Clarifications on PA's New Accounting Formats

Eugene H. Gillin, Esq., an attorney who practices with the Philadelphia law firm Harkins & Harkins, exchanged email with Vincent F. Lackner, Jr., Esq. about Pennsylvania's new model Orphans Court Accounting Forms, to take effect on & after April 30, 2007.

For background & relevant links, see: PA EE&F Law Blog postings "PA's New Orphans' Ct Accounting Forms" (04/02/07), and "Comparison of PA's Old & New Accounting Formats" (04/03/07).
Gene is a member of the same law firm as Mary Jane Barrett, Esq., who serves as the Chair of the Pennsylvania Supreme Court's Orphans' Court Procedural Rules Committee. That Committee had originated, revised, and then recommended the new forms for approval. Gene also conferred with some members of that Committee on points raised.

Along with Vince and Judge Calvin S. Drayer, Jr. (of the Orphans' Court Division, Court of Common Pleas of Montgomery County, PA), Gene had spoken at the Pennsylvania Bar Institute's "Fiduciary Accounting Workshop", held on September 1, 2006.

The book for that course (PBI Publication No. 04565-BK, 108 pages, $69.95), addressed many of the principles involved in fiduciary accounting, and it will remain an important reference.

The audit of fiduciary accounts is often filled with troublesome accounting issues. This manual focuses on the preparation of fiduciary accounts to be filed with the Orphans’ Court and Court procedures involved in the audit of these accounts.

Summary of Contents: Preliminary Observations about Practice in the Orphans’ Court | Jurisdiction in the Orphans’ Court | Petition Practice | Accounting Practice in the Orphans’ Court | Format and Content of Accounts | Fiduciary Accounting Principles | Protocols for Preparing an Account | Difficult Accounting Issues | Model Unitrust Account and Similar Formats | Decedent’s Estate Petition for Adjudication/Statement of Proposed Distribution Pursuant to Rule 6.9 | Model Estate Account | Model Trust Account | Model Unitrust Account

So Gene's observations about the new accounting formats offer insight into some matters not specifically addressed in the AOPC's announcement, the revised Supreme Court Orphans' Court Rule 6.1, or the forms themselves.

Gene first commented about the clear delineation required between principal and income items, the two-part presentation of dividend reinvestment transactions within this structure, and the elimination for practical reasons of a proposed schedule of distribution in the new accounting forms.

The revised estate and trust models were designed to remain simple and consistent with the original models while correcting obvious math errors which persisted for years.

The clear intent of the the revised Rule is to require separate schedules for principal and income.

Thus, if there is a dividend reinvestment program income investments and income capital changes will be required schedules * * *. Any securities acquired in the fashion outlined should appear on the income balance page of the Account.

The reason for eliminating the Proposed Distribution Schedule from the model form was simply recognition of the the fact that the reappraised values for distribution of assets in kind would inevitably be "stale" in the instance of any matter filed with the Court for which a Schedule of Distribution would instead likely be required. Proposed Distribution Schedules offered in most sophisticated software programs remain a useful tool for accounts being settled informally.

As to the presentation of a "mortgage payable" in an accounting, Gene commented further.

Mortgages most commonly must be dealt with in an estate administration setting and typically involve the circumstance in which the decedent's former residence is sold before the estate is settled and the mortgage is satisfied at settlement. In that circumstance all mortgage payments would be listed as principal disbursements on the date(s) paid.

If the mortgage remains on the closing date of the account I do not believe there is any requirement to show mortgage a "payable" as the Account is stated on a cash basis.

On the other hand, there would be nothing improper about a footnote on the balance page listing the principal mortgage balance payable as of the closing date of the Account but the composition of balances and cash on hand is not otherwise affected by the existence of the mortgage.

In other words, the new accounting formats anticipate that any mortgage payment shown as a disbursement would be comprised of two elements -- one portion as a principal repayment against the remaining balance of the original obligation, and another portion as an expense from income for the periodic interest charged on the outstanding principal amount owed. For an accurate allocation, the original amortization schedule (or a reconstructed substitute based on the original obligation's terms) should be followed.
Gene mentioned in his email that he is proud of his business consultant relationship with FASTER System, LLC. He knows that the data treatment & accounting output from that vendor's software is already compliant with the new rules.