Copyright © 2002, United States Conference of Catholic Bishops, Inc. All rights reserved.
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XVIII. Service Funds
One of the main advantages of a centralized operation, such as a diocese, is the ability to provide goods and services to constituents, such as parishes, in a more efficient manner than these constituents would be able to accomplish on their own. Various services, such as centralized employee benefit programs, insurance coverage, purchasing programs, etc., are provided by dioceses to parishes and schools throughout the country. These programs are known by various names. "Auxiliary enterprises" provide goods or services necessary or related to the mission, such as a college bookstore or a cafeteria. "Cooperative efforts" involve programs that the resource providers are not able to do by themselves, for whatever reason. "Central service funds" provide service such as printing to constituents. All of these programs are exchange programs. Some exchange programs were considered incorrectly to be agency funds even though they were not true agency funds.
Prior to the issuance of Statement of Financial Accounting Standards (SFAS) No. 116, Accounting for Contributions Received and Contributions Made, many of these programs were treated as restricted funds for accounting purposes. The theory was that the fund provider restricted the use of the funds to provision of the goods or services to themselves. One problem with this thought process was that the exchange was reciprocal. Therefore, the transactions were not contributions under SFAS No. 116. Nor were these agency transactions unless the recipient organization was merely collecting proceeds for another organization, such as a qualified pension trust, without having any discretion as to the use of the funds. Absent any legal obligations to the contrary, most of these programs would result in the earning of unrestricted income by organization for the performance of services or the provision of goods for a fee.
The accounting for those transactions that are really unrestricted exchange programs is straightforward. Program revenues and expenses are recognized as accrued with the net earnings being included in the change in unrestricted net assets. The governing board may want to designate the net income from a program as available for that program. This is especially prudent in the case of a reserve to cover self-insured risks or when the continuance of a program depends on funds available. Such board designations do not change the unrestricted character of the funds. The earnings of the program must remain in the unrestricted net assets, but can be transferred to board-designated unrestricted net assets within the unrestricted net assets.
Designations can serve a valuable purpose in planning and budgeting for the dioceses in general. An example of this treatment would be a service fund providing general insurance to all of the parishes in the diocese. The revenue of the program would be included in unrestricted revenue. This revenue should be shown separately if the revenue is a large enough portion or percentage of the total unrestricted revenue. The expenditures of the program are shown in the unrestricted expenditures, again separately if significant. Thus, the net income of the program would be included in the increase or decrease in unrestricted net assets. Disclosure of the changes in designated unrestricted net assets may be shown in a note to the financial statements or on a separate schedule.
There are times when more assurance than that provided by board designations is desired. In such cases, dioceses may enter into contracts to provide services, agreeing to return to the resource provider any unused funds. This is especially true in cases formerly considered "agency transactions," which were really advance payments for services, or in cooperative efforts where the "profit" will be returned to the fund providers similar to a co-op dividend. These transactions are really exchange transactions and should be accounted for as such. The only difference is that there is no excess of revenue over expenses. Revenue would be recognized as earned revenue when expenses are incurred. The difference is that the "fund balance" is a liability, and program revenues and expense are shown as unrestricted revenues and expense.
The ultimate assurance that program assets will not be commingled with those of the service provider can be accomplished through the use of a separate entity. The service provider will receive and report only fee-for-service income, unless the service provider is considered to control the separate entity. The usual example of a separate entity that is not controlled is a pension trust, which receives accounting and management services from the provider, but which is not controlled by the diocese. The assets and liabilities of the separate entity should not be included in the financial statements of the provider if the provider does not control the entity. An example of a controlled entity might be a separately incorporated school managed by the central corporation. The revenues and expenditures of a controlled entity should be included (actually consolidated) with those of the controlling entity, along with the assets and liabilities of the controlled subsidiary.