Pass Through Charge Guide for Church Extension Funds

At month-end, a CEF controller may find the same appraisal-related cash movement in three places: a borrower receipt, a vendor payment, and a general-ledger account that now appears to contain revenue. The numbers reconcile to the bank, but the economic story isn't clear. Was the CEF recovering a third-party cost, providing an administrative service, or charging for arranging a securities transaction?

That distinction matters. A pass through charge can affect revenue presentation, investor disclosures, state securities compliance, tax treatment, liquidity reporting, and the confidence of churches and individuals who entrust funds to the organization. For a Church Extension Fund, precision isn't clerical polish. It is part of financial stewardship.

Defining Pass Through Charges in Ministry Finance

A loan operations manager closes the month with an unresolved variance. The borrower paid an appraisal amount at closing, the appraisal firm was paid from the CEF's account, and a small difference remains because the vendor invoice arrived after the loan was booked. One employee calls the entire receipt a fee. Another calls it reimbursement. The controller has to decide whether the amount belongs in revenue, a liability, an expense-recovery account, or several of those categories.

In CEF operations, a pass through charge is an amount collected from a borrower, investor, church, or other party to recover a cost incurred with a third party or to transfer funds to the party that is economically entitled to them. The label alone doesn't determine the accounting. The organization must examine the contract, the underlying service, its role in arranging or delivering that service, and whether it retains any amount for its own work.

Three categories appear regularly:

• Borrower-paid third-party costs: Appraisals, inspections, credit reports, title work, recording charges, legal services, and similar items may be paid by the borrower while the CEF coordinates the transaction.
• Investor-related transaction amounts: Note issuance, redemption, transfer, or administrative amounts require special scrutiny because a charge connected with selling securities may be treated differently from a genuine operating recovery.
• Operational disbursements: A CEF may pay a cost for another organization, affiliated church, or restricted program and hold the amount until it can be remitted. That balance may be a liability rather than revenue.

The dual audience makes CEF accounting less forgiving than a simple vendor-reimbursement model. Borrowers expect a clear explanation of what they paid. Investors expect their note principal, interest, and redemption proceeds to remain distinct from operating charges. Boards and auditors need to see whether the CEF earned a fee, recovered a cost, or merely moved money through its bank account.

Historical payment-card economics illustrate why the distinction deserves attention. A 2010 economic study reported that merchant fees for accepting Visa and MasterCard rose from approximately $26 billion in 2004 to $48 billion in 2008, while interchange fees increased from about $18 billion in 2000 to $47 billion in 2008. The study estimated that roughly 70% of interchange-fee costs reached consumers through higher retail prices, producing an estimated $26.9 billion in consumer price effects in 2008. Those figures and the broader pass-through lesson are documented in the economic study of card-charging costs.

The lesson for a CEF is straightforward: the amount paid to a vendor, the amount recorded by the CEF, and the eventual effect on a stakeholder can sit in different systems and periods. A policy should therefore define the charge, identify the beneficiary, specify the allocation method, and preserve the evidence supporting the posting.

Determining Gross Versus Net Revenue Recognition

Reimbursement doesn't automatically make a transaction net. Under ASC 606, the central question is whether the CEF controls the underlying good or service before transferring it to the customer. The relevant guidance explains that agency accounting under ASC 606 turns on control, not on whether another party reimburses the expense.

A CEF generally acts as an agent when it arranges for another provider to deliver the service and doesn't control that service before transfer. In that case, revenue typically reflects only the CEF's fee or commission. A CEF generally acts as a principal when it controls the service, accepts responsibility for fulfillment, or otherwise directs the service before the borrower receives it. In that case, customer consideration is generally presented gross, with the related cost recorded as cost of sales or expense.

Apply the control test to each fee

Consider an appraisal. If the borrower selects the appraiser, the appraisal firm contracts directly with the borrower, and the CEF merely collects the exact invoice amount for convenience, the facts point toward an agency or pass-through presentation. The CEF may receive cash and pay the vendor, but it hasn't necessarily controlled the appraisal service.

The conclusion may differ if the CEF selects the provider, contracts in its own name, controls the price presented to the borrower, and bears responsibility for obtaining a usable appraisal. Those indicators can support principal treatment. A markup doesn't settle the question, but it does require the chart of accounts to separate the underlying vendor amount from the CEF's own service revenue.

The same analysis applies to ACH or card processing. Ask who chooses the processor, who bears performance risk when a payment fails, who controls pricing, and who is responsible for delivering the payment service. Don't classify the fee solely by looking at the bank statement or the fact that the borrower paid the amount.

Practical rule: Document the answer to the control question before creating the account code. A reimbursement description isn't an accounting policy.

Build a decision record

For each recurring charge, retain a short memo or system configuration record covering:

• Provider relationship: Identify who contracts with and pays the vendor.
• Control: State whether the CEF controls the service before the customer receives it.
• Performance risk: Explain who handles errors, rework, refunds, or service failure.
• Pricing authority: Record whether the CEF sets the customer amount or passes through an established invoice.
• Economic benefit: Separate the third-party cost from any CEF administrative service.

This discipline protects more than revenue presentation. Gross reporting can inflate management measures, program scale, gross receipts, and potentially covenant calculations even when the CEF earns no margin. Net reporting can also mislead if the CEF controls the service and has understated both operating activity and expense.

The European Union's experience with interchange-fee caps reinforces the need to track each layer. After Regulation (EU) 2015/751 was implemented across member states by 2017, the European Commission reported lower interchange fees and lower merchant service charges for consumer cards. Econometric estimates found that merchants passed approximately 66% to 72% of long-run cost reductions to consumers, with estimated annual consumer savings of roughly EUR 864 million to EUR 1.93 billion. The European Commission's interchange-fee report shows why an upstream charge and downstream effect shouldn't be treated as identical amounts.

Recording Journal Entries for Borrower and Investor Fees

Classification should be settled before the journal entry is automated. The entry must show the original cost, the person or organization that owes it, any amount retained by the CEF, and the final settlement. That structure lets the loan subledger, investor records, accounts payable, and general ledger tell the same story.

Borrower-paid appraisal with no CEF markup

Assume a borrower pays an appraisal invoice that the CEF arranges but doesn't control, and the CEF expects to remit the full amount to the appraisal firm. The clean pattern is:

1. At collection

   • Debit Cash or Borrower Receivable.
   • Credit Appraisal Pass-Through Liability.

2. When the vendor invoice is received

   • Debit Appraisal Pass-Through Liability.
   • Credit Accounts Payable.

3. When the vendor is paid

   • Debit Accounts Payable.
   • Credit Cash.

This approach treats the receipt as an obligation until the vendor is paid. For nonprofit organizations collecting money on behalf of another organization, pass-through accounting generally records an asset with a corresponding liability owed to the ultimate recipient, rather than revenue. That treatment is discussed in the nonprofit pass-through accounting guidance.

If the CEF records an expense on receipt and reverses it later, the month-end account may look active even though the organization never consumed the service or earned a margin. A liability-based pattern is usually easier to reconcile when the vendor invoice and borrower receipt occur in different periods.

Borrower fee with a separately earned administrative amount

Suppose the CEF performs documented coordination work and its policy permits a separate administrative fee. Keep the amounts distinct:

• Debit Cash or Borrower Receivable for the total collected.
• Credit Appraisal Pass-Through Liability for the vendor amount.
• Credit Administrative Service Revenue for the CEF's approved amount.

When the vendor invoice arrives, debit the liability and credit accounts payable. When the vendor is paid, debit accounts payable and credit cash. The administrative amount remains revenue because it represents the CEF's own service, not the third-party cost.

Don't bury the spread inside the vendor-recovery account. If the amount is earned, name it. If it isn't authorized, don't create it through a rounding rule or an unexplained difference.

Investor-related amounts require a separate control path

Investor note transactions need a different workflow. Record note proceeds, investor liability, issuance costs, and any administrative service in separate accounts. A charge that reduces cash received from an investor shouldn't automatically reduce note principal. The system should preserve the gross subscription or redemption, the charge, the net cash movement, and the approval supporting each component.

For timing differences, use a documented accrual rather than forcing all activity into the cash date. Teams that need a refresher on period-end treatment can review accrued revenue adjusting entries and then adapt the principle to the organization's approved accounting policy.

A useful subledger design keeps borrower costs, investor costs, vendor payables, and CEF service revenue in separate dimensions. The general-ledger and subledger reconciliation approach provides a practical reference for connecting transaction detail to the control account.

Audit test: An independent reviewer should be able to start with the posted charge, trace it to the contract and invoice, follow the cash movement, and identify the remaining liability or recognized revenue without reconstructing the transaction from email.

Navigating NASAA Compliance and Securities Restrictions

A common commercial assumption is that any disclosed cost can be passed to the customer. A CEF can't rely on that assumption when a charge is connected with offering or selling notes.

The National Association of State Securities Administrators Church Extension Fund Statement of Policy says CEF notes should be offered without direct or indirect underwriting, sales, or similar fees or commissions. It also calls for disclosure that underwriting or selling agreements don't exist and that no individual or organization receives commissions or other remuneration connected with the offer and sale of the notes. The NASAA CEF securities policy should be read alongside the applicable state offering documents and legal advice.

Separate cost recovery from selling compensation

A fee may be described as administrative, but its function matters more than its label. If an amount is paid to a representative, intermediary, church leader, or other party based on attracting investors, facilitating subscriptions, or placing notes, it deserves immediate compliance review. The organization should be able to explain why the charge exists, who receives it, how it is calculated, and what service was delivered.

A borrower-paid appraisal recovery is analytically different from an investor charge tied to note placement. The first may compensate a third-party service provider. The second could create a securities concern if it operates as direct or indirect remuneration for selling notes.

Build the policy around evidence:

• Purpose: State the business or regulatory reason for the charge.
• Recipient: Identify the vendor or internal function receiving the amount.
• Calculation: Specify the invoice, allocation rule, or fixed service basis.
• Authority: Tie the charge to the loan agreement, note terms, offering circular, or approved policy.
• Review: Require compliance approval for any investor-facing charge or new recipient.

A strong compliance documentation process should preserve the fee schedule version, approval history, offering disclosure, and transaction-level calculation. That record helps an examiner distinguish bona fide cost recovery from a disguised commission.

Review state requirements before implementation

CEF securities requirements vary by state. Offering documents may address registration or exemptions, marketing practices, investor protection, financial standards, and reporting. A fee that appears acceptable in one program may require different treatment or disclosure in another.

The board committee should ask whether the charge changes investor economics, reduces redemption proceeds, affects stated principal, or creates remuneration for a person involved in selling notes. If the answer is unclear, pause the configuration and obtain securities counsel's view before posting transactions.

Balancing Transparency With Operational Flexibility

A fee schedule can be perfectly itemized and still confuse stakeholders. If a borrower receives a list of changing vendor charges without the calculation date, source invoice, or explanation of an estimate, more lines don't necessarily create more transparency. They may create more disputes and more reconciliation work.

The practical target is traceable flexibility. State what the charge covers, identify whether it is an estimate or an actual cost, explain when the amount can change, and preserve the source used to calculate it. Keep taxes separate from third-party service charges, especially when the tax treatment depends on the legal payer or the jurisdiction.

Use versioned fee tables

A workable control design includes:

• Effective date: Record when the fee rule began and when it ended.
• Source document: Retain the vendor schedule, invoice, contract, or regulatory basis.
• Allocation rule: State whether the CEF uses actual cost, an approved estimate, or a defined allocation.
• Customer calculation: Preserve the inputs used for each borrower or investor.
• Variance treatment: Explain how the organization bills, refunds, or absorbs the difference.

Recent FCC proposals would allow providers to aggregate certain fees as a maximum or “up to” amount rather than itemizing every component. The proposal highlights the tradeoff between useful budgeting information and detailed traceability, as reported in the discussion of proposed FCC fee-disclosure changes. A CEF can apply the lesson without copying the model: give stakeholders a clear estimate when exact costs aren't available, but retain the detailed calculation and later reconciliation internally.

Disclosure principle: A concise customer statement is acceptable only when the underlying ledger can reproduce the amount and explain any variance.

The best process uses customer-facing language that is understandable without sacrificing audit evidence. A borrower should know whether the amount is a vendor cost, a CEF service fee, or an estimate subject to adjustment. An investor should see whether a charge affects proceeds, note principal, or a separate service relationship. Clarity protects mission trust because it reduces the chance that a routine operational recovery feels like an undisclosed deduction.

Automating Fee Allocation and Controls in CEFCore

Automation should enforce policy, not replace it. Before configuring a system, the CEF should create a fee catalog with separate codes for borrower pass-through costs, investor-related charges, CEF service revenue, taxes, vendor liabilities, and prohibited or restricted categories. Each code should carry its accounting treatment, approval requirement, disclosure language, and applicable program or state scope.

A practical configuration sequence looks like this:

1. Define the event trigger. Link the charge to loan application, closing, construction draw, payment, note issuance, redemption, or another controlled event.
2. Assign the economic owner. Identify the borrower, investor, affiliated church, restricted program, or CEF operating function responsible for the amount.
3. Route non-standard charges. Require maker-checker approval when the amount differs from the approved schedule, involves an investor, or includes a markup.
4. Post by subledger dimension. Keep the original third-party cost, CEF service amount, tax, and liability movement separately visible.
5. Reconcile automatically. Compare receipts, invoices, payable settlements, and general-ledger balances.
6. Lock the audit trail. Preserve the original entry, adjustment, approver, source document, and effective fee-table version.

A purpose-built platform such as CEFCore can make those controls part of the workflow rather than leaving staff to maintain parallel spreadsheets. The objective isn't automation for its own sake. It is to ensure that a loan event creates consistent entries, a note transaction preserves investor economics, and a board report draws from reconciled data.

Test for unsupported markup

Federal acquisition rules define an excessive pass-through charge as indirect cost or profit applied to subcontracted work when the prime contractor adds no or negligible value. The rules require heightened disclosure when subcontracted effort exceeds 70% of total contract cost, as set out in Federal Acquisition Regulation section 52.215-23. CEFs aren't federal prime contractors by default, but the control concept is useful: separate the vendor amount from management activity and document the value the organization adds.

System reports should flag charges where the CEF has no documented service, where the retained amount lacks approval, or where a third party receives funds connected with investor acquisition. The cost-allocation methods reference can help finance and IT teams translate policy into consistent allocation dimensions.

A board-ready dashboard should answer four questions without manual spreadsheet assembly: what was collected, what was paid onward, what was retained as CEF revenue, and what remains outstanding. If the system can't answer those questions from source transactions, the organization still has a control gap even if the final bank balance agrees.

Strengthening Financial Stewardship Through Precision

A pass through charge is small only when viewed in isolation. Across borrower closings, investor transactions, payment operations, and restricted funds, inconsistent treatment can distort the financial statements and weaken the evidence supporting regulatory compliance. The cost of correction often appears later, during an audit, a securities review, a board question, or a dispute over investor proceeds.

CEF leaders can address the exposure with a focused review:

• Reassess classification: Apply ASC 606 control indicators to each recurring third-party service.
• Separate the ledger: Distinguish vendor liabilities, CEF service revenue, taxes, note liabilities, and restricted funds.
• Test investor charges: Review every investor-facing amount against the NASAA CEF Statement of Policy and the applicable offering documents.
• Trace the cash: Confirm that each receipt, invoice, settlement, adjustment, and remaining balance reconciles across subledger and general ledger.
• Strengthen disclosure: Use effective dates, source documents, calculation rules, and clear variance handling.
• Evaluate automation: Identify where spreadsheets or manual double entry create duplicate postings, delayed reconciliations, or weak approval evidence.

CEF financial stewardship has a mission dimension. Borrowers need affordable, understandable financing for churches and ministry facilities. Investors need confidence that their notes and redemption rights are recorded accurately. A disciplined fee policy respects both groups by showing exactly what the organization collected, what it owed to another party, and what it earned for its own work.

Board question: Can management explain every recurring charge in one sentence, support that explanation with a governing document and invoice, and reproduce the posted amount from the source transaction?

That standard is demanding, but it is achievable. When policy, subledger design, approvals, and reporting align, finance staff spend less time reconstructing history and more time supporting lending decisions, treasury planning, and the ministry relationships the CEF exists to serve.

CEFCore brings loan management, investor notes, general ledger, cash operations, fee workflows, reconciliation, and compliance reporting into one purpose-built environment for Church Extension Funds. Visit CEFCore to see how your team can create a more consistent, audit-ready process for pass through charges and the financial records behind them.