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August 1989

College accounting - what a mess! (Accounting)

by Tiedemann, Frank H.

    Abstract- Revisions of the Industry Audit Guide standards for colleges will require the recording of depreciation, which is now optional. The Guide requires the financial statements of colleges to include a balance sheet and a statement of changes in fund balances. The latter is not a true income statement but a statement of current funds revenue and expenditures. The statement does not require net income or loss. To facilitate the needs of college financial statement users, college financial statements should take into account the entity's financial position and operations results. College financial statements should distinguish between appropriations and expenses. Operating statements must be modified to give a fair representation of college operations, and include income and total expense, including appreciation.

Current Status

The current status of college accounting can be summarized as follows:

* The Industry Audit Guide Audits of College and Universities (the Guide) is the authoritative literature on the subject. However, the FASB's SFAS No. 93, Recognition of Depreciation by Not-for-Profit Organizations, when it becomes effective, will modify the Guide by requiring the recording of depreciation of plant and equipment. Depreciation accounting is now optional. (See Chapter 2, page 10 of the Guide.)

* The FASB issued SFAS 93 in August 1987, with an effective date of May 15, 1988. SFAS 93, which "does not cover matters of financial statement display," states that "issues of display being studied by the AICPA task force are separate from issues of depreciation."

* Soon after SFAS 93 was issued, the GASB issued its Statement No. 8, which instructed colleges supported by governmental units not to follow SFAS 93.

* After industry groups convinced the Financial Accounting Foundation (which supports both the FASB and GASB) that the conflict between FASB and GASB created an intolerable jurisdictional dilemma, the FASB voted on May 11, 1988, to postpone the effective date of SFAS 93 to January 1, 1990. I hope that a solution to this problem will be reached by that date.

* The AICPA task force studying financial reporting of not-for-profit organizations must consider financial stateements of all types of not- for-profit organizations. Also, it must consider other matters, such as whether pledges for gifts should be recorded by all not-for-profit organizations. Consequently, it may be some time before the AICPA can issue a report. Thereafter, the FASB must consider that report before we can be sure of the form of financial statements which will ultimately be recommended for colleges and universities.

Effect on the Preparer of Financial


Colleges were informed in August 1987 (when SFAS 93 was issued) that they would be required to adopt depreciation accounting for years beginning after May 15, 1988. For most of us that meant the fiscal year beginning July 1, 1988. It also meant that depreciation accounting records would have to be established for the preceding year so that comparative data could be presented in published reports covering periods after July 1, 1988.

Most colleges have not recorded depreciation previously. Accumulating the data necessary for recording depreciation can be a substantial task, especially if complete property records have not been maintained. The controller who has spent the time necessary to gear up for depreciation accounting has now been told that he may postpone depreciation accounting until January 1, 1990, but the FASB encourages earlier adoption. Assuming that the controller decides to adopt depreciation accounting as of July 1, 1988 (rather than scrap the calculations and start anew two years hence), he or she also knows that the form of financial statements may be changed after the AICPA task force makes its recommendation and the FASB acts thereon. Consequently, the controller anticipates a change in financial statements next year and another change two years later.

Effect on the User of Financial


Foundations and other major donors, who read and compare college financial statements, can anticipate little change for the next two years, except that more colleges may adopt depreciation accounting next year in view of the fact that the FASB has indicated that it will encourage application of SFAS 93 earlier than the January 1, 1990, effective date. After that date, it is hoped that depreciation accounting and the form of financial statements will be uniformly applicable to all colleges, whether government supported or privately supported. Failure to achieve such uniformity would make it difficult to compare financial positions and operating results of government- supported colleges with those of privately-supported colleges.

Financial Statements

The Guide prescribes the form of financial statements of colleges. These include a balance sheet (with the assets, liabilities, and fund balance shown separately for each type of fund) and a "statement of changes in fund balances." (with a cloumn for each type of fund). The Guide does not prescribe an income statement. Presumably, when the Guide was written, an income statement was not considered appropriate for a not-for-profit organization. Instead, the Guide prescribes a statement of current funds revenue, expenditures, and other changes, which it states "does not purport to present the results of operations or the net income or loss for the period." Is this logical? Should one conclude that because an organization's objective is not to maximize net income it is not important to know the results of its operations?

Appendix B (paragraph 30) to SFAS 93 states that "the cost of using assets for a period determined by accrual accounting concepts is essential to assessing an entity's performance." If depreciation is essential for assessing an entity's performance, isn't it equally essential that it be reported within the context of an operating statement? Also, if this is true, are "issues of display...separate from issues of depreciation," as stated in paragraph 43 of SFAS 93?

The Guide (Chapter 5) points out that restricted current revenue is income only to the extent that it is expended for the purposes for which it was received. If this principle is also applied to other expendable funds, we have the basis for preparing an income statement. A gift received for a restricted purpose, whether recorded in a current restricted fund or in an unexpended plant fund, is income when expended for the purpose designated by the donor.

The Statement of Changes in Fund Balances. The statement of changes in fund balances has been prepared as follows:

* Changes in the current unrestricted fund and the investment-in-plant fund have been combined to form the column "Unrestricted."

The Statement of Income, Expense, and Unrestricted Funds Balance. The statement of income, expense, and unrestricted funds balance is prepared by combining the Statement of Current Fund Revenue, Expenditures and Other Changes with changes in the investment-in-plant fund, and making other adjustments.


Those who are interested in the financial reports of colleges, especially those who support them financially (private or public agencies) should, and probably do, consider their financial position and results of operation. Colleges should make available financial statements designed to present this information in a form which is understandable to a non-accountant. Failure to do so means that those interested will make their own (possibly erroneous) judgments of financial position, and results or operations, by reading the financial statements presently prescribed for colleges.

An operating statement, showing total income, total expense (including depreciation), and the difference between total income and total expense, is essential for a fair presentation of results of a college's operations. The form of statement should clearly distinguish appropriations from expense.

Finally, uniformity in financial reporting by all colleges is essential and should be achieved as soon as possible.

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