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Nov 1993

SFAS No. 117 and its impact on not-for-profit colleges and universities. (Statement of Financial Accounting Standard) (Accounting)

by Pelfrey, Sandra

    Abstract- Statement of Financial Accounting Standards No 117 will have the greatest impact on nonprofit colleges and universities. 'Financial Statements of Not-for-Profit Organization' calls for the classification of fund balances of nonprofit organizations into one of three categories: unrestricted, temporarily restricted or permanently restricted. This provision compels these institutions to trace the origins of their different funds and subfunds. Moroever, any significant addition to the fund must also be assessed to ascertain the classification of its equity. A review process is also called for on funds allocated for plants and equipments, and subfunds for repairs and replacements. The significant changes brought about by SFAS No 117 on the reporting standard for not-for-profit colleges and universities are discussed.

Funds Requiring Further Analysis

The loan fund may have been established by government grant, or restricted donation. If the monies are to be used to lend to students in perpetuity, the equity would be listed as permanently restricted. The assets associated with this fund would not be available to satisfy current debts and must therefore be placed with other restricted assets.

If the institution established the loan fund with a transfer of institutional funds, then its equity would be included with the other unrestricted net assets. It is also possible that a temporarily restricted donation established the fund. If this is the case, the accountant must determine whether the donor's restrictions have been satisfied. If they have, the fund becomes part of unrestricted net assets; if not, it remains part of the temporarily restricted classification.

Not only must the initial source of funds be traced and analyzed, but also any other major additions to the fund must be reviewed to determine how its equity will be classified.

Similar analysis must be performed on the plant and equipment fund. If restricted donations are the source of additions to the unexpended plant subfund, then its equity will be classified as temporarily restricted. Should the institution transfer assets that are board restricted to this fund, the equity in those assets are considered unrestricted and must be separated from the others. The same analysis must be performed on the repairs and replacement subfund.

The retirement of indebtedness subfund will generally prove to be unrestricted in nature if transfers from the current fund are responsible for its increases. Donations may have been received with restrictions attached specifying that the monies be used to repay outstanding debt. If the monies have not as yet been used for repayment, that portion of the subfund associated with these restricted donations must be classified as temporarily restricted.

The bulk of the first year's analysis may center on the investment in plant fund. Donated plant assets and/or those acquired using donations restricted for plant asset purchases must be identified and separated. SFAS No. 116, Accounting for Contributions Received and Contributions Made, stipulates that the purchase of fixed assets does not satisfy a donor's restriction, but rather it is the use of the asset that completes the process. Therefore, the book value of these plant assets will remain in the temporarily restricted net asset category, separated from the equity of plant assets purchased with the university's operating or borrowed monies. As these assets are depreciated, the amount of their depreciation will appear as a reclassification of income from one class of net assets to the other.

Once the initial analysis has been completed, the financial statements can be modified to reflect the reporting changes required by SFAS No. 117. To minimize the trauma associated with change, colleges and universities may continue to record transactions in the same manner that they have historically used as long as new accounts are established for those items that need to be separated (i.e., purchase of plant assets using restricted donations as opposed to those purchased with university monies). The information, once gathered, can then be reformatted to comply with SFAS No. 117.

Mandatory and Nonmandatory Transfers

The operating statement of colleges and universities includes mandatory and non-mandatory transfers, that while used to gather data, will be effectively eliminated from the final activity statement. Those transfers are usually made between funds that are considered unrestricted and are shown in the operating portion of their respective fund's activity statement. It would be helpful if these two types of expenditures were moved to the statement of changes in the net assets portion of the activity statement. Reporting the increase and decrease on the same line will effectively eliminate the transaction from the totals reported for unrestricted net assets.

Nonmandatory transfers, are often used by colleges and universities to record the transfer of board designated assets to a quasi endowment fund. Using the same procedure that was used for mandatory transfers will effectively negate the effect of the transfer on total net assets.

While the above changes affect the top financial statements only, colleges and universities will need to initiate an internal change of procedures to deal with the purchase of minor equipment from departmentally budgeted funds. Colleges and universities currently record purchases of minor equipment as expenditures of the respective departments. These amounts are included in the current unrestricted fund's statement of revenue and expense. These assets are then picked up by the plant fund as asset additions subject to depreciation under SFAS No. 93. Prior to SFAS No. 117 there was no direct impact on the operating or activity statement because the plant funds did not TABULAR DATA OMITTED report expenses on the activity statement. SFAS No. 93 requires that the impact of accumulated depreciation appear on the balance sheet. Annual depreciation had to be disclosed, but this could have been accomplished with a footnote.

Including the plant fund on the activity statement would bring depreciation into the activity statement and effectively expense these assets twice; once at time of purchase and later over the asset's life through depreciation. The extent of this problem is unknown. While it may have an immaterial impact on the activity statements of some institutions, it may be material for others. It is important to gather information regarding this practice and adjust for it in the financial statements.

While it may be an essential part of departmental budget prerogatives to be allowed to purchase equipment this way, it is necessary that such purchases be identified and charged to a separate departmental account. This account can still affect departmental budgets, but it would not affect the expenses of the entire institution. It can be handled later in a manner similar to the aforementioned mandatory and nonmandatory transfers. By reclassifying them as changes in net assets and placing the increase to unrestricted net assets of the investment in plant subfund and a decrease to operating unrestricted net asset on the same line will cause them to offset with no impact on total unrestricted net asset.

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