transferred to another location and arrangements made for day-to-day transactions to continue and be properly recorded.
Types of funds
A treasurer must understand that the church may hold up to four types of funds:
1. endowment funds
2. restricted funds
3. designated funds
4. unrestricted funds
Endowment funds
These are often funds where only the interest may be spent. Technically, such funds are called capital endowment funds or permanent endowments. For example, an individual donates £100,000 which is invested at (say) 5% a year providing an indefinite income of £5,000 a year for a specific purpose. The £100,000 is the capital and £5,000 is the interest. Any expenses of administering an endowment fund should be charged to that fund and not to unrestricted funds.
In accounting, the capital of the endowment does not appear in the church accounts at all, but in a separate note to the accounts. The interest is included as income for the appropriate type of fund. In such a case, both the £100,000 capital and £5,000 a year interest will lose their value as the years pass. This is known as withering on the vine. While a few per cent each year may not seem much, the effect over a long period is immense. Inflation led to a sixty-six-fold increase in prices during the twentieth century, and a thirty-fold increase since 1945. This means that £100,000 today is worth about £1,500 from 100 years ago. If the twenty-first century has similar inflation to the twentieth, £100,000 and £5,000 today will be worth about £1,500 and £75 in a hundred years’ time. How to deal with funds which have become small during the passing of years is addressed below.
There is also a rare creature, the expendable endowment fund, where the church is allowed to spend the capital as well as the interest. In such a case, the capital (or so much of it as may be spent) is included with the appropriate restricted, designated or unrestricted fund.
An endowment fund may hold assets in addition to funds. Someone may leave a house on the basis that the church may spend the rent generated, for example. If the asset is sold, the proceeds must be treated as part of the same endowment fund.
Restricted funds
These are when the church is not allowed to do what it wishes and may only use them for a specific purpose, such as to maintain the buildings or to replace the church hall one day. Restricted funds commonly arise from legacies where the deceased stated the restriction. This is legally binding on the church.
The restriction is imposed either by the donor or by the church. A donor may leave money on condition that it is used to maintain the church building, or the bells, or whatever. Alternatively the church may have launched an appeal for a specific purpose, such as to replace the roof or build an extension. The money collected for such a specific appeal must be used only for that purpose.
For this reason, it is advisable to say at the outset what the church authorities intend to do with any surplus. The restriction then only applies until the original objective has been satisfied. If a church appeals for funds to replace the roof, raises £120,000 but only needs £100,000, a statement at the outset that any excess funds will be held to maintain the church fabric generally will allow that £20,000 excess to be transferred to a fabric fund where it could be used to repair the floor or walls the following year. If it did not make such a statement at the outset, the £20,000 would have to be held in a roof fund where it may not be needed for thirty years while the church is desperate for funds for other purposes.
Another issue is what the church will do if it raises insufficient funds. A church may always use unrestricted funds to meet an objective of a restricted fund, provided it has or can generate sufficient unrestricted funds. Otherwise it is advisable to say at the outset that insufficient restricted funds will be used for another but related purpose.
The treasurer must know exactly what the restrictions are for each fund. A restricted fund to replace the church hall cannot be used to maintain the existing hall. Conversely, if the church incurs expenditure within the scope of a restricted fund, the treasurer should use the restricted fund rather than unrestricted funds.
Sometimes there may be a special trust which is defined in Charities Act 1993 s.97 as ‘property which is held and administered by or on behalf of a charity for any special purposes of the charity, and is so held and administered on separate trusts relating only to that property’. Such funds are treated as a restricted fund of the church.
In practice, the only advantage of a restricted fund is that people tend to give more generously when a purpose is specifically identified.
It should be noted that a church is not obliged to accept any donation, and may wish to refuse if the restrictions are unreasonable, particularly if the amount is small.
Designated funds
These are when the church itself has set aside some of its money for a specific purpose. For example, the church may realize that it will need £250,000 to replace its church hall in ten years’ time, so it resolves to set aside £25,000 a year to pay for this. This is not a restricted fund as the church authority can at any time decide to reverse its decision and spend the sum as it wishes. Neither is this an unrestricted fund, as the church does not wish to spend this sum on anything else.
A designated fund must be for a specific purpose and must be approved by the church council, diaconate, trustees or similar body. A designated fund must not be created by the treasurer acting alone. Sometimes treasurers have created designated funds to ‘squirrel’ away surpluses to make the church accounts look less prosperous.
Rather than produce accounts showing that the church made a surplus of £21,467 one year, the treasurer may be tempted to transfer £20,000 to a designated fund, perhaps for building maintenance, and show a surplus of just £1,467. Sometimes this can be done to create a sense of the church ‘just about paying its way’ as an incentive for people to keep giving, and to prevent church members coming up with unwelcome ideas on how to spend this surplus. While understandable, this is a form of deception on the church members, even if you correctly report the transactions. By the time the annual accounts are prepared, the church authorities should have decided what to do with any surplus, and that should be included in the treasurer’s report.
Unrestricted funds
These are when the church is free to do what it wishes with the money. For most churches, most of the funds should be unrestricted. This is what you use to pay the routine bills. Any fund which is not an endowment, designated or restricted comes within the scope of unrestricted funds.
It is not necessary for these funds to be kept in separate bank accounts, though an endowment fund will often be in a separate investment account anyway. It is possible for restricted and designated funds with any surplus unrestricted funds to be kept in a deposit account while unrestricted funds are kept in a current account on which the day-to-day cheques are drawn.
Old funds
Before 1993, there was no specific requirement in the Charities Act to separate restricted and unrestricted funds in the same way (though trust law has always required some separation of different funds), so some old funds may contain a mixture. A common example is a fabric fund which may contain restricted funds from specific appeals and designated funds allocated by the church council. The basis of how those funds arose may have been lost.
Where an old fund is mixed, the charity should go back as far as it can in its records. Since 1960, charities have been obliged to keep records for the previous six years, though many churches keep accounts indefinitely as part of their history.
THE RECORDS
The choice
Having understood the objectives, the treasurer should decide what form the records should take. The choice is between bound books and a computer system. Note that looseleaf files are generally not acceptable. Records must be seen to be timely and unfalsified. This is much more difficult for looseleaf records than for a bound