To GAAP or not to GAAP
Churches must prepare their financial statements using Generally Accepted Accounting Principles (GAAP all the time; right? Wrong!!! This misunderstanding by church administrators can lead to the misapplication of accounting practices that can result in inaccurate and even unintentionally misleading financial statements. It is true that the Financial Accounting Standards Board (FASB) through FAS 117 require that not-for-profit organizations – including churches – prepare external financial statements in a GAAP format. However; this does not necessary mean that churches cannot utilize another method of accounting for internally prepared financial statements. More often than not; the requirement of presenting ministry financial statements in a GAAP format are an external user’s requirement such as a lender or third party accreditation agency.
One specific requirement of GAAP accounting is that accrual basis of reporting be utilized. This is a clear different for how church administrators handle their ministry finances since they are typically cash basis – that is to say that ministry leader’s typically only care about what cash came in, how much cash was sent and how much cash you have at the end of the month. Accrual accounting says that revenue is recognized when earned and not received while expenses are recognized when incurred and not paid. This principle doesn’t generally apply to most churches since they don’t typically have accounts receivables or accounts payable – revenue is typically in the form of cash and expenses are paid when cash is available to pay.
As a church CPA; I recommend that church administrators maintain their internally prepared financial statements on a strict cash basis – void of any accruals or capitalization of expenses. This methodology provides church leaders with the most accurate information as it best demonstrates the cash transactions of the church. This might seem odd to some readers of the blog since my suggestion seems the opposite of what a CPA would suggest; however this method provides the most accurate financial statements for the purposes of internal end users such as ministry leadership.
As you might expect; I suggest that ministries that utilize a cash basis of reporting obtain an annual or bi-annual audit or review by an independent CPA – preferably by a CPA who understands the unique accounting issues that churches face. The importance of obtaining financial statements prepared by an independent CPA provides leadership that the financial statements of the ministry are accurate and that there are no improper accounting practices utilized. More importantly; the church has a GAAP formatted financial statement available for third party users such as financial institutions and those who require accrual basis reporting.
I wrote another blog posting titled “Financial Statement Transparency and Accountability for the Local Church” which discusses in greater depth the importance of obtaining financial statements prepared by and independent CPA, so I won’t go too far into why I feel it is important. What I will say is that ministry financial statements need to be helpful to decision makers or else they are of little value, so utilizing a reporting basis that is consistent with the organizational structure is key to better understanding the financial position of your ministry.
Financial Accounting Standards Board (FASB). Statement of Financial Accounting Standards No. 117 (June 1993). “Financial Statements of Not-for-Profit Organizations.” Retrieved fromhttp://www.fasb.org/pdf/fas117.pdf
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