Skip to main content

Reconstructed Church Financial Statements for Bank Financing

Question:

A church owns real estate and has no mortgage. There are no records indicating the original cost of land or improvements (circa 1955). The church now plans to buy land and to build elsewhere. The bank wants financial statements as the church seeks a loan. How does the the treasurer value assets for which s/he has no costs? This includes not only the building and land, but most of the furnishings.

Answer:

The answer depends, in part, on the requirements placed on the church by the bank. If it insists on financial statements in accordance with Generally Accepted Accounting Principles (GAAP), then the treasurer has a lot of work ahead for him or her, and the bank is going to wait a while to receive its statements. Further, professional assistance may be required.

It might be that switching to GAAP reporting is long overdue for many large churches, but most small churches use non-GAAP cash or modified cash methods which work well for their congregations.

GAAP will require the church to inventory its assets (land, building, building additions, furnishings, and equipment), determine as best it can the original purchase dates and costs (not market value), and depreciate the assets using standard depreciation rules.

Of course, a 55 year-old building would likely be fully depreciated by 2011 and perhaps reflect a zero net book value on the Balance Sheet. Also, the original land, recorded at cost, will not reflect its current value. In the end, if the bank plans to use the old property as collateral or if the church plans to sell it to partially fund the new facilities, then appraised value may be the only relevant amount, not what the GAAP financial statements disclose.

Collateral is not the only determinant of the bank's willingness to grant credit to the church. Annual financial statements from the church that can demonstrate consistent cash flows sufficient to support the new debt will be very important. A strong General Fund Balance on the Balance Sheet generated by substantial cash balances (or other liquid assets) in excess of accounts payable and other non-mortgage debt is necessary. Further, evidence from the annual Profit and Loss statements of the church that its revenues consistently exceed its expenses, enough to absorb the additional new demands on the budget due to the mortgage payments, must be demonstrated.

It may very well be that the production of GAAP financial statements is less important to the bank than everything else I've discussed above. In this case, the typical church's current non-GAAP financial statements may be satisfactory. Church leaders should inquire of bank personnel whether the inventorying of assets and many other issues related to GAAP financial reporting is required.

Further, church leaders should carefully read any subsequent loan agreements with the bank to be fully informed of the bank's financial reporting requirements after the loan is secured.

Comments

Popular posts from this blog

Qualified Small Employer HRAs

On December 13, 2016, President Obama signed the 21st Century Cures Act, allowing qualified small employers to offer Health Reimbursement Arrangements (HRA) that follow certain terms.

After the Affordable Care Act was passed, the IRS originally determined that an HRA was not a qualified group health plan. The Cures Act overrules this decision. HRAs are again an option for qualifying small employers.

To be eligible, the small employer must have fewer than 50 employees and must not offer a group health plan to any of its employees.

The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) must be subject to the following terms.
No salary reduction contributions may be made (i.e., 100% employer-funded).Employer must receive proof of employee’s minimum essential coverage.Reimbursements must be for qualifying medical expenses.Reimbursements for any year cannot exceed $4,950 (or $10,000 for family coverage), which will be adjusted annually for inflation.Employer must offer the …

Gifts Paid Out of Church Funds: Form 1099-MISC Requirements

Question:
 A church gave a wedding gift of $1000 to a couple who are church members. No goods or services were provided by the couple in exchange for the gift.  Is a Form 1099-MISC required? 
Answer: In the following answer, we assume that the couple are not employees of the church from whom the gift could not be viewed as compensation for their services. Also, the amount seems to be small enough to avoid any concerns of "private inurement."

Accordingly, no Form 1099-MISC is required. According to the 2017 IRS Instructions for Form 1099-MISC a Form 1099-MISC is only required for payment of goods or services. The requirements are as follows:
"File Form 1099-MISC, Miscellaneous Income, for each person to whom you have paid during the year:  At least $10 in royalties (see the instructions for box 2) or broker payments in lieu of dividends or tax-exempt interest (see the instructions for box 8);  At least $600 in:  1. Rents (box 1);  2. Services performed by someone who is not your …

Revised Form I-9 Released

The U.S. Citizenship and Immigration Services released a revised Form I-9. All new hires after January 21, 2017, must complete the revised Form I-9. All prior released versions of Form I-9 will be invalid for new hires.

Employers are required to have a completed hard copy of Form I-9 on file for each employee. Current employees do not need to re-complete the revised form.

More information on Form I-9 can be found on the USCIS website.