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Business Officer Magazine

Apples to Apples

NACUBO’s work group on reporting inconsistencies found that for internal department eliminations no specific method is prescribed—making institutional comparisons difficult. Here are the analysis and conclusions of the group’s work on the issue.

By Sandra K. Brown and Karen Craig

*In 2006, the NACUBO Accounting Principles Council formed a working group to address financial statement reporting inconsistencies that make it difficult to compare information across higher education institutions. This volunteer group (see sidebar, “Committee Composite,” for a listing of individuals working on this issue) was tasked with identifying major areas of inconsistency and providing guidance to NACUBO's members in situations where specific guidance did not exist.

Among the areas of inconsistency was the elimination of internal income generated by units that provide services to others within the campus community. The income and expenses associated with internal transactions must be eliminated when preparing external financial statements, but what methodology should be used and how can comparability of results across institutions be improved?

Method 1 Pros and Cons


  • Easy to administer.


  • Results in a much lower percentage in the function where the recharge center is classified and slightly higher percentages in other functions.
  • Understates supplies or general expenses and overstates other natural expenses.

A survey of public and independent institutions regarding the ways internal income is eliminated identified the methods most commonly used. The work group concluded that institutions should select the method that best tells their story and can be most efficiently implemented given administrative capabilities. To enhance comparability, higher education institutions should disclose in their footnotes or Management's Discussion and Analysis (MD&A) section of the financial statement the elimination method chosen and its impact on financial results.

Following are the analysis and conclusions of the group's work in this area.

Current Guidance

Institutions often operate service activities to provide prompt, efficient response to the needs of the campus community. These operations include recharge centers, interdepartmental services, internal service centers and departments, and the internal services provided by auxiliaries. They provide goods or services to the campus and bill the campus community for those services. The centers record operating expenses and recognize revenue. Examples of the services provided by such centers include printing, copying, mail services, catering, and physical plant painting and repair work. These are generally goods or services that could be purchased externally but, for a variety of reasons, are retained within the campus community.

Method 2 Pros and Cons


  • Results in a much lower percentage in the function where the recharge center is classified, with slightly higher percentages in other functions.


  • Does not reflect expenses in the function where consumed.
  • Does not accurately state natural expenses, since amounts are allocated on a pro-rata basis.
  • Requires more intervention to administer.

While the elimination of interdepartmental transactions has always been a requirement, when reporting was structured around the performance of each fund, the eliminations (or lack thereof) were less of an issue. However, when the reporting focus changed to the entity as a whole, the method of elimination created reporting inconsistencies that make it difficult to compare institutions' results. While the elimination is required under both the Financial Accounting Standards Board (FASB) in the Statement of Activities, and the Governmental Accounting Standards Board (GASB) standards in the Statement of Revenues, Expenses, and Changes in Net Assets (SRECNA), the elimination method is undefined.

FASB Accounting Standards Codification (ASC) 958-210-45-2 indicates that interfund items are not precluded from being displayed in the financial statements; however, the requirement to display total net assets results may have certain practical limits on how interfund items are displayed in a financial statement. For example, because income and expense between fund groups are not attributable to the organization, the financial statements must clearly label and arrange those interfund items to eliminate their amounts when displaying total net assets.

GASB Statement No. 34 (“Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments”), paragraph 59 states: “Eliminations should be made in the statement of activities to remove the 'doubling-up' effect of internal service fund activity. The impact of similar events (such as allocations of accounting staff salaries) that are, in effect, allocations of overhead expenses from one function to another within the same function also should be eliminated, so that the allocated expenses are reported only by the function to which they are allocated.”

Methodology Varies

The objectives for the elimination of the activity are: (1) to eliminate the double counting of expenses and revenue in the financial statements, and (2) to serve as a way to identify how institutional resources were used. Eliminating entries is necessary to avoid overstating the revenue and expense of the institution. 

Method 3 Pros and Cons


  • Results in a higher percentage in the function where the recharge center is classified, with slightly lower percentages in other functions.
  • Accurately states natural expenses.


  • Does not reflect expenses in the function where consumed.
  • Understates supplies or general expenses and overstates other natural expenses.
  • Is administratively cumbersome if it cannot be automated.

As previously noted, while elimination is required, no method is prescribed. Why is the method for eliminating internal service center activity an issue? Using different methods for the elimination entries can create significant issues with comparability. Institutions may use benchmarking or ratio analysis to compare to peers, evaluate successes, and identify opportunities for improvement. The method used may have a considerable effect on the reporting of NACUBO functional activities and the natural classification of expense.

Identifying the range of methods. In June 2009, NACUBO surveyed public institutions, reporting under GASB, and independent institutions, reporting under FASB, regarding the methodology used for eliminating internal income. Results of the survey showed use of the following income elimination methods and the percentage of survey participants that reported using the particular method:

Method 1 (48 percent). Internal income recognized in the recharge center is offset against supplies or general expense.

Method 2 (23 percent). Income is eliminated up to the expense in the recharge centers by prorating elimination allocations to natural expenses in the center.

Method 3 (16 percent). Income is eliminated by reversing the original entry.

Other methods (13 percent). These might include using contra-expense instead of revenue, or not eliminating internal income.

Examples of the elimination methods. Exhibit 1, Exhibit 2, and Exhibit 3 present the methodologies most commonly used by institutions along with examples for each of recommended disclosures to be included in the notes to the financial statements (or MD&A). None of the methods is necessarily right or wrong, nor are these the only methods that can be used.

The pros and cons for each methodology are noted in the sidebars adjacent to each exhibit. Consider these factors when determining which elimination method is best for the institution.

Committee Composite

Contributing to the efforts of the NACUBO Accounting Principles work group addressing financial statement reporting inconsistencies are the following NACUBO members:

Sandra K. Brown, comptroller, Texas A&M University

Beverly Cotton, assistant vice president for budget resource planning, Texas Tech University, Lubbock.

Karen Craig, technical consultant, NACUBO.

Jeff Follman, associate controller, University of Washington, Seattle.

Joan Hagen, chief accountant and managing director, Indiana University Bloomington.

Karl Turro, controller, Northwestern University, Evanston, Illinois.

Mary Wheeler, assistant vice president for finance,
Stevens Institute of Technology, Hoboken, New Jersey.

Kenneth J. Wilson, controller, University of Wisconsin LaCrosse.

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For example, many public institutions focus on expenses by function, with one of the major performance measures being the cost of institutional support in relation to all other costs. For other institutions, the focus may be more on natural expense classifications, with a  key measure being salaries and wages. An institution should identify the method that helps tell its story and that can be best implemented, given system and other administrative limitations that may exist.

Committee Conclusions on Comparability

Regardless of the method used for reporting internal income eliminations, steps can be taken to improve comparability between campuses.

While virtually all institutions provide within their financial statements information about expenses on both a natural and functional basis, there is little, if any, discussion about how service department activities are eliminated within the presentation. Including disclosures in the notes to the financial statements or as required supplementary information (such as the MD&A section of the financial statements, which is required for public institutions) would provide readers with valuable information regarding the magnitude of services provided internally rather than purchased from external sources. It would also allow for improved comparability across institutions. Whether through a note disclosure or inclusion in the MD&A, business officers should select a methodology for calculating and recording the eliminations that best reflects the institution's results and objectives. 

SANDRA K. BROWN  is comptroller, Texas A&M University System, and KAREN CRAIG is a technical consultant for NACUBO.