Catholic Diocese of Columbus Parish Accrual Accounting Implementation Guide

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1 The purpose of this document is to guide you through implementation of accrual accounting for your Parish. Moving to accrual accounting will involve establishing accurate accrual accounting balances in your balance sheet. Once this has been done, you will then begin, in selected cases, using a different set of entries to the ones you have used historically. This guide contains two sections. First, we have addressed the balance sheet and the conversion activity you will need to undertake. Second, the guide will walk you through each Activity Statement account and identify whether changes will occur in the transactions which impact the account. The first critical decision to be made is the date you choose to convert. The most desirable date, and the one assumed in the information below is June 30, the end of our fiscal year. At this date you would establish the balances in the new balance sheet accounts that will then carry over and be used in the new fiscal year. The information related to the accounts you will use to record income and expense, would then be employed in the new fiscal year. If you choose to convert at a time other than at year end, we ask that you contact the Diocesan Finance Office so that we may assist you in planning a course of action. There are three significant impacts that the Parish Finance Council must understand before moving to accrual accounting. First, there will be a negative impact on income in the year of conversion. This is particularly applicable to Parishes with elementary schools. The impact occurs because pre-paid tuition, which under cash accounting is recorded as income when received, will be recorded on the balance sheet at June 30, and not recorded as income until the following year. Second, the move to accrual accounting will make comparison to your prior year results much more difficult due to how transactions are recorded. Finally, the change will impact your budgeting, particularly how you calendarize your budget across the 12 months of the year. Our expectation is it will make this process more predictable and straight forward, but using history as a basis for calendarizing certain accounts will not be possible. We do believe that the benefits outweigh these challenges. Accrual accounting allows for a more meaningful matching of your income and expenses, particularly for Parishes with schools or significant religious education programs. In addition, we will now recognize all of the major liabilities that the Parish has, including loans and amounts due to the Diocese for insurance and assessment. These factors allow the Parish Finance Council to more accurately assess the financial condition of the Parish. The main areas of the Balance Sheet which will differ under Accrual accounting, include: Accounts Receivable Prepaid Expenses Fixed Assets Auxiliary Organization Income & Expense Cemetery Income & Expense Accounts Payable Accrued Interest Prepaid Tuition & Fees Deferred Income Loans From a timing perspective, we realize that the migration to accrual accounting will require education and time. Therefore, we would like to accomplish the move over several years, ending at June 30, This will provide the ability of the Finance Office to work with each Parish that requires our assistance.

2 ASSETS Checking and Savings The move to accrual accounting will not impact, per-se the accounts you have on your balance sheet for checking and savings. The exception would be funds you receive in one fiscal year, that relate to the following year, such as prepaid tuition for schools, or prepaid fees for religious education. It is important that you separate these funds and not use them until you need to pay expenses for the year the fees or tuition relate to. 6/30: if you have collected funds for tuition or fees that apply to the following year, establish accounts or sub-accounts and move these funds as appropriate. For this category of account you would Debit the new account or sub-account and Credit the account representing where you moved the funds from. Accounts Receivable Under Accrual accounting, we will begin recording on the balance sheet, amounts owed to the Parish for selected categories. For example, school tuition that families owe to the school. 6/30: you will need to determine the amounts that you are owed for several categories of accounts receivable: School Tuition Receivable what do families owe you for the school year just completed. For reporting purposes, if you have pre-school and/or latchkey, please establish a separate account for each. Allowance for Doubtful Accounts School Tuition of the amounts families owe you for the school year just completed, how much do you believe will not be collected. If you have multiple tuition receivable accounts, please establish a separate Allowance account for each. School Subsidy Receivable what do other Parishes owe you for subsidy for the school year just completed Allowance for Doubtful Accounts School Subsidy of the amounts Parishes owe you for subsidy for the school year just completed, how much do you believe will not be collected School Tuition Assistance Receivable what are you owed from outside the Parish for Tuition Assistance for the school year just completed Other School Tuition Credits Receivable what amounts are you owed from outside the Parish for other types of tuition credit that you granted for the school year just completed. This could include state funds for Ed choice, scholarship funds, etc. Allowance for Doubtful Accounts Tuition Credits of the amounts outside entities owe you for tuition credits (i.e. Tuition assistance, scholarships, etc.) for the school year just completed, how much do you believe will not be collected Religious Education Fees Receivable what do families owe you for the school year just completed. This might also include amounts unpaid for programs completed (i.e. Vacation Bible School completed in June but a family still owes you the fee). Allowance for Doubtful Accounts Religious Education Fees of the amounts families owe you for the school year just completed or programs that are completed, how much do you believe will not be collected Endowment Distribution Receivable if you have not received your distribution on an endowment by June 30, you will need to record the anticipated amount in this account.

3 In recording amounts to the Receivable accounts above, you will use the following entries DR Receivable CR Income (tuition, religious ed fees, etc.) In recording amounts to the Allowance accounts above, you will use the following entries DR Bad Debt Expense CR Allowance Please note that the Bad Debt Expense account is new. One is to be established in each major area of expense (i.e. Parish, School and Religious Education). Once these accounts are established and you begin the new fiscal year, you will follow the accounting prescribed in Financial Policy Chart of Accounts Parishes Other Accounting Procedures. The one area of receivables that we have chosen not to record is related to Capital Campaign pledges. There are three reasons for this. First, Campaign pledges are a component of Diocesan tax and if you record the receivable offset to income (the appropriate accounting entry), you may be charged tax long before you actually collect the funds. Second, pledges do not represent a commitment in the same way that tuition or religious education fees do. Finally, the recording of pledges and the associated allowance for doubtful accounts can be quite complex and require significant work on the part of the bookkeeper. Pre-paid Expenses Standard accrual accounting provides for recognition of pre-paid expenses on the Balance Sheet. Prepaid expenses are items paid for in one accounting period, but recognized in your income statement in a following period when the associated income in recognized. In determining whether you would use this account there are two things to evaluate: 1 is the income associated with the expense being recorded to the balance sheet (Pre-paid Tuition & Fees liability account) to be released to the income statement in the future 2 is the expense significant If the answer to both questions is yes, then it will benefit you to use a Pre-paid Expense account. An example might be Vacation Bible School which occurs in July, but you have some significant expenses in May and June. If the fees collected prior to June 30 are recorded as a liability, and the expenses are significant, then when the expenses are paid, you would record the offset in this account. Then in the month you recognize the income, you would recognize the expense through a reduction to this account. The two areas where it would be appropriate to use this account are: Prepaid School Expenses and Prepaid Religious Education Expenses. In order to keep our accounting as simple as possible, it is recommended that Pre-paid Expenses only be recorded at June 30. 6/30: if you have expenses which fit the above definition, you would record the following entries: DR Prepaid School Expenses CR Appropriate school expense account DR Prepaid Religious Education Expenses CR Appropriate religious education expense account Leasehold Improvements One of the significant changes that occurs with moving to accrual accounting is that Parishes will now record their major capital expenditures on the balance sheet, and recognize the cost of those items over a

4 longer period of time through recording Depreciation. Because your expenditures in prior years have already been fully recognized as an expense in account 370, we will not attempt to record the full value of your fixed assets on the balance sheet. Instead, the accounts (Leasehold Improvements; Current Year Leasehold Improvements; Accumulated Depreciation Leasehold) will be used for expenditures occurring in the current year and future years only. One additional note. It will be critical that you implement accurate recordkeeping related to your fixed assets so that when an assets is fully depreciated, no additional expense is recorded. Also, if you sell an asset that has been recorded as a fixed asset, you will need to know whether the asset is fully or partially depreciated in order to record the proper entry at the time of sale. 6/30: if you have amounts recorded in account 370 for the current fiscal year that meet the criteria for capitalization (Financial Policy Capitalization Policy), then you will record the following entry DR Leasehold Improvements CR 370 Major Capital Expenditures If the capital project is complete, then you will need to record one year of depreciation on the item as follows: DR Depreciation Expense CR Accumulated Depreciation Leasehold If the capital project is not complete, then you will not record depreciation on the item until the year it is in-service. If the capital project began in the fiscal year prior to the one you are converting in, and completed in the current fiscal year, please contact the Finance Office for assistance with generating the appropriate entries. For example, a project began in the fiscal year and completed in the fiscal year. Your conversion is at 6/30/09. This will require additional entries to record the proper amount in Leasehold Improvements. LIABILITIES Accrual accounting will allow us to more properly present our true liabilities, those amounts that we owe to someone. As part of the conversion to accrual accounting, you will add several accounts, and also you will need to reclassify several accounts previously shown in the Liabilities section. Designated Accounts Designated accounts represent amounts you have collected that you will remit to the Diocese so that we can submit one check to the designated charity. There will be no conversion activity related to these accounts. Also, there will not be any changes in how these accounts are used or the entries that will impact them. Auxiliary Organization Offset The Auxiliary Organization Offset accounts were established to allow for income and expense to be recorded for these organizations without impacting the income and expense accounts for the Parish and school. However, these are not true liability accounts, but instead, equity accounts for these organizations. We will therefore, move the balances in these accounts to the Equity section of the balance Sheet. Under accrual accounting, we will begin to record the income and expense for these organizations as Non-Operating activity (see Accrual Chart of Accounts).

5 6/30: you will establish a sub-account under Net Assets (Equity section of the Balance Sheet) for each Auxiliary. You will then record the following entry: DR Auxiliary Organization liability account CR Net Asset Auxiliary Organization account Contra Items This account will continue to be used for the same purpose as described in the Chart of Accounts. It is, however, more critical than ever that all activity recorded in this account follow the rules defined in the Chart of accounts. No conversion activity will occur related to this account. Cemetery Income & Expense The Cemetery Income and Expense account was established to allow for receipts and disbursements to be recorded for support of a Parish managed cemetery without impacting the income and expense accounts for the Parish. However, this is not a true liability account, but instead, is an equity account. We will therefore, move the balance in this account to the Equity section of the balance Sheet. Under accrual accounting, we will begin to record the income and expense for cemetery as Non-Operating activity (see Accrual Chart of Accounts). 6/30: you will establish a sub-account under Net Assets (Equity section of the Balance Sheet) for Cemetery. You will then record the following entry: DR Cemetery Income & Expense liability account CR Net Asset Cemetery account Stipend Income & Expense The Stipend Income and Expense account was established to allow for receipts and disbursements to be recorded for Mass stipends without impacting the income and expense accounts for the Parish. Unlike Auxiliary and Cemetery accounts, this account represents a true liability. The transactions that impact this account will be changed when you convert to accrual accounting as no interest income earned on a stipend savings account will be recorded to this liability. 6/30: you will need to determine the true value of the Masses you have collected stipends for but which have not been said (you should be able to review your Mass Intention book to obtain this amount). For the difference between the balance in this account and the amount collected for future Masses, record the following entry: DR Stipend Income & Expense liability account CR 70 - Other Parish Income In addition, if you have a separate bank account for Mass stipends, the amount above should be moved from the separate account to your regular Parish account. The value of the Stipend bank account and the liability should then be equal. Payroll Withholdings As payroll is paid, entries are made to this liability area representing amounts withheld from employee paychecks. There will be no conversion activity related to these accounts. Also, there will not be any changes in how these accounts are used or the entries that will impact them. Accounts Payable Standard accrual accounting calls for recording your expenses at the time service is rendered or goods provided. Since this point in time typically pre-dates the actual payment, accounting rules call for establishing an accounts payable as the offset to the expense. We have made the determination that, for

6 the most part, we will not follow this methodology. Instead, the majority of our expenses will continue to be recorded at the time they are paid. The exception we will be making is related to a number of potentially significant expenses that we believe should be highlighted on the balance sheet if they are due but unpaid at the end of a month. Based on how we have chosen to recognize payables, this will only apply to a small number of parishes. The items that you would record accounts payable for include any due but unpaid: general liability insurance premiums; the employer portion of insurance premiums for employee benefits; the employer portion of payroll taxes; the employer portion of pension payments Diocesan Assessment Property taxes Payroll School subsidy If these items are remitted in the month they are due, then no Accounts Payable would be recorded. 6/30: if you have due but unpaid amounts in any of the eight areas, record these using one or more of the following entries: DR Employee Benefits Expense (accounts 240, 241, 292, 293, 620, 625) CR Employee Benefit Insurance Premiums Payable (new liability account) DR Employee Benefits Expense (accounts 240, 241, 292, 293, 620, 625) CR Payroll Taxes Payable (new liability account) DR Employee Benefits Expense (accounts 240, 241, 292, 293, 620, 625) CR Pension Payments Payable (new liability account) DR Insurance Expense (accounts 330 or 815) CR General Liability Insurance Premiums Payable (new liability account) DR Diocesan Assessment Expense (accounts 350) CR Diocesan Assessment Payable (new liability account) DR Property Tax Expense (accounts 331) CR Property Taxes Payable (new liability account) DR Payroll Expense (debit the appropriate account where payroll due) CR Payroll Payable (new liability account) DR School Subsidy Expense (accounts 340 or 341) CR School Subsidy Payable (new liability account) Please note that if you use these accounts, then when you pay the associated invoice, you will Debit the Payable account, not the Expense account. Accrued Interest

7 Accrued interest represents the amount of interest on a loan which has been billed to you but which you have not paid. See the information under Loans to determine if you need to record entries to this account at the time of your conversion. Pre-Paid Tuition & Fees Many of our schools and religious education programs collect money in one fiscal year that is related to the following school year. Under Cash accounting, these monies were recorded as income in the year received. Under Accrual accounting, these monies will be recorded as a liability in the year received, and then recorded as income in the following year. 6/30: determine the amount you have received in tuition (and recorded as tuition income) that is really tuition for the following school year. Record the following entry: DR Tuition Income (account may vary depending on whether elementary, pre-school or latchkey) CR Pre-paid School Tuition (if you have multiple types of Tuition, then use multiple pre-paid accounts) Determine the amount you have received in religious education fees (and recorded in account 75 as religious education income) that are really fees for the following school year. Record the following entry: DR 75 Religious Education Fees (accounts may vary depending on the detail you record) CR Pre-paid Religious Education Fees (may need multiple accounts, one per major type of fee) Deferred Income The accrual accounting methodology we will use includes the recording of deferred income. No conversion entry will be necessary. See Financial Policy Chart of Accounts Parishes Other Accounting Procedures for the entries that will record activity to the Deferred Income accounts. Loans In moving to accrual accounting we will record any loans outstanding on the Balance Sheet. The amount recorded should represent two items, the loan principal, and any interest which has accrued but is unpaid. The amounts can be taken directly from the statement you received from the Finance Office. 6/30: From the loan statement, obtain the amount of principal left to be paid on your loan and record the following entry: DR Net Assets Adjustment (this is a new account) CR Loan Principal If you made principal payments during the current fiscal year (recorded in account 390), record the following entry: DR Net Assets Adjustment CR 390 Principal Payments on Debt If you obtained funds through a loan during the year (recorded in account 100 New Loans), record the following entry: DR 100 New Loans CR Net Assets - Adjustment If you have interest due but unpaid at the end of the fiscal year, record the following entry: DR 360 Interest Expense CR Accrued Interest (new Liability account) Equity

8 Under Accrual accounting, the presentation of your equity will be somewhat different than under Cash accounting. Net Asset accounts will be used to allow us to separate Permanently Restricted assets from unrestricted and temporarily restricted assets. 6/30: Execute the following steps: Set up an Equity account that will be used as a summary level account called, Net Assets Unrestricted & Temporarily Restricted. Set up an equity account called, Net Assets Adjustment. This is a sub-account of Net Assets Unrestricted & Temporarily Restricted. We will use this account to record some of the other necessary entries required for our conversion (see Loans). In Account Edit, set up your Retained Earnings as a sub-account of Net Assets Unrestricted & Temporarily Restricted. If you have endowment accounts, set up an equity account called, Net Assets Permanently Restricted. This is not a sub-account of any other account. Based on the 6/30 market value of your endowments, record the following entry DR Net Assets Adjustment CR Net Assets Permanently Restricted

9 Statement of Activity There are no conversion steps directly related to your Income and Expense accounts unless they occur as part of establishing accurate balance sheet accounts as of 6/30. In the next fiscal year following conversion, the entries that impact some of these accounts will occur differently. The information below provides insight into whether differences occur between your cash accounting entries and the new accrual accounting entries. Parish Receipts 10 Offertory offertory will continue to be recorded as you receive donations 20 Gifts, Bequests, Societies entries to record donations to this account will continue to occur as you receive the funds 60 Fund Drives entries to record donations to this account will continue to occur as you receive the funds 70 Other Parish Income entries to record donations to this account will continue to occur as you receive the funds 50 Parish Activities Gross Receipts entries to record donations to this account will continue to occur as you receive the funds. If you record Latchkey and/or pre-school income in this account, please see Note Parish Activity Costs entries to record expenses to this account will continue to occur at the time payment is made. 80 Diocesan Support Received entries to record donations to this account will continue to occur as you receive the funds 81 Net Assets Released From Restrictions distribution on an endowment recorded when check deposited provided this occurs within the fiscal year of distribution (i.e. prior to 6/30/09 for the June 2009 distribution). If the receipt is late, then the recording of the income will occur through a journal entry with the offset being a receivable. 90 Sale of Assets recorded at the time you receive the check. If the asset sold is included in your Leasehold Improvements, then additional entries will be required. 92 Insurance Recoveries recorded at the time you receive the check. 100 New Loans this account will no longer be used as new loans will be recorded on the Balance Sheet. Religious Education Receipts 75 Fees, Other Religious Education Income recording fees and other income for Religious Education will occur in two ways. o If the funds relate to a major program where the collection of income and spending of those funds spans multiple months, then you will follow the accounting prescribed in Financial Policy Chart of Accounts Parishes Other Accounting Procedures. Examples would include: annual fees for CCD; annual fees for your Youth Ministry program. o If the funds relate to a specific activity where the funds are received and spent within a short period of time, then you will record the income as the funds are received. An example would include a Senior High retreat. School Receipts 501 Student Receipts tuition will now be recorded using the accounting prescribed in Financial Policy Chart of Accounts Parishes Other Accounting Procedures 530 Net Student Services Activities, Gain or (Loss) income is recorded as the funds are received with the exception of Pre-school income (see Note 1). Expenses are recorded as they are paid.

10 540 Other School Income income is recorded as the funds are received 563 Interparochial School Support Received subsidy received from other parishes will be recorded using the accounting prescribed in Financial Policy Chart of Accounts Parishes Other Accounting Procedures Parish Expenses 200 Clergy & Religious Salaries expense recorded as paid. See Note Office Salaries expense recorded as paid. See Note Household Salaries expense recorded as paid. See Note Other Parish Salaries expense recorded as paid. See Note Maintenance Salaries expense recorded as paid. See Note Employee Benefits and Allowances, Lay expense recorded as paid. See Note Employee Benefits & Allowances, Clergy and Religious expense recorded as paid. See Note Rectory & Household Supply and Expense expenses recorded as paid 230 Office Supply and Expense expenses recorded as paid 250 Transportation & Travel Costs expenses recorded as paid 280 Church Supply and Expense expenses recorded as paid 300 Parish Charities expenses recorded as paid 301 Catholic Times (net cost) expenses recorded as paid 310 Utilities expenses recorded as paid 320 Maintenance Supply & Repair expenses recorded as paid 330 Insurance expenses recorded as paid. See Note Property Taxes expenses recorded as paid. See Note Diocesan Assessment expenses recorded as paid. See Note Interest Expense expenses recorded as paid. See Note Insurance Losses expenses recorded as paid 340 Secondary School Support Paid (Net) expenses recorded as paid. See Note Interparochial School Support Paid expenses recorded as paid. See Note 8 Depreciation expense recorded through a standard monthly entry, plus adjustments made at year end Bad Debt Expense expense recorded through year end entry to Allowance for Doubtful Accounts 370 Major Capital Expenditures this account will no longer be used as major capital expenditures will be recorded under Leasehold Improvements on the Balance Sheet 390 Principal Payment on Debt this account will no longer be used as Principal payments will be recorded as a reduction of your Loan. Religious Education 290 Clergy & Religious Salaries expense recorded as paid. See Note Other Religious Education Salaries expense recorded as paid. See Note Employee Benefits & Allowances, Lay expense recorded as paid. See Note Employee Benefits & Allowances, Clergy and Religious expense recorded as paid. See Note Transportation and Travel Costs expense recorded as paid 295 Youth Programs Supply & Expense expense recorded as paid 296 Adult Programs Supply & Expense expense recorded as paid 297 Share of Plant Costs expense recorded as paid

11 Bad Debt Expense Religious Ed expense recorded through year end entry to Allowance for Doubtful Accounts School 600 Administrative Salaries expense recorded as paid. See Note Office Salaries expense recorded as paid. See Note Clergy & Religious Salaries expense recorded as paid. See Note Lay Teacher Salaries expense recorded as paid. See Note Other School Salaries expense recorded as paid. See Note Library and A/V Salaries expense recorded as paid. See Note Maintenance Salaries expense recorded as paid. See Note Employee Benefits & Allowances, Lay as expense recorded as paid. See Note Employee Benefits & Allowances, Clergy & Religious expense recorded as paid. See Note Staff Development Costs expense recorded as paid 840 Faculty Residence Costs expense recorded as paid 610 Office Supply & Expense expense recorded as paid 615 Central Administration Fees expense recorded as paid 640 Secular Instruction Supply & Expense expense recorded as paid 644 Religion Instruction Supply & Expense expense recorded as paid 680 Library & A/V Supply & Expense expense recorded as paid 690 School Technology Costs expense recorded as paid 760 Marketing Costs expense recorded as paid 810 Maintenance Supply & Repair expense recorded as paid 811 Utilities expenses recorded as paid 815 Insurance expenses recorded as paid. See Note 4 Bad Debt Expense School expense recorded through year end entry to Allowance for Doubtful Accounts Statement of Activity Permanently Restricted Net Assets 110 Permanently Restricted Revenue income recorded as received 111 Permanently Restricted Investment Income recorded based on Catholic Foundation statement 112 Permanently Restricted Realized/Unrealized Gain(Loss) recorded based on Catholic Foundation statement 113 Net Assets Released from Restrictions Permanently Restricted recorded when distribution received, if received in the year distribution applicable to (i.e. received on or before 6/30/09 for the June 2009 distribution). If you have not received your distribution on an endowment by June 30, you will record a receivable and this account will be used as the offset for the entry. The actual receipt would then be recorded as a reduction of the receivable. Non-Operating Activity Statement The Non-Operating activity statement will contain income and expense accounts for each auxiliary organization and for the Parish run cemetery. For Cemetery and each Auxiliary, you will set up separate income and expense accounts. Transactions will then be recorded to these new accounts as activity occurs. A new Statement will be created so that your Finance Council has visibility to the activity.

12 NOTES: 1 Latchkey and Pre-school income will be recorded using the accounting prescribed in Financial Policy Chart of Accounts Parishes Other Accounting Procedures 2 if Salaries are not paid when due, a Payable will be established. The expense would be recorded as the offset to the payable, and the payable would be reduced when payment is actually made. 3 if Benefits are not paid when due, a Payable will be established. The expense would be recorded as the offset to the payable, and the payable would be reduced when payment is actually made. 4 if Insurance premiums are not paid when due, a Payable will be established. The expense would be recorded as the offset to the payable, and the payable would be reduced when payment is actually made. 5 if Property taxes are not paid when due, a Payable will be established. The expense would be recorded as the offset to the payable, and the payable would be reduced when payment is actually made. 6 if Diocesan Assessment is not paid when due, a Payable will be established. The expense would be recorded as the offset to the payable, and the payable would be reduced when payment is actually made. 7 if Interest is not paid when due, an Accrual will be established. The expense would be recorded as the offset to the accrual, and the accrual would be reduced when payment is actually made. 8 if Subsidy you pay to another Parish, is not paid when due, a Payable will be established. The expense would be recorded as the offset to the payable, and the payable would be reduced when payment is actually made.