Changeups Keep on Coming
The economic future remains uncertain, cautioned presenters at NACUBO's 2011 Higher Education Accounting Forum. Workshop content focused on techniques for confronting the risks, regulations, and revenue reductions being thrust at the business office.
By Karen Craig, Bryan Dickson, and Sue Menditto
Change is in the air. It seems to be lingering, threatening to disrupt things permanently. After all, it's been more than two years since the abrupt start of the financial crisis, and business officers continue to deal with ever-changing expectations being thrown their way. Trustees now want to understand in a more holistic fashion the key factors affecting the income statement today and into the future. Those include revenue reductions and opportunities, cost efficiencies and new expenses, pursuit of strategic objectives, and risks related to certain decisions.
At the same time, controllers' offices must be prepared to field internal information requests, new regulatory requirements, and changing accounting guidance, while working more effectively across the institution. An assortment of sessions at NACUBO's Higher Education Accounting Forum (HEAF), held in Boston in late spring, dealt with the changing role of the controller's office specifically and the business office in general.
Financial Risk and Viability
In a session aptly titled, "Risk and Where the Industry Is Going," Louis Mezzina and John Mattie, partners and higher education practice leaders at KPMG and PricewaterhouseCoopers, respectively, began with the premise that the higher education financial model may not be sustainable. They believe cost management is key, and their perspective was centered on two major influences on colleges and universities: (1) institutions have moved from crisis to uncertainty, and (2) as a consequence, there is a serious search for revenue and growth.
Mezzina and Mattie subsequently focused on risks that institutions may be absorbing as a result of these two interacting themes. An uncertain future, for example, can broadly affect an organization's ability to thoroughly and rationally assess risk in order to aggressively pursue objectives, which may include those designed to generate revenue. The perception that objectives are more easily achieved while funding is available can lead to an inadvertent increase in risk tolerance.
The presenters proceeded to examine common higher education risks related to the pursuit of revenue opportunities to remain competitive. These might include:
- Making changes to financial aid to enhance enrollment management. (See sidebar, "Enrollment Management: A Strategic Risk.")
- Rapidly expanding international operations.
- Enhancing amenities to attract certain applicant pools.
- Growing athletic programs.
- Diversifying investment portfolios.
- Broadening technology options.
- Expanding the research base.
- Growing alternative educational delivery mechanisms.
All of these familiar activities require an understanding of risks, costs, and benefits. However, from the vantage point of the presenters, colleges and universities must commit to an effective cost-management plan.
A Flurry of FASB Activity
Three proposed FASB standards—"Leases," "Revenue From Contracts With Customers," and "Accounting for Financial Instruments"—are likely to have the most significant impact on higher education institutions.
Since May 2010, the Financial Accounting Standards Board (FASB) has issued 11 Accounting Standards Updates (ASUs), invitations to comment on 19 proposed ASUs, and three discussion papers on a broad range of accounting topics. In addition, the FASB held several public roundtables to discuss the various documents. NACUBO responded to seven of the issued documents and participated in three roundtable discussions on behalf of higher education.
During the FASB update session at HEAF, Jeff Mechanick, FASB's assistant director of nonpublic entities, focused on the proposed standards likely to have the greatest impact on higher education. In addition, he provided updates on the activities of the Blue-Ribbon Panel on Standard Setting for Private Companies (Blue-Ribbon Panel or the Panel) and the Not-for-Profit Advisory Committee (NAC).
Proposed standards. Three proposed standards—"Leases," "Revenue From Contracts With Customers," and "Accounting for Financial Instruments"—are likely to have the most significant impact on higher education institutions. While the guidance in the original exposure drafts would have resulted in significant changes to an institution's financial statements, the FASB is redeliberating these topics based on comments received from users, preparers, and auditors. As a result, some of the more onerous aspects of these proposed standards have been eliminated or revised, significantly reducing the potential effects on financial reporting. Each of the three standards is expected to be issued in 2011 but will likely not be effective until FY14 or later.
Blue-Ribbon Panel. In an effort to ensure that issues specific to nonpublic entities—(private companies and not-for-profits (NFPs)—are being addressed, the Financial Accounting Foundation or FAF (the parent organization of the FASB) created the Trustee Working Group in March 2011. The group's focus will be to address the recommendations of the Blue-Ribbon Panel, which was formed in 2009 to consider how accounting standards can best meet the needs of users of private company financial statements in a cost-effective manner.
After several meetings throughout 2010, the Panel issued its final report in January 2011. The key recommendations were (1) to create a separate private company standards-setting board, or (2) establish GAAP (generally accepted accounting principles), with exceptions and modifications for private companies. While the work of the Panel was focused only on private companies, FAF has indicated that it will consider NFPs within the scope of the Panel's recommendations.
Not-for-Profit Advisory Committee. Another important initiative has been the formation of the Not-for-Profit Advisory Committee. The 17-member committee serves as a resource to the FASB on issues specific to the not-for-profit sector. At its most recent meeting, the committee created three subgroups to identify potential improvements in NFP financial reporting. The subgroups will be focusing on (1) reporting financial performance, (2) telling the story, and (3) reporting liquidity/financial health. The subgroups are tasked with studying potential initiatives and developing tentative recommendations and alternatives for the committee as a whole to consider at its next meeting, in September 2011.
GASB Updates and Guidance
Public institutions needn't worry about implementing new standards from the Government Accounting Standards Board (GASB) in the current fiscal year. However, although few if any higher education institutions will be affected, GASB project manager Wesley Galloway reminded the audience that agent employers must be prepared to implement the OPEB (other postemployment benefits) measurement changes in GASB Statement No. 57 next year. He also urged colleges and universities that would like to report service effort and accomplishment (SEA) to become familiar with the suggested guidelines for voluntary SEA reporting of performance information.
Galloway pointed out two standards with FY13 effective dates that public institutions should take note of:
Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements. A service concession arrangement (SCA) is an arrangement between a transferor (a government) and an operator (a governmental or nongovernmental entity) in which all of the following criteria are met:
- The transferor conveys to an operator the right and related obligation to provide services through the use of infrastructure or another type of public asset (for example, a facility such as a campus dining hall) in exchange for significant consideration.
- The operator collects and is compensated by fees from third parties.
- The transferor is entitled to significant residual interest in the service utility of the facility at the end of the arrangement.
- The transferor determines or has the ability to modify or approve the following: (a) the services that the operator is required to provide, (b) the entity to whom the services will be provided, and (c) the prices or rates that will be charged.
The statement provides guidance on whether it is the transferor or the operator who reports the capital asset in its financial statements, when to recognize up-front payments from an operator as revenue or as deferred inflow of resources, and how to evaluate whether a current obligation or a deferred outflow of resources exists.
Galloway explained that common examples of SCAs include situations in which (1) an operator designs and builds a facility and obtains the right to collect fees from third parties; (2) an operator provides significant consideration in exchange for the right to access an existing facility and collect fees from third parties for its use; and (3) an operator designs and builds facilities, finances construction costs, provides associated services, collects associated fees, and then conveys the facility to the government at the end of the arrangement.
For example, if a food service operator (for consideration paid to the university) designs and builds an eatery on campus, provides services, collects fees, and conveys the eatery to the university at the end of a service arrangement period, the public institution will follow Statement No. 60 for accounting and reporting the service concession arrangement. In this example, the institution will record the eatery as a capital asset. The provisions of this standard apply only when full control of operations—in exchange for consideration—is granted to the operator, in addition to the right to collect fees for the services provided.
Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989, FASB and AICPA Pronouncements. GASB Statement 62 is a codification standard that directly incorporates into GASB's authoritative literature the guidance that previously could be found only in certain FASB and AICPA pronouncements. The impetus for the standard was the FASB's Accounting Standards Codification, which superseded pre-Nov. 30, 1989, literature that governmental entities were required to follow. That is, governmental entities, including public institutions, were required to apply pronouncements issued on or before Nov. 30, 1989, by the FASB and its predecessors to the extent that those pronouncements did not conflict with or contradict GASB pronouncements.
Although no new guidance is created by GASB's codification standard, it is possible that public colleges and universities will discover some standards that they were not aware of, and thus have not complied with in the past. Although the likelihood is low, accounting changes discovered and adopted to conform to the provisions of this statement should be applied retroactively by restating financial statements for all periods presented.
Galloway also advised that public institutions follow a project recently placed on GASB's technical agenda. The project will research accounting and reporting of fiduciary activities. Because institutions invoice or collect tuition payments on behalf of students from many third parties—including the federal government—the project's discoveries could potentially affect how Pell Grants (and similar agency or fiduciary activities) are recorded and reported by public institutions. Many believe that fiduciary activities do not warrant separate revenue recognition that is reflected in either the governmental general fund or single-column BTA (business type activity) reporting. NACUBO will closely monitor this project.
Tax-Exempt Bond Compliance
As more institutions increase their global presence, they are confronted with administrative responsibilities for which there is little precedence among their peers.
In a session focused on compliance issues, James Matteo, assistant vice president for treasury management and fiscal planning, University of Virginia (U.Va.), discussed the steps taken by the university in response to an Internal Revenue Service (IRS) compliance questionnaire and an IRS audit of U.Va.'s Series 2003 bond. These events and U.Va.'s discussion with its financial advisers and legal counsel became catalysts for the creation of a comprehensive bond compliance program.
In 2007, the IRS sent out approximately 200 questionnaires to organizations with tax-exempt debt. The primary objective of the questionnaire was to identify the overall knowledge of the post-issuance compliance and record-retention requirements generally applicable to tax-exempt bond issues.
The responses from the questionnaire and continued political scrutiny of tax-exempt organizations have resulted in the continued efforts by the IRS to ensure issuance and post-issuance compliance. The 2011 work plan of the IRS's Tax-Exempt Bonds (TEB) division includes a commitment to "expand TEB's compliance presence in the tax-exempt bond and tax-credit bond market through increased use of compliance check initiatives and correspondence examinations."
Consequently, the university established a compliance team with internal representatives from treasury, accounting, tax, and facilities as well as external members including bond counsel, financial advisers, and the arbitrage calculation agent. The objectives for the team were to create a formal policy to define compliance practices and to build an information dashboard to consolidate the compliance data and support the policy. Team members began by determining what data would be needed, using the IRS questionnaire as a starting point. They also reviewed presentations, best practices, and policies from other universities, as well as publications from organizations such as the National Association of Bond Lawyers and the Government Financial Officers Association.
U.Va.'s policy focuses on key areas such as debt issuance, proceeds tracking, private business use, records maintenance, and required disclosures and filings. Once the team drafted the policy, it was able to develop specifications for the dashboard using such criteria as the need to consolidate data from multiple sources, use of a relational database for compliance items, and scalability to allow for future uses. The team decided to use QlikView business intelligence software to build the dashboard, in part because the university already owned the software, which meant no external costs. In addition, the software provided a complete business intelligence solution, including a data source integration module, analytics engine, and user interface.
Matteo admits that U.Va.'s compliance solution may not be the gold standard but advises that for institutions with limited resources it is a good model to consider. While the university's cost to implement this solution was minimal, the action mitigated the risk of noncompliance costs, which can be significant. In addition to the compliance aspects, having data from numerous sources in one searchable database has proven valuable to university management.
Group Advice on Going Global
As more institutions increase their global presence, they are confronted with a number of administrative responsibilities for which there is little precedence among their peers. Conducting a panel discussion were Sunanda Holmes, global compliance officer, Johns Hopkins University; MaryAnn Piccolo, associate comptroller of tax and payroll, University of Pennsylvania; and Robert Lammey, director, higher education, High Street Partners, who addressed the key issues faced by universities doing business internationally.
The panel members discussed areas of risk, including tax and financial compliance, human resources, U.S. laws and regulations, and monitoring and compliance. In addition, they discussed what their institutions have done to address these risks.
One of the most fundamental issues that institutions face is finding out what activities they might be involved in internationally. Key to addressing this is creating open communication across the institution that allows for early identification of global activities. In addition, creating reporting mechanisms, somewhat similar to phone trees, is helpful. For example, if the provost's office is contacted with regard to a global project, the provost would then also alert the controller's office and the legal office to ensure that they are kept in the loop.
While there are many issues to be addressed when doing business globally, some pose greater risks than others. Among these is hiring and paying individuals in foreign countries. Each country has its own rules regarding hiring, paying, and withholding tax for the following types of workers:
- U.S. expatriates—U.S. citizens working for the institution in a foreign country.
- Host-country nationals—citizens of the country in which the institution is doing business.
- Third-country nationals—citizens of another country working in a second country for the institution.
- Independent contractors—nonemployees working on behalf of the institution.
Holmes, Piccolo, and Lammey recommended that institutions understand the rules for the specific countries where their organizations are doing business and ensure that an appropriate infrastructure is in place to avoid violations and potential fines. For example, in many foreign countries it is illegal to make payments in a currency other than the local currency. To overcome this hurdle, some schools have used prepaid cards in the local currency, some have used PayPal, and some have outsourced the payment to an in-country entity that acts as an agent for the institution.
Presenters cautioned that careful attention be paid to laws of both the United States and the individual countries. In particular, the panel highlighted the Foreign Corrupt Practices Act, the U.S. Export Control Act, and the Clery Act. With regard to the Clery Act, the institution needs to determine the extent of its control over the foreign location to determine whether crimes committed in that location must be included in the school's crime report.
The panel concluded with a list of hot topics including:
- Student and employee tracking—especially in the wake of the recent earthquake and tsunami in Japan.
- Immigration—visas and work permits.
- Expatriate taxation.
- Employee-independent contractor classification.
- Data security in the European Union.
Effective Resource Allocation Means Effective Cost Management
Underscoring the cost-management priority that was a recurring HEAF theme, Larry Goldstein, president of Campus Strategies, shared some thoughts in his session, "Allocating Resources to the Plan." Goldstein acknowledged that while each institution is unique, a key to institutional success is the linkage and integration of three essential elements: planning, resource allocation, and assessment. He also cautioned that the process be a continuous one.
Goldstein explained that the overall goal of a resource allocation process is to achieve the university's vision while honoring its values. At the same time, detailed planning is focused on achieving specific goals that continually improve the university. Maintaining financial equilibrium is an additional objective. This can be achieved, said Goldstein, through balancing budgets, investing in human capital, preserving physical assets, and protecting the university's endowment purchasing power.
"Guide the overall process with a campuswide committee," advised Goldstein. In addition, include in the group representatives of the accounting, budgeting, planning, and institutional research communities, as well as faculty, staff, student government, and academic department leadership. This process will also be informed by (1) quantitative data relating to enrollment and market activity and (2) qualitative inputs, including institutional values and culture.
"You do not want to plan while you are in an overly reactionary state during a crisis," said Goldstein. Additionally, while in a year with a shortfall, don't be tempted to make budget cuts across the board. While this might appear an easy solution, it neither recognizes units that are performing well, nor does it recognize units that should most likely receive the cuts. Effective resource allocation implements plans while responding to assessment data from previous goals. To provide an accurate assessment, those goals should have predefined measures that are consistently gauged across periods. Further, the institution should assess and benchmark internally as well as externally with other institutions. Those results then guide further actions.
All that said, concluded Goldstein, "The best time to plan for resource allocation is when things are going well."