Chapter 13
Granof & Khumawala-6e Chapter 13
Colleges and Universities
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Thoughts to Ponder: Chapter 13
Education is simply the soul of a society as it passes from
one generation to another.
G. K. Chesterson
Granof & Khumawala-6e Chapter 13
When we make college more affordable, we make the
American dream more achievable.
William J. Clinton
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• 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 for
o Revenues and expenses
o Tuition and fees
o Grants
o Student Loans
o 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.
Granof & Khumawala-6e Chapter 13
Learning Objectives
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Two types
• Public (1,672 public institutions in 2011)
o GASB Reporting Standards
o Example: Univ. of Houston, Univ. of Texas, Univ.
of California, Univ. of Michigan
o Main sources of revenues are state appropriations
and grants
• Private (2,823 private institutions in 2011)
o FASB Reporting Standards
o Example: Rice University, Harvard, Yale,
Princeton, Duke, Univ. of Chicago
o Main sources of revenues are student tuition,
investments and fees.
Granof & Khumawala-6e Chapter 13
Overview
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Basic Issues
• Public C&Us have much in common with their NFP
counterparts, so comparability is desirable
• 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 activities
2) Only in governmental activities
3) In both
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• Most C&Us have used the AICPA reporting model.
o However, some institutions (e.g. community colleges) use
standard governmental model.
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GAAP for Colleges and Universities
GASB
Stmt. No. 35
(1999)
FASB
Codified as
ASC 958
GASB
Stmt. No. 34
as special-purpose
governments
AICPA AAG State and
Local Governments
FARM (industry
guidance maintained
by NACUBO)
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Chapter 13
Private C&U
Granof & Khumawala-6e
Public C&U
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Fund Accounting
•
Used for:
•
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
o
o
o
o
o
Current funds (unrestricted and restricted)
Loan funds
Endowment and similar funds
Annuity and life income funds
Plant funds (4 sub-funds)
Agency funds
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o Internal Purposes ONLY
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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 Unrestricted
o Restricted
o Net Investment in Capital Assets (net of
related debt)
Statement of Revenues, Expenses, and Changes
in Net Position
Statement of Cash Flows
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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 restricted
o permanently restricted
•
Statement of Activities
•
Statement of Cash Flows
•
Example: Brown University, Stanford, Dartmouth
College, Northwestern University
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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 appropriations
o Private gifts
o Grants and contracts
o Endowment income
o Sales and services of educational activities
o Sales and services of auxiliary activities
o Gain/loss on sales of investments
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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.
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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
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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.
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Natural v/s Functional Expenses
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•
•
•
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
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•
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
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Grants: as 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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• Nonreciprocal transactions in which the donor does
not receive “quid pro quo” are called nonexchange
transactions.
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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
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C&U - Example 1(cont’d)
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 million
Cash
Deferred faculty salaries (liability)
$8 million
$2 million
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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.
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• Following GASB (instead of AICPA):
To recognize revenue:
Cash
$120 million
Revenue from tuition/fees
Deferred revenues from tuition/fees
$96 million
24 million
• Faculty salaries would be divided between the 2
semesters.
To record faculty salaries:
Faculty salaries relating to
summer semester (expense)
Cash
$8 million
$8 million
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C&U - Example 1 (cont’d)
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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:
To record tuition and fees applicable to fall semester (Sept 3, 2013):
Cash
$180 million
Deferred revenue (liability)
$180 million
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• recognized as revenue in the fiscal year ending July 31, 2014
• and should be reported as deferred revenue when received in
June 2013.
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C&U - Example 2
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.
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In 2013 a private university’s accounting department
received a $300,000 federal grant to carry out
research in government budgeting.
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C&U - Example 2 (cont’d)
Entries:
To record amount due from federal government for reimbursement
of direct/indirect costs:
Due from federal government
$75,000
Government 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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To record faculty salaries (unrestricted fund):
Sponsored research—expense
$45,000
Cash
$45,000
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Auditing Issues in C&U
•
C&U that expend more than $500,000 of federal
awards a year need a Single Audit.
•
Auditors will use government auditing
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.
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standards (yellow book) and follow
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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.
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Related Entities
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GASB Stmt. # 39 Affiliated Organizations
GASB Stmt. # 39 (2002) requires public universities* to
report affiliated organizations as component units if
these criteria are met:
• 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
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• The economic resources received or held are almost
entirely for the direct benefit of the university,
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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.
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Evaluation of colleges and universities
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Summary
• 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.
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• Government colleges and universities have the option
of reporting similarly to “full-service” governments or to
other governments as business-type activities.
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