Accounting for Governmental Study Set 1
Quiz 11 :
College and University Accounting
From the annual report of Harvard University 2013-14 following points are noted- (a) Annual report 2013-14 has been audited by Price water house Coopers LLP, 125, High Street, Boston, MA 02110. (b) University has prepared a single statement of activities. Three separate columns are used here to indicate unrestricted, temporarily restricted and permanently restricted net asset. Also there are two columns indicating total net assets for the period 2013 and 2014. (c) Additional financial statement includes statement of changes in Net Assets of the Endowment. It has been shown analytically by showing funds taken from unrestricted, temporarily restricted and permanently restricted class of net assets. (d) Yes university has temporarily restricted net assets. University has released from temporarily restrictive net asset category to unrestrictive category. The amount is $1,650,254. (e) Oxford University has net asset in permanently restrictive category also. The amount is - (f) It is an agreement to share donations with different trusts. Annual report also contains details of split agreement. There is a note (11) indicating the detailed break up of split agreement. As per notes 11 the composition of split agreement is as follows-
a. (1) GSAB (Governmental Accounting Standard Board) has primary authority over setting accounting standards over government colleges and universities. (2) Statement of Net assets, Statement of Revenues, Expenses and Changes in Net Assets and Statement of Cash flows are the required Financial statements. (3) The following Equity accounts are required: Net Assets (Position) showing Unrestricted, Restricted and Net investment in capital assets. b. (1) FASB (Financial Accounting Standard Board) has primary authority over setting accounting standards over private, not-for-profit colleges and universities. (2) Statement of Financial position, Statement of Activities and Statement of cash flows are the required financial statements. (3) The following Equity accounts are required: Net Assets: Unrestricted, Restricted, and Permanently Restricted. c. (1) FASB (Financial Accounting Standard Board) has the primary authority over setting of accounting standards over investor-owned schools. (2) Statement of Financial position (Balance sheet), Income Statement, Statement of Changes in Equity and Statement of Cash flows. (3) The following Equity accounts are required: Owner's equity: Paid-in-capital and Retained earnings.
Answer (a): FASB guideline is applicable on non -profit colleges and universities. It is used for preparing financial statement of such institutes. Due to non-profit nature, excess of revenue over expenditure is not shown as profit or surplus. It is indicated as net asset. Net asset can be of three types. They are - 1. Net assets - unrestricted 2. Net assets - temporarily restricted and 3. Net assets - permanently restricted Net asset -permanently restricted: Sometimes a person/institute donating money imposes restriction on use. The money is required to be invested on permanent basis. It is known as donation for endowment. It is classified as net asset permanently restricted. Instead of investing money on permanent basis, it may be for a specific period. In that case it will not be considered as net asset permanently restricted. Further Institute may create endowment from fund of unrestricted in nature. It is known as quasi-endowment. It should not be considered as permanently restricted net asset. Here donor has not imposed restriction. It has been created by the institute itself. Income from endowment is not permanently restricted. It will be considered in other two categories. It will either restrict by use or of unrestricted in nature. Net asset- temporarily restricted: Donor can also impose some conditions on the donated money. It can be of two types. a. Use restriction - Donated amount here can be used only for a specified purpose. It may be restricted for use in research work or for purchase of assets. b. Time restriction - Here donated amount is paid in future or can be used in future. If donation is payable in 206 or can be used only in 2016, then it is restricted by time. First one is pledge. Amount has been promised today but will be paid in 2016. As per FASB guidelines, such pledge amount is recorded in the book at present value in the year of pledge. Thus a pledge of 2014 is recorded in 2014 although amount is receivable in coming years. Further the value of pledge should be escalated on expiry of one year, since its present value will go up due to such passing of time. Income from endowment is considered as temporarily restrictive in nature, when some use or time restriction has been imposed on them at the time of donation of endowment sum. Net asset - unrestricted: All donations not included in above two categories are included here. This fund is free for use. Receiver can use it in any manner. Quasi-endowment is included in net - asset unrestricted although amount has been fixed. Net asset temporarily restricted is transferred to unrestricted category on fulfillment of time or use restriction. Answer (b): Financial reports required under FASB statement 117: Four types of financial reports are required under FASB guidelines. They are - 1. Statement of unrestricted revenues, Expenses and other changes in unrestricted net asset: It indicates impact of current years transactions on the unrestricted net assets. Consider all - a. Revenues of unrestricted nature, b. Expenses and c. Net assets reclassified to unrestricted class. If total of (a) and (c) are greater than total of (b), then balance of unrestricted net asset in Balance sheet will go up. This changed amount and ending net asset figure is ascertained from this financial statement. 2. Statement of change in net assets: First statement is showing detailed composition of change in net asset unrestricted in nature. A summarized picture of the first statement is also included here. With this summarized figure detailed calculations of changes in other two categories of net assets are added. First consider change in net asset- temporarily restrictive in nature. All revenues and expenses affecting this class of net asset are shown in detail. Details are as follows- a. Consider all revenues increasing this class of net asset b. Then deduct all expenses made from this class of net assets c. Also deduct portion of net asset temporarily restrictive that are removed from this class and transferred to unrestricted class. Finally consider all changes in the net asset -permanently restrictive in nature. Sum of the three classes will constitute total changes in the net assets. Opening net asset figure is added to get closing total net assets. 3. Statement of financial position: It is like balance sheet. It is a statement indicating assets, liabilities, and net assets. Assets and liabilities are shown sequentially on the basis of liquidity. Most liquid asset is cash. Last item is land, building, plant etc. Liabilities will also start with the most liquid one. Like accounts payables, it ends with long term loans. After liabilities, net assets of different types are recorded. Then total of net asset is added with liabilities. This total should agree with the total of assets. Statement of cash flows: It indicates the causes of change in cash in hand. There are different sources of cash inflows and outflows. They are divided into three groups: a. Cash inflow from operating activities b. Cash flow from investing activities and c. Cash flow from financing activities In first group cash are inflowing or out flowing from normal activities of institute. In second group money will be related with durable assets. When these assets are bought, cash will out flow. On the other hand cash will inflow from the sale of assets. Finally consider third group. It will include all cash received from issue of new debts. Cash will outflow when interest or loans are repaid. Answer (c) Difference between Endowment, term Endowment and Quasi-endowment: 1. Endowment will mean fixed deposit of permanent nature. In private sector college and Universities main sources of revenues are donations / contribution. Donor can donate the money specifying the purpose of its use. When amount is paid for permanent investment, it becomes Endowment. Accounting: since amount received for endowment is not usable in any other manner, the contribution is classified as contribution - permanently restricted. On its receipt accounting entry is - 2. At the time of depositing money as permanent investment, journal is as follows: 3. At the end of the year, contribution - permanently restricted account is closed by transferring the amount to net asset-permanently restricted. Journal is as follows: Term Endowment: It is also fixed deposit. But the deposit is not permanent in nature. A person may contribute for 10 years endowment. This amount will remain as fixed deposit for 10 years. After 10 years the deposit can be encased. Money can be used for any other purposes. Accounting: Entries on receipt of money and deposit of cash as term endowment are same as stated in (i) above. It will be debited in term endowment. Also contribution is considered as - temporarily restricted in nature. Thus at the end of the year, contribution received account is closed by transferring the amount to net asset- temporarily restricted by use account. Like endowment income, the annual earnings (interest) from term endowment is usually unrestricted in nature. The money earned can be used in any manner as desired by the college/ university. If donor has imposed condition specifying its usability, then it will be used only for that purpose. Quasi-endowment: Sometimes Institute has decided to open endowment from donations of unrestricted nature. The donor has not imposed any endowment. It is known as quasi-endowment. Accounting entry: i. On receipt of donation - ii. On opening of endowment- iii. At the end of the year, contribution - unrestricted account is closed by transferring it to unrestricted net asset. So journal is as follows: Note that the amount has not been credited in net -asset permanently restrictive class. It is due to self imposed restriction by the concern. Answer (d1): Accounting required for endowment of gifts: This amount of gift is meant for permanent investment. Accounting entries are - 1. On receipt of endowment gift- 2. On deposit of money for fixed endowment- 3. At the end of the year- Answer (d2): Pledge is a promise to pay some gift in future. It may be unrestricted in nature. Sometimes restriction is imposed on its use also. In this problem, a pledge has been received in the year 2014. It is unrestricted in its usability. But the amount will be used in 2015 although it has been received in 2014. (a) On receipt of money, it will be entered in the book as pledge received for temporarily restricted in nature restriction is on time of its use. Journal is- (b) At the end of the year, pledge amount is transferred to net asset - temporarily restricted by time. Journal is - Answer of (d3): Now pledge has been received in the year 2014. Purpose of its use is restricted. Journal entries are as follows- (a) On its receipt in 2014: (b) At the end of 2015, pledge amount is transferred to net - asset: temporarily restricted by use. (c) In the year 2015, on its use for specific purpose, Journal is - (d) After its use, the restriction has been removed. So amount is now transferred from Net asset-temporarily restricted by use account to net asset - unrestricted. Journal is -
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