Accounting for Colleges and Universities

Public colleges and universities such as The Ohio State University and the University of Kansas historically have been in a somewhat awkward position in terms of financial account­ing. Private schools including Harvard, Duke, and Stanford follow the pronouncements of the FASB, especially those created for private not-for-profit organizations.

FASB statements that were issued on contributions and the proper form of financial statements have provided a sig­nificant amount of official reporting guidance for these private institutions. The standards developed for such not-for-profit organizations have progressed greatly over the last few years.

In contrast, the GASB has retained primary authority over the reporting of public colleges and universities. Much of the GASB’s work, however, has been directed at improving the accounting standards utilized by state and local government units. Consequently, until recently, the evolution of financial statements for public schools has lagged behind that for other types of reporting.

For decades the question of whether the financial statements prepared for public colleges and universities should be any different than those of private schools has been the subject of much theoretical discussion. Generally, the operations of public colleges differ in at least two important ways from private schools. First, the state or other governments directly provide a significant amount of funding (at least for qualifying students), lessening the reliance on tuition and fees.

For example, information provided with the 2007 financial statements of Utah State University disclosed state grants and appropriations of more than $163 million and federal grants and contracts of approximately $130 million in comparison to revenues of only $65 million from tuition and fees (after scholarship allowances).

Second, because of the ability to generate money each year from the government, public schools often raise and accumulate a smaller amount of endowment funds than private schools. Private schools usually try to build a large endowment to ensure financial security; this is not always necessary at a public school backed by the state or another government.

For example, at June 30, 2006, Princeton University, a private school, held investments with a fair value of nearly $13.6 billion, an amount (roughly equal to $2 million per student) that is almost beyond the comprehension of officials at most public colleges.

Do these and other differences warrant unique financial statements for public colleges and universities? In many ways, public and private schools are very much alike. They both educate students, charge tuition and other fees, conduct scholarly research, maintain libraries and sports teams, operate cafeterias and museums, and the like. What should be the measurement basis and what should be the form of the financial statements to reflect the financial activity and position of a public college or university?

These questions are especially relevant in light of the frustration as to the utilization of such statements- “The Board has found that few resource providers—especially citizens and legislators—or others with an interest in the financial activ­ities of public colleges and universities read the institutions’ external financial reports.”

Four alternatives have been suggested for properly constructing the financial statements that public colleges and universities prepare and distribute:

1. Simply adopt the FASB’s requirements for private not-for-profit organizations so that all colleges and universities (public and private) prepare comparable financial statements. The private reporting model is now relatively well developed. This sug­gestion presents some potential problems, however, because the FASB, a group that has not had to deal with the intricacies found in governmental entities, could fail to comprehend the unique aspects of public schools.

It might simply ignore the reporting needs associated with such schools. In addition, loss of authority to the FASB could weaken the GASB. Politically, reducing the power of this board might not be pleasing to organizations that provide much of the GASB’s support and financing.

2. Continue to use the traditional model that focused on fund-based statements and the wide variety of funds that such schools often maintain. However, both private not-for-profit organi­zations and governments (at least in part) have abandoned the reporting of individual funds so that for public schools to continue relying on this approach seems somewhat outdated.

3. Create an entirely new set of financial statements designed specifically to meet the unique needs of a public college or university. If the FASB’s pronouncements are not to be fol­lowed, the fundamental differences between the two types of schools must be significant. If those differences can be identified, new statements could be developed to satisfy the informa­tional needs of users and properly reflect the events and transactions of these public institu­tions.

Unfortunately, the creation of a new set of financial statements would require an enormous amount of work by the GASB. Would the benefit gained from tailor-made financial statements outweigh the cost of producing new standards for reporting by public schools?

4. Adopt the same reporting model for public school that has been created for state and local governments. Because a large amount of funding for public schools comes directly from governments, the financial statement format utilized by a city or county could be applied.

GASB Statement 35, “Basic Financial Statements—and Management’s Discussion and Analysis—for Public Colleges and Universities,” issued in November 1999, officially selected the fourth option. According to paragraph 25, “the objective of this Statement is to amend Statement 34 to include public colleges and universities in the financial reporting model estab­lished by that Statement.” This pronouncement creates a formal reporting model for public colleges and universities such as the University of Florida and Michigan State University.

However, a review of public college and university financial statements shows that many do not prepare both government-wide and fund-based financial statements. Such schools can logically be viewed as rather large enterprise funds. They have a user charge (tuition and fees), and they are open to the public. The accounting for enterprise funds in government-wide statements and fund-based statements is very similar. For these proprietary funds, both statements report all economic resources and use accrual accounting.

Thus, having two sets of almost identical statements was viewed by the GASB as redun­dant. For this reason, most public schools are allowed to prepare a single set of statements.

Exhibit 17.8 presents the financial statements for June 30, 2005, and the year then ended for James Madison University for illustration purposes. To focus on the format of these state­ments, the accompanying notes have been omitted but should be considered an integral part of the financial statements.