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.

11-2

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

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Who has standard setting authority for colleges and universities?

PrivateNot-for-profit

Public Government-

owned

Investor-owned

Commercial

FASBStandards

GASBStandards

FASBStandardsExcluding those for

not-for-profits

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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

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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

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Basic Principles1. Accrual basis of accounting, including depreciation expense2. FASB 116 applies for contributions, including pledges of

support and contributed services 3. 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

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Basic Principles, con’t

4. Investments are reported at fair value

5. Collections may be reported in statements or merely in notes.

6. Fund-raising expenses follow not-for-profit allocation rules based on purpose, audience and content

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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

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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

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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

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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.

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

Residence halls Bookstores

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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

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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.

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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

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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.

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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.

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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.

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Pooled Life Income Funds

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