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Thoughts to Ponder: Chapter 13
When we make college more affordable, we make the American dream more achievable.
William J. Clinton
Education is simply the soul of a society as it passes from one generation to another.
G. K. Chesterson
Learning Objectives • Understand the reporting options available to government C&U
and the differences in financial reporting for government C&U and not-for-profit C&U.
• Discuss accounting and reporting issues for all C&U, such as accounting foro Revenues and expenseso Tuition and feeso Grantso Student Loanso Special concerns related to auxiliary enterprises
• Journalize transactions and prepare financial statements for governmentally owned C&U following GASB Statement No. 35.
• Prepare financial statements for private colleges and universities following SFAS Statement No. 117.
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Overview
Two types• Public (1,672 public institutions in 2011)oGASB Reporting StandardsoExample: Univ. of Houston, Univ. of Texas, Univ.
of California, Univ. of MichiganoMain sources of revenues are state appropriations
and grants• Private (2,823 private institutions in 2011)oFASB Reporting StandardsoExample: Rice University, Harvard, Yale,
Princeton, Duke, Univ. of ChicagooMain sources of revenues are student tuition,
investments and fees.
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Basic Issues• Public C&Us have much in common with their NFP
counterparts, so comparability is desirable
• Most C&Us have used the AICPA reporting model.o However, some institutions (e.g. community colleges) use
standard governmental model.
• C&Us differ from other governments in how they are funded and managed.o E.g. While auxiliary enterprises exist at universities (e.g.
bookstore), the school does not budget by fund.o Therefore, fund accounting is sometimes undesirable.o According to GASB Stmt. No. 34, public C&U may report as
special purpose entities engaged:1) Only in business-type activities2) Only in governmental activities3) In both
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GAAP for Colleges and Universities
Granof & Khumawala-6e Chapter 13
Public C&U Private C&U
GASB FASB Stmt. No. 35 Codified as
(1999) ASC 958
GASB Stmt. No. 34 as special-purpose governments
AICPA AAG State and FARM (industry Local Governments guidance
maintained by NACUBO)
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• Used for:
o Internal Purposes ONLY
• The fund structure prescribed by the AICPA 1973 Audit and Accounting Guide for Colleges and Universities (no longer authoritative for external financial reporting purposes):
o Current funds (unrestricted and restricted)o Loan fundso Endowment and similar fundso Annuity and life income fundso Plant funds (4 sub-funds)o Agency funds
Fund Accounting
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• Reporting as a special purpose government engaged in business-type activities only under GASB Statement Nos. 34 and 35 .
• Statement of Net Position, classifying net assets into: o Unrestrictedo Restrictedo Net Investment in Capital Assets (net of
related debt)• Statement of Revenues, Expenses, and Changes
in Net Position • Statement of Cash Flows
For Public C&Us
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• Reporting under SFAS Nos. 116 and 117
• Statement of Financial Position classifying net assets into:
o unrestricted o temporarily restrictedo permanently restricted
• Statement of Activities
• Statement of Cash Flows
• Example: Brown University, Stanford, Dartmouth College, Northwestern University
For Private C&Us
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• Both governmental and private universities classify revenues by SOURCE.
• Common categories of revenue include: o Tuition and fees o Federal, state, and local appropriationso Private giftso Grants and contractso Endowment incomeo Sales and services of educational activitieso Sales and services of auxiliary activitieso Gain/loss on sales of investments
Revenue Classifications
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• Both governmental and private universities classify expenses by FUNCTION (see next slide).
• Recognized on the accrual basis.
• May be also classified by (i.e. matrix form):
o program functions
o organizational units
o projects
o object classes.
Current Operating Expenses
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• Instruction
• Research
• Public service
• Academic support
• Student services
• Institutional support
• Operation and maintenance of plant
• Scholarships and fellowships
Functional Classification of Expenses
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Colleges and universities reporting under GASB are supposed to provide something along these lines, although it is rarely equivalent to the FASB statement of functional expenses (which is NOT required for private C&Us)
- Rice University only reports functional expenses
- University of Houston reports a more detailed breakdown.
Natural v/s Functional Expenses
• Scholarship allowances are the difference between the stated tuition charges and the actual amount billed to the student.
• If the tuition reduction is an employee benefit, the reduction is treated as compensation expense.
- For example, tuition waivers for work-study programs and graduate assistantships are compensated expenses.• However, scholarships that do not require service to
the university or college are allowances and treated as reductions in revenue.
- Example: athletic or academic excellence scholarships
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Scholarships
• Grants may be exchange transactions if the grantor receives direct benefits in the form of something of value in exchange for the grant. o Example: if a university tests a product under a
federal contract, but the government retains the patent (or rights) to use the product
• Many C&U treat research grants as exchange transactions because the grantor expects performance and a report on how the funds were used.
• In these cases, restricted funds not yet spent are considered “Deferred Revenue.”
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Grants: as Exchange Transactions
Grants: as Nonexchange Transactions
• Nonreciprocal transactions in which the donor does not receive “quid pro quo” are called nonexchange transactions.
• These gifts are considered increases to “temporarily restricted” net assets for a private C&U and as restricted net assets in a public C&U.
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C&U - Example 1
The fiscal year of a college ends July 31. In June 2013 a college collects $120 million in tuition and fees for its summer semester that begins on June 3 and ends on August 16.
It also collects $180 million for the following fall semester, which begins on September 3rd. Faculty salaries applicable to summer session courses are $10 million. Of this amount, $8 million are applicable to June and July and $2 million to August.
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C&U - Example 1(cont’d)
Following the AICPA guidance, the entire summer semester’s tuition and fees, as well as the related faculty salaries, should be recognized in the fiscal year ending July 31, 2013.
To record revenue for the summer semester (June 3, 2013): Cash $120 million
Revenue from tuition/fees $120 million
To record faculty salaries: Faculty salaries relating to
summer semester (expense) $10 millionCash $8
millionDeferred faculty salaries (liability) $2
million
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C&U - Example 1 (cont’d)
• Following GASB (instead of AICPA):To recognize revenue: Cash $120 million
Revenue from tuition/fees $96 million Deferred revenues from tuition/fees 24 million
• Faculty salaries would be divided between the 2 semesters.
To record faculty salaries:Faculty salaries relating to summer semester (expense) $8 million
Cash $8 million
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C&U - Example 1(cont’d)Under both FASB and GASB the $180 million in tuition
and fees applicable to the fall semester should be:• recognized as revenue in the fiscal year ending July 31, 2014• and should be reported as deferred revenue when received in
June 2013.
To record tuition and fees applicable to fall semester (Sept 3, 2013):
Cash $180 million
Deferred revenue (liability) $180 million
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C&U - Example 2
In 2013 a private university’s accounting department received a $300,000 federal grant to carry out
research in government budgeting.
Of this amount, $180,000 was to cover faculty
salaries and $120,000 was to cover overhead.
During 2013 the department began the research and paid faculty members $45,000. It was reimbursed by the federal government for $75,000. G
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C&U - Example 2 (cont’d)Entries:
To record faculty salaries (unrestricted fund):Sponsored research—expense $45,000
Cash $45,000
To record amount due from federal government for reimbursement of direct/indirect costs:
Due from federal government $75,000Government grants and contracts— direct reimbursement (revenue) $45,000 Government grants/contracts— reimbursement for overhead (revenue) $30,000
To record collection of cash from federal government: Cash $75,000
Due from federal government $75,000
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• C&U that expend more than $500,000 of federal awards a year need a Single Audit.
• Auditors will use government auditing
standards (yellow book) and follow
OMB Circular A-133 and AICPA SOP 98-3.
• Auditors must be sure that the C&U has complied with the cost principles in OMB Circular A-21.
Auditing Issues in C&U
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• C&U may have institutionally related foundations for fund-raising, alumni relations, or management of assets.
• Related entities should either be disclosed in the Notes to the Financial Statements or reported as component entities, depending on the degree of control and economic interest.
• The FASB and GASB both have projects on affiliated organizations and consolidations.
Related Entities
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GASB Stmt. # 39 (2002) requires public universities* to report affiliated organizations as component units if these criteria are met:
• The economic resources received or held are almost entirely for the direct benefit of the university,
• The university is entitled to access those resources,
• The economic resources are significant to the university.
Discrete presentation is required, i.e., a separate column on the face of the financial statements.
*GASB # 39 is not exclusively for colleges and universities
GASB Stmt. # 39 Affiliated Organizations
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• The Fiscal health of colleges and universities can be evaluated using the traditional analytical tools.
• However, to obtain a broader and longer-term perspective, the analysis also have to look to factors that are far afield from those associated with corporate financial analysis.
-- Examples include: admissions selectivity, the percentage of faculty that are tenured, and the nature of course offerings.
• The fiscal health of colleges and universities, both government and private, is sensitive to unfavorable national economic conditions.
Evaluation of colleges and universities
Summary
• Government colleges and universities have the option of reporting similarly to “full-service” governments or to other governments as business-type activities.
• Government C&U are required to distinguish between operating and nonoperating revenues and expenses.
• Not-for-profit colleges and universities must follow FASB’s reporting standards for not-for-profits.
• C&U also have unique revenues and expenses. G
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