Fund Accounting

Jim Corkill

Accounting Services & Controls

November 2011

Agenda

Goals/Objectives Definitions Fund Groups Budgeting Financial Statements

Goals

Concepts of fund accounting Understanding the various fund groups How are we different than a profit

organization?

What is Fund Accounting?

A method of segregating resources into categories (i.e., funds), to identify both the source of funds and the use of funds.

Objectives of Fund Accounting

Demonstrating accountability and stewardship

Determining financial condition Planning and budgeting

Objectives of Fund Accounting

Evaluating organizational and managerial performance

Determining/forecasting cash flow Communication

Definitions

Fund: A fund is a segregation of resources established to control and monitor resources and to help ensure and demonstrate compliance with legal/administrative requirements.

Definitions

Fund Balance: Equity within a fund.

Assets = Liabilities + Fund Equity

Fund Assets – Fund Liabilities = Fund Balance

Assets – Claims Against Assets = Fund Balance

The fund balance may also be known as Net Assets, Capital, or Net Worth.

Chart of Accounts

How do we track the sources and uses of funds?

Definitions

Fund Group: A separate entity with a self-balancing set of accounts consisting of assets, liabilities, fund balance, and, where appropriate, revenue and expenditure accounts.

Fund Groups

Six basic fund groups: Current Fund Plant Fund Endowment & Similar Funds Group Annuity & Life Income Group Loan Fund Agency Fund

Current Fund

Group of funds expendable for operating purposes in support of the institution’s mission; expected to be expended in the near term. Unrestricted Restricted Designated Funds

Current Fund

Unrestricted Funds: Includes all funds received in which a donor or other external agency has not specified the purpose(s) for which the funds should be expended.

Examples: General funds Reg. Fee funds Unrestricted gifts (“RARE”)

Current Fund

Restricted Current Funds: Includes funds available for financing operations, but that are limited to specific purposes, programs, or departments specified by donors or external agencies.

Examples: Federal funds for contracts & grants Work Study funds Endowment income

Current Fund

Designated Current Funds: Unrestricted funds the governing body designated for a special purpose.

Examples: Special State Appropriations

Tobacco Research Breast Cancer Research

Scenario #1

For each of the fund numbers and titles listed, mark the fund either:

a) Restricted

b) Unrestricted

c) Designated

For each transaction, assign the appropriate fund number.

Plant Fund

The plant fund group is used to record acquisition of assets, replacement of assets, pay off debt, and record the investment in assets (equity). There are four subgroups of plant funds: Unexpended Plant Funds Renewal and Replacement Retirement of Indebtedness Investment in Plant

Plant Fund

Unexpended Plant Fund: Used for recording construction or acquisition of long-lived assets. This includes items such as: Land and building acquisition Construction of new facilities Renovation Remodeling

Plant Fund

Renewal and Replacement: Used for extraordinary repairs and maintenance or equipment replacement.

Retirement of Indebtedness: Used to record the accumulation of funds and disbursement for repayment of long term debt for assets.

Plant Fund

Investment in Plant: Used to record the equity of campus assets. This subgroup in plant should reflect the total amount of resources expended for additions to assets.

Discussion #1

For each transaction or situation, name the correct fund (Current or Plant) where it should be recorded.

Endowment & Similar Funds

This fund group is used to record donations to the University which require that the principal is invested and only the interest income is expendable. Interest income earned on these funds is returned to the campus and expended in the current funds group.

Endowment & Similar Funds

There are four types of endowments:

1)True Endowments (or Permanent Endowments):

Donors have stipulated that the principal of the gift is to remain in perpetuity and is to be invested for the purpose of producing present and future income.

Endowment & Similar Funds

Four types of endowments, cont’d:

2)Funds Functioning as Endowments:

The governing board of the institution, rather than the donor or other external agency, has determined that funds (usually a gift) are to be retained and invested as an endowment.

Large amounts - usually $50,000.

Endowment & Similar Funds

Four types of endowments cont’d:

3)Funds Held in Trust by Others:

These are funds derived from private gifts and bequests that are held in trust for investment by outside trustees, and the University is designated as the income beneficiary.

Endowment & Similar Funds

Four types of endowments cont’d:

4)Living Trusts, Annuity Trusts, and Unitrusts:

These are donations where the terms stipulate that income must be paid to a designated beneficiary for a specified period, which in most cases is the duration of the beneficiary’s life. At the end of the specified payment period, income from these funds reverts to the University.

Annuity & Life Income Funds

Annuity: Institution is obligated to pay stipulated amounts periodically to the donor’s beneficiary. When the agreement terminates, the remaining funds become property of the institution.

Annuity & Life Income Funds

Life Income: Established when a college/ university is the trustee and remainder for a charitable remainder trust. Income and expenses are paid to beneficiary for life. Principal returns to the institution when beneficiary dies.

Scenario #2

Your department has received a $150,000 gift to be used for operating expenses for the Biology department. The chair asks you to make a recommendation about turning it into an endowment. What do you need to consider to make the recommendation?

Loan Fund

Used to record activity on funds available for loans to students, faculty, and staff.

Examples include:Student Financial Aid Loan FundFaculty Home Mortgage LoanStaff Emergency Loan Fund

Agency Fund

Used to record funds held by the University for outside groups who have a close relationship with the University.

Funds in the Agency Fund group do not belong to the Regents and are not reported in the UC Financial Statements.

Agency Fund

Examples: Scholarship funds Fraternities and sororities The UCSB Foundation UCSB Alumni Association

Agency Fund

Accounting for Agency Accounts Transactions are recorded as a balance

sheet item, not as income and expense. To keep their accounting activity

separate, a special account series is used.

Agency Fund

Accounting for Agency Accounts During fiscal closing, any balances in

these agency accounts are transferred to a balance sheet payable account.

Agency accounts affect the campus’ STIP earnings. Therefore, the accounts should have a positive or zero balance at all times.

Financial Transfers Between Fund Groups

Mandatory Non-Mandatory Temporary Permanent

Budgeting

Budgets are the most widely used method for control in colleges & universities.

Fund accounting assists in budget control by providing information that enables: Managers to review their expenditures to ensure they are within their allocations. This is also a Department Key Control for SAS 112. Demonstration of compliance with funding sources.

Budgeting

Budget entries are the reverse of financial entries: Revenue entries are budgetary debits. Appropriations to expenditure accounts are budgetary credits.

Encumbrances

In managing available resources in a non-profit organization, we need to recognize future commitments of resources prior to an actual expenditure.

Encumbrances (or liens) are used to reflect these commitments in the accounting system and attempt to prevent overspending.

Encumbrances

When the order/services are received and the University is invoiced, the original encumbrance entry is cancelled, and the expense and related cash payment is recorded.

Financial Statements

Internal Users Managers Analysts/Internal Auditors Executive Campus Mgmt. Office of the President Regents

External Users External Auditors Creditors/Lenders State Government Other Colleges Granting Agencies

Purpose: To communicate financial condition and operating results.

Financial Statements

What do users want to know? Is the institution financially healthy? Is the institution financially better off or not at

the end of the year than it was at the beginning?

How does the institution compare with others?

Can the institution repay debt it may be taking on?

Questions