2063-10 - Prepaid Exp accounting - GAAP etc 10-30-10


TOPIC:  Accounting for Prepayments of Insurance Premiums                                     ORIGINATED  October, 2010

TOPICAL OVERVIEW:   Insurance premiums are sometimes paid a year in advance.  At Ministries this should show up as an expenditure when it is paid during the Ministry fiscal year.  Do NOT place it into an asset account called "Prepaid Expenses"  during the year and then allocate it as a Ministry expense during future months.  This is another example of an Internal GAAP (Generally Accepted Accounting Principles) situation which you reflect as an External GAAP matter when it is material in amount and a portion of the coverage applies to the next fiscal year.    

FILE: 2063-10                                                                                                                            UPTD:  March 09, 2012

TO Bcidot.org:  

        We are a larger Church that handles some $2,000,000 per annum via our "General Purpose Fund" operations.  Our internal Accountant is following the usual accounting rules and has set up as "Prepaid Expenses" some $35,000 of insurance premiums that we have paid for in advance of the upcoming year and will allocate said amounts as Expenditures to the future months to which they apply.

TO Onliner:  

        As the head of the Church Board's finance team, tell me why this is of concern to you.
TO Bcidot.org:  

      First,  our CPA indicates that this is the usual way to account for such matters. 
        But my
practical concern in that we have used some of our current resources to pay now for these premiums but it does not show up as operating  Expenditures until later.   Or it seems that we should know what happens now and not be so concerned about what months it pertains to later.   
        It reminds me that if at home I were to prepay an annual insurance premium now my wife and I would budget it as an Expenditures of this month as we make use of this month's resources in order to do this, etc.  
        What do you think, Jim?

TO Onliner:     
       I agree .....  I believe this is another example of unique "Ministry Expenditures" issues that all Ministries need to deal with during their fiscal year.
        You will remember that I have  set forth what has been called Internal   GAAP and  External GAAP.  
        Or some of a Ministry's  "Ministry Expenditure" transactions during the year are unique to their operations and are handled differently.   
"Ministry Expenditures" examples that are paid from the Current "General Purpose Fund" Operations Income are:
                >>  Debt Retirement
                >>  Procurement of equipment and/or fixed assets
                >>  SetASides for future expenses and/or  various projects
        These "Prepaid Insurance" matters, in my view,  are another Internal GAAP  "Ministry Expenditures" example and should be added to the example list above and handled differently both during the year and at the end of the fiscal year.
TO Bcidot.org:  

           So how should we handle such activity during the year re
Internal GAAP  and what would we do at the end of the fiscal year to comply with  External GAAP ?   
TO Onliner: 
            You plan your budget and show the insurance premium payments as "Ministry Expenditures" transactions during the month when paid and no longer have any "Prepaid Expenses"  for such transactions like this during the operational fiscal year.
            At the end of your fiscal year only,  for
External GAAP purposes,  you discover the material amounts, if any,  of those premium payments which pertain to the next fiscal year and show it as a "Prepaid Expenses" at that time only. 

          As most of you know, at  www.bcidot.org   we dialog by email with Onliners regarding Ministry Finance (MinFin) matters.  Above are what we call "Edited Onliner Dialogs", or edited versions of actual dialogs with some of you;  but we have honored your privacy and not used your name or that of your Ministry.  Our purpose is to make topical MinFin  information available to any interested  Ministry Finance Team  so we all can learn from these perspectives.   Thanx - Jim Bramer, Retired Auditor-CPA  - Proverbs  9:10

Jim@bcidot.org            UPTD:  March 09, 2012