With a history of greatness, American higher education institutions have reputations to keep. Presenters at NACUBO’s 2010 Higher Education Accounting Forum advised focusing on the details of legislative, governance, and reporting agendas—while continuing to deal with economic uncertainties.
By Mary Bachinger, Karen Craig, Bryan Dickson, and Sue Menditto
Although there are many great universities worldwide, a majority of the top 100 institutions are in the United States. That fact was the centerpiece of Jonathan Cole’s opening presentation at this year’s Higher Education Accounting Forum, April 18–20, in Chicago. Cole, the John Mitchell Mason Professor of the University and former chief academic officer at Columbia University, New York City, highlighted the historical origins of America’s great universities and the dangers they currently face. The session featured several passages from Cole’s recently published book, The Great American University: Its Rise to Preeminence, Its Indispensible Role, Why It Must Be Protected (PublicAffairs, 2010). His presentation wove a story that progressed from early academic triumphs to current threats.
Cole noted that indicators of institutional dominance include research performance and discoveries, number of Nobel Prizes awarded, and the invention of new industries. For example, U.S. higher education produces a very high proportion of the most important fundamental knowledge and practical research discoveries in the world. Colleges and universities achieving such distinction range from the elite Ivy League to the many public and independent institutions.
A number of trends and dynamics, noted Cole, have shaped our impressive higher education system. Those characteristics include the expanding U.S. population and its internal migration and immigration patterns, citizens’ desires to advance socioeconomically, social and educational mobility pressures among certain groups, war needs and response, governmental pressures and incentives, and the growing role of science in society.
That said, Cole focused on the unique aspects of the top 100–200 research universities, asserting that these schools are responsible for the most important scientific, medical, and technological breakthroughs. Add that to the generation of new concepts and ideas in the social sciences and humanities—and a role in local community growth—and you’ll find that research universities create a national economic impact that can be measured in billions of dollars annually. Not only are universities major employers, said Cole, but graduates of a number of these universities collectively have founded thousands of companies. For example, approximately 4,000 graduates of the Massachusetts Institute of Technology, Cambridge, have had a hand in developing companies that employ more than a million people and generate annual global sales that exceed $225 billion.
But, such triumphs are tempered, Cole noted, by considerable threats and challenges to resources both financial and human. While the economy increases demand for higher learning, the continuing economic crisis has reduced state support for public institutions and depleted endowments. Public and independent institutions struggle to operate with fewer resources while for-profit and non-U.S. institutions continue to grow.
Now more than ever, institutions need to maintain financial viability while being accountable to stakeholders.
Nicholas J. Wallace, Capin Crouse LLP
In addition to the need to accomplish more with fewer resources, other factors have increased the burdens of higher education. Specifically, concerns about terrorism led to post-9/11–era legislation that directly and indirectly affects universities. The explosion of information technology has also increased data vulnerability. Resonating with the audience were Cole’s comments about the many administrative resources deployed to assess these risks, preserve security, and protect privacy.
An important part of any effort to realign resources and priorities, said Nicholas J. Wallace, is the ability to measure outcomes. Wallace, a partner at Capin Crouse LLP, led the session “Measuring What Matters,” describing the need for effective performance indicator dashboards and benchmarking. Now more than ever, he noted, institutions need to maintain financial viability while being accountable to stakeholders.
Benchmarking can be a useful tool to compare an institution with itself or another group; demographics, location, financial structure, and size are characteristics to consider when creating comparison groups. Evaluating performance measures provides a comprehensive view of the data being analyzed, reinforces performance, is reality-based and mission-focused, and offers a framework for reflection, said Wallace.
He described the seven steps of effective benchmarking:
- 1. Audit your situation. What is important to you? What do you want in your reports?
- 2. Select relevant measures.
- 3. Form groups. The project will affect many individuals; understand how they will interpret the data.
- 4. Collect data.
- 5. Monitor outcomes.
- 6. Use results.
- 7. Adjust the process; benchmarking is a continuous activity.
Wallace suggested dashboards as a way to collect and present key data. Reminding attendees that such measures are just the “tip of the iceberg,” he described dashboards as “summaries designed to highlight key performance indicators that can highlight impending problems.” He further emphasized that while dashboards are not comprehensive reports, they should conform to certain ground rules:
- Provide concise analysis from available data.
- Narrow the report focus to the most important issues.
- Explain the trends, benchmarks, and targets clearly.
- Demonstrate the data’s impact on decision making.
- Stimulate questions that explore issues beyond the data alone.
Clarify context. To provide background for particular data, Wallace suggested including a narrative at the beginning of each report. The narrative could explain the significance of the information, the trends indicated, and the way the data might tie back to strategic planning objectives. It can also highlight problems or opportunities the data may reveal. Wallace also suggested including a ratio map—that is, a collection of financial ratios, such as primary reserve, net income, return on net assets, and viability. Such details can help resolve unanswered board-level questions such as: Are we solvent? Are we efficient? Are we sustainable?
Consider content and design. Presenting a dashboard is no different from presenting other data, said Wallace. He identified several guidelines:
- Don’t confuse reviewers with too many performance indicators. Less is more.
- Emphasize function over form; avoid overcomplicating the presentation of data.
- Avoid pointless data; keep the focus of the dashboard on information users can act upon.
- Understand changes in data; be aware of anomalies, such as the timing of data collection, in the presentation.
Legislative and Tax Compliance
Several sessions summarized impacts of Department of Education (ED) and Internal Revenue Service (IRS) legislation and other anticipated congressional action.
Matt Hamill, NACUBO’s senior vice president of advocacy and issue analysis, drew independent institution leaders’ attention to the recent flurry of activity related to compliance with the Department of Education’s financial responsibility standards under Title IV. The rules came into effect in the late 1990s when the not-for-profit financial reporting model was new. Hamill noted that the global economic collapse of 2008 led to declines in endowments, pension plans, and interest rate swaps. A combination of unrealized losses, debt renegotiations, and the application of FAS 117-1 (a cumulative change in accounting principles) has caused several institutions’ financial ratios to drop dramatically. He reported that NACUBO is working with ED to find a solution and urged institutions that are experiencing problems with their ratios or that have been contacted by ED to contact NACUBO.
In addressing the current legislative agenda in Washington, Rick Grafmeyer, a principal of Capitol Tax Partners, highlighted the following:
- “Pay-as-you-go” restrictions on legislators, as they seek ways to offset the revenue to fund the extension of the 2001 Bush administration tax cuts, as well as other expiring tax provisions.
- Enactment by the House of long-delayed legislation to simplify the tax treatment of employer-provided cell phones (a measure that could get bogged down in a Senate schedule that will likely not allow it to be picked up any time soon).
- The mandatory 3 percent withholding requirement on the purchase of goods or services by governmental entities, including public institutions. Grafmeyer hypothesized that the requirement, currently scheduled to become effective on Jan. 1, 2012, will not be repealed outright, but will be put off for another year.
Participants in the Tax Roundtable discussed an array of tax administration and compliance topics, including: due diligence practices in gathering unrelated business income tax (UBIT) amounts submitted by investment managers on K-1 forms, the tax treatment of health insurance reimbursements, and organizational approaches to the first year of expanded Form 990 reporting. In addition, attendees heard about the schedule of ongoing IRS college and university compliance audits as well the anticipated wave of several hundred employment tax audits.
Accounting Standards Updates
The global financial crisis has underscored the importance of accounting standards. Both the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB) have responded with a number of project updates to address this and other current issues.
FASB projects. Jeff Mechanick, FASB’s assistant director of nonpublic entities, reported on upcoming FASB projects relevant to higher education. Among the topics discussed were the standard-setting environment, major convergence projects involving two newly formed committees, and fair value measurement and endowment accounting.
While not directly affecting not-for-profit entities, the move toward International Financial Reporting Standards (IFRS) continues to dominate the FASB’s agenda. Joint projects between FASB and the International Accounting Standards Board (IASB) currently under way include new standards for financial instruments, fair value measurement, revenue recognition, leases, and financial statement presentation—all of which could affect higher education. The FASB has set an aggressive schedule for releasing exposure drafts (EDs) on these topics, with eight EDs due out by June 30. NACUBO members are encouraged to review these drafts, as not-for-profit entities are not expected to be scoped out.
The FASB has formed two committees to address the standards-setting needs of nonpublic companies: (1) the 18-member “Blue-Ribbon” Panel on Standard Setting for Private Companies was created to address the way accounting standards can best meet the needs of users of private company financial statements (the panel is expected to deliver its recommendations in February 2011); and (2) the Not-for-Profit Advisory Committee (NAC) was established to serve as a standing resource to the FASB, providing input on existing guidance, current and proposed agenda topics, and longer-term projects affecting not-for-profit entities. The NAC’s first meeting is scheduled for September 2010.
Fair value measurement continues to be an area of focus for the FASB. Accounting Standards Updates to this topic include the use of net asset value as a practical expedient for valuing alternative investments and enhanced disclosure requirements for FY10. Additional disclosures are also required for postretirement benefit plans assets beginning this fiscal year. In an effort to provide additional guidance in this area, the American Institute of Certified Public Accountants (AICPA) issued a draft paper addressing fair value issues specific to not-for-profits, including valuing contributions and split-interest agreements. There is no projected date for final issuance of the paper.
GASB updates. Wesley Galloway, GASB project manager, noted that Statement No. 51, “Accounting and Financial Reporting for Intangible Assets,” has been generating a number of questions as to which assets might be covered by the standard. For example, software rights are intangible assets and would be considered capital assets under this standard. Somewhat related are internal software development costs that make purchased software operational for the institution. The internal development costs are capitalized to create an intangible capital asset.
A financial statement disclosure checklist, available from most audit firms, is an excellent tool for preparing complete and pertinent statements.
Many other inquiries relate to patents that may be the unintended results of research. Such patents are intangible assets that are investments if the institution holds the patent to generate income. However, because the work on the patent was not entered into for the purpose of income, little if any development costs may need to be capitalized. That is because expenses begin to be capitalized once the intent to hold the patent for the purpose of income can be clearly demonstrated. Galloway noted details of several other statements:
- Statement No. 58, “Accounting and Financial Reporting for Chapter 9 Bankruptcies.” The GASB recently issued this statement regarding Chapter 9 bankruptcies. It’s a good one to have on record, but hopefully most institutions will never need to become familiar with it.
- Statement No. 54, “Fund Balancing Reporting and Governmental Fund Type Definitions.” Even though this statement on fund balance reporting changes some definitions related to proprietary and enterprise funds, the vast majority of public colleges and universities report these as a “business type activity,” and BTAs are not affected by this standard.
- Statement No. 52, “Land and Other Real Estate Held as Investments by Endowments.” Concerning the fair value of investments, this statement allows public colleges and universities to price at fair value real estate held as an endowment investment. State trust lands granted to public institutions, however, are scoped out of Statement 52, and do not have to be carried at fair value.
Although the GASB does not address the fair value of alternative investments, observation indicates that fair value accounting is common practice—therefore fair value will be addressed in a future project. Likewise, the treatment of land grants will be revisited during this project, and the question that will be asked is: “Are these even investments?”
Most in the audience were not very familiar with derivative instruments. Yet, because the statement is effective in FY10, public institutions need to understand and quickly assess derivatives used by their institutions and determine their intent, effectiveness, and value. Galloway walked participants through a lengthy series of illustrations of the basic concepts behind derivatives. He explained that the most common instrument used in higher education appears to be the variable to fixed-rate swap.
Finally, attendees received confirmation from Galloway that the GASB considers Pell grants to be nonexchange transactions and, therefore, nonoperating revenue. In doing so, the GASB acknowledged that—in targeting such a specific grant—it had addressed the industry in too detailed a way, something it would refrain from doing in the future. Clearly, board and staff have heard the outcry from higher education on the matter. Meanwhile, NACUBO’s Accounting Principles Council is currently revisiting Pell and other forms of federal financial aid with GASB staff.
Financial Reporting Review
The financial reporting session, presented by consultants Larry Goldstein and Karen Craig, focused on improving the quality and value of financial statements, with an emphasis on common errors and areas of divergence in practice for both FASB and GASB institutions. Although it was axiomatic advice, attendees were reminded of the importance of checking statements for math errors, ensuring that amounts articulate from one statement to another, and properly classifying amounts within the statements.
For independent institutions, common classification errors include putting noncash equivalents into the cash balance, releasing temporarily restricted net assets before donor restrictions are met, and including payables and receivables for fixed assets and investments in the operating section of the cash flow statement. For public institutions, common classification errors are likely to include placing amounts in restricted cash for other than payment of long-term debt, treatment of certain nonexchange grants as operating revenue, and including capital and endowment additions as operating revenue.
Other financial reporting advice included the following;
- A thorough annual review of the financial statements is critical to ensuring their value and relevance to users.
- A financial statement disclosure checklist, available from most audit firms, is an excellent tool for preparing complete and pertinent statements.
- Removing disclosures that are no longer required and incorporating new disclosures in a manner that will provide the most value to readers are essential to creating informative, relevant statements.