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

2. 2 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.edufinancial- standards@calstate.edu

3. 3 Chapter 4-GAAP Adjustments & Reclassifications Not Requiring Information from the C.O. 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

4. 4 Chapter 4-GAAP Adjustments & Reclassifications Not Requiring Information from the C.O. TYPES OF ADJUSTMENTS Permanent adjustments Timing adjustments Campuses that are using PeopleSoft Financials version 8.4 will create a separate business unit for the purpose of recording GAAP adjustments and then generating resulting financial statements from their adjusted PeopleSoft data.

5. 5 Section 4-1 – Net Assets: Validating Beginning Trial Balance PS 8.4 campuses no longer need to make entries to “re-establish” beginning Net Assets if GAAP business unit was used to record or convert PY balances. ======================================= If a GAAP business unit was not used to record or convert PY balances, then an analysis of PY GAAP adjustments must be performed to determine the effect on CY beginning Net Assets. CY adjustments need to be recorded to re-establish the CY beginning Net Assets. (See 2003-2004 GAAP Manual)

6. 6 Section 4-1 – Net Assets: Validating Beginning Trial Balance After issuance of your PY GAAP Financial Statements, the prior fiscal year GAP ledger should be closed This will establish you Beginning CY GAAP balances into Period 0 of the current fiscal year for the GAP Ledger Queries should be immediately run to verify the completeness and accuracy of the closing The CY Period 0 balances should agree to you “Final” PY GAAP Reporting Package balances

7. 7 Section 4-1 – Net Assets: Validating Beginning Trial Balance If beginning GAAP Trial Balance does not agree to the preceding year’s final “Post Closing” Trial Balance, this situation indicates a problem with the Year-End Closing process for the preceding year GAAP Ledger. The problem could be the result of the following circumstances: Not all prior year GAAP adjustments were posted before the Year-End Closing process was run. The Year-End Close Rules have not been set up correctly. The “Account Types” “Roll-Forward” checkbox has been incorrectly configured. There is an application problem (“bug”). After correcting the circumstances, the Year-End Close Request should be reprocessed and the beginning Trial Balance re-validated

8. 8 Section 4-1 – Net Assets: Validating Beginning Trial Balance Sample Query for Validating Beginning Trial Balance:

9. 9 Section 4-1 – Net Assets: Validating Beginning Trial Balance Sample Query for Validating Beginning Trial Balance:

10. 10 Section 4-1 – Net Assets: Validating Beginning Trial Balance Sample Query for Validating Beginning Trial Balance:

11. 11 Section 4-1 – Net Assets: Reversing PY GAAP Adjustments Which of the following PY GAAP adjustments would require that a reversing adjustment be made in CY to properly report CY balances? 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 ? ?

12. 12 Section 4-1 – Net Assets: Reversing PY GAAP Adjustments “Gross change” vs. “net change” adjustments Can use either method –adjustments from C.O. using “net change” COMPARATIVE EXAMPLE Campus X had prepaid expenses of $100,000 at 6/30/PY and $150,000 at 6/30/CY. What GAAP adjustment(s) would it have recorded at 6/30/CY to reflect the $150,000 of CY prepaid expenses: Using the “gross change” method? Using the “net change” method?

13. 13 Section 4-1 – Net Assets: Reversing PY GAAP Adjustments COMPARATIVE EXAMPLE (cont.) Both methods work – the key is to verify that after all CY GAAP adjustments have been made, the adjusted balances agree with the expected 6/30/CY amounts

14. 14 Section 4-1 – Net Assets: Reversing PY GAAP Adjustments The following is a list of reversing entries and reference to the sections where these entries are illustrated: Library Book Disposals (refer to Section 4-2) Faculty Payroll Accruals (refer to Section 4-7) Unrecorded (as of Legal CYE) Liabilities “Gross Method” Entries: Prepaid Expenses and Inventories (refer to Section 4-6) Compensated Absences (refer to Section 4-8) Deferred Revenues (refer to Section 4-9)

15. 15 Section 4-2: Capital Assets and Depreciation ADDITIONS Legal – expense payments in operating net assets category, capitalize in Invested in Capital Assets category with offset to net assets. GAAP – capitalize asset with offset to liability or cash. GAAP permanent adjustment needed to eliminate entries to net assets and expense (see manual for full entry and net assets categories). Dr. Net assets Cr.Operating expense

16. 16 Section 4-2: Capital Assets and Depreciation DEPRECIATION Legal – record accumulated depreciation with offset to net assets. GAAP – record depreciation expense and accumulated depreciation. GAAP permanent adjustment required to record depreciation expense. DRDepreciation expense CRNet assets

17. 17 Section 4-2: Capital Assets and Depreciation DISPOSALS Legal – delete cost and accumulated depreciation, with offset to net assets. GAAP – delete cost and accumulated depreciation, with offset to loss on sale. GAAP permanent adjustment required to record loss on sale. Dr. Other non-operating revenue/expense Cr.Net assets GAAP timing adjustment is often required to accrue library book dispositions recorded in the following fiscal year on legal basis books.

18. 18 Section 4-3: Accounts Payable: Encumbrances and Obligations Encumbrances are no longer accounted for in the Actuals ledger; therefore, a GAAP adjustment is no longer required for governmental funds In the first year of PS 8.4, one final adjustment is recorded to eliminate the current year reversal of prior year expenses related to encumbrances of governmental (General/Capital Outlay) funds 001, 574, 6028, 6041 Obligations are purchase commitments in which receipt of goods or services has occurred as of June 30 Recording of retention relating to capital projects are specific to each campus, but must be included as obligations. Obligations and retention are timing adjustments, assuming that purchase commitments are valid and receipt ultimately occurs

19. 19 Section 4-4: State and CSU Receivables and State Appropriations For legal (budgetary) basis accounting, State appropriations in governmental funds (e.g.: 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” (e.g.: Funds 0574 and 6028) or “non-capital” (e.g.: Fund 0001) – different Net Asset Categories and Natural Classifications 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 RSA 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”

20. 20 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 0576) – see page 4-21 Reclass Fund 0576 transfers to A/R (Restricted net assets)

21. 21 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. claim schedules, payroll, fund transfers out) For GAAP, these postings either add to or reduce campus assets (Appropriations Receivable, Investments, or Cash depending upon whether the fund receives State appropriations) Need to reclassify Pre-Closing Fund Balance-Clearing to appropriate asset line by Net Asset Category

22. 22 SECTION 4-4 & 4-5: State AR/FBC Proof 1. Start with the 6/30/PY State AR GAAP Balance and 6/30/CY Pre-Close FBC Legal Balance 2. Record CY State Appropriation Revenue DR – State Accounts Receivable CR – State Appropriation Revenue 3. Reduce State AR by SAM06 CY Expenditures (net) DR – Fund Balance Clearing CR – State Accounts Receivable

23. 23 SECTION 4-4 & 4-5: State AR/FBC Proof 4. Increase/Reduce State AR by Revenues/Expenditures not yet known by the SCO (SAM99 CY Total Accruals) DR/CR – State Accounts Receivable CR/DR – Fund Balance Clearing 5. Reduce State AR by SAM06 CY Expenditures (net) DR – Fund Balance Clearing CR – State Accounts Receivable 6. Re-class Fund 0576 transfers to A/R (Restricted net assets)

24. 24 SECTION 4-4 & 4-5: State AR/FBC Proof

25. 25 SECTION 4-6: Prepaid Expenses and Inventories Legal – most purchases are expensed. GAAP – expense only goods and services used in the current year. GAAP timing adjustment is required for unused goods and services. Dr Prepaid expense CrOperating expense “Prepayments” to CSURMA – net against liability for insurance claims.

26. 26 SECTION 4-7: Faculty Payroll Accruals Legal – expense salaries as paid. GAAP – expense salaries earned in current year. GAAP timing adjustments needed to accrue: Fall and Spring semester salaries paid in July and August Summer session salaries paid in July for June Dr Salaries Dr Benefits CrAccrued salaries and benefits

27. 27 SECTION 4-8: Compensated Absences Legal – expense vacation pay when paid. GAAP – expense as earned. GAAP timing adjustment required to accrue earned but unused vacation pay. Dr. Salaries Dr. Benefits Cr.Accrued compensated absences – current Cr. Accrued compensated absences - noncurrent Obtain data from CLAS “H46” report or campus leave accounting system. Accrue vacation on vacation. Allocate expense to programs. Estimate current portion of liability based on amounts used – CY or average.

28. 28 SECTION 4-9: Deferred Revenues Legal – record collections as revenue when received. GAAP – record when earned. GAAP timing adjustment needed for Summer (pro-rated) and Fall registration and housing fees collected before 7/1. Dr. Student tuition and fees Dr. Sales and services of auxiliary enterprises Cr.Deferred revenue - current

29. 29 SECTION 4-10: Capital Lease Obligations Legal and GAAP – leased assets are capitalized (see section 4- 2) if one of four conditions is met. Legal – no liability recorded; payments are expensed. GAAP – liability is recorded at inception; payments are charged to principal and interest. GAAP permanent adjustment is needed at inception to record the obligation. Dr. Net assets Cr.Capitalized lease obligations – current Cr.Capitalized lease obligations - noncurrent GAAP permanent adjustment is needed each year to reclassify annual payments (see manual for full entry and Net Asset Categories). Dr. Capitalized lease obligations – current Dr. Interest on capital related debt Cr.Operating expenses

30. 30 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

31. 31 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) (K) is the same % of (B) + (F)…as (G) is of (H) – makes sense!

32. 32 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

33. 33 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 Student Union Fee Revenue: also reported by auxiliary SUG/EOP Grants: revenue/expense recorded twice GAAP adjustments needed re: SMIF Interest for 1/1/- 6/30/CY if AD-NOAT issued after legal basis close Treatment of student loans receivable – all noncurrent Allowance for Uncollectible Federal Perkins or Nursing Loan Programs

34. 34 SECTION 4-12: Other Accounting Topics Transfers between CSU entities (Lottery revenue and Debt Pool Subsidy) Resident Assistant Fee Waivers-reclassification of compensation to housing revenue (exluded from tuition discounting calculation) Elimination of nonexchange transactions between the campus and auxiliary organizations

35. 35 Chapter 4 Q & A