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UNDERSTANDING COLLEGE AND UNIVERSITY

ACCOUNTINGAN INTRODUCTION FOR

NON-ACCOUNTANTS

2018

Joyce Lopes

Vice President of Administration and Finance

Sonoma State University

1

Learning Objectives• After completing this course, you will be

able to – Identify the various fund types utilized by

colleges and universities

– Understand the purpose and function of these funds

– Recognize the basic financial statements

– Describe basic differences in financial reporting for private and public institutions

– Hold your own at the next board meeting

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CONCEPTS AND DEFINITIONS

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CHARACTERISTICS OF Not For Profit ORGANIZATIONS

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BUSINESS NOT FOR PROFIT

Individuals own it YES NO

People give money and YES NOexpect products andservices in return

Profit is primary YES NOpurpose

Business NFP

Individuals own it YES NO

Customers give money; YES NOexpect products andservices in return

Profit is primary YES NOpurpose

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Profit

Profit = Net Income

Net Income = Revenues – Expenses

Can a NFP make a profit (have positive net income)?

FUND ACCOUNTING

Classify financial resources for

accounting and financial

reporting purposes in

accordance with their intended

use or purpose.

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FUND ACCOUNTING

• Although no longer required by GAAP, fund accounting:– Can assist with financial reporting

– Is an effective way to manage an institutions resources

– Will probably be around for a while

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FUND ACCOUNTING

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CHART OF ACCOUNTS• Blueprint of financial structure

• Used to classify financial transactions

• Identifies fund group, function, organizational unit, ledger, etc.

• Important to internal management and external reporting

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Typical Account String

• Fund-Department-Account-Program-Activity-Location

• This is one example…

110000-521001-69010-1600

How does your campus’ differ?

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What is Fund Accounting?

Fund accounting is the procedure by which resources for various purposes are classified by accounting and reporting purposes in accordance with activities or objectives as specified by donors, in accordance with regulations, restrictions, or limitations imposed by sources outside the institution, or in accordance with directions issued by the governing board.

AICPA Audits of Colleges and Universities Industry Audit Guide

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What does that mean?

Fund Accounting is a convenient way to organize/compartmentalize various resources to facilitate

(1) the management of those resources, and

(2) the required reporting for those resources

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Ok…

So what does it look like?

FUND GROUPS

• A way to organize funds within the chart of accounts based upon classification and restrictions

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Audit Guide Fund Groups

• Unrestricted Current Funds

• Restricted Current Funds

• Loan Funds

• Endowment and Similar Funds

• Plant Funds

• Other Funds

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Fund Groups

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General Funds

Designated Funds

Restricted Funds*

Auxiliary Enterprises

Current Funds

Financial Aid

Internal Agency*

External Agency*

Other Funds

Loan Funds

Endowment Funds

Plant Funds

Noncurrent Funds

*Indicates fund classifications

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Unrestricted Current Funds

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Fund Groups

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General FundsGeneral Funds

Designated FundsDesignated Funds

Restricted Funds

Auxiliary EnterprisesAuxiliary Enterprises

Current Funds

Financial Aid

Internal Agency

External Agency

Other Funds

Loan Funds

Endowment Funds

Plant Funds

Noncurrent Funds

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Unrestricted Current Funds

Economic resources of the institution which are expendable for any purpose in performing the primary objectives of the institution (i.e. Instruction, Research, Public Service)

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Unrestricted Current Funds• General Funds • Designated Funds

– Continuing Education – Public Service – Internal Research– Other– Unrestricted Scholarships

• Auxiliary Enterprise Funds– Auxiliary – Recharge Centers – Hospitals

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What is an Auxiliary?

An enterprise that furnishes goods or services to students, faculty, or staff and charge a fee related to the cost of the goods or services. Basically, an entity managed as a self-supporting activity.

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Examples of Auxiliary and Recharge Activities• Athletics

• Residence halls

• Student unions

• Parking and transportation

• Bookstores

• Copy center

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Unrestricted Current Funds –Sources & Uses

SOURCES• State Appropriations

• Student Fees

• Sales and Services

• Recovery, Indirect Cost• Interest Gifts• Rent, Dividends • Endowment Income – if

unrestricted• Transfers In

USES• Compensation

• Supplies

• Travel

• Capital Expenditures

• Note Payments (lease purchases)

• Interest Expense (lease purchases)

• Transfers Out

Unrestricted Current Funds –Assets & Liabilities

ASSETS• Cash

• Investments

• Accounts Receivable

• Inventories

• Prepaid Expenses

• Due from Other Funds

• Notes Receivable

LIABILITIES• Accounts Payable

• Salaries Payable

• Accrued Vacation Liability

• Deferred Revenue

• Due to Other Funds

• Notes Payable

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Restricted Current Funds

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Fund Groups

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General Funds

Designated Funds

Restricted Funds


Current Funds

Financial Aid

Internal Agency

External Agency

Other Funds

Loan Funds

Endowment Funds

Plant Funds

Noncurrent Funds

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Those funds expendable for operating purposes but restricted by donors or other outside agencies as to the specific purpose for which they may be expended.

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WHAT IS “RESTRICTED”Public Colleges & Universities

LIMITED BY RESTRICTED

Donor YES

External entity YES

Federal, state YES

Institution NO, but may designate or allocate

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WHAT IS “RESTRICTED”Private Colleges & Universities

Limited by DONOR only Restricted

In perpetuity Yes-permanently restricted

Until passage of time or Yes-temporarily restrictedoccurrence of event

No donor limitation No-unrestricted


• Other Restricted

– Fellowships

– Scholarships

– Special State Appropriations

• Contract and Grants

– By agency type, I.e. federal, state, foundations, etc.

– Cost Share

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Restricted Current Funds –Sources & Uses

SOURCES• Sales & Services

(Program Income)

• Interest & Gains

• Gifts

• Grants & Contracts

• Endowment Income

• Other Income (program income)

• Transfers In

USES• Compensation

• Supplies

• Travel

• Indirect Cost Recovery


• Note Payments (lease purchases)

• Interest Expense (lease purchases)

• Transfers Out

Restricted Current Funds –Assets & Liabilities

ASSETS• Cash

• Investments


• Inventories

• Prepaid Expenses

• Due from Other Funds



• Salaries Payable

• Deferred Revenue

• Due to Other Funds

• Notes Payable

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Loan Funds

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Fund Groups

34

General Funds

Designated Funds

Restricted Funds


Current Funds

Financial Aid

Internal Agency

External Agency

Other Funds

Loan Funds

Endowment Funds

Plant Funds

Noncurrent Funds

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Loan Funds

The loan funds group consists of loans to students, faculty, or staff, and of resources available for such purposes.

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Loan Funds – Sources & Uses

SOURCES• Interest

• Gifts

• Endowment Income

• Other Sources

– Government advances

• Transfers In

USES• Student Loan

Expenditures

– Collection fees

– Write-offs of loans

– Administrative collection costs

– Refunds to grantors

• Transfers Out

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Loan Funds - Assets

ASSETS• Cash

• Investments – temporary

• Due from other Funds


– Face value

– Allowance for doubtful loans


– amounts due collection agencies for fees

– Refundable loan amounts

Endowment and Similar Funds

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Fund Groups

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General Funds

Designated Funds

Restricted Funds


Current Funds

Financial Aid

Internal Agency

External Agency

Other Funds

Loan Funds

Endowment FundsEndowment Funds

Plant Funds

Noncurrent Funds

Endowment and Similar Funds

• Endowment Funds

• Term Endowment Funds

• Quasi-endowment Funds

• Annuity and Life Income Funds

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Endowments and Similar Funds

• Governed by Uniform Prudent Management of Institutional Funds Act (UPMIFA)

• Spending Policy

• Investment Policy

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Endowment Funds

Endowment funds are funds to which donors or other outside agencies have stipulated, as a condition of the gift instrument, that the principal is to be maintained inviolate and in perpetuity and invested for the purpose of producing present and future income which may either be expended or added to principal.

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Term Endowment Funds

Term endowment funds are similar to endowment funds except that, upon the passage of a stated prior of time or the happening of a particular event, all or a part of the principal may be expended.

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Quasi-endowment FundsSometimes called funds functioning as

endowments, quasi-endowments are funds which the governing board of an institution, rather than a donor or other outside agency, has determined are to be retained and invested. Because they are internally designated, the governing board has the right to decide at any time to expend the principal.

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Annuity and Life Income Funds

Funds contributed to an institution subject to the requirement that the institution periodically pay the income earned on the assets to designated beneficiaries.

• Received under deferred giving agreements

• Income to donor or designee; lifetime or fixed period

• When contract expires, funds used as designated by donor

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WHAT CAN BE SPENT?

Createdby

PrincipalSpent

IncomeSpent

Endowment Donor No Yes

TermEndowment

Donor Yes-after period of

time or event

Yes

Quasi-endowment

Board Yes Yes

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Endowments and Similar Funds – Sources & Uses

SOURCES• Interest & Gains

– Losses

• Gifts

• Other Income

– Income from Asset –Farm Activity, Rental, etc.

• Transfers In

USES• Supplies & Expense

– Payouts on life income funds

• Transfers Out

Endowments and Similar Funds – Assets & Liabilities

ASSETS• Cash

• Investments

LIABILITIES• NONE

The mission of these funds is to make money, not spend it. Therefore, there tends to be no liabilities since there are no deductions.

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Plant Funds

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Fund Groups

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General Funds

Designated Funds

Restricted Funds


Current Funds

Financial Aid

Internal Agency

External Agency

Other Funds

Loan FundsLoan Funds

Endowment Funds

Plant FundsPlant Funds

Noncurrent Funds

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Plant Funds• Unexpended

– Funds for acquisition of physical plant; sometimes called Construction

• Retirement of Indebtedness

– Indebtedness incurred for plant expansion

• Renewal and Replacement

– Funds set aside for replacement of property

• Investment in Plant

– Assets that have been capitalized, construction in progress and related debt

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Construction - Sources

• Additions

– State Appropriations

– Interest & Gains

• Losses

– Gifts

– Grants – federal and state

– Bond Revenue

– Transfers In

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Construction – Sources & Uses

SOURCES

• Additions– State Appropriations

– Interest & Gains

• Losses– Gifts

– Grants – federal and state

– Bond Revenue

– Transfers In

USES

• Supplies & Expenditures

• Expendable equipment


• Predominantly building capitalization

• Transfers Out

Construction – Assets & Liabilities

ASSETS

• Cash

• Investments


• Prepaid Expense


LIABILITIES

• Accounts Payable

• Due to other Funds

• Notes Payable

• Bonds Payable

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Retirement of Indebtedness –Sources & Uses

SOURCES

• Interest and gains– Losses

• Gifts

• Grants

• Transfers In

USES

• Supplies & Expense– Trustee’s fees and

expenses

• Note Payments

• Bond Payments

• Interest Payments

Retirement of Indebtedness -Assets & Liabilities

ASSETS

• Cash

• Investments

• Funds on deposit


• Due from other funds

• Notes receivable

LIABILITIES

• NONE - Retirement of Indebtedness usually does not have any liabilities. Predominantly this is true because there are no operating expenditures involved in the fund group, nor any long term debt.

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Renewal and Replacement Funds – Sources & UsesSOURCES

• Interest and gains– Losses

• Gifts

• Grants

• Transfers In– Mandatory

– Voluntary

USES

• Supplies and Expense– Expendable

Equipment

– Maintenance of R&R Items


• Transfers Out – very seldom

Renewal and Replacement Funds – Assets & Liabilities

ASSETS

• Cash

• Investments

• Funds on Deposit



LIABILITIES

• Accounts Payable

• Due to other Funds

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Investment in Plant – Sources & Uses

SOURCES

• NONE - There is no revenue in Investment in Plant because there is no cash activity. Only the recognition of new plant capitalized occurs in the balance sheet assets.

USES

• NONE - There is typically no expenditure in Investment in Plant. The only exception is depreciation expense when it is recognized in plant funds.

Investment in Plant – Assets & Liabilities

ASSETS• Capital Assets

– Land

– Buildings

– Moveable Equipment

– Library Acquisitions

– Improvements to Land

– Infrastructure

• Accumulated Depreciation

LIABILITIES

• Notes Payable

• Bonds Payable

Only debt that relates to (matches) the capital asset items

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Other Funds

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Fund Groups

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General Funds

Designated Funds

Restricted Funds


Current Funds

Financial Aid

Internal Agency

External Agency

Other Funds

Loan FundsLoan Funds

Endowment Funds

Plant FundsPlant Funds

Noncurrent Funds

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Other Funds

• External Agency

• Internal Agency

• 3rd party financial aid (private only)

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Agency Funds

Funds held by an institution as custodian or fiscal agent for others such as student organizations, individual students, or faculty members.

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Financial Aid – FASB Schools

Note: For private institutions, Pell grants and 3rd party financial aid directed toward specific students are shown as Agency transactions.

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Internal Agency Funds

• Temporary Holding Accounts• Examples:–FICA–Federal Taxes–State Taxes

• Reported as Unrestricted assets and liabilities at the end of the fiscal year (typically June 30)

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External Agency Funds

• Enhance institution’s mission

– Federally-funded research labs

– Software production corporation

– Alumni associations

– Foundations

– University press

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Higher Education Function Codes

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Why are function codes needed?• IPEDS reporting

• Facilities and Administrative Rate

• Internal management of how dollars are spent

• Some states require reporting by function

• Institutions can report expenses in the operating statement by function instead of natural classification

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Educational and General Function Codes

• Instruction• Research• Public Service• Academic Support• Student Services• Institutional Support• Operation and Maintenance of Plant• Scholarships and Fellowships

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EDUCATIONAL AND GENERAL

INSTRUCTION

• General Academic

• Vocational/Technical

• Continuing Education

• Remedial

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RESEARCH

• Individual

• Project

• Institutes and research centers

NOT equivalent to sponsored research

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PUBLIC SERVICES

• Community service

• Cooperative extension services

• Public broadcasting services

–not primarily instructional

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ACADEMIC SUPPORT

• Libraries

• Museums and galleries

• Educational media

• Academic computingCont’d

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ACADEMIC SUPPORT Cont’d

• Ancillary support

• Academic administration

• Academic personnel development

• Course and curriculum development

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STUDENT SERVICES

• Student services administration

• Financial aid administration

• Student records

• Admissions

Cont’d

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STUDENT SERVICES, con’t

• Counseling and career guidance

• Social and cultural development

• Student health services

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INSTITUTIONAL SUPPORT

• Executive management

• Fiscal and business operations

• General administration and logistical services

• Administrative computing

• Public relations/development78

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OPERATION AND MAINTENANCE OF PLANT

• Physical plant administration (and planning)

• Building maintenance

• Custodial services

• Utilities

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OPERATION AND MAINTENANCE OF PLANT

• Landscape and grounds maintenance

• Major repairs and renovations

Note: Not an expenditure category for private, must allocate out to all other functions.

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SCHOLARSHIPS AND FELLOWSHIPS• Grants• Trainee stipends• Prizes and awards• Tuition and fee waivers

NO exchange of services, used as directed by donor

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FINANCIAL REPORTING

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Purpose

To provide financial information useful

for making rational decisions to

allocate resources.

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Who are the users of financial statements?

• Federal/State Government

• Private Sponsors

• Granting Agencies

• Media

• Analysts

• Rating Agencies

• Colleges & Universities

• Students/Parents

• Others?

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What are the objectives?

• Assess financial condition and results of operation

• Assist in determining compliance with laws and regulations

• Assist in evaluating efficiency and effectiveness

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Financial Analysis

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FASB/GASB Comparability Challenges

• Display differences exist with the reporting models established by GASB and FASB

• The Accounting Principles Council and academic researchers have initiated analysis of reporting and standard inconsistencies

• The inconsistencies impact financial statement comparability between public and private institutions

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Consequences of GASB/FASB Differences

• Misinterpretation by statement users

• Comparisons between public and private statements difficult if not impossible

• Financial analysis significantly different– Ratios, Vertical analysis, Horizontal Analysis,

etc.

• Debt rating agencies’ analysis and conclusions

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Prominent FASB/GASB Differences

• Pell Grants– FASB – Agency recognition i.e., funds held for others– GASB – Revenue

• Recognition of Pledges– Discounting of operating pledges FASB yes GASB no– Recognition of endowment pledges FASB yes GASB

no• Reporting of restricted revenues

– FASB – Mandates first dollar release method– FASB – Only donors can restrict– GASB – Any external party can restrict

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• Time Restrictions– FASB – Time and purpose are restrictions– GASB – Time is a condition, not a restriction (result is

deferred revenue)• OPEB

– FASB – Accrues a liability– GASB – Also accrues liability but with different

assumptions and funding not required• Cash Flow

– FASB – Direct or indirect method, three categories– GASB – Direct method mandatory, four categories

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• Split Interest Agreements (planned giving)– FASB – Current guidance in the Not-for-Profit

Audit Guide

– GASB – Single Q&A Answer

• Funds held in trust by others– FASB – Reported as an asset

– GASB – Not reported unless as a component unit

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• Display– FASB – must allocate depreciation, three net

asset groups not consistent with GASB, unclassified balance sheet, MD&A and operating measure are not required

– GASB – no requirements to allocate depreciation, three net asset groups not consistent with FASB, classified balance sheet, mandatory operating measure, mandatory MD&A

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BASICS OF ALL COLLEGES &

UNIVERSITIES FINANCIAL STATEMENTS

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ACCRUAL BASIS

• Revenues should be recognized in the accounting period in which they are earned and become measurable; expenses should be recognized in the period incurred, if measurable.

Vs.

• Cash basis – revenues and expenses are recognized when cash is exchanged

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FINANCIAL STATEMENTS FOR PUBLIC COLLEGES &

UNIVERSITIES (GASB)

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FINANCIAL STATEMENTS FOR PUBLIC INSTITUTIONS

– Management Discussion & Analysis

– Statement of Net Assets (Balance Sheet)

– Statement of Revenues, Expenses, and Changes in Net Assets

– Cash Flow Statement

– Notes to the Financial Statements

– Other Required Supplementary Information (budget)

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MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A)

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MD&A• The basic financial statements should be preceded by

MD&A

• MD&A should provide an objective and easily readable analysis of the financial activities based on currently known facts

• Comparison of current-year results to prior year; both positive and negative results should be discussed

• Although not mandatory, graphs, charts and tables are encouraged

• Data provided should reinforce analysis and results of operations

• Important economic factors that significantly affected operating results

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STATEMENT OF NET ASSETS

(BALANCE SHEET)

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STATEMENT OF NET ASSETS

• Net assets should be displayed in three broad components—invested in capital assets, net of related debt; restricted (distinguishing between major categories of restrictions); and unrestricted.

100

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STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET

ASSETS (SRECNA)

101

SRECNA• Operating statement for proprietary

funds/enterprise funds/business type activity

• Revenues should be reported by major source

• Should distinguish between operating and nonoperating revenues and expenses

102

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EXPENSES

• May be displayed using either natural or functional classification

• Many schools voluntarily provide both, one on face of statements and the other in the notes– This is not required

• Must distinguish between operating and nonoperating

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CASH FLOW STATEMENT

104

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CLASSIFICATIONS

• Operating Activities

• Noncapital Financing Activities

• Capital and Related Financing Activities

• Investing Activities

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OPERATING ACTIVITIES

• Direct reporting method prescribed

• Accrual data must be converted into cash basis. A reconciliation [indirect method] of this conversion must be presented at the bottom of the statement

• Inflows reported by major type

• Outflows reported by payment type

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NOTES TO THE FINANCIAL STATEMENTS

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NOTES TO THE FINANCIAL STATEMENTS

• Integral part of the basic financial statements

• Communicates information that is essential for a fair presentation of the financial statements not displayed on the face of the financial statements

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

• Measurement focus basis of accounting used• Definition of cash equivalents• Defining operating and non operating revenues • Capital assets and long-term liabilities reported in

SRECNA• Capital acquisitions/dispositions• Beginning/end of the year balances with separate

accumulated depreciation • Description of collections• Bonds, notes, loans, lease, payable and compensated

absences, claims and judgements • Endowment & investment detail

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FINANCIAL STATEMENTS FOR PRIVATE COLLEGES &

UNIVERSITIES (FASB)

110

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Types of StatementsStatement

Financial Position

Activities

Cash Flow

Purpose

Current Status (Balance Sheet)

Detailed Sources &Uses, Transactions

Cash Receipts & CashPayments

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Statement of Financial Position

(Balance Sheet)

112

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Minimum Requirements include

• Total amount of assets, liabilities, & net assets

• Total amount of each class of net assets (unrestricted, temporarily restricted, permanently restricted) based on existence or absence of donor-imposed restrictions

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• Information regarding types of restrictions on net assets (usually in notes)

• Information regarding liquidity (e.g. by providing classified balance sheet)

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Statement of Activities

115


• Amount of change in total net assets

• Amount of change in each of the 3 classes of net assets

• All revenues, expenses, gains, and losses for the period -classified by and reported in the class of net assets they affect

• Revenues reported as increases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by law

116

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• Expenses reported as decreases in unrestricted net assets

• Reporting expenses by function either in the statement or in the notes

• The amount of expired donor-imposed restrictions that increase one class of net assets and simultaneously decrease another class of net assets

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Statement of Cash Flows

118

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• Total changes in cash and cash equivalents

• Total amount of net cash provided by or used for investing, financing, & operating activities

• Interest paid on indebtedness

• Significant non-cash financing and investing activities

• Reconciliation of change in total net assets to net cash provided by or used for operating activities

119

Notes to the Financial Statement

120

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Footnotes required by SFAS 116 & SFAS 117 or

suggested as being informative:

• Summary of significant accounting policies

• Nature of restriction/limitations on net asset balances

• Net assets released from restrictions

• Expenses by classification

121

Footnotes required by SFAS 116 & SFAS 117 or

suggested as being informative:

• Unconditional and conditional promises to give

• Collections policies

• Appreciation of endowment investments

• Contributed services details

122

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GROUP DISCUSSION –TELLING THE STORY

123

Financial Analysis

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Ratio Analysis

RATIOS

• Used to evaluate the financial position of an institution

• Important to track them over time and compare year to year

• Can be used to compare one institution to another

VIABILITY RATIONet assets available to cover debt

Unrestricted Net Assets less Property, Plant & Equipment

Long-Term Liabilities

Ratio Analysis

RESERVE RATIOMeasures financial strength &

flexibility

Unrestricted Net Assets less Property, Plant & Equipment

Unrestricted (Operating & NonOperating) Expenses

RETURN ON NET ASSETS RATIO

Measures financial well-being over time

Change in Net Assets

Total Net Assets

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Questions for Statement of Net Assets?

Use a financial statement provided or pull up your institution’s statement on-line:

What is the cash balance?

How much are they owed?

How much to they owe?

What amount of net assets are available for an immediate need?

Questions forSRECNA?


What revenues were collected in the most recent year? How much from contributions?

What were the expenses for general operations? How much for

instruction/academics?

What is listed under nonoperating activities?

66

Questions forCash Flow?


What was the cash on hand at the end of the year?

Did it increase or decrease over the year?

Did investing activities change the cash available?

Questions forNotes to the FS?


How much did the institution have in capital assets?

Did the institution have debt?

67

Questions forMD&A?


Did the MD&A provide year to year comparison?

Did it provide any ratio analysis?

134

Hope this put the FUN into FUNd Accounting!

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