Chapter 4-GAAP Adjustments & Reclassifications Not Requiring Information from the C.O.

1. Chapter 4-GAAP Adjustments & Reclassifications Not Requiring Information from the C.O. • This Chapter describes GAAP entries that campuses must create from their own source records • Chapter 5 describes GAAP entries that campuses must record for which the C.O. has the source data • These entries convert accounting information from State legal/budgetary (modified accrual) to GAAP (full accrual) basis • All sections and entries will be covered – all questions welcomed • If questions arise after this session, post them to the Financial Standards list serve: financial-standards@calstate.edu

2. MODIFIED ACCRUAL Expenditures Recognized when purchase commitment (encumbrance) or payment is made Revenues Recognized when billing or receipt occurs Budgets Used to fund expenditures – externally provided FULL ACCRUAL Expenses Recognized when payee has earned the right to receive payment from us Revenues Recognized when we have earned the right to be paid Budgets For internal use only – revenues fund expenses Chapter 4-GAAP Adjustments & Reclassifications Not Requiring Information from the C.O.

3. Chapter 4-GAAP Adjustments & Reclassifications Not Requiring Information from the C.O. • TYPES OF ADJUSTMENTS (Page 4-2 of Manual) • Permanent adjustments • Timing adjustments • Reclassifications • Eliminations • Start with pre-closing legal basis trial balance – separates CY revenue/expense from Fund Balance-Clearing in governmental funds • PS 8.4 campuses can use GAAP business unit

4. Section 4-1 – Net Assets: how to re-establish beginning balances • PS 8.4 campuses no longer need to make these entries if GAAP business unit was used to record entries in PY • ========================================== • Which PY entries affected ending Net Assets? (p. 4-3) • DR Assets/Liabilities, CR Rev/Exp/Trfrs/Net Assets • DR Rev/Exp/Trfrs/Net Assets, CR Assets/Liabilities • The PY GAAP entries above require CY entries to re-establish effect on 7/1/CY GAAP Net Assets – all others do not • ==========================================

5. Section 4-1 – Net Assets: how to re-establish beginning balances • Which of the following PY GAAP adjustments would require that a GAAP adjustment be made in CY to re-establish the effect on beginning Net Assets? 1. DR Accounts Payable, CR Operating Expense for $250,000 2. DR Tuition and Fees, CR Scholarships and Grants for $50,000 3. DR Investments, CR Fund Balance-Clearing for $750,000 4. DR Accts Receivable, CR State Appropriations for $25 MM 5. DR Interest on Capital Debt, CR Transfers for $25,000 6. DR Net Assets – Unrestricted, CR Operating Exp for $90,000 7. DR Operating Expenses, CR Prepaid Expenses for $100,000 8. DR Net Assets Invested in Capital Assets, CR Capital Lease Obligations for $500,000

6. Section 4-1 – Net Assets: how to re-establish beginning balances • “Gross change” vs. “net change” adjustments (pp. 4-3, 4-4) • Can use either method – Manual presents permanent adjustments using “net change”, timing adjustments using “gross change”, adjustments from C.O. using “net change” COMPARATIVE EXAMPLE • Campus X had prepaid expenses of $100,000 at 6/30/2002 and $150,000 at 6/30/2003. Using the “net change” method, what GAAP adjustment would it have recorded at 6/30/2003 to reflect the $100,000 of PY prepaid expenses: • Using the “gross change” method? • Using the “net change” method?

7. Section 4-1 – Net Assets: how to re-establish beginning balances COMPARATIVE EXAMPLE (cont.) What would be the dollar amount of the debit and credit required to adjust Campus X’s prepaid expenses to $150,000 at 6/30/2003: 1. Using the “gross change method”? 2. Using the “net change method”? Both methods work – the key is to verify that once all GAAP adjustments to 7/1/CY Net Assets have been made to the Pre-closing trial balance, the adjusted Net Asset balances agree with the amounts reported at 6/30/PY per last year’s reporting package – this is part of the Net Asset rollforward See Exhibit 19 in Chapter 9 for a sample Net Asset rollforward

8. Section 4-2: Capital Assets and Depreciation • ADDITIONS 1. Alladditions to capital assets, including library books, C.O. AD-NOATs for CWIP, and assets acquired under a capital lease (Section 4-10), are to be recorded in campuses’ legal basis accounting records – direct credit to Net Assets. 2. GAAP adjustment reclassifies this direct credit (p. 4-10). • DEPRECIATION 1. Campuses are encouraged to record depreciation adjustments in their legal basis records: DR Net Assets Invested in Capital Assets CR Accumulated Depreciation To reflect depreciation expense for the year.

9. Section 4-2: Capital Assets and Depreciation DEPRECIATION (cont.) • GAAP adjustments re: depreciation depend upon whether campus records accumulated depreciation in legal books. a. If campus does record depreciation for legal, then the GAAP adjustment would be: DR Depreciation Expense CR Net Assets Invested in Capital Assets b. If not, then the GAAP adjustment would be: DR Depreciation Expense CR Accumulated Depreciation (Depreciation expense not permitted in legal basis accounts.)

10. Section 4-2: Capital Assets and Depreciation • DISPOSALS • GAAP adjustments re: disposals depend upon whether (a) campus records accumulated depreciation in its legal basis accounts and eliminates it for disposed assets and (b) assets are fully depreciated at time of disposal. • If legal basis entry to record disposal is as follows: DR Net Assets Invested in Capital Assets CR Capital Assets at cost then GAAP adjustment would be: DR Accumulated Depreciation (if any) DR Loss on Disposal (if any) CR Net Assets Invested in Capital Assets

11. Section 4-2: Capital Assets and Depreciation DISPOSALS (cont.) • If the legal basis entry to record disposal is as follows: DR Accumulated Depreciation DR Net Assets Invested in Capital Assets (loss) CR Capital Assets at cost then the GAAP adjustment would be: DR Loss on disposal (if any) CR Net Assets Invested in Capital Assets (no GAAP adjustment required for fully depreciated assets) 4. Disposals of library materials frequently are not recorded before the legal basis close. If this is the case, a GAAP adjustment is required – see pages 4-14 and 4-15.

12. Section 4-3: Accounts Payable: Encumbrances and Obligations • Encumbrances relate to purchase commitments for which receipt of goods or services has not occurred • Obligations relate to purchase commitments for which receipt of goods or services has occurred • In governmental (General / Capital Outlay) funds - 001, 574, 6028 – both are recorded as expenditures (modified accrual) • In all other funds, only obligations are expenses (full accrual) • Need to record GAAP adjustments to reverse expenses related to encumbrances – use “SAM18A” report for detail by fund • These are timing adjustments, assuming that purchase commitments are valid and receipt ultimately occurs

13. Section 4-3: Accounts Payable: Encumbrances and Obligations EXAMPLE Campus X had recorded encumbrances in the following funds and for the following amounts in its legal basis records: Fund 0001Fund 6028 6/30/PY $ 750,000 $ 500,000 6/30/CY 1,000,000 400,000 What are the GAAP adjustments that Campus X would record in the current fiscal year related to encumbrances: • Using the “gross change” method? • Using the “net change” method?

14. Section 4-4: State and CSU Receivables and State Appropriations • For legal (budgetary) basis accounting, State appropriations in governmental funds (0001, 0574, 6028) are neither revenue nor expense, but they allow campuses to charge expenditures up to the amount appropriated • For GAAP, such appropriations are treated as revenue – the GAAP entries reflect permanent differences from legal basis • GAAP revenue is either “capital” (Funds 0574 and 6028) or “non-capital” (Fund 0001) – different net asset categories • Adjusted appropriation revenue must agree with amounts per C.O., except for de-allocations and reverting appropriations • Unexpended portion of appropriations becomes a receivable – must agree with 6/30 BBA per State Controller’s records • Lottery Fund no longer receives allocation orders – unexpended portion of previous appropriations should be recorded in Trust Fund 481 and treated as investments

15. Section 4-4: State and CSU Receivables and State Appropriations • “Net change” method for recording CY GAAP revenue provides more reliable results when appropriations may revert • Need to have SAM06 reports for current and prior year, and extract BBA at 6/30 for both years and CYTD actuals • Record 7/1/CY A/R per p. 4-20 (top), CY appropriations revenue per pages 4-20 (bottom) and 4-21 • Appropriations receivable are reduced by 6/30/CY pre-closing balance of Fund Balance Clearing – discussed in Section 4-5 • Allocation orders don’t always mean appropriation revenue for GAAP (e.g. for transfers to Fund 576) – see page 4-21 • Reclass Fund 576 transfers to A/R (Restricted net assets)

16. SECTION 4-5: Fund Balance-Clearing • Fund Balance-Clearing postings represent SCO revenues and expenses recorded on behalf of CSU – these SCO transactions either give the CSU more available money to spend through the State (e.g. remittances, interest income, transfers into a fund) or reduce what had been available to spend (e.g. revolving fund reimbursements, payroll, fund transfers out) • For GAAP, these postings either add to or reduce campus assets (Appropriations Receivable or Investments, depending upon whether the fund receives State appropriations) • Need to reclassify Pre-Closing Fund Balance-Clearing to appropriate asset line by net asset category – pgs. 4-25 et. seq. • QUESTION: Which of the sample entries on pages 4-26 and 4-27 would require an adjustment to beginning Net Assets in the following year?

17. SECTION 4-6: Prepaid Expenses and Inventories • Under legal (modified accrual basis) of accounting, payments for goods or services are recorded as expenses • For GAAP (full accrual basis) accounting, payments made this fiscal year for goods and services that won’t be used until after the end of the year represent purchases of assets, not expenses • GAAP adjustment is required for the portion of the goods or services that will be used in future years – timing difference • Manual has examples of such prepayments and adjustments – under which method (gross/net) are adjustments presented?? • Special rules for GAAP treatment of “prepayments” to CSURMA – these are NOT prepaid expenses, because the campus has a liability for insurance claims that is greater than the amount that it pays to CSURMA as premiums (pg. 4-29)

18. SECTION 4-7: Faculty Payroll Accruals • Faculty contracts frequently require that the last installment of Fall and Spring semester salaries be paid in July and August of the following fiscal year – also, faculty frequently are paid in July for Summer Session teaching done in June • Salary and benefit costs related to this fiscal year but paid next fiscal year need to be accrued as a liability for GAAP at 6/30/CY – IF they were not accrued in the legal basis records • Your Payroll office should be able to identify these payments • For Summer Session, need to pro-rate expense based on number of days in each fiscal year – again, if not accrued on legal basis • Manual has examples of GAAP adjustments that assume that no accrual was done for legal – if legal basis payroll accrual was done, reclassify accounts payable to accrued salaries

19. SECTION 4-8: Compensated Absences • Under legal (modified accrual) basis, vacation/CTO/holiday leave is expensed as part of regular salary ONLY when the leave is used, or when paid to a separating employee • For GAAP, earned but unused leave also is an expense, and must be accrued as a liability – current and non-current portions of the liability must be disclosed in financials • Use either the CLAS “H46” report (Excel file) or data from your CMS HR leave accounting system to determine the dollar value (salary and benefits) of leave credits earned, used and remaining at the end of the current year • Manual has examples of adjustments (gross change method) – separate salary expense from benefits expense for footnotes! • Current portion of 6/30/CY GAAP liability can be estimated for financials based upon average of (or CY) leave $ used

20. SECTION 4-9: Deferred Revenues • In legal (modified accrual basis) accounting, payments received for services (e.g. registration and housing fees) to be provided in a future fiscal year may still be recorded as revenue when they are billed or received • For GAAP (accrual) accounting, the payments relate to work not yet performed - therefore the payments have not yet been earned and are to be reported as deferred revenue • If campus has recorded such collections as revenue for legal basis, a GAAP adjustment is required to reduce revenue – see example on page 4-40 (“gross change” method) • These adjustments, if required, are the result of timing differences and will have a net effect on Net Assets

21. SECTION 4-10: Capital Lease Obligations • There are 4 conditions (see P. 4-41) under which a lease of equipment or other tangible property is to be treated for GAAP reporting as the purchase of an asset • If the lease terms require capitalization, the capital asset should be recorded in the campus’ LEGAL BASIS records as if it had been purchased outright, at present or stated value • If a leased asset is capitalized, then two GAAP adjustments are required each year of the lease: (1) to (re-)establish the liability (permanent difference) related to the capital lease (2) to reclassify the annual lease payments either as reduction of the capital lease liability or as interest expense (These adjustments are in addition to those for depreciation) Examples of adjustments (1) and (2) are on pages 4-43 and 4-44

22. SECTION 4-11: Tuition Discounting • In legal basis records, all scholarships and grants disbursed to or on behalf of students are recorded as expense, including the portion that is used to pay University fees • For GAAP, the portion that is used to pay fee charges is to be reclassed as a contra-revenue item, “Scholarship Allowances” • If a campus’ student information system can not directly determine the amount of Scholarship Allowances, an “Alternate Method” has been developed • GAAP Manual includes all steps in Alternate Method – the basic student account equation is (G) + (E) = (A) + (B) + (C) + (D) + (F) • (A), (B), (C) and (F) can result in refunds to students, (E) • (B) and (F) are reported as expenses or contra-revenue; (A) and (C) are not

23. SECTION 4-11: Tuition Discounting • The sum of (B) and (F) must be reported either as contra-revenue (Scholarship Allowances) or expense (Scholarships and Grants) EXAMPLE Registration Fees: $1,600 Housing Fees: $2,400 Perkins Loan: $800 SUG Grant: $900 Pell Grant: $1,500 3rd Party Contract: $1,600 Fee Waiver: $1,200 Net Paid to Student: $2,000 (A) = ?? (B)= ?? (C) = ?? (D) = ?? (E) = ?? (F) = ?? (G) = ?? (H) = ?? (I) = ?? (J) = ?? (K) = ?? RESULT (K) is the same % of (B) + (F)…as (G) is of (H) – makes sense!

24. SECTION 4-11: Tuition Discounting • Things to remember in applying either “direct” or Alternate method: • Account for all sources of aid that might be used to pay fees or be given to students • Reclassify all fee waivers (whether or not given to employees) as scholarship/grant expense before doing calculation: debit expense, credit fees • Allocate scholarship allowances between tuition and fees and auxiliary enterprise revenue wherever possible • GAAP entries will cross net asset categories, as restricted scholarship and grants expense will become contra-revenue to unrestricted fee revenue – offset w/transfers • The GAAP adjustments related to Scholarship Allowances are reclassification entries that do not affect Net Assets

25. SECTION 4-12: Other Accounting Topics • Record GAAP adjustments as necessary to eliminate double-counting of revenue and expense: • Reimbursed Activities (FIRMS Program 1100): auxiliary organization and interfund reimbursements (pgs. 4-50/51) • Student Union Fee Revenue: also reported by auxiliary (page 4-50) • SUG/EOP Grants: revenue/expense recorded twice (4-54) • GAAP adjustments needed re: SMIF Interest for 1/1/-6/30/CY if AD-NOAT issued after legal basis close (pgs. 4-51/4-52) • Treatment of student loans receivable – all noncurrent (4-52) • Transfers between CSU entities (Lottery revenue and Debt Pool Subsidy) – page 4-54

26. Chapter 4 • OPEN “FOUR-UM” • Questions, anyone?