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GASB and FASB

How can colleges and universities keep the accounting and reporting differences between GASB and FASB straight? Here’s a crash course on the standards and their significance for campuses.

By Larry Goldstein and Sue Menditto

Public institutions follow Governmental Accounting Standards Board (GASB) standards, and independent institutions follow Financial Accounting Standards Board (FASB) standards. The coexistence of two standards boards, each with its own distinct mission, results in disparity in recognition, measurement, display, and disclosure that challenges comparable financial reporting transparency.

Many people familiar with the sweeping accounting and reporting changes resulting from GASB statements 34, “Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments,” and 35, “Basic Financial Statements and Management’s Discussion and Analysis for Public Colleges and Universities,” looked forward to enhanced comparability between the annual financial statements of public and independent institutions. However, accounting and reporting differences still exist.

NACUBO’s Accounting Principles Council began examining and enumerating the accounting and reporting differences in preparation for a meeting with the standards boards in 2003. The purpose was to raise the standards boards’ awareness of how the differences impact the higher education industry. The longer-term goal was twofold:

  • educate stakeholders, including rating agencies, federal agencies, and general financial statement readers, and
  • assist with interpretation of financial statement data made by users such as the rating agencies, the National Center for Education Statistics, or analysts working with the Integrated Postsecondary Education Data System.

Users of such data need to be aware of the financial reporting differences between public and independent institutions.

The Road to the Rift

Public and independent institutions followed similar reporting models and had comparable financial statements between 1973 and 1997. In 1973, the American Institute of Certified Public Accountants (AICPA) issued formal guidance in the College and University Audit Guide, the foundation of which was fund-based reporting. Comparability between institutions began to change in the late 1980s with FASB’s not-for-profit agenda. FASB addressed depreciation, contributions, investments, and the financial reporting model. AICPA reacted to the issuance of FASB landmark statements 116 (contributions) and 117 (the reporting model) by issuing an audit guide. Consequently, independent institutions’ required adherence to the not-for-profit audit guide (in 1997) began the official accounting and reporting separation between public and independent institutions. Independent institutions began following FASB 117 and the AICPA not-for-profit audit guide, while public institutions continued to follow the older fund-based college and university audit guide.

GASB was created in 1984. All governmental organizations, except the federal government, are subject to GASB standards. The part of GASB’s agenda that impacted colleges and universities addressed deposits; the prohibition of adopting FASB guidance regarding depreciation; the reporting entity; Pell grants; nonexchange transactions; and the financial reporting model. Public institutions had two reporting options: the governmental model or the 1973 fund-based AICPA College and University Audit Guide model. Beginning in 2002, higher education was forced to abandon fund-based reporting and follow the groundbreaking GASB statement 35, which made the fund-based college and university audit guide obsolete.

What do all these standards and rules mean? Publicized corporate and accounting scandals have caused shareholders, rating agencies, stakeholders, financial institutions, taxpayers, and general readers of financial statements to plead for greater transparency. If transparency is needed and desired, why are the rules and requirements issued by the two standards boards so different? The answer lies in mission differences between the boards. FASB has a decision utility focus; its mission is to help investors and creditors make decisions. In contrast, because the vast majority of financial resources used by governments comes from the public or taxpayers, GASB’s mission revolves around accountability. Although each board has its respective primary focus, they both take into consideration the other focus as well as additional factors when setting standards.

Two Takes

Here’s a look at how the standards differences play out for various accounting transactions and financial reporting elements.

Contributed services. FASB has a provision for recognition, offering criteria for recognition and measurement. GASB has not addressed this topic, although it may do so in the future. The impact for independent institutions is to recognize both contribution revenue and a corresponding expense equal to the fair value of the contributed services, with no effect on net assets.

Restricted cash contributions. FASB standards recognize cash contributions as temporarily or permanently restricted. GASB standards require recognition as deferred revenue if use of the resources is restricted to a future period. The result of the difference affects liabilities, revenue, and deferred assets.

Endowment pledges. There are notable differences between the standards boards with respect to endowment pledges. FASB recognizes these pledges as permanently restricted net assets. GASB prohibits recognition of endowment pledges because the primary restriction on an endowment—that it be invested in perpetuity—cannot be satisfied until the funds have been received. This recognition difference will impact total assets, gift revenue, and net assets.

Restricted non-endowment pledges. FASB recognizes these as temporarily restricted revenue with the pledge discounted to present value if they are due beyond one year from the date of the financial statements. GASB prohibits recognition if the pledge is for resources that will not be available for use in the current fiscal year. This difference affects total assets, gift revenue, and net assets.

Investment income. Per GASB, net investment income and realized gains and losses must be reported as a single amount, while FASB allows separate display. Additionally, investment income can be operating revenue only when the source is from student loan programs, according to GASB. FASB does not prohibit recognition as operating revenue. In fact, independent institutions that display operating results typically report the spending portion of endowment and other investment income as an operating revenue amount.

Pell grants. FASB treats these grants as a balance sheet pass through only, whereas GASB regards these grants as an activity statement transaction. For public institutions following GASB, grant revenue will be higher, net tuition revenue will be lower, and liabilities and net assets will be different.

Perkins loans. FASB treats these loans as a balance-sheet transaction with the federal portion as a liability. GASB currently allows differing treatment. It is acceptable to use the balance-sheet approach employed by independent institutions, or the activity-statement approach, which treats the federal portion as revenue, resulting in net assets rather than a liability.

Funds held in trust by others. There are recognition and display differences between the boards. FASB offers guidance for the calculation and display of such funds as an asset. There is no basis in GASB literature that would allow an entity to record and report these assets. (Assets held by affiliated foundations, however, will be reported under GASB 14 and GASB 39.) This accounting and reporting difference will impact assets, revenues, and net assets.

Definitions of restrictions. In FASB literature, only donors can impose restrictions. In the GASB environment, donors and any external party can impose restrictions. The difference in the standards boards’ perspective on restrictions is rooted in GASB’s focus on accountability. From GASB’s perspective, if creditors or legislation impose a restriction, it makes sense to identify it and be accountable to those that imposed the restriction. In FASB’s view, a reader must be informed that an externally imposed restriction will affect the use of resources. The reporting difference will impact the categorization of net assets.

Use of restricted funds. If both restricted and unrestricted resources are available for a given expense, the FASB reporting model requires that restricted net assets be reduced—even when unrestricted resources were used. This concept is known as first dollar release. GASB recognizes that there are many approaches to releasing restrictions, so it requires a disclosure explanation for how funds are being released from restriction.

Other post-employment benefits. Within the FASB reporting model, pensions and other post-retirement benefits are treated consistently. The same is true for GASB’s reporting model—that is, pensions and other post-employment benefits are accounted for using consistent methodologies. The divergence stems from differing FASB and GASB measurement methodologies.

Software. FASB organizations are required to capitalize investments in major software systems purchased or developed with in-house resources. GASB currently does not have a similar requirement, although this is being considered as part of a project focused on intangible assets. NACUBO’s advisory report on this subject recommends that public institutions follow the same guidance as independent institutions.

Asset impairment. FASB requires that future cash flows be measured to determine impairment losses. GASB’s measurement of impairment focuses on an asset’s service utility. The result of the differing approaches is that the same event may result in the reporting of a different amount of impairment loss.

Management’s discussion and analysis. GASB requires that institutions present explanatory information with the financial statements; FASB has no similar requirement. The GASB requirement is satisfied by public colleges and universities including a section titled management’s discussion and analysis. This is a plain-language presentation of information explaining the financial statements, usually supplemented with tables, charts, and graphs.

Key FASB - GASB Accounting Differences

Description FASB GASB Impact

Contributed Services

Allows recognition

No recognition

  • Gift revenue
  • Expenses

Restricted Cash Contributions

Recognize as temporarily or permanently restricted

Recognized as deferred revenue, if use restricted to a future period

  • Liabilities
  • Gift revenues
  • Net assets

Endowment Pledges

Recognize as permanently restricted

Recognition prohibited

  • Assets
  • Gift revenues
  • Net assets

Restricted Non-endowment Pledges

Recognize as temporarily restricted revenue

Prohibits recognition if for future period use

  • Assets
  • Gift revenues
  • Net assets

Investmet Income

  • Reconize and display net against income
  • Recognize as operating or non-operating
  • Display income net of related expenses
  • Cannot be operating revenue unless from student loan programs
  • Line item display
  • Operating and non-operating categories

Pell Grants

Balance sheet transaction

Activities statement transaction

  • Grants and contract revenue
  • Net tuition
  • Net assets
  • Liabilities

Perkins Loans

Balance sheet transaction

Balance sheet or activities statement

Activities statement:

  • Grants and contract revenue
  • Net assests
  • Liabilities

Funds Held in Trust by Others

Included as assets

No recognition

  • Assets
  • Revenues
  • Net assets

Restrictions Definition

Only donors can restrict

Any external party can restrict

  • Categorization of net assets

Use of Restricted Funds

First dollar release mandated

First dollar release optional

  • Categorization of net assets

Pensions and Other Post-Retirement Benefits

Expense and liability calcuated consistently using FASB methodology

Expense and liability calculated consistently using GASB methodology

  • Measurement difference
  • Expenses
  • Liabilities
  • Net assets

Software

Capitalization required

No capitalization required

  • Assets
  • Expenses
  • Net assets

Impairment

Requires cash flow approach

Requires service utility approach

  • Assets
  • Expenses and losses
  • Net assets

Distinct Styles

The boards’ differences in approach and outcome are fairly evident when one examines the financial statements. The financial statements for two similar institutions will have noticeable differences if one is a public institution and the other is an independent institution. FASB is relatively flexible when it comes to financial statement presentation, while GASB tends to be more prescriptive. For instance, FASB allows institutions to select disaggregated reporting based on line of business (e.g., academic, auxiliary, medical) or net asset class. GASB, on the other hand, prohibits disaggregation based on net asset class, although it is acceptable to present disaggregated line of business information.

Balance sheet. GASB imposes several requirements related to the balance sheet, which is usually referred to as the statement of net assets. GASB requires that the statement be classified—that is, current assets must be presented separately from noncurrent assets, while current liabilities must be presented separately from noncurrent liabilities. FASB allows such a presentation but does not require it in the balance sheet, commonly referred to as the statement of financial position. Unlike FASB, GASB also prescribes that nondepreciable capital assets be displayed separately from depreciable capital assets.

Other differences show up in the presentation of net assets. Both boards have identified three classes of net assets although, unfortunately, they did not select the same classifications. FASB relies on permanently restricted, temporarily restricted, and unrestricted net asset classes. GASB’s net asset classes are unrestricted, restricted, and invested in capital assets, net of related debt. Additionally, if an entity has any true endowments, it must divide restricted net assets into two additional components: restricted nonexpendable and restricted expendable.

GASB’s restricted nonexpendable net assets are equivalent to FASB’s permanently restricted net assets. Similarly, FASB’s temporarily restricted net assets are comparable to GASB’s restricted expendable net assets. In all likelihood, however, a public institution will have more restricted expendable net assets than its independent counterpart’s temporarily restricted net assets. This is because of GASB’s more expansive definition of restrictions. The fact that GASB identifies invested in capital assets, net of related debt as a separate net asset classification produces a significant quantitative difference for institutions. This category is not separately identified in FASB financial statements but instead is included in unrestricted net assets.

Another difference related to the balance sheet affects unrestricted net assets. Many public and independent institutions designate unrestricted net assets for specific purposes. Such designations are the result of board actions. FASB does not prescribe specific reporting requirements related to such designations. GASB, on the other hand, prohibits the identification of such designations on the face of the statement of net assets. It is acceptable to identify designations in the notes to the statements.

Cash flow statement. There are two key differences between the statements of cash flows presented by public and independent institutions. FASB identifies three categories of cash flows: operating, investing, and financing. GASB uses two of the same categories—operating and investing—but adds a fourth by separately identifying cash flows from noncapital financing activities and cash flows from capital and related financing activities.

Additionally, while GASB mandates the direct method of determining cash flows from operating activities, FASB allows either the direct or indirect method. Despite the fact that the direct method is recognized as providing more meaningful information, more than 95 percent of all FASB entities use the indirect method. Finally, because GASB prescribes the direct method, it also requires that institutions present a reconciliation of the net loss from operations per the statement of revenues, expenses, and changes in net assets to cash provided or used by operating activities as presented in the statement of cash flows.

Activities statement. The differences begin with the titles for the statements. FASB institutions typically present a statement of activities while GASB institutions label theirs the statement of revenues, expenses, and changes in net assets (SRECNA). GASB also imposes a classification requirement for the SRECNA. As with its balance sheet counterpart, GASB requires that some segments of the SRECNA be presented separately. Most notably, GASB imposes a requirement to identify the net results from operations. Furthermore, it prescribes that some revenues used to finance operations be classified as nonoperating revenues. State operating appropriations, investment income (except interest income on student loans), and gifts all must be reported as nonoperating revenues. As a result, all public institutions will reflect a loss from operations. FASB, on the other hand, allows independent institutions to present an operating measure, but does not require one. If one is presented, the institution determines which items are operating and which are nonoperating.

Another striking difference emanates from FASB’s determination that all expenses are unrestricted. GASB has no similar concept; expenses can be restricted or unrestricted, operating or nonoperating. Because many expenses are financed with temporarily restricted resources, there is a requirement in a FASB statement of activities to present the shift of resources between temporarily restricted net assets and unrestricted net assets as reclassifications. Typically, the unrestricted portion of the statement of activities will include a section labeled revenues and other support. Included in this category will be an addition labeled net assets released from restrictions. The temporarily restricted portion of the statement will include the same label and amount but, in this case, it will be a reduction of temporarily restricted net assets.

The boards’ different standards also affect the presentation of expenses. GASB allows operating expenses to be classified using either natural classifications (e.g., salaries, benefits, depreciation) or functional or program classification (e.g., instruction, research, institutional support). FASB also allows either classification method, but if the natural classifications designation is used in the statement of activities, the notes to the statements must include the same information presented using functional classification. (NACUBO encourages all institutions—both public and independent—to include a note presenting the operating expense information in a matrix format with “functional” on one dimension and “natural” on the other.)

FASB imposes additional requirements relating to expenses. Because plant operations and maintenance is not recognized as a programmatic category, all such expenses must be allocated to the functional categories such as instruction, research, academic support, and so forth. The same is true for depreciation and interest—both items must be allocated when functional expenses are presented.

FASB - GASB Reporting and Display Differences

Description FASB GASB

MD&A

No requirement

Required supplementary information

Disaggregation

  • Allowable by line of business
  • Allowable by net asset class
  • Only allowable by line of business
  • Not allowable by net asset class

Balance Sheet Display

  • No classified display requirement
  • Three net asset classes that differ from GASB:
    • Unrestricted
    • Temporarily restricted
    • Permanently restricted
  • Net assets are displayed for each of the three classes
  • No special requirements for capital asset display
  • Requires a classified balance sheet
    • Current
    • Noncurrent
  • Three net asset classes that differ from FASB
    • Capital assets, net of related debt, separately display:
      • Nondepreciable
      • Depreciable
    • Restricted
      • Expendable
      • Nonexpendable
    • Unrestricted
  • Display of unrestricted net asset designations is prohibited

Cash Flow Statement

  • Indirect method allowed
  • Three categories
    • Operating
    • Investing
    • Financing
  • Direct method mandated
  • Must reconcile operating cash to net loss from operations per Statement of Revenues Expenses and Changes in Net Assets
  • Four categories
    • Operating
    • Investing
    • Capital and related financing
    • Noncapital financing

Activities Statement

  • All expenses are unrestricted
  • Operating measure is optional and self defined
  • Expense categories
    • Functional required with prescribed allocations (display or notes)
      • Depreciation
      • O&M of plant
      • Interest
    • Natural is allowed
  • Expenses among net asset classes
  • Operating measure is required and prescriptive
  • Expenses categories
    • Allows natural or functional with lack of prescriptive allocations
      • Depreciation allocation optional
      • O&M of plant is separate function
      • NACUBO guidance encourages both natural and functional in the notes

Lacking Uniformity

On Board for the Higher Education Accounting Forum

Representatives from the Governmental Accounting Standards Board and the Financial Accounting Standards Board are scheduled to speak at NACUBO’s Higher Education Accounting Forum in Chicago April 17–19. Robert Attmore, chair of GASB, and Katherine Schipper, FASB board member, will provide the latest updates on their boards’ activities and will respond to questions from program participants.

The premier event for advanced-level accounting and finance professionals, the Higher Education Accounting Forum offers the latest information on trends, issues, and best practices in both financial and managerial accounting and analysis for all types of institutions. The program presents plenary sessions for key presentations and discussions; smaller sessions address special topics and bring together attendees from similar institutions. Formal presentations are intermingled with roundtable exchanges to provide valuable information as well as opportunities for networking.

For more details, visit www.nacubo.org or call 800.426.4916.

Any stakeholder interested in drawing global or industrywide conclusions about higher education financial data should be keenly aware of the distinctions outlined in this article. From cost of college to financial health analyses, data are readily available for public and independent colleges and universities. However, as long as institutions are subject to the rules of two disparate accounting standard-setting bodies, there will not be uniformity in recognition, measurement, display, or disclosures between FASB and GASB institutions.

Author Bios Larry Goldstein is president of Campus Strategies, Crimora, Virginia, and Sue Menditto is director, accounting policy, at NACUBO.
E-mail larry.goldstein@campus-strategies.com; sue.menditto@nacubo.org