1. Essentials of Accounting for Governmental and Not-for-Profit Organizations Chapter 11 College and University – Private Institutions Copyright © 2015 McGraw-Hill Education. All rights reserved.

2. 11-2 Chapter 11 – Learning objectives Apply the accrual basis of accounting in the recording of typical transactions for a private not-for-profit college or university Prepare the financial statements for a private not-for-profit college or university Identify the various types of Split-Interest Agreements and describe accounting practices for each.

3. 11-3 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

4. 11-4 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 for both public and private

5. 11-5 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

6. 11-6 Basic Principles 1. Accrual basis of accounting, including depreciation expense 2. 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.

7. 11-7 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

8. 11-8 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

9. 11-9 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

10. 11-10 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.

11. 11-11 Auxiliary Enterprises Activities of colleges or universities that furnish services on a user-charge basis. Residence halls Bookstores

12. 11-12 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 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

13. 11-13 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.

14. 11-14 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

15. 11-15 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.

16. 11-16 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.

17. 11-17 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.

18. 11-18 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