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Designated Funds: Liability or Equity accounts?

Question:

A recent question came up on how certain designated funds should be reported on our balance sheet – we have funds like benevolence, scholarship, etc. – a previous treasurer changed these accounts from liability to equity and now we have another individual saying that these accounts must be liabilities; any recommendations on which way is correct?

Answer:

Unless the ministry is undergoing a certified audit or otherwise committed to strictly following Generally Accepted Accounting Principles (GAAP), I believe the classification is irrelevant. The key point is that the unspent balances will be carried over from one fiscal year to the next.

For us accountants:
Technically, the accounts are equity accounts in not-for-profit organizations following FASB 116,  which stipulates this treatment in order to comply with GAAP.

Comments

  1. Would you also agree that monies held by a mission board on behalf of missionaries (the mission board acts as the agent/trustee) should also be set up as temporarily restricted net asset accounts rather than liabilities?

    Monthly missionary support is made payable to the mission board, but some staff tell me the missionary has full control over how those funds are spent as it belongs to them. I'm also told by others that if the missionary were to leave the field, the funds are usually sent to the sending church who may decide to absorb those funds into their own ministry. What is the criteria for properly setting up these types of accounts on the balance sheet. Also, church (which oversees the mission board is moving from a cash basis to an accrual basis. I prefer that we be fully GAAP compliant.

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  2. It seems that you are addressing two issues here. One is a matter of policy for a specific organization for which there may be some latitude for your organization to determine.

    The second relates to GAAP accounting. We will answer this one:
    Typically, the situation you describe involves the use of temporarily restricted asset accounts rather than liability accounts.

    ReplyDelete
  3. Thank you Kyle. If I'm understanding you correctly, to be compliant, I really need to move these accounts from Liability Accounts to Net Asset Accounts.

    We will be using QuickBooks Enterprise Accountant 2014 as our Accounting system and here are the categories of accounts we have been considering and how we've been considering tracking by specific missionary:

    Missionary Support (where we'd record the incoming support and gifts)

    Missionary General Escrow (this is where we'd transfer the balance of the Support account once payroll had been deducted, along with some other minor transfers (tax estimates, admin fees, etc.)

    Missionary Tax Estimates (used to cover the quarterly taxes we pay on behalf of the missionary)

    We would track by missionary by possibly using QB Customer:Job.

    Do you have another recommendation that would be better?

    ReplyDelete
  4. Another question that comes to mind.....if a missionary were to leave the field permanently, but still had funds available....is it proper to just contact the sending church to determine what to do with the remaining funds or should we really be contacting the individual donors and asking them what they'd like us to do with the funds?

    ReplyDelete
  5. The matters raised by the comments from Anonymous are representative of some of the complex matters mission agencies must oversee on behalf of their missionaries. They require very specific counsel applied to each unique situation. We enjoy serving these types of needs, and do so through formal professional engagements.

    ReplyDelete
  6. FASB requires funds to be net assets. Period. Liability or worst revenue/expense accounts should never be used. I have seen all three used and its a nightmare. Liability by it very definition is money you owe to people/orgs. Do you owe fund monies to someone? No. It is a resource that you have. Stick to what the chart of accounts says that should be in each section and you will avoid dumb things happening.

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