or any bank charges to expenses. See Exhibit A

Investments should be reconciled each month. All the information, you will need to record investment properly will be included in the statement. See Exhibit B
for investment reconciliation. Investment should be recorded at cost; however, at the end of the month, the following items should be recorded:

·Interest Income
·Realized gains/losses
·Fees paid
·Dividend Income
·Interest Expense
·Unrealized gain/loss
·Capital Gains
·Purchases of Investments
·Sales of Investments

Besides the cash account, if the organization has petty cash accounts, that should also be closed each month. See Exhibit C for monthly closing procedures. All petty cash should be supported by receipts, so the funds are accounted for properly, each month.

Each month, it would be good to review the coding of income and expenses for accurateness and reasonableness. If all expenditures are approved by a purchase order/requisition, then the person reviewing should be familiar with all charges. Some ministries and churches may have income that has been designated for a particular use, building program or endowment. Thus, the organization should record these funds in a temporary or permanently restricted income account. This is discussed further in our December 7, 2007 blog called “Designated Contribution.”

In our next post we will discuss property, plant and equipment.

Are you ready? - Keep blogging...Michelle Francis

The following was a recent question we received via e-mail and we want to share the common situation with you.

Introduction: Contributions may be the most gracious form of expression that a donor can provide a church/ministry to aid in its vision. Yet, with gracious offerings can come many challenges when attempting to account for the funds. Most ministries solicit contributions through a variety of avenues each offering it’s own set of challenges in how the revenues and expenditures should be treated.

The following example is a scenario that many ministries and churches encounter:

A donor purchased an event ticket in advance with the understanding (clearly printed on the ticket) that a portion of the ticket price was a charitable contribution to the church, and the remaining portion of the ticket price was for value received, a meal (therefore not tax-deductible). The ticket price was $125 — $100 charitable gift, $25 value of event. ($25 per person was the church's cost to hold the event.)

The purchase of the ticket by that individual was recorded by the church accordingly- a portion as a charitable contribution and a portion as not tax-deductible.

Later, the individual was not able to attend the event, and did not request a refund of their ticket purchase.

The church relied on and used $25 of the ticket price to pay for the costs of the event.

How should the $25 be treated? Since the donor didn’t show up, is this a contribution?

What if the cost of the meal is $25 and the church/ministry spends an additional $10 per person in advertising the event?

Is this a $125, $100, or $90 contribution? See post #2 for the answer.

So what defines a designated fund/contribution? Shouldn't accounting be simple? Isn't it basic math (one plus one equals two)?

The difficulty lies in the terminology or meaning of words. The manner in which the word designated is used can cause significant differences in how churches account for a transaction.

Not all designated funds are accounted for as restricted funds. Accounting standards state only third party designated funds are to be accounted for as restricted funds. Internally designated funds, such as board-designated funds, are accounted for as unrestricted funds.

Churches/Ministries can do a lot of things to prepare for an audit. This preparation can greatly decrease audit time and therefore decrease the related audit fees.

The Ministry can begin by documenting the internal controls related to financial transactions and cycles. They should have clear, detailed procedures for each significant transaction cycle (cash receipts, disbursements, payroll and financial reporting). This could also include contribution collection procedures, fees for services, accounts payable voucher processing, debt procedures, and compliance with donor designations/restrictions. This documentation will assist the auditors in evaluating whether controls/procedures are adequate (based on the size of the Ministry) and whether they have been placed in service for the period under audit.

The Ministry should formally document the understanding and management’s measurement of risks. These risks include

> The Ministry’s strategic business risk,

> Accounting reporting risks, and

> Fraud risks within the Ministry

The Ministry should document the understanding of the above risks and steps taken by management and the board of directors to mitigate the risks identified.

Understanding the Ministry’s controls and risks will help management understand various risks that must be considered by the auditor in auditing the financial statements of the ministry.

See post #2 relating to additional documentation needed for the audit.

Many of us understand that once a month/quarter/year a business, ministry or church will need to do an assessment of its activity and the stewardship of that activity. This is considered a monthly/quarterly/yearly closing of the financial records, which is a review or overview of the books, to ensure that they are complete and all information is recorded correctly. In addition, it gives an analysis on how well an organization has done during the month/quarter/year. A similar assessment was performed in the Bible regarding the story of the talents as follows:

Again, it will be like a man going on a journey, who called his servants and entrusted his property to them. To one he gave five talents of money, to another two talents, and to another one talent, each according to his ability. Then he went on his journey. The man who had received the five talents went at once and put his money to work and gained five more. So also, the one with the two talents gained two more. But the man who had received the one talent went off, dug a hole in the ground and hid his master's money. After a long time, the master of those servants returned and settled accounts with them. The man who had received the five talents brought the other five. 'Master,' he said, 'you entrusted me with five talents. See, I have gained five more. His master replied, 'Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share your master's happiness!' Then the man who had received the one talent came. 'Master,' he said, 'I knew that you are a hard man, harvesting where you have not sown and gathering where you have not scattered seed. So I was afraid and went out and hid your talent in the ground. See, here is what belongs to you.' His master replied, 'You wicked, lazy servant! So you knew that I harvest where I have not sown and gather where I have not scattered seed? Well then, you should have put my money on deposit with the bankers, so that when I returned, I would have received it back with interest. 'Take the talent from him and give it to the one who has the ten talents. For everyone who has will be given more, and he will have abundance. Whoever does not have, even what he has will be taken from him. Matt. 25:14-21,24-29 NIV

Most of you may know this parable. In like manner, when proper stewardship is not performed over the finances of the business, ministry or church, the entity may receive IRS inquiries and/or audits; monies may be fraudulently used or wasted without the organization being aware. In closing the books, we need to review the cash accounts, review revenue and expenditures to ensure completeness and classification, determine which items purchased represents property, plant and equipment, determine if the organization has operating/capital leases and ensure that all documents are available to support long-term debt (i.e. notes payable and mortgages). If accrual basis is used, the entity will need to determine the account receivable, accounts payable, accruals and prepaid and/or deferred revenue transactions and properly post entries to set up these accounts at year-end.

In the next four blog posts we will address many of these areas, assisting you and your Church’s efforts in closing the books.

In post #2 – we will look at closing cash and reviewing revenue and expenses – Stay tuned.

Small non-public entities prepare financial statements for a variety of reasons. Usually, it is done at the request of third parties (banks, potential investors or other interested parties) or simply for internal monitoring purposes. The basis of accounting that an entity uses to prepare its financial statements generally is determined by the needs of the users.

A large number of companies, including public entities (SEC registered), prepare financial statements in accordance with Generally Accepted Accounting Principles (GAAP). GAAP basis statements require that entities comply with a large amount of accounting rules and standards resulting in management time ensuring compliance. When these entities consider the cost benefit of such compliance compared to the needs of the users, they have the option to prepare their financial statements on another basis, commonly referred to as OCBOA (Other Comprehensive Basis of Accounting). Typical examples of OCBOA include Cash Basis, Modified Cash Basis, Tax Basis and Regulatory Basis of accounting.

See our next post, as we discuss the differences between the cash and modified cash basis of accounting for non-profit entities.

As I began preparing for the Church's 2007 audit, I encountered some difficulties in calculating the activity for the temporarily restricted contributions. Over the past year our Church has launched a building campaign and we are tracking the donor contributions, expenses that have been incurred and the related third party debt that has been obtained to help finance the early phase of the construction.

My question to the auditors, are the expenses paid by the 3rd party debt included in the net assets released from restriction on the Statement of Activities? Their answer was No. Third party debt restricted for the capital campaign construction is a management designated account and therefore the activity or disbursements financed by the debt is not a restricted contribution. The management decision to borrow funds is part of “unrestricted net assets” and can be classified as a component of unrestricted net assets.

This made perfect sense, since I knew that it wasn’t a third party designation. Management’s decision to obtain financing is just that, “management” designated for capital expansion, and therefore should be reported as part of unrestricted net assets.

Tammy Bunting is the accounting manager for a large church in the Grapevine Texas area.