Essentials of Accounting for Governmental and Not-for-Profit Organizations

1. Essentials of Accounting for Governmental and Not-for-Profit Organizations Chapter 9: SLG Financial Analysis; Special Purpose Entities; Public Colleges and Universities

2. Overview of Chapter 9 • Common ratios used in financial analysis of SLG entities • GASB requirements for special purpose entities • Accounting for Public Institutions of Higher Education

3. Primary SLG Financial Statement Users • Citizen groups • Legislative and oversight officials • Investors • Creditors

4. Users want to know • Did the SLG use its money efficiently and effectively? • How did the SLG do this year compared to last year? • Was money spent as promised? • Were laws and regulations followed? • Do current funding requests make sense in terms of past performance? • Investors and creditors want to be sure the SLG can afford to honor its financial obligations.

5. Bond Markets and Financial Analysis • The CAFR is a major data source for professional bond rating agencies such as • Moody’s, Standard and Poor’s, Fitch’s Investors Services • Bonds are rated from Aaa to C • Insured bonds are automatically rated Aaa • The financial condition of SLGs affects the cost of debt and/or bond insurance.

6. Common ratios • Net debt per capita • Shows average outstanding debt per citizen • Net debt to fair value of property • Shows % of debt outstanding on taxable property • Interest coverage: (Rev- Op Expense) divided by Interest • Same as times interest earned for business reports • Enterprise Operating ratio: (Operating Exp less depreciation) / op revenue • Shows % of revenue spend on current vs. debt service

7. Common ratios cont’d • Governmental revenues per capita: Revenues other than for capital projects divided by population • Shows the citizen tax burden • Debt service to total revenues: Principal and interest payments/total revenues of general, special revenue, and debt service funds • Shows % of budget used up for debt repayment

8. Common ratios cont’d • Unreserved fund balance as % of revenues • Shows level of rainy day fund • Actual to budget expenditures in General Fund - • Indicator of budgetary control • Unrestricted net assets to general revenues - government activities • Shows degree of financial flexibility

9. Common ratios cont’d • Net expenses of government activities to general revenues of government activities • Shows whether the government is generating enough revenue to cover its net costs • Other issues to consider • Population trends, trends in assessed values, economic trends, debt limits and margins, pension position, current issues in the news, etc.

10. Special Purpose Entities • If engaged in governmental and business type activities • Use general GASB 34 reporting model • If engaged in multiple governmental activities • Use general GASB 34 model, just omit enterprise funds statements which are not applicable • If engaged in single governmental activity • Can prepare governmental fund, entity wide statements, and reconciliation effects all on one statement per Illustrations 9-1 and 9-2

11. Key points in Illustration 9-1 • Governmental funds shown first per current financial resources model • Adjustments column used for conversions to economic resources (accrual) model • Elimination of internal receivables and payables • Addition of long-term liabilities and long-term assets net of accumulated depreciation. • Differences in deferred revenues under accrual vs. modified accrual • Differences in interest due vs. accrued interest and amortization of premium/discount • Restructure of fund balance vs. net assets section

12. Key points in Illustration 9-2 • Governmental funds shown first on modified accrual basis • Adjustments column used for conversions to accrual basis • Additional accruals of salaries • Depreciation • Elimination of capital outlay and principal repayments • Interest adjustments from modified to full accrual • Last column just below 11,203,213 seems it should be 1,458,437 instead of blank -- blank because not called “expenditures” in entity wide statement. • Last four lines of adjustments column in GASB model does not completely reconcile beginning of year to end of year amounts.

13. Special-Purpose Entities with Business only Activities • Will prepare fund level statements of enterprise funds • No need to do entity-wide statements because enterprise funds and entity-wide are both on accrual basis with all long-term assets and liabilities already included.

14. Special Purpose Entities -- Fiduciary Activities only • Prepare fiduciary fund level statements only • No need to do entity wide statements • If a PERS has multiple defined benefit plans, each should be reported in a separate column or show separate combining statements

15. PUBLIC Colleges and Univ. • Public College financial reporting is covered by GASB. • Private Colleges come under FASB and AICPA audit guidance -- covered in a later chapter. • Although there are more private than public colleges, roughly 3/4 of the students attend public institutions.

16. Public College Financial Reports • Public Colleges may have governmental type activities, business type activities, or both. • Most public colleges, with the exception community colleges that have power to levy property taxes, will report as governmental units with “business activities only” . • Public colleges will be making the transition to GASB 35 for fiscal year ends in mid 2002 to 2004. • GASB35 requires statements similar to those of special purpose governments under GASB34. • The transition will require colleges to use full accrual basis and record long-term assets, including infrastructure, along with depreciation.

17. Public College Entries p. 253 • #1-4: Accrual and collection of tuition and the handling of scholarships. • Scholarships treated as deductions from revenue if no services required, otherwise treat as an operating expense. • #5-6: Handling of deferrals -- if the year ends in middle of a semester, a portion of the tuition must be deferred to the following fiscal year. • #7: State appropriations • Regular appropriations treated as NONOPERATING revenue; restricted appropriations earmarked by purpose.

18. Public College Entries p. 254 • #8: Restricted Operating grants earmarked by purpose. • Note: term ‘restricted’ implies the restriction was imposed by an outside party. • #9: Revenues from auxiliary enterprise operations are treated as specially earmarked OPERATING revenues. • #10: Contributions listed as restricted NONOPERATING revenues or as capital grants.

19. Public College Entries p. 255 • #11: Endowment gift recorded as “Addition” • #12: Cash is invested • #13: Prior yr accrued interest collected • #14 & 15: Investment income is recorded as nonoperating • #16: Beginning of the year accounts payable and accrued liabilities paid from restricted and unrestricted cash.

20. Public College Entries p. 256-257 • #17: Payment, accrual, use of supplies resulting in operating expense • Classified by object here, can be grouped by function such as: Teaching, Research etc. • #18: Payments and accruals of restricted expenses • #19: Accrual of depreciation • #20: Purchase of capital assets • #21: Inventory • #22: Interest payment and accrual - treated as NONOPERATING expense • #23: Paid debt principal due this year

21. Public College Entries p. 257-258 • #24: Reclassification of a portion of long-term debt to short term • #25: Movement of money into bond trustee account and related net asset reclassification as restricted • #26: Accrual of compensated absences • #27: Short term investments sold • #28: New short term investments purchased • #29: Year end adjustment of investments for unrealized gains

22. Public College Entries p. 258-260 • Closing entries • #30: closing unrestricted revenues and expenses • #31: closing endowment items • #32: closing restricted scholarship and fellowship items • #33: closing restricted grants against related revenues • #34: Capital appropriations and gifts closed • #35 & 36: Adjustment of Capital Assets net of Debt for changes during the year.

23. Public College Stmt of Net Assets • Assets and Liabilities • Classified as current and noncurrent. • Net Assets Classified as • 1) Invested in capital assets, net of debt, • 2) Restricted -- Nonexpendable and Expendable • 3) Unrestricted • Note: Deficits in unrestricted assets may be common because • Colleges are not accustomed to setting aside funds for depreciation. • States seldom fund compensated absences in advance.

24. Public College Stmt of Rev., Expenses and Changes in Net Assets • Operating Revenues: • Student Tuition net of scholarship allowances • Federal and State Grants • Auxiliary • - Operating Expenses including depreciation • + or - Nonoperating Revenues and Expenses • Includes statement appropriations, gifts, investment income, interest on capital debt • + or - Capital appropriations, gift, endowment additions • = Increase in net assets • + Beginning net assets = Ending net assets

25. Public College SCF • Must be on direct format • Operating: Excludes interest and dividend revenues and expenses • Noncapital Financing: Includes state appropriations and gifts including endowments • Capital Financing: Purchase of long-term assets and related gifts, appropriations and debt repayment including interest • Investing: Includes interest revenues, endowment and other investments kept separate • Reconciliation -- could also have noncash section

26. Slides prepared by • Dr. Louella Moore • Arkansas State University