GAAP - Internal and External Thrust --- 0941-08 12-26-08

                  TO:   All Interested Onliners                                                                      FROM: Jim Bramer. Retired Auditor-CPA
                                                                                                                                            FILE:  0941-08/fwi

                   RE:   "Internal" and "External" aspects of GAAP                               Originated in December 2008


  Today's  "FOR WHAT IT IS WORTH" editorial   

         OK, what is "GAAP" --- in most "gap" situations, something is missing?  Well, in this case nothing is missing, but it is another one of our vocational acronyms that stands for:

     G)enerally A)ccepted A)ccounting P)rinciples,  

          So without getting into a bunch of additional Certified Public Accountant (CPA) vocational acronyms, let's just say that professional accountants must do things 'according to hoyle',  or they have certain pronounced finance accounting rules and regulations as financial information is captured and displayed for applicable users.  Some of the GAAPs we will examine here are generic and some pertain uniquely to Ministry, or Non Profit Organization, finances.    By the way, some view the "P" in GAAP to also include "Practices", "Procedures" and/or "Policies."   Please go to the link at the end of this writing for more vocational details about all of this.
         
This old codger maintains that there are enough unique aspects of finances at Ministries which he has worked with for over 50 years so that
GAAP matters should be separated into the following two categories:

        >>   Every Day GAAP   for  "INTERNAL  purposes at the Ministry that apply to day to day management and reporting purposes to "insiders."  The fundamental emphasis is to be able to answer this essential question:  "How much authorized money do I have to spend in my area of responsibility?",   and then .....

        >>   Year End
GAAP   for  "EXTERNAL"  purposes that applies only to fiscal year end accountability and reporting as you provide appropriate financial information primarily to "outsiders."

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"D A I L Y   I N T E R N A L" (01)

           Of course,  these Ministries MUST have criteria for accounting and reporting of their unique finances as such "INTERNAL"  GAAP matters are formally established via written  policies  and then carefully followed in a consistent manner throughout the Ministry's fiscal year.  This enables the Ministry to be complete and thorough stewards in making prudent daily finance decisions that have to do with such fiduciary resources.  
            We further maintain that the Ministry should NOT unnecessarily "muddy the waters" during the year and attempt to commingle any "year end only"   "
EXTERNAL" GAAP   names/applications (see matters discussed below)  with the "INTERNAL"  GAAP  matters.    Or you should leave such matters for year end application only and concentrate during the year on providing meaningful information that allows your leaders to make timely and well informed fiscal decisions.  We believe the following topics are very pertinent to this entire "INTERNAL"  GAAP  process.  

                   01 - Readily know the complete balance in each Fund

          The system needs to be designed so you can view its periodic Balance Sheet report and see the amount in each Fund or who belongs to Net Assets (Liquid assets less operating liabilities).  Please  Click Here for more Info.  
           Of course, this means that all known buying transactions are shown   ....  or, as indicated when you Go Here,  you must show expenditures that perhaps have not yet flowed through the Bank Account.
           Another issue is that you have the option of setting aside once a year operations, like the Land, Building and Equipment (and related liabilities),  and you do NOT include them in every day accounting matters.  Ask us about "Memo Accounting".

                   02 - Pooled Bank accounts

          A Ministry should  not  have separate Checking/Savings Bank Accounts for each Fund or Fund Group.    All non General Fund monies must have advance  Board approval; Church Sunday School Classes (or like Auxiliaries) are not  permitted to have their own Bank accounts; 
          The Board is always in charge - no  "Pass Through"  of money is allowed without Board approval as they make sure that all money is used for the Ministry's pre-approved purpose.  When a Ministry functions from a Pooled Bank Accounts approach it requires less bookkeeping chores,  plus the Ministry should earn as much "Interest Income" as any good steward.   Please  Click Here  and   Here for more details on this topic. 

                    03 - A single entry does the job

          You establish your  Fund Accounting  system so that a single transaction entry provides you what is needed.  Or you make as few Journal Entries as possible to accommodate the peculiarities of the Fund Accounting system.

                    04 - Ease of setup and viewing of internal Financial Reports

          Your bookkeeping software ideally should provide you with the ability to go to its "Chart of Account" listing  (like that provided by QuickBooks - QBs)  and you easily gain access to all of transaction details within that Fund.   From there you design/produce 'easy to access" repetitive reports that meet your Fund Accounting reporting needs.

                    05 - Spending Control (yea, Budget) capabilities

           It is essential that all "Decision makers" timely have Spending Control (Budget) information.    As for each "Special Purpose Fund",  conclusions are almost always arrived at from the available Fund Balance - seldom from line item info.   However, in the  "General Purpose Fund",  action is determined by individual Expenditure line item "Actual to Budget" data, etc.  Click Here for information about an alternative to the usual line item Budget process.

                    06 - Fund Balance "Carried Forward" Issues:

           As to fiscal year features --- the computer accounting system needs to be able to accommodate such things as the following: 

      a>  The  "General Purpose Fund"   does have a Fiscal Year only annual emphasis; Example --- --  unused authorized annual budget line item amounts for this year are not  carried forward to the new fiscal year, etc. 
      b>  Each "Special Purpose Fund"  almost always does not have an annual (Fiscal year) emphasis as their Fund Balances are carried forward to future years.

                  07 - Condensed or One-Page overview financial reporting

          We also believe that your Ministry leaders (and/or decision makers) should, at least monthly,  be provided with a condensed (Click Here and see an Example)  key item financial report of the over-all "INTERNAL"  GAAP  results.   Usually your accounting software can not  provide such a condensed report, so it comes via an easily updated, but  manually produced Excel document.   This should include a Ministry's fiscal year-to-date recap of all of its  Income and Expenditures  - including "General Purpose Fund"  Actual to Budget data,   And then a current month end status report of its condensed Assets, Liabilities and Fund Balances.  Please Click Here for more information.

KNOW your Financial "VITAL SIGNS"

        Another perspective is that the  "INTERNAL"   GAAP  accounting and reporting system is to timely provide decision makers with at least the following "Vital Signs."

     a>    How much money is on deposit and how much is really available.
     b>   
As applicable, who owes us money and how late are they
     c>    What  "strings are attached"  to this money; or this money pertains to which part of our Ministry
     d>    How much money do we owe and are we current with our bills and like obligations
     e>    What is the scope of donor unused restricted money
     f>     What is the amount of Board discretionary money; some of which is setaside by the Board for a specific purpose.
     g>    Are we living within our General, or Operating, Fund Income and budget constraints

        We believe that this can best be done via its own Operational Accounting Set of Books that is designed for this purpose (Go Here for info about Fund Accounting) --- and it does NOT include all of the non cash fiscal resources nor accommodate "DAILY EXTERNAL"  GAAP matters discussed below.   Please Go Here  for more information on this topic.   Information on Ministry resources tied up in Land, Buildings and Equipment (LB&E),  along with related mortgages or long term obligations, is NOT needed for current decision making.   We maintain that almost all Ministries show this type of fiscal accountability in its own separate Set of Books that is updated at least annually.   Please Go Here  for content for another possible reporting option.  Please note when you  Click Here  that "Debt Servicing" and Here for procurement of certain "Furniture and Equipment"  as these two expenditures MUST  be paid from the General Operational resources.   We also deal with what we call "GAAP Overkill"  as to   Functional Expenses   matters at Churches in this  Ax to Grind  Editorial.    Please note the use of the non-accounting  terms of  PHOTO and VIDEO  found Here.   Please note Here  our comments about expenditures re "Accrual and Cash"  basis of accounting/reporting.

        More operational day to day "DAILY INTERNAL" GAAP accounting and reporting issues are also detailed below.  

 

 

 

 

 

  Mission

Camps &

 

 

 

Church

School

Agencies

  Others

Prepaid Expenses - Asset (aa) No No No No

Accounts Receivable (c)

See Below

Yes

See Below

Yes

Inventory

 

 

 

 

 

 

Retail Goods (a)

See Below

See Below

See Below

Yes

 

SCRIP (b)

 

Yes

Yes

See Below

See Below

Vendors/Plastic Payable (c)

Yes

Yes

Yes

Yes

Other Liabilities

 

 

 

 

 

 

Prepaid Income

Yes

Yes

See Below

Yes

 

Agency Monies

Yes

Yes

See Below

Yes

Operational Issues

 

 

 

 

 

 

- - -- Accrual Basis of Accounting - - -:

 

 

 

 

 

(c) Or Income as Earned

Yes

Yes

Yes

Yes

 

(c) and Expenditures as Incurred

Yes

Yes

Yes

Yes

 

(d) Furniture & Equipment

Yes

Yes

Yes

Yes

 

    SetASides from GPFund

Yes

Yes

Yes

Yes

 

(b) No Deprecation Expense

No

No

No

No

 

(d) Debt Retirement

Yes

Yes

Yes

Yes

 

 

 

 

   "See Below" means not usually applicable 

 

     (aa)  Please Click Here for more info about not using  

 

   (a)    Ask us about monthly "Cost of Goods" accounting

 

 

   (b)    Please  Click Here for more info on this topic

 

 

 

 

   (c)    Please  Click Here re Accrual basis of acctg

 

 

 

 

   (d)   Tsfd at least annually to Fixed Assets/Liabilities

 

         Click Here  for more report examples at Churches, but below are some  "INTERNAL" GAAP  report examples that result from operating in this manner:

                           Church Sample
                      PHOTO(1)  STATEMENT
                              As of 06/30/xxxx

                                                            ASSETS
            Assets

                      Checking/Savings
                        101 Credit Union Sweep Acct                             $    9,770
                        102 Credit Union Money Market @ x.xx               15,625
                        103 Credit Union@ x.xx % Due xx/xx/xxxx       101,859
                        104 �Credit Union @x.xx % Due xx/xx/xxxx        50,145
                        109 � Petty Cash - Office                                                   52
                        111 � "NOW" CHECKING ACCT                              . 1,500

                            Total Checking/Savings                                     178,951
                   Accounts Receivable                                                       4,214
                        170 � Scrip Store Advance                                             523
            Fixed Assets -- link here
            Total Assets                                                                         $183,688

LIABILITIES & EQUITY (FUND BALANCES)

            Liabilities
                            Accounts Payable                         $               625
                            Credit Cards                                                  6,328       
                            Other Liabilities                                                779
            Total Liabilities                                                              7,732

            Equity or Fund Balances  

                    320 � Elder's Discretionary                                39,588
                    330 � Donor Restricted                                         5,124
                    350 � Medical Reserves                                        1,243
                    359   Special Missions Funds                          67,773
                    369 � Short Term Mission Projects                    2,880
                    37x � Some 12 Ministry Groups                        12,761

        Total Special Purpose Funds                                    129,369
 

 General Purpose Fund YTD Net Income      46,587
 

                    Total Fund Balances                                         175,956

TOTAL LIABILITIES & EQUITY (Fund Bal)        183,688

        (1) Rather than the term "Balance Sheet" or "Statement of Financial Position" we believe that non-accountants identify better with the term "Photo" --- since it is a "Point in Time" view of your account balances.

Church Sample
GPFund  (GPF) VIDEO(2)  since 07/01/xxx1 through 06/30/xxx2

Income            %
  401 - Unrestricted Donations            807,679 100
       
Expenditures    
  500 Salaries & Benefits            425,242 83
  620 Church Office Expenses              34,605 4
  640 Property Expenses              93,147 12
  660 General Ministry Expenses            110,460 14
  700 Mission Support            103,020 13
  800 Self Funding Operations               (5,382) -1
       
        Total Expenditures            761,092 94
       
  Gain (loss) of the GPFund              46,587 6
       

        (2   Rather than "Income Statement," or "Profit and Loss Statement," non accountants identify better with the term  "Video" --- or a view of finances during a "Period of Time" of the current fiscal year.   The "Debt Servicing" and "Fixed Asset" costs are usually found within the details of the above 6xx Expenditure groups.

 

                                                  Church Sample
           SPFund (SPF)  Video Report - since 07/01/xxx1 through 06/30/xxx2      

              01 Beg. Bal. 7/1/x1                                  $ 134,202
                        40 SPF Income
                                44-Restricted Donations        171,978
                                48 Other Income                           2,369
                                49-Interest Income                       6,960
                      Total 40 SPF Income                        181,307

                       50 SPF (Expenses)
                            01-Sal/Benefits                            (11,950)
                            61 Operating Exp                      . (82,912)
                            63 Travel Expense                        (9,105)
                            64 Bldg. Maint                            . (25,700)
                            65 Grounds Maint.                        (2,065)
                            66 Modular Expense                  (14,104)
                            67 Help Provided                         (15,968)
                            81 Expense Reimb/Event Fees 60,599
                            71 Grants                                       (78,341)
                            91 Cross Fund Transfers           25,936
                            92 Fixed Asset Acquired           (31,350)
                            94 Debt Service                              (1,179)
           Total 50 SPF Expenditures                      (186,140)

    SPF Ending Balances  06-30-xxx2              $ 129,369
 

       The purpose of this "SPFund Video Report" is to show what all of the SPFunds started with at the beginning of the fiscal year and then what caused all of these SPFunds to change during the period of time.  Please especially note the above 92 and 94 categories. 
       You need to have to means to filter for the activity of a specific SPFund, or its group. 
       Obviously,  this report goes beyond what the PHOTO shows as only the balances in SPFunds at a "Point in Time".  

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"Y E A R   E N D    E X T E R N A L (02)

        But for "YEAR END EXTERNAL"  GAAP purposes they  MUST annually structure and report their finances according to applicable Finance and Accounting mandates of various monitoring agencies.   We maintain that the following items have a  YEAR END ONLY  thrust, since they are NOT structured for good day to day management purposes,  and are readily facilitated by a separate annual, what I call "Combo" Set of Books
       The "
YEAR END EXTERNAL" GAAP issues especially apply to the following matters: 
 

          Mission Camps &
      Church School Agencies All Others
Prepaid Expenses          
  Insurance   Yes Yes Yes Yes
  Others   Yes Yes Yes Yes
Inventory - Supplies   Yes Yes Yes Yes

Update Investments to Fair Market Value (FMV) (2)

Yes

Yes

Yes

Yes

Fixed Asset Capitalization Above Above Above Above
Reduction of Debt   Above Above Above Above
Depreciation Accounting Yes Yes Yes Yes
Functional Expense Accounting (1) (1) Yes Yes
Pledge Accounting  (1) Yes Maybe Yes Maybe

Released Restrictions --
Click here for more Info with an example

Yes

Yes

Yes

Yes

Net Assets (Fund Balances) as:        
  Unrestricted Yes Yes Yes Yes
  Temp Restricted Yes Yes Yes Yes
  Perm Restricted Yes Yes Yes Yes
       
  "Above":   Please also note "Daily/Monthly" comments above    
    (1) Discuss with your Ministry Savvy CPA; Also see (a) comments below and that found Here      
    "Maybe" above means not likely applicable    

 Below are examples of  "YEAR END EXTERNAL" GAAP  Year End only reports;  

SAMPLE CHURCH
STATEMENT OF FINANCIAL POSITION
For  the years Ended June 30, XXX9 and June 30, XXX8

 A S S E T S

This Year

Last Year

General Assets

Cash and Banks

$181,668

$131,340

Receivables

4,220

 

Supply Inventory

 

1,500

1,500

         Total General Assets

187,388

132,840

Land, Building and Equipment

_3,080,416        3,099,013

Total Assets

   

$3,267,804

$3,231,853

LIABILITIES & NET ASSETS

Liabilities

 

Payables

   

9,932

5,445

Net Assets

Unrestricted

3,129,452

3,197,018

 

Temporarily Restricted

128,420

29,390

Total Net Assets

 

3,257,872

3,226,408

Total Liabilities and Net Assets

$3,267,804

$3,231,853


 

SAMPLE CHURCH
STATEMENT OF ACTIVITIES #1
For the Years Ended June 30, XXX9 and June 30, XXX8

Temporarily

   Total

   Total

Unrestricted

  Restricted

This Year

Last Year

SUPPORT AND REVENUE:

   Contributions

       General

$807,679

$

$807,679

$760,171

       Restricted

171,978

171,978

196,057

   Activity Reimbursements

35,212

60,599

95,811

(1)

   Other Income

9,329

9,329

3,439

   Released Restrictions

243,877

(243,877)

0

            0

            Total

 

1,086,768

(1,971)

1,084,797

959,667

EXPENSES (a):

   Staffer Costs

433,942

433,942

432,010

   Church Operations
   (1) appeared here last year

384,741

384,741

242,947

   Missions

164,261

164,261

117,503

   Depreciation

70,389

70,389

33,684

           Total

 

1,053,333

 

1,053,333

826,144

NET ASSETS

   Yearly Changes

33,435

(1,971)

31,464

133,523

   Begin of Yr Balances

3,096,017

130,391

3,226,408

3,092,885

End of Yr Balances

$3,129,452

$128,420

$3,257,872

$3,226,408

           (a)  You will notice that these EXPENSES  are NOT according to what is known as Functional Expenses  categories.  The intent of  Functional Expenses  reporting is to show annually how much was spent for  Program, Fund Raising and General/Administrative matters by publicly supported Non Profits.   
          We strongly believe it unnecessary for member supported and controlled Ministries (like Churches),  who do not file annual forms 990 with the IRS,  to account for and display such 
Functional Expenses  within their annual reports. 

SAMPLE CHURCH
STATEMENT OF CASH FLOWS
For the Years ended June 30, XXX9 and June 30, XXX8

   

        This

           Last

   

        Year  

          Year

S O U R C E S:

   

     From Entire Operations:

   

            Income

$ 988,986

$ 959,667

            Expenses

957,522

826,144

                      Balance

31,464

133,523

     Add back Depreciation

70,389

33,684

                Total Sources

101,853

167,207

U S E S:

     To Acquire Equipment

51,792

40,697

     To finalize Mortgage debt

5,445

128,515

     Other items

(6,909)

3,095

                Total Uses

50,328

172,307

Begin - Cash/Banks

131,340

136,440

End  -  Cash/Banks

$ 181,668

$ 131,340

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           Some other link references to GAAP on this web site   are listed below

Annual GAAP Church Financial Info 
Church-Fixed Assets Acctg Issues
Current-Dormant Sets of Books
Fixed Asset and LB&E Issues l
GAAP and Budgets
GAAP compliance via QuickBooks 
Overkill re GAAP at a Church
Pledge Accounting 
QB Fund Accounting FAQ

              Link to the following excellent resource for details on Ministry/Not-for-Profit  GAAP and related information:.

http://www.muridae.com/nporegulation/accounting.html#general_subject 

K E E P   L O O K I N G   U P !!

  Click Here  for a list of of our "For What it is Worth" Editorials or Online documents.


UPTD: June 08, 2012

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