Nonprofit finance, accounting, and tax news. Other tidbits of interest to the charity community.
A local church should keep track of its equipment, improvements to property, and building.
You will definitely need that information if you have an audit, review, or compilation of your financial statements.
A far more common reason to accumulate that information is for insurance purposes. In the event of a tragedy such as earthquake, tornado, or hurricane, you will need to have some detail records to present to you insurance company to get full recovery for your loss. (more…)
This is the most technically complex ratio we will discuss. This is one of three calculations that lenders typically use when considering whether to make a loan to a local church. Previous discussions started here, and continued here and here.
The concept of this ratio is to look at how much income the church had last year to apply towards the loan payments. This would take the change in net assets (okay, okay, you can call that net income if you want) then add back interest and depreciation. This represents the income that could be applied to loan payments after all the other expenses were paid.
This number is then divided by the total P&I payments, not just the interest expense.
So you see it is an interesting arithmetic calculation. The goal is to provide an indication how easily the church will be able to continue making loan payments.
So what does this calculation look like? (more…)
Another thing lenders look at when evaluating whether or not to make a church loan is the ratio of debt to total income.
This calculation looks at the total long-term debt, or the loan that is being considered, and compares that to the total revenue. This would include contributions and the various program revenue items. If there is a school, the tuition income would probably be included.
The ethical attitudes and values of senior leadership will set the ethical atmosphere for an entire organization. This is called “tone at the top.”
This is something an auditor considers on every audit.
If you would like a short explanation of this idea, along with suggestions on what senior leadership can do to create a good environment, check out Tone at the Top, a post by Sharlynn Garza at the Nonprofit/Government GPS blog.
In my years of auditing, it has long been obvious that organizations have a corporate personality. (more…)
When considering whether to make a loan to a church, a lender will likely look at the loan to value ratio. Introduced this discussion here.
In one sentence, LTV is the ratio of the balance of the loan in relation to the appraised value of the real estate that will be securing the loan.
Purpose of this ratio is to evaluate how secured the lender is in the event the loan has to be foreclosed. If the lender takes back the property, will they be able to sell it and recover their loan balance in full after paying commission and closing costs along with past due interest.
Typically, the expected ratio is 70% or less. Go over that ratio and the lender probably won’t make the loan.
I have started a series of posts about ratios used by lenders when considering a church loan. Here are the financial statements I made up to illustrate the series.
A loan officer would extract data from these financial statements to evaluate whether the church is healthy enough to afford the loan. The overall health of this fictitious example is probably slightly better than the typical church today, but that is just my guess.
Example Community Church – financial statements
Statement of financial position (a.k.a. balance sheet) (more…)
Where will the loan officer get the numbers for calculating those ratios when deciding whether to give your church a loan?
That’s where those financial statements from your CPA come into play. The loan officer will go to those financial statements for last year and pull out the numbers.
This is where the question of having an audit or review comes into the discussion. (more…)
A loan officer from your bank or credit union looks carefully at your financial statements when deciding whether to give your church a loan for construction or to refinance your existing loan. A variety of numbers will be pulled from the financial statements and compared to other numbers. What does the loan officer look at?
I will discuss this in a series of posts. I’ll describe the ratios, how they are calculated, and give an illustration.
4,100 people work so 200 can fly.
In August, my wife and I toured the USS Midway aircraft carrier museum in San Diego. Quite a treat if you enjoy either airplanes or naval ships.
One narrative plaque really caught my attention. It quoted someone as saying that 4,100 people are hard at work onboard so 200 can fly airplanes. Since the purpose of the carrier is to put planes in the air, everyone else on board is in a ‘supporting’ function.
Seems to me that this is a good illustration of the concept of overhead or functional allocation that we work with in the nonprofit world.
I’m developing a post on the functional allocation issue. Particularly how expensive it is to conduct ministry in the American cultural context. Part of that discussion will be analogies to the “overhead” it takes the US military to accomplish its mission.
As a lead-in to that idea, consider the following blog post by Jasmine Lee, a photographer who went on a KC-10 flight to refuel some C-17s and the Thunderbird flight demonstration team.
U.S. Air Force Media Flight – Travis Air Force Base… Part I
Some really cool pictures. A good photographer, decent equipment, flight of F-16s, a tanker to put you 100 feet from said flight, and awe-inspiring skill of the USAF crews combined to produce fabulous photos.
Also an amazing 37 second video of an F-16 sliding into position to draw fuel.
As you look at the pix, consider the amount of effort that is behind the scenes.
The discussions on the revisions to lease accounting are starting to get technical. I am going to continue discussing the proposed revisions but will do so on my other blog, Attestation Update. If you think that stuff is cool, check out that blog for a May update and future discussions.
(duplicate of post at Attestation Update)
Uh, oh. In part four of the Journal of Accountancy’s interview with FASB chair Leslie Seidman, she made it clear that the comments at the FASB’s website about their meeting in February do not mean they are changing the direction they’re going on leases.
They still intend to bring most material leases on to the balance sheet.
Consider dashboards.
Having a problem interpreting your 10 page financial statement to the board? Try turning key indicators into a green, yellow, or red light. Put several key pieces of data on a summary page and you have an easily understood report on where the organization stands.
Might be worth your time to ask your funders if they really need to see audited financial statements. If the only reason you’re having an audit is to meet the requirements of a few foundations, call them to see if they still need it. Perhaps they would be happy with reviewed financial statements.
(duplicate of post from Attestation Update blog )
Looks like FASB is listening very seriously to the comment letters on leases. They seem to be backing off on some of the strongest components of the lease revisions. (see big news in UPDATE below!)