Public colleges and universities such as The Ohio State University and the University of Kansas historically have been in a somewhat awkward position in terms of financial account- ing. Private schools including Harvard, Duke, and Stanford follow the FASB Accounting Standards Codification. Authoritative accounting literature on contributions and the proper form of financial statements have provided a significant amount of official reporting guidance for these private institutions. As will be discussed extensively in the following chapter, gener- ally accepted accounting principles developed for such not-for-profit organizations have progressed greatly over the years.
In contrast, GASB has retained primary authority over the reporting of public colleges and universities. Much of the GASB’s work, however, has been directed at improving the accounting standards utilized by state and local government units. Consequently, until recently, the evolution of financial statements for public schools has lagged behind that for other types of reporting.
For decades the question of whether the financial statements prepared for public colleges and universities should resemble those of private schools has been the subject of much theo- retical discussion. Generally, the operations of public colleges and universities differ in at least two important ways from private schools. First, the state or other governments directly provide a significant amount of funding (at least for qualifying students), lessening the reliance on tu- ition and fees. For example, information provided with the 2008 financial statements of Utah State University disclosed state grants and appropriations of $176 million and federal grants and contracts of approximately $110 million in comparison to revenues of only $67 million from tuition and fees (after scholarship allowances).
Second, because of the ability to generate money each year from the government, public schools often raise and accumulate a smaller amount of endowment funds than private schools. Private schools usually try to build a large endowment to ensure financial security;
this is not always necessary at a public school backed by the state or another government. For example, at June 30, 2008, Princeton University, a private school, held investments with a fair value of approximately $15.9 billion, an amount (roughly equal to $2 million per student) that is almost beyond the comprehension of officials at most public colleges.
Do these and other differences warrant unique financial statements for public colleges and universities? In many ways, public and private schools are very much alike. They both educate students, charge tuition and other fees, conduct scholarly research, maintain libraries and sports teams, operate cafeterias and museums, and the like. What should be the measurement basis and what should be the form of the financial statements to reflect the financial activity and position of a public college or university?
752 Chapter 17
LO8
Prepare financial statements for a public college or university.
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Accounting for State and Local Governments (Part 2) 753
Four alternatives have been suggested for properly constructing the financial statements that public colleges and universities prepare and distribute:
1. Simply adopt FASB’s requirements so that all colleges and universities (public and pri- vate) prepare comparable financial statements. As the next chapter discusses, the private re- porting model is now relatively well developed. This suggestion presents some potential problems, however, because FASB, a group that has not had to deal with the intricacies found in governmental entities, might fail to comprehend the unique aspects of public schools. The re- porting needs associated with such institutions might go unnoticed. In addition, loss of author- ity to FASB could weaken GASB. Politically, reducing the power of this board is not a goal of the organizations that provide much of GASB’s support and financing.
2. Apply a more traditional model focusing on fund-based statements and the wide variety of funds that such schools often maintain. However, both private not-for-profit organizations and governments (at least in part) have abandoned the reporting of individual funds. For pub- lic schools to continue relying on this approach seems somewhat outdated.
3. Create an entirely new set of financial statements designed specifically to meet the unique needs of a public college or university. If FASB’s Accounting Standards Codification is not to be followed, the fundamental differences between private and public schools must be significant. If those differences can be identified, new statements could be developed to sat- isfy the informational needs of users and properly reflect the events and transactions of these public institutions. Unfortunately, the creation of a new set of financial statements would re- quire an enormous amount of work by GASB. Would the benefit gained from tailor-made fi- nancial statements outweigh the cost of producing new standards for reporting public schools?
4. Adopt the same reporting model for public schools that has been created for state and local governments. Because a large amount of funding for public schools comes directly from governments, the financial statement format utilized by a city or county could be applied.
GASB Statement 35, “Basic Financial Statements—and Management’s Discussion and Analysis—for Public Colleges and Universities,” issued in November 1999, officially selected the fourth option. According to paragraph 25, “the objective of this Statement is to amend Statement 34to include public colleges and universities in the financial reporting model estab- lished by that Statement.” This pronouncement creates a standard reporting model for all pub- lic colleges and universities such as the University of Florida and Michigan State University.
However, a review of public college and university financial statements shows that many do not prepare both government-wide and fund-based financial statements. Such schools can logically be viewed as large enterprise funds: They have a user charge (tuition and fees), and they are open to the public. As discussed, accounting for enterprise funds in government-wide statements and fund-based statements is very similar. For these proprietary funds, both state- ments report all economic resources and use accrual accounting.
Thus, having two sets of almost identical statements was viewed by the GASB as redun- dant. For this reason, most public schools are allowed to prepare a single set of statements.
Consequently, a note to the financial statements for Middle Tennessee State University for June 30, 2008, and the year then ending provides a common rationale for the method by which the statements are structured:
For financial statement purposes, Middle Tennessee State University is considered a special-purpose government engaged only in business-type activities.Accordingly, the financial statements have been prepared using the economic resources measurement focus and the accrual basis of account- ing. Revenues are recorded when earned, and expenses are recorded when a liability is incurred, re- gardless of the timing of related cash flows. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. [Emphasis added.]
Exhibit 17.8 presents the financial statements for June 30, 2008, and the year then ended for James Madison University (a public school) for illustration purposes, although the accompanying notes have been omitted. The component unit that is reported here is identified as follows:
The James Madison University Foundation, Inc. meets the criteria which qualify it as a component unit of the University. The Foundation is a legally separate, tax-exempt organization formed to promote the achievements and further the aims and purposes of the University.
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754 Chapter 17
JAMES MADISON UNIVERSITY Statement of Net Assets
As of June 30, 2008
2008 James Madison
University Component Unit Assets
Current assets:
Cash and cash equivalents (Note 1 O., 2) . . . . $ 80,934,146 $ 1,564,770
Securities lending—Cash and cash equivalents (Note 2) 4,283,467 —
Short-term investments (Note 2) . . . . 16,135,861 — Accounts receivable (Net of allowance for doubtful
accounts of $340,931) (Note 3) . . . . 5,199,574 45,074 Contributions receivable (Net of allowance for
doubtful contributions of $40,321) (Note 3) . . . .- — 1,975,712
Due from the Commonwealth (Note 1 O., 4) . . . . 8,675,904 —
Prepaid expenses . . . . 5,293,919 30,300 Inventory . . . . 717,916 — Notes receivable (Net of allowance for doubtful
accounts of $46,208) . . . . 524,295 — Total current assets . . . . 121,765,082 3,615,856 Non-current assets:
Restricted cash and cash equivalents (Note 1 O., 2) . . 31,960,868 —
Endowment investments (Note 2) . . . . 236,948 35,549,782 Other long-term investments (Note 2) . . . . 660,616 29,995,637 Contributions receivable (Net allowance for
doubtful contributions of $166,792) (Note 3) . . . . . — 8,172,842
Due from the Commonwealth (Note 1 O., 4) . . . . 8,312,935 —
Notes receivable (Net of allowance for
doubtful accounts of $190,109) . . . . 2,141,705 — Capital assets, net: (Note 5)
Non-depreciable . . . . 98,704,624 312,391 Depreciable . . . . 404,250,035 403,805 Other assets . . . . — 8,141 Total non-current assets . . . . 546,267,731 74,442,598 Total assets . . . . 668,032,813 78,058,454 Liabilities
Current liabilities:
Accounts payable and accrued expenses (Note 6) . . . 36,332,271 177,756
Deferred revenue . . . . 10,902,526 — Obligations under securities lending . . . . 20,419,328 — Deposits held in custody for others . . . . 3,375,865 —
Demand note payable . . . . — —
Long-term liabilities—current portion (Note 7) . . . . 18,078,562 437,588
Advance from the Treasurer of Virginia . . . . 62,500 —
Total current liabilities . . . . 89,171,052 615,344 Non-current liabilities (Note 7) . . . . 114,506,770 1,077,779 Total liabilities . . . . 203,677,822 1,693,123 Net Assets
Invested in capital assets, Net of related debt . . . . 402,361,323 716,196 Restricted for:
Non-expendable:
Scholarships and fellowships . . . . 317,261 26,421,501 Research and public service . . . . — 1,952,393 Other . . . . — 10,527,213
EXHIBIT 17.8
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Accounting for State and Local Governments (Part 2) 755
2008 James Madison
University Component Unit Expendable:
Scholarships and fellowships . . . . 50,743 5,262,695 Research and public service . . . . 2,167,651 879,157 Debt service . . . . 9,404 596,104 Capital projects . . . . 11,125,011 9,218,916 Loans . . . . 344,591 — Other . . . . — 13,148,602 Unrestricted . . . . 47,979,007 7,642,554 Total net assets . . . . $464,354,991 $76,365,331 The accompanying notes to financial statements are an integral part of this statement.
JAMES MADISON UNIVERSITY Statement of Revenues, Expenses, and
Changes in Net Assets For the Year Ended June 30, 2008
2008 James Madison
University Component Unit Operating revenues:
Student tuition and fees (Net of scholarship
allowances of $7,148,487) . . . . $116,453,199 $ — Gifts and contributions . . . . — 12,143,084 Federal grants and contracts . . . . 12,588,258 — State grants and contracts . . . . 6,848,436 —
Non-governmental grants and contracts . . . . 4,618,784 —
Auxiliary enterprises (Net of scholarship
allowances of $5,731,404) (Note 10) . . . . 115,334,434 —
Other operating revenues . . . . 1,472,934 965,912 Total operating revenues . . . . 257,316,045 13,108,996 Operating expenses (Note 11):
Instruction . . . . 111,236,644 817,037 Research . . . . 5,922,628 14,437 Public service . . . . 11,522,193 88,546 Academic support . . . . 27,607,524 358,820 Student services . . . . 12,527,005 64,339 Institutional support . . . . 21,867,048 3,240,225 Operation and maintenance—plant . . . . 28,993,421 55,437 Depreciation . . . . 20,376,369 118,996 Student aid . . . . 6,298,269 1,767,595 Auxiliary activities (Note 10) . . . . 90,314,477 828,403 Total operating expenses . . . . 336,665,578 7,353,835 Operating gain/(loss) . . . . (79,349,533) 5,755,161 Non-operating revenues/(expenses):
State appropriations (Note 12) . . . . 82,810,149 — Grants and contracts (Note 1 L.) . . . . 4,363,043 — Gifts . . . . 1,524,711 — Investment income (Net of investment expense
of $907,568 for the University and $433,601 for
the Foundation) . . . . 6,627,327 (7,647,864)
In-Kind support from James Madison University . . . . — 2,265,037
EXHIBIT 17.8 (continued)
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756 Chapter 17
2008 James Madison
University Component Unit Interest on capital asset—related debt . . . . (4,092,175) (212,546) Gain/(loss) on disposal of plant assets . . . . (75,662) — Payment to the Commonwealth . . . . (711,906) — Net non-operating revenues/(expenses) . . . . 90,445,487 (5,595,373) Income before other revenues, expenses, gains
or losses . . . . 11,095,954 159,788
Capital appropriations and contributions (Note 13) . . . 52,459,804 —
Capital gifts . . . . 576,821 —
Additions/(reductions) to permanent endowments . . . . — 3,087,613
Net other revenues . . . . 53,036,625 3,087,613 Increase in net assets . . . . 64,132,579 3,247,401 Net assets—beginning of year . . . . 400,222,412 73,117,930 Net assets—end of year . . . . $464,354,991 $76,365,331 The accompanying notes to financial statements are an integral part of this statement.
JAMES MADISON UNIVERSITY Statement of Cash Flows For the Year Ended June 30, 2008
2008 Cash flows from operating activities:
Student tuition and fees . . . . $116,116,954 Grants and contracts (Note 1 L.) . . . . 24,127,243 Auxiliary enterprises . . . . 115,561,542 Other receipts . . . . 1,376,820 Payments to employees . . . . (142,666,639) Payments for fringe benefits . . . . (45,748,857) Payments for services and supplies . . . . (87,550,038) Payments for utilities . . . . (12,727,770) Payments for scholarships and fellowships . . . . (6,298,269) Payments for noncapitalized plant improvements and equipment . . . . (18,741,433) Loans issued to students . . . . (590,709) Collections of loans from students . . . . 408,572
Net cash used by operating activities . . . . (56,732,584) Cash flows from noncapital financing activities:
State appropriations . . . . 82,808,646 Nonoperating grants and contracts (Note 1 L.) . . . . 4,363,043 Payment to the Commonwealth . . . . (711,906) Gifts and grants for other than capital purposes . . . . 1,524,711 Loans issued to students and employees . . . . (2,100) Collections of loans from students and employees . . . . 2,100 Agency receipts . . . . 14,599,177 Agency payments . . . . (14,582,073) Reductions to permanent endowment . . . . —
Net cash provided by noncapital financing activities . . . . 88,001,598 Cash flows from capital financing activities:
Capital appropriations and contributions (Note 1 O.) . . . . 51,735,150 Proceeds from capital debt . . . . 34,523,071
EXHIBIT 17.8 (continued)
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Accounting for State and Local Governments (Part 2) 757
2008 Capital gifts . . . . — Proceeds from sale of capital assets . . . . 58,260 Purchase of capital assets . . . . (80,793,325) Principal paid on capital debt, leases, and installments . . . . (18,723,060) Interest paid on capital debt, leases, and installments . . . . (4,927,954) Net cash used by capital financing activities . . . . (18,127,858) Cash flows from investing activities:
Interest on investments . . . . 1,425,637 Interest on cash management pools . . . . 4,692,471 Net cash provided by investing activities . . . . 6,118,108 Net increase in cash . . . . 19,259,264 Cash and cash equivalents—beginning of the year, restated . . . . 93,635,750 Cash and cash equivalents—end of the year (Note 1 O.) . . . . $112,895,014
EXHIBIT 17.8 (concluded)
Note that these statements are quite similar to the fund-based financial statements presented in this chapter for the proprietary funds of the City of Sacramento, California (Exhibits 17.5, 17.6, and 17.7).
Summary 1. As with businesses, state and local governments often obtain assets through lease arrangements.
Government accounting applies the same criteria for identifying a capital lease as a for-profit orga- nization. Government-wide financial statements initially report both the resulting asset and liability at the present value of the minimum lease payments. This asset is depreciated over the time that the government expects to use it. Interest expense on the reported liability is recognized each period.
Fund-based financial statements recognize an expenditure and an other financing source at this same present value when the contract is initiated. Subsequent payments on the debt and interest are also recognized as expenditures.
2. Solid waste landfills create large potential debts for a government because of closure and postclo- sure costs. Government-wide statements accrue this liability each period based on the latest cost es- timations and the portion of the property that has been filled. Fund-based financial statements report no expenditures until a claim to current financial resources is made.
3. Government employees often have the right to future compensated absences because of holidays, va- cations, sick leave, and the like. In creating government-wide statements, the debts for these ab- sences are estimated and reported as the employees earn them. Fund-based statements do not recognize a liability until the use of current financial resources is expected.
4. A state or local government that obtains a work of art or historical treasure normally records it as a capital asset on the government-wide financial statements. However, if specified guidelines are met, an expense can replace recognition of the asset. A state or local government that receives such a work of art or historical treasure through donation must still recognize revenue according to the rules established for voluntary nonexchange transactions. In contrast, fund-based financial statements for the governmental funds report no capital assets and, therefore, do not show these items.
5. Depreciation must be recorded each period for works of art and historical treasures that are capital- ized unless they are viewed as inexhaustible.
6. Infrastructure assets must be capitalized and depreciated on the government-wide financial statements. However, depreciation is not recorded if the modified approach is applied. Under this method, if a monitoring system is created to ensure that a network of infrastructure is main- tained yearly at a predetermined condition, the cost of this care is expensed in lieu of recording depreciation.
7. A state or local government must include a management’s discussion and analysis (MD&A) as part of its general purpose external financial reporting. As with for-profit businesses, this MD&A pro- vides a verbal explanation of the government’s operations and financial position.
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8. A primary government produces a comprehensive annual financial report (CAFR). Both state and local governments as well as any special purpose government that meets certain provisions are viewed as primary governments. A component unit is any function that is legally separate from a pri- mary government but for which financial accountability still exists. In the government-wide state- ments, component units can be discretely presented to the right of the primary government or can be blended within the actual funds of the primary government.
9. A statement of net assets and a statement of activities are prepared as government-wide financial statements based on the economic resources measurement focus and accrual accounting. These statements separate governmental activities from business-type activities. Internal service funds are usually included with the governmental funds in the governmental activities. The statement of activities reports expenses by function along with related program revenues to determine the net expense or revenue resulting from each function. The government then shows the amount of general revenues as its way of covering the net expenses of the various functions.
10. In fund-based financial statements reported for the governmental funds, the General Fund and any other major fund are reported in separate columns. These statements are based on measuring current financial resources using modified accrual accounting. Additional statements are presented for pro- prietary funds and fiduciary funds.
11. Financial statements prepared by public colleges and universities must follow the same reporting guidelines as those created for state and local government units. Those statements will differ from the statements produced by private schools that follow FASB guidelines. Many public schools view themselves as special purpose governments that are engaged only in business-type activities.
Thus, they only need to present fund-based statements for a proprietary fund.
758 Chapter 17
(Estimated Time: 40 minutes) The following is a series of transactions for a city. Indicate how the city re- ports each transaction within the government-wide financial statements and then on the fund-based fi- nancial statements. Assume that the city follows a policy of considering resources as available if they will be received within 60 days. Incurred liabilities are assumed to be claims to current resources if they will be paid within 60 days.
1. Borrowed money by issuing a 20-year bond for $3 million, its face value. This money is to be used to construct a highway around the city.
2. Transferred cash of $100,000 from the General Fund to the debt service funds to make the first pay- ment of principal and interest on the bond in (1).
3. Paid the cash in (2) on the bond. Of this total, $70,000 represents interest; the remainder reduces the principal of the bond payable.
4. Completed construction of the highway and paid the entire $3 million.
5. The highway is expected to last for 30 years. However, the government qualifies to use the modified approach, which it has adopted for this system. A $35,000 cost is incurred during the year to main- tain the highway at an appropriate, predetermined condition. Of this amount, $29,000 was paid im- mediately but the other $6,000 will not be paid until the sixth month of the subsequent year.
6. Received lights for the new highway donated from a local business. The lights are valued at $200,000 and should last for 20 years. The modified approach is not used for this network of infrastructure, but straight-line depreciation is applied using the half-year convention.
7. Leased a truck to maintain the new highway. The lease qualifies as a capital lease. The present value of the minimum payments is $70,000. Depreciation for this year is $10,000 and interest is $6,000. A single $11,000 payment in cash is made.
8. Recorded cash revenues of $2 million from the local subway system and made salary expense pay- ments of $300,000 to its employees.
9. Opened a solid waste landfill at the beginning of the year that will be used for 20 years. This year an estimated 4 percent of the capacity was filled. The city anticipates closure and postclosure require- ments will be $2 million based on current cost figures although no costs have been incurred to date.
SOLUTION
1. Government-wide financial statements.On the statement of net assets, under the Governmental Activities column, both Cash and Noncurrent Liabilities increase by $3 million.
Fund-based financial statements.The Cash balance increases on the balance sheet by $3 million whereas Other Financing Sources increases by the same amount on the statement of revenues,
Comprehensive Illustration PROBLEM
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