Recent Developments

Issues that affect ministers and churches

In 1987, the "Financial Accounting Standards Board" (FASB) issued "Statement of Financial Accounting Standards No. 93," which required all nonprofit organizations (including churches) to recognize depreciation in their financial statements. The new rule was scheduled to take effect in 1988, but its implementation was delayed until January 1, 1990. FASB based the new rule on its conclusion that a nonprofit organization has assets that are used up in providing services, and that this "using up" of assets is a real "cost" that should be recognized (as depreciation) in the organization's financial statements in order to fairly present its financial condition. To illustrate, FASB noted that the value of a cathedral "is used up not only by wear and tear in intended uses but also by the continuous destructive effects of pollutants, vibrations, and so forth. The cultural, aesthetic, or historical value of [such assets] can be preserved, if at all, only by periodic major efforts to protect, clean, and restore them, usually at significant cost. Thus, [it was] concluded that depreciation of those assets needs to be recognized." Stated another way, a nonprofit organization "produces and distributes goods and services by using resources …. Some of its resources (assets) are used up in providing services at the time they are received, others are used up at a later date, and still others are used up gradually over time." In any event, "using up assets in providing services has a cost whether those assets have been acquired in prior periods or in the current period and whether acquired by paying cash, incurring liabilities, or by contribution." FASB further noted that "even if that organization plans to replace the asset through future contributions from donors, and probably will be able to do so, it has not maintained its net assets during the current period." Not reporting depreciation (the cost of using up assets), on a nonprofit organization's financial statements "produces results that do not reflect all costs of services provided." FASB rejected the argument that depreciation need not be recognized on a nonprofit organization's donated properties since "whether an organization's use of an asset results in an expense does not depend on how the asset was acquired." FASB did concede that "depreciation need not be recognized on individual works of art or historical treasures whose economic benefit or service potential is used up so slowly that their estimated useful lives are extraordinarily long. A work of art or historical treasure shall be deemed to have that characteristic only if verifiable evidence exists demonstrating that (a) the asset individually has cultural, aesthetic, or historical value that is worth preserving perpetually and (b) the holder has the technological and financial ability to protect and preserve essentially undiminished the service potential of the asset and is doing that." What is the relevance of the new rule to churches and religious organizations? Simply this—if your financial statements are audited by a CPA firm each year, you will not receive an "unqualified opinion" if you do not recognize depreciation on your long-lived assets. An unqualified opinion cannot be given because readers of your financial statements will not receive information about the cost of using up your assets, and accordingly they are not presented with information reflecting your organization's true costs. What difference will this make? None, if your financial statements are not audited by a CPA firm. Even if you have an annual CPA audit, the failure to report depreciation will probably result in a "qualified" opinion by your CPA (i.e., an unqualified opinion except for your failure to report depreciation). According to FASB, the best reason to record depreciation in your accounting records is ensure that the readers of your financial statements receive an accurate picture of your financial condition because of the inclusion of all relevant cost information. Whether or not your church or organization will record depreciation is a matter that should be addressed in a board meeting early in 1990.

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Posted: January 1, 1990
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