Accounting for Colleges & Universities

1. Accounting forColleges & Universities Chapter 17

2. Learning Objectives • Understand why most government C&Us choose to report as “business-type only” special purpose governments • Explain unique aspects of C&U reporting • Prepare journal entries consistent with C&U financial reporting requirements

3. Learning Objectives (continued) • Prepare C&U financial statements • Understand principal differences between reporting government and nongovernment not-for-profit C&Us • Prepare nongovernment not-for-profit C&U financial statements

4. Early Contributors for C&U Accounting Standards • National Association of College and University Business Officers (NACUBO) • Publishes Financial Accounting & Reporting Manual (FARM) which provides detail for implementing GASB (public) or FASB (private) standards • Provides input to GASB and FASB on new standards • American Institute of Certified Public Accountants (AICPA)

5. Basic Standards for C&Us • Nongovernment (private) C&Us follow FASB’s not-for-profit accounting standards • Government (public) C&Us follow GASB #35, Basic Financial Statements – and Management’s Discussion and Analysis – for Colleges and Universities, which applies GASB #34 to C&U environment

6. Full Model vs Enterprise-only Model • Entity with governmental and proprietary funds must present full set of basic financial statements per GASB #34 • Enterprise-only entities (special purpose governments) present • 3 Enterprise Fund financial statements • Notes to the financial statements • MD&A and other RSI

7. External vs. Internal Inconsistency • Most public C&Us have chosen to report as enterprise-only activities • During the year, these same C&Us use unique fund structure to manage operations • Uses expenditures rather than expenses • Fund structure is unique to C&Us – developed over time by NACUBO X

8. GAAP Reporting Requirements • Statement of Net Assets (or Balance Sheet) • Statement of Revenues, Expenses, and Changes in Net Assets • Statement of Cash Flows • Management’s Discussion and Analysis (RSI) • Other Required Supplementary Information (RSI) 1 2 3

9. Statement of Net Assets (Balance Sheet) • Presentation is not unique to C&Us • Net Assets uses standard three account classification, with one big change • Restricted Net Assets has two categories • Nonexpendable – used for permanently restricted amounts • Expendable – amounts will be expended at some point in the future

10. Operating Statement:Specific Requirements • Tuition and fee revenues to be reported net of uncollectible accounts and scholarship allowances • Operating grants and gifts reported as nonoperating revenues • Capital grants and gifts reported after nonoperating revenues (expenses) • Operating grants are more like contracts – grantor expects something in return

11. Operating Statement:Specific Requirements Auxiliary enterprises • Provide goods and services to students, faculty, & others that are not directly related to mission of C&U • Revenues are separately identified in operating revenues • Examples include • Residence Halls • Food Service • Bookstore • Parking

12. Operating Statement:Specific Requirements • State appropriations for • Operations reported as nonoperating revenues • Capital outlay reported after nonoperating revenues (expenses) • Additions to permanent endowments reported with capital appropriations, capital grants, and capital gifts • Expenses usually reported by function or natural classification (utilities) • Special & extraordinary items and changes in accounting principle last items on statement before Change in Net Assets

13. Tuition and Fees Revenue Note that scholarships may be netted against revenues or shown as a separate expense – must know the difference • Allowances come from scholarships that reduce the amount of tuition and fees owed by students • Expenses come from amounts actually paid by the C&U to students • Tuition waivers to employees are part of compensation expense

14. Tuition and Fee Revenues:Timing Issues • Special case when revenue spans two fiscal years – often involves Summer session • Current guidance is to recognize it proportionately

15. Restricted Gifts and Grants • Gifts & grants from private foundations and individuals reported as revenues when received – amounts reported as restricted net assets until spent • Permanent endowment gifts recognized as revenues when C&U takes actions required under gift

16. Revenue & Expense Classifications • Revenues reported by source • Expenses may be reported as • Object (or natural) classification • Function • NACUBO recommends natural classification in statements and functional classification schedule in notes

17. Statement of Cash Flows • State appropriations not for capital purposes are reported as noncapital financing activity • Use of direct method required

18. Sample Journal Entries • Assumes accounting system is maintained on GAAP basis • Both revenues and expenses recorded as either • Education and general, or • Auxiliary enterprises • Subsidiary effects not demonstrated • For ease of display, all amounts are in thousands unless otherwise noted

19. Tuition, Fees, & Appropriations (685)

20. Scholarships & Waivers (686) Tuition and fees are reported net of uncollectible amounts and scholarship allowances.

21. Other Revenues (686)

22. Purchase & Use Supplies (686)[Entries 4 – 5]

23. Salaries & Wages andOther Operating Expenses (686 – 7)[Entries 6 – 8]

24. Student Aid Cash Grants (687)[Entry 9]

25. Purchase of Capital Assets (687)[Entries 10 & 12]

26. Borrowing (687)Current Operations [Entry 11]Capital Outlay [Entry 13]

27. Capital Asset Construction (687)[Entry 14]

28. Mortgage & Interest Payments (687)[Entry 15] Expenses are for interest payment.

29. Operating Debt Interest Accrual (688)[Entry 16, not thousands]

30. Restricted Gifts for Operations & Plant PurposesCash Receipts (688)[Entry 17]

31. Expenses Paid by Restricted Assets (688)[Entry 18]

32. Stock Donation (688)[Entry 19] Donation reported at fair value. C&U must apply provisions of GASB #31 as do other governmental entities.

33. Debt Service Donation (688)[Entry 20] This donation (and one in Entry 22) will be reported as operating grants on Statement of Revenues, Expenses, and Changes in Net Assets. However, on the Statement of Cash Flows, the donations are reported as capital and related financing activities since the donations will be used for capital debt-related transactions.

34. Mortgage Payment Made (689)[Entry 21] Interest recorded in the Expenses – Educational & General account.

35. Donation (689)Received [Entry 22]and Invested [Entry 23]

36. Gift for New Building (689)[Entry 24]

37. Uninsured Loss (689)[Entry 25] Equipment was new; therefore, no depreciation had been recorded.

38. Depreciation (689)[Entry 26]

39. Other Resources • C&U often have unique arrangements • Gifts to used for loans to students, faculty, & staff • Split interest gift agreements that provide benefits to C&U and some other individual (sometimes the donor) • Primary aspects of reporting • Timing of revenue recognition • Use of restricted asset accounting to indicate use of resources is limited to specific purposes

40. Loan Funds • Must have separate accountability to ensure donors funds are being used properly – restricted asset accounting is frequent tool • If only fund’s income may be loaned, principal part of C&U endowment • Unrestricted resources set aside by C&U board are not restricted assets • Funds may be major program at C&U, requiring separate, professional management

41. Donation (690)Received [Entry 1]Loans made [Entry 2]

42. Investments (690)[Entry 3, not in thousands]

43. Interest received (690)[Entry 4, not in thousands]

44. Write-off an Account (691)[Entry 5, not in thousands]

45. Endowment and Similar Gifts • Categories • Given in perpetuity – true or pure endowment • Donor specifies principal may be spent after a particular date or event – term endowment • Revenue recognized when C&U invests gift per donor’s instructions • As with Loan Funds, C&U board may use unrestricted resources in similar manner – does not use restricted asset accounting

46. 3rd Party Management • Donor may designate 3rd party to manage principal – not reported as an asset or revenue of C&U but disclosed in the notes • Income from trust reported as revenue when received • If restricted for specified purposes, increases restricted net assets • If no restrictions, becomes part of unrestricted net assets

47. Determining & Reporting Income • How to account for net appreciation of endowments is a much debated issue • Options • Addition to expendable endowment – total return approach • Increase to endowment principal – classical trust (or fiduciary principle) • May be decided by donor’s stipulation or state law

48. Determining & Reporting Income(continued) • Gains and losses – including most unrealized changes in fair value – must be reported as investment income • Corresponding debit will depend on which of the options is selected

49. Endowments created (692 – 693)[Entry 1, all entries not in thousands]

50. Investments made (693)[Entry 2]