Reporting Issues

Finding Subsequent Events

There are several procedures that help auditors find and evaluate subsequent events. These include:

1. Reading and comparing the most recent financial statements to the statements under audit. Obtain client explanations for significant fluctuations.

2. Discussing with executive management:
a. how contingent liabilities were estimated at year-end and if they have been paid subsequent to year-end.
b. if any significant events have occurred after year-end.
c. if any unusual adjustments were made after year-end.

What is a Subsequent Event?

Many financial statements disclose subsequent events for a church or ministry. What is a subsequent event and why are they important?

A material event that occurs after the balance-sheet date (say December 31, 2006) but prior to the auditor issuing the financial statements (say March 15, 2007) is a subsequent event. This event may require an adjustment to the financial statements or may require disclosure.

How do you determine if you adjust or disclose?

Sample Board Resolution for Designating the Housing Allowance

If a church hires a new minister during the year or if they need to make changes to a minister’s housing allowance, a board resolution is one of the methods used by churches to designate and approve the allowance.

For an example of a board resolution, see SAMPLE

Remember, the allowance should be approved (i.e., properly designated) before any payments are made to the minister.

Housing Expenses – (3 of 3)

In the two previous posts we have discussed how the housing allowance should be reported by a minister and taxed. What kind of housing expenses are allowed? In an excerpt from the 2006 Church & Clergy Tax Guide, published by Christianity Today International, the following expenses are allowed in computing the housing allowance:

· down-payment on a home

· interest and principal payments on a mortgage loan to purchase or improve the home

· real estate taxes

· property insurance

· utilities (electricity, gas, water, trash pickup, local telephone charges)

Nonmonetary Exchanges – New Standard – (1 of 2)

In December 2005 the Financial Accounting Standards Board (FASB) issued FAS #153: Exchanges of Nonmonetary Assets. This statement amended certain provisions of APB Opinion No. 29, Accounting for Nonmonetary Transactions.

Reporting Housing Allowance (2 of 3)

Ministers may designate a portion of their compensation as a housing allowance. Ministers do not pay federal income taxes on the housing allowances. However each year the minister is responsible for calculating any excess housing benefits and paying and reporting the federal income tax.

What is an excess housing benefit? An excess housing benefit is the difference between the housing allowance received and the amount allowed for reporting purposes. The amount allowed is the lowest of the following three:
1. Church designated housing allowance

Reporting Housing Allowance (1 of 3)

Question: How are housing allowances reported to the taxing authorities?

By January 31st churches are required to file the W-2s with their employees. By February 28th the W-2s and W-3s are filed with the Social Security Administration.

The amount of a minister’s taxable compensation is reported in box 1 wages, tips and other compensation on the W2. The housing allowance is not reported on form W-2 or on the form 1099.

Fraud Maintenance and Detection (7 of 7)

In the last several fraud postings we have discussed ways that ministries and churches may be vulnerable for fraud. Fraud is defined as an intentional act to misrepresent financial information or misappropriate resources.

Management has a responsibility to set "ethical standards" within the organization. They must establish the "tone at the top" promoting ethical behavior. In post #4 we discussed that management has the opportunity to create a culture of honesty and high ethics.

Related Party – Defined and Reporting Requirements (4 of 4)

As we have discussed in the three previous blog postings, organizations are required to disclose material related party transactions in their financial statements. Transactions incurred by compensation arrangements, expense allowances, and other similar items in the ordinary course of business are not considered to be a related party transactions and therefore not required to be disclosed in the organization’s financial statements.

Related Party – Defined and Reporting Requirements (3 of 4)

In our two previous posts on related parties organizations may incur material transactions with individuals or organizations that are required to be disclosed in the financial statements.