Lecture 1 – MSCM8615 May 19, 2009

Summary of Readings  Problems  Drop in members, drop in contributions, increase in expenses, aging facilities  Lack of controls, supervision, expertise, hierarchical oversight  Lack of transparency  Embezzlements  Cost of lawsuits  Recommendations  Publication of diocesan and parish financial statements and audits in their entirety  More transparency (we will look at Boston’s Transparency Project later)  Forums with finance council members  Continuing professional education for financial officers  Parishioners should have access to written reports on all appeals that contain financial info and progress reports  Implementation of “best practices” (but they can only be recommendations, since Canon law does not require bishops to follow them), with particular emphasis on internal controls  Filing of IRS Form 990, which includes compensation info on key employees

Ruppel Chapter 1  For now, let’s just focus on some of the terminology, then we will see how it all fits together in the next few weeks

Assets and Liabilities  Asset – an item of monetary value, owned/controlled by an entity (parish, diocese) that provides future economic benefit  Examples: cash, equipment, buildings (inventory is probably irrelevant to our discussion)  Liability – an amount or benefit owed by an entity at a future point in time  Examples: payables, accrued expenses, loans  Special examples  Prepaid expenses are an asset  Unearned revenue is a liability (not as relevant for us)

Net Assets  Equal to the difference between assets and liabilities  Must be reported in three different classifications  Unrestricted net assets  Temporarily restricted net assets  Permanently restricted net assets  Also need to know which particular assets and liabilities fall into each of the three categories

Net Assets, Unrestricted  Unrestricted net assets - Assets and contributions that are not restricted by the donor or for which restrictions have expired. (Boston)  Net unrestricted assets would be the end result of the Diocesan Administration Offices liquidating all of its unrestricted assets and paying all of its liabilities. This is not cash in the bank. Property and equipment make up the bulk of the Diocesan Administration Offices’ unrestricted net assets. (La Crosse)

Net Assets, Temporarily Restricted  Temporarily restricted net assets - Net assets subject to donor-imposed restrictions that permit the Corporation Sole to use or expend the donated assets as specified and that are satisfied by either the passage of time or by actions of the Corporation Sole. (Boston)  Contributions become restricted because it is the donor’s intent that the money donated be used for a specific purpose or within a specific time period. When these restrictions are fulfilled, the contributions are released from their restriction. This year, $6,012,756 was released from temporarily restricted net assets due to distributing the $4,242,000 per the Diocesan Annual Appeal case statement, $50,000 was used towards building renovations, and $1,720,756 was distributed from the We Belong to Christ Capital campaign to the Diocesan Administrative Offices per the case statement, which includes $781,494 for the endowment funds. This year, the Diocesan Annual Appeal case statement for the pledge year is $4,242,000, this money is temporarily restricted until it can be distributed per the case statement the following year. (La Crosse)

Net Assets, Permanently Restricted  Permanently restricted net assets - Net assets subject to donor- imposed stipulations that they be maintained permanently by the Corporation Sole. Generally, the donors of these assets permit the Corporation Sole to use, all or in part, the income earned on related investments for general or specific purposes. Unexpended appreciation on permanently restricted net assets is included in temporarily restricted net assets. (Boston)  Permanently restricted contributions are contributions that are given by the donor with the intent that the amount given (the principal) will remain forever in perpetuity, unless the trust document states differently. The interest generated by this principal is used to fund the purpose of the endowment. The trust document also governs how much of the income from the endowment fund can be distributed each year as well as what happens to any excess income that is not distributed. (La Crosse)

Revenues  Revenues and Support – traditional definition of revenue is that it represents the dollar amount associated with a transaction when there are three specific elements present:  Exchange of goods or services  Agreed upon price  Receipt of cash or a promise of a future receipt of cash (creates an account receivable)  Since contributions/donations, make up a significant amount of the revenue received by a church entity, but they do not seem to fit nicely with this definition, the term “Support” is used along with Revenue

Expenses  Using up of an asset as part of normal ongoing operations  Cash is not always involved  Prepaid expenses  Depreciation  Accrued expenses

Accrual versus Cash Basis Accounting Accrual basis is GAAP (Generally Accepted Accounting Principles), but may not be needed, particularly at the parish level Cash basis is easier to understand and record The basic differences:  Under accrual accounting, revenues get recognized (recorded) when they are earned and can reasonably be expected to be received (realized) – the receipt of cash is not the critical event; expenses get recognized when they are incurred/matched  Under cash accounting, the terms cash receipts and disbursements are more appropriate than revenues and expenses; transactions are only recorded when there is a cash event; in pure cash accounting there would only be the cash account, and no such thing as liabilities; the only asset would be cash (as we will see next week when this is the case there is no need for many of the financial statements that we will be looking at; again this is only relevant at the parish level)

Other Concepts  Materiality  Asset versus expense classification may depend on the dollar size of the transaction  Historical Cost vs. Fair Value  Many assets are kept on the books at their original purchase cost, and do not reflect their “fair value”