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Plant Fund Accounting The Basics Beyond the Bottom Line 2017 Robyn W Kajiura, General Conference Auditing Service
Plant Fund AccountingThe Basics
Beyond the Bottom Line 2017
Robyn W Kajiura, General Conference Auditing Service
Course Description
This course reviews the fundamental concepts
of plant fund accounting and illustrates the
most frequent plant fund transactions using a
two-fund plant fund model.
Learning Objectives
Review foundational concepts of fund accounting
Describe the two plant funds (sub-funds) recommended by the SDA Accounting Manual
Identify sources of increases and decreases for Unexpended Plant Funds
Identify sources of increases and decreases for Net Invested Plant Funds
Know the basic plant fund entries relating to the most common plant fund activities
Recognize areas for potential problems
Do you have any
questions?
WHY?
Why? - Fund Accounting
Fund accounting: Accounting and reporting in accordance with activities, objectives or limitations that are either specified by donors, imposed by outside sources, or designated by the governing committee. Allows for separate reports for the separate segments of the organization.
Fund accounting is used when segregating resources into funds is the best way to monitor and report on the entity’s stewardship responsibility. It is common in not-for-profit and government organizations.
SDA Accounting Manual requires fund accounting for conference, mission, college or university financial statements which include land, improvements and buildings.
HOW?
How? - Fund Accounting A Fund is a separate accounting entity with a self-balancing set of
accounts for recording assets, liabilities, net assets and financial activity.
Transactions within and between funds require a complete entry in each fund because each fund is a separate entity (require balancing DR and CR).
“Due to/from” accounts are used to record inter-fund transactions if cash is not transferred. (Balance sheet)
“Transfer to/from” accounts are used if cash/resources are intended to be transferred. (Income statement)
Transactions between funds don’t increase/decrease the total resources of the organization. They are not revenues or expenses.
Plant Fund Accounting
Plant funds: the funds that include all the accounts related to the entity’s land, land improvements, buildings, equipment, and furnishings which are used for the organization’s purposes.
Plant funds do not include land or buildings which are held for future sale or for long term investment purposes.
Plant Fund Accounting
Unexpended plant fund: Resources that are available for future acquisitions of property, plant, and equipment. Accounts such as cash, investments, receivables, payables, etc. Considered non-current on the balance sheet.
Invested in plant fund: Resources that have been spent for property, plant, and equipment. Accounts such as land, building, equipment, accumulated depreciation, and plant-related debt. Considered non-current on the balance sheet.
Unexpended Plant Fund
Increases come from donations, investment earnings, proceeds from sale of assets, and funding transfers from operating funds.
Decreases result from purchases of assets, payments of plant debt and interest, losses on investments, and transfers to operating fund.
Net Assets = unallocated, allocated, or restricted, depending on source of funds and instructions from committee or donors.
Resources typically consist of cash, investments, amounts due from other funds, and occasionally, accounts receivable or accounts payable. These accounts are reported as non-current in the balance sheet.
Repairs and maintenance are expenses in the Operating fund.
Invested Plant Fund Increases come from donations or other acquisitions of plant
assets, and reduction of outstanding plant debt.
Decreases result from depreciation expense, disposal of a plant asset, or increase in plant debt.
Net Assets = PPE less accumulated depreciation less outstanding debt on plant assets.
Payments to acquire plant assets are recorded as transfers between Unexpended and Invested in Plant funds (not revenue & expense)
Accounts include land, building, Improvements, equipment, vehicles, furnishings and leased equipment, as well as debt against those assets. All are non-current on the balance sheet.
Plant Fund Financial Statements
Statement of financial position
Statement of financial activity and changes in net assets
Statement of cash flows
Footnotes
Activity: Transfers between FundsTransfers: Transfers are movements of resources from one fund to another. They do not increase or decrease net assets for the organization overall, but represent financial activity within each fund. Transfers should be authorized by the governing committee.
Acquisition funding: Transfer of resources from the Operating fund to the Unexpended plant fund for the future purchase of plant assets. Generally funding is focused on a particular project.
Depreciation funding: Transfer of resources from the Operating fund to the Unexpended plant fund for the future replacement of plant assets. Systematic funding and related to the depreciation of assets or budget goals.
Operation Funding: Not as common; reverse of above.
Plant Fund Entries #1Fund Transfer (Question)
The governing committee voted to allocate $30,000 from unallocated non-tithe resources for future replacement of buildings and $10,000 from unallocated tithe for equipment.
Plant Fund Entries #1Fund Transfer (Answer)
Operating Fund Debit CreditUnalloc Tithe Function–Transfer to Plant 10,000Unalloc NT Function-Transfer to Plant 30,000
Cash in Bank–Operating Fund 40,000
To record allocation of resources for future plant use Unexpended Plant FundCash in Bank–Plant Fund 40,000
Unexp Equip Function–Trans from Oper 10,000Unexp Bldg Function-Trans from Oper 30,000
To record allocation of resources for future plant use
Activity: Purchases & SalesMost plant fund activity impacts both plant funds (Unexpended and Invested in Plant) and in essence represents a transfer of assets between them.
Purchase of assets: When an asset is purchased, cash from Unexpended Plant is used to acquire a physical asset for Invested in Plant. Acquisition payments is account used to record the decrease in Unexpended Plant and Plant Assets Added/Purchases is the account used to record the increase in Invested in Plant.
Sale of assets: When a plant asset is sold, the cash proceeds increase Unexpended Plant (Proceeds from sale), while removing the asset decreases Invested in Plant (Net book value of assets sold/disposed).
Activity: New Debt & Debt Reductions
Debt transactions also impact both plant funds (cash in Unexpended and the loan/mortgage principal recorded in Invested in Plant)
New debt: Acquiring financing for plant purposes results in an increase to Unexpended plant if cash is received by the organization (Proceeds from new loans). Recording the loan in Invested in Plant results in a decrease to that fund (New Loans).
Payment on Debt: Debt payments decrease Unexpended Plant as cash is paid out (Payments on Loans & Interest Expense). The payment on the loan principle increases Net Invested in Plant (Reduction of Debt Principal).
Plant Fund Entries #2aPurchase of equipment with cash (Question)
The governing committee voted to purchase five computers at $1,200 each from cash in the plant fund.
Plant Fund Entries #2aPurchase of equipment with cash (Answer)
Unexpended Plant Fund Debit CreditPlant assets purchased 6,000
Cash in Bank-Unexpended Plant 6,000
Invested in Plant FundOffice equipment-Computers 6,000
Plant assets Acquired 6,000
To record acquisition of computer equipment for cash.
Plant Fund Entries #2bPurchase of property with financing (Question)
The governing committee voted to purchase land and house for employee housing; total price of $100,000 of which $30,000 is paid in cash from unexpended and the rest is financed. Allocate 20% for land.
Plant Fund Entries #2bPurchase of property with financing (Answer)
Unexpended Plant Fund Debit CreditPlant assets purchased 30,000
Cash in Bank-Unexpended 30,000
Invested in Plant FundEmployee Housing-Land 20,000Employee Housing-Buildings 80,000
Plant assets acquired 30,000Mortgage payable 70,000
To record acquisition of land/house for cash & mortgage
Plant Fund Entries #2cConstruction of property with cash (Question)
The organization is building an office extension on land they already own. $150,000 was paid in 2015, and the remaining balance of $275,000 is paid in 2016. The building is placed in service by 12/31/16.
Plant Fund Entries #2cConstruction of property with cash (Answer part 1)
2015
Unexpended Plant Fund Debit CreditPlant assets purchased 150,000
Cash in Bank-Unexpended 150,000
Invested in Plant FundOffice building in progress 150,000
Plant assets acquired 150,000
To record payments to date on new office extension
Plant Fund Entries #2cConstruction of property with cash (Answer part 2)
2016
Unexpended Plant Fund Debit CreditPlant assets purchased 275,000
Cash in Bank-Unexpended 275,000
Invested in Plant FundOffice building in progress 275,000
Plant assets acquired 275,000
To record payments to date on new office extension
Plant Fund Entries #2cConstruction of property with cash (Answer part 3)
2016
Unexpended Plant Fund Debit Credit
No entry needed
Invested in Plant FundOffice building (GL & Subsidiary) 425,000
Office building in progress 425,000
To record completion of office building extension
Plant Fund Entries #3Sale/Disposition of Asset (Question)
Executive committee voted to purchase a new vehicle for $18,000 cash and $2,800 as trade-in allowance on an old vehicle. The old vehicle cost $6,500 and has accumulated depreciation of 4,500 (net value $2,000).
Plant Fund Entries #3Sale/Disposition of Asset (Answer)
Unexpended Plant Fund Debit CreditPlant asset purchased 18,000
Cash in bank-Unexpended 18,000
Invested in PlantMotor vehicles 20,800Accum Depreciation Vehicles (old one) 4,500
Motor vehicles (old one) 6,500Gain on sale of assets 800Plant assets acquired 18,000
To record acquisition of new vehicle, and trade-in of old vehicle
Plant Fund Entries #4Payment on Loans (Question)
At the end of each year, an annual payment of $15,000 is made on the employee housing mortgage, which consists of $8,000 principal and $7,000 interest.
Plant Fund Entries #4Payment on Loans (Answer)
Unexpended Plant Fund Debit Credit
Interest expense 7,000
Principal paid on debt 8,000
Cash in bank-Unexpended 15,000
Invested in Plant
Mortgage payable 8,000
Reduction of debt principal 8,000
To record annual payment of principal and interest on employee housing mortgage
Activity: Borrowing between Funds “Due to” and “Due from” Accounts: These accounts allow one
fund to temporarily borrow from another fund. The funds should be paid back within the year.
These accounts are an asset in one fund and a liability in the other fund. They are on the balance sheets of each fund.
These accounts should net to zero in the combined financial statements.
Funds involved are normally Operating and Unexpended Plant. This activity should not involve the Invested in Plant fund.
“Loan to” and “Loan from” accounts: Long-term borrowing between funds should be formalized and voted by the governing committee.
Activity: Other Activity
Unexpended Plant Activity (no impact on Invested in Plant)
Interest earned on investments
Interest expense on plant related debt
Invested in Plant Activity (no impact on Unexpended)
Depreciation expense
Donated non-cash assets for plant purposes
Disposal of an asset (no sale proceeds)
Plant Fund Entries #5Depreciation of Buildings (Question)
The subsidiary ledger generates a report of depreciation per month (or year). According to that report, monthly entries should be recorded for building depreciation such as:
PLANT FUND ENTRIES #5Depreciation of Buildings (Answer)
Invested in PlantDepr Expense, Office building 9,250Depr Expense, Community Svc building 7,200Depr Expense, Employee Housing bldg 10,800Depr Expense, Auxiliary building 4,600
Accum Depr, Office building 9,250Accum Depr, Community Svc building 7,200Accum Depr, Employee Housing bldg 10,800Accum Depr, Auxiliary building 4,600
To record depreciation on buildings for (month or year)
Unexpended Plant Fund Debit CreditNo entry
Plant Fund Entries #6Non-cash donation of equipment (Question)
The academy received a donation of 10 new computers valued at a total of $12,000 for their computer lab. The school’s capitalization policy requires capitalization of purchases over $1,000 with a useful life of 3 or more years.
Plant Fund Entries #6Non-cash donation of equipment (Answer)
Unexpended Plant Fund Debit Credit
No entry is needed
Invested in Plant Fund
Computers (Computer lab) 12,000
Non-cash donation – equipment donated 12,000
To record non-cash donation of computers for computer lab.
Plant Fund Entries #7Non-cash donation of church building (Question)
A local church has just completed a building project. The project was started and completed within one fiscal year! (A Miracle)
Plant Fund Entries #7Non-cash donation of church building (Answer USA GAAP)
Invested in Plant Fund
Local church buildings (asset cost acct) 750,000
Non-Cash donation-Property Added 750,000
To record acquisition of property purchased or constructed with donations raised by local congregation
Quarterly or at year-end in Invested in Plant:
Non-Op: Depreciation Expense churches 12,500
Accum Depr-church buildings 12,500
To record depreciation expense on local church property.
Unexpended Plant Fund Debit CreditNo entry is needed
Identify potential problems - early!
Capitalization Policy
Every organization should develop a capitalization policy which sets the threshold at which assets should be capitalized. The policy should be voted by the governing committee and then applied consistently to the purchase of plant assets. The governing committee should also set thresholds for which purchases need specific approval for purchase.
For example, an entity may have its policy like this:
“The Organization’s policy is to capitalize all plant asset purchases above $5,000 with a useful life of 3 or more years. Board approval is required for purchases of $15,000 and above.”
Depreciation Expenses vs Funding Depreciation Expense is the systematic recognition in each
accounting period of a pro-rata share of the cost of land improvements, buildings, and equipment over their useful lives. As an expense, this results in a decrease to the net assets of the whole entity.
Depreciation Funding is a practice of systematically setting aside resources to be used in future periods for acquisition or replacement of plant assets. It is not an expense to the organization, rather an allocation/transfer of resources within the organization.
Note: Accumulated Depreciation is the total of all depreciation expense taken against the depreciable assets. It does not relate to resources set aside for replacing property, plant or equipment!
Capitalize vs Expense
They significantly extend the original useful life of the underlying asset
They increase the efficiency or output of the underlying asset
They improve the condition or quality of the asset to be more than when it was first constructed or acquired
Ordinary repairs & maintenance are recorded as current expenses in the operating fund because they do not add value or materially prolong the life of the underlying asset.
Major repairs & renovations are capitalized and depreciated over multiple years if they meet one of the following criteria:
Property laws, title & ownershipThere are legal connotations to the acquisition of, holding title to, and accounting for land and building. Every country has its own legal statues governing these matters.
Title to real property: To protect denominational property:
Title search should be performed prior to purchase
Don’t pay the seller before the property is registered in new owners name. (Deposit with attorney or title-transfer entity.)
Record title deed promptly in name of association
Keep title documents in secure, fireproof storage
Whose financial statement should include the assets? (US GAAP, IFRS, legal agreements, etc.)
Capital LeasesIf an organization leases equipment, they must determine whether the lease is a capital or operating lease.
For now, a lease that meets any one of the following conditions is a capital lease:
The lease transfers ownership/title of the asset at the end of the lease term
The lease contains a bargain purchase option
The lease term is 75% or more of the useful life of the leased property
The present value of all lease payments is 90% or more of the current market value of the leased equipment/property
Impairment Loss
If indications exist that a plant asset has been impaired, the organization must assess the recoverable amount
“An impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value.”
“The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset/asset group.”
Recognise impairment loss as expense
Use “new” carrying amount to calculate future depreciation
Questions
Resources:
Resources available:
SDA Accounting Manual (especially chapters 7 and 13) Download from North American Division website under “Treasury Department Resources”
Moneywise.Adventist.org
Network with colleagues
Your local GCAS auditor
Robyn Kajiura, GCAS Associate Director NAA
Bonus Material
GAAP – Cost of Asset PP&E should be recorded based on the fair value given up or
the value received, whichever is more clearly evident
Costs include purchase price and related taxes, directly attributable costs incurred to bring the asset into condition and location to perform its function
Costs that are not directly attributable should be expensed as a period cost
Interest costs incurred during construction can be capitalized as part of the asset
Interest costs incurred after the asset is complete and in service should be recorded as expense
GAAP – Impairment of Asset Impairment indicators for an asset include such items as:
significant change in its use,
projected losses related to its use,
a significant decline in its market value, etc.
An impaired asset must be written down, and the charge is recorded as expense
A reversal of the impairment loss is prohibited
Proofing your PP&E scheduleThe schedule of fixed assets should contain:
Prior year ending general ledger (GL) property historical cost balance
Current year additions to property
Current year disposals of property
Current year ending GL property cost balance
Depreciation method and asset life
Prior year ending GL accumulated depreciation balance
Additions to the allowance account for current year depreciation
Reductions to the allowance account for current year disposals
Current year ending GL accumulated depreciation balance
Asset Registers/SubsidiaryThe subsidiary ledger should include the following information for each individual asset:
The name, serial number/title number if applicable, and the asset inventory number
An adequate description of the purpose and location of the asset
Sufficient other detail to distinguish that particular item from other similar items
Total cost, source document, and date reflecting the original purchase
Estimated useful life and annual depreciation rate (in either percentage or years), and
Carrying value at the beginning and end of each year, and amount of depreciation recorded each year
