College and University Accounting—Private Institutions Essentials of Accounting for Governmental and Not-for-Profit Organizations Chapter 11 College and University Accounting—Private Institutions McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Overview of Chapter 11 Who has standard setting authority for colleges and universities? Overview of Financial Statements and General Accounting Principles for private colleges and universities Split-Interest Agreements

Who has standard setting authority for colleges and universities? Private Not-for-profit Public Government- owned Investor-owned Commercial FASB Standards GASB Standards FASB Standards Excluding those for not-for-profits

Standard Setting Authority GASB has primary authority over government related (Public) colleges There is one standard (GASB 35) specific to Public Colleges and Universities FASB has primary authority over private colleges NACUBO - National Association of College and University Business Officers provides additional guidance

Required Statements: Private Not-for-Profit Colleges and Universities Required statements are set forth in FASB 117 and are the same as other not-for-profits. Statement of Financial Position Statement of Activities or (both) Statement of Unrestricted Revenues, Expenses and Other Changes in Unrestricted Net Assets plus Statement of Changes in Net Assets Statement of Cash Flows Not required: Statement of Functional Expenses

Basic Principles Accrual basis of accounting, including depreciation expense FASB 116 applies for contributions, including pledges of support and contributed services FASB 117 applies to classification of net assets as unrestricted, temporarily restricted, or permanently restricted. Plant assets may be initially recorded as unrestricted or temporarily restricted Restricted resources are assumed to be used before unrestricted

Basic Principles, con’t Investments are reported at fair value Collections may be reported in statements or merely in notes. Fund-raising expenses follow not-for-profit allocation rules based on purpose, audience and content

Equity Accounts: Types of Colleges and Universities Private not-for-profit Net Assets: Unrestricted, Temporarily Restricted, and Permanently Restricted. Public Net Assets(position): Unrestricted, Restricted, and Net Investment in Capital Assets Investor Owned Owners’ Equity: Paid in Capitals and Retained Earnings

Statement of Unrestricted Revenue, Expenses and Other Changes in Unrestricted Net Assets Illustrations 11-3 and 11-4 are an alternate approach to the single Statement of Activities Revenues – (Compared to Public Colleges) No distinction between operating and nonoperating revenues -- state appropriations are treated like other revenues State Colleges (GASB standards) did not have a category for release of restrictions Expenses include: Education and General Auxiliary activities

Statement of Changes in Net Assets This statement is presented when a college uses a Statement of Unrestricted Revenues, Expenses, and Other Changes in Unrestricted Net Assets The Statement of Changes in Net Assets shows changes in temporarily restricted and permanently restricted net assets which are not presented in the Statement of Unrestricted Revenues, Expenses, and Other Changes in Unrestricted Net Assets

FASB: Statement of Cash Flows Direct or indirect format is permitted The cash flow statement is for all 3 net assets categories: unrestricted, temporarily, permanently restricted Cash flows are Not displayed separately for the 3 categories 3 Categories (Operating, Investing, and Financing) Interest payments and revenues appear in the operating section. The indirect method begins with total “change in net assets” Investing section includes long-term investments, long-term asset activity and loan receivable activity Financing section includes receipt of permanently restricted contributions.

Auxiliary Enterprises Activities of colleges or universities that furnish services on a user-charge basis. Bookstores Residence halls

Reporting of Tuition Revenues (NACUBO guidelines) If a tuition or fee reduction is an employee benefit (work study or graduate assistantship), the reduction is treated as an expense Academic or athletic scholarships that do not require service to the college are treated as reductions in revenue Estimates of uncollectible tuition and fees are also treated as reductions in revenue

Academic Terms Encompassing More than One Fiscal Year Because colleges and universities commonly use June 30 as fiscal year end, tuition for summer school frequently cover parts of two fiscal years. NACUBO requires that both revenues and expenses for split sessions be apportioned to the two fiscal years, in a manner similar to that followed by commercial organizations.

Split-Interest Agreements Split interest agreements are arrangements with donors in which not-for-profits receive benefits that are shared with other beneficiaries. There are Five types: Charitable lead trust funds Perpetual trusts held by third parties Charitable remainder trusts Charitable gift annuities Pooled (life) income funds

Charitable Lead Trust Funds In a charitable lead trust, the donor provides resources which generate income that is paid to the not-for-profit for a period of time (term). At the end of the term, the remaining assets are paid to another party The not-for-profit recognizes a receivable and temporarily restricted revenue equal to the present value of expected receipts Changes in the present value or expected receipts affect temporarily restricted assets in future years.

Perpetual Trusts Held by Third Parties In a perpetual trust held by a third party, the trust benefits the not-for-profit only (no remainder interest). When established, the not-for-profit records the present value of anticipated receipts as an asset and as contribution revenue (permanently restricted). Receipt of the income each year is treated as temporarily restricted or unrestricted income. Changes in present value and/or fair value of assets to be received affects permanently restricted net assets.

Charitable Remainder Trusts and Gift Annuities Charitable remainder trust: The donor provides resources which generate income that is paid to a beneficiary for a period of time (term). At the end of the term, the not-for-profit gets the remaining assets. When established, assets are recorded at their fair value, and a liability is set up for the present value of expected payments to the beneficiary. The difference between the assets and the liability is contribution revenue. Charitable gift annuity is the same as a charitable remainder trust except no formal trust agreement exists. The accounting is also similar to a charitable remainder trust.

Pooled Life Income Funds Pool in which donors or recipients of their choice receive income from the trust for the remainder of the beneficiary’s life. Afterwards the not-for-profit receives the assets. May require use of actuarial techniques to determine appropriate present value amounts