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Business and Policy Areas
Business and Policy Areas

NACUBO Comments on Exposure Draft


NACUBO Comments on Exposure Draft
August 20, 1999

Governmental Accounting Standards Board
Director of Research, Project No. 17-1R
401 Merritt 7
P. O. Box 5116
Norwalk, Connecticut 06856-5116

Dear Madam or Sir:

Thank you for the opportunity to provide input to the Board's project on reporting guidelines for public colleges and universities. We appreciate the considerable effort that the Board and the staff have invested in this project and the consideration you give to our input. NACUBO's comments in response to your Exposure Draft (ED) Basic Financial Statements—and Management's Discussion and Analysis—for Public Colleges and Universities follow.

It should be noted at the outset that, until the ED was released, Statement 34 was not expected to apply directly to public colleges and universities. Thus, until recently, Higher Education has not considered Statement 34, under the assumption that a separate standard would be issued for public colleges and universities. Although a separate standard was expected, we support the Board’s decision to extend the applicability of Statement 34 to public institutions. As will be explained in more detail below, we further support the Board’s decision not to require fund group reporting for public institutions.

Reporting Infrastructure Assets

NACUBO recommends modifying the early implementation requirements to allow institutions that elect early implementation of the standard to be able to phase in the reporting of their infrastructure (using the timelines outlined for phasing in their financial statements). NACUBO understands that many colleges and universities already may be capturing this information and implementation would not be as difficult for these institutions. However, some institutions will need time to capture data in order to begin reporting infrastructure. We believe a phased approach for infrastructure reporting will enable colleges and universities to implement the other aspects of the new standard earlier than they would otherwise. This will result in improved overall reporting even if the infrastructure reporting is not complete.


NACUBO supports the Board’s conclusions in paragraph 13. This approach will encourage timely adoption of the new standard without the need to invest significant effort restating a prior period.

Reporting Options

NACUBO supports the Board’s decision, explained in paragraph 26, to provide institutions the option to employ one of three reporting formats: business type activity (BTA) reporting, governmental reporting, or BTA reporting combined with governmental reporting. We recognize that providing different reporting options can impair comparability among institutions. In this case, however, we believe the options afforded will actually improve comparability. The vast majority of public institutions will elect BTA reporting. For them, comparability will be enhanced both among public institutions and with their private counterparts. For the smaller number expected to elect governmental reporting (or BTA with governmental reporting), their comparability will be enhanced because they will be using the model that is most appropriate for their activities.

Entity-Wide Perspective

NACUBO believes that the proposed entity-wide perspective (EWP) financial statements will provide the highest quality information to the greatest number of financial statement users. We believe this will simplify the statements for users and avoid the confusion created by intra-institutional transfers. The EWP statements will reflect the entire entity and provide a full financial picture. Also, this method of reporting will help provide better comparability between public and private institutions.

Measurement Focus and Basis of Accounting (MFBA)

NACUBO agrees with the Board’s position that the entity-wide statements should be prepared using the economic resource measurement focus and accrual basis of accounting. We believe the MFBA will significantly improve financial reporting because it recognizes the effect of transactions on total financial resources by accruing all revenues and expenses, including depreciation. Although it will impose a significant burden on institutions, the value of recognizing depreciation in public institutions’ financial statements is far more important. We support the Board’s efforts to incorporate this major cost element into the reporting model for public institutions.

Reporting Fund Group as RSI

The Board has focused on the critical issue in paragraphs 37 through 39. There is little or no utility in examining fund group information as a means of assessing the impact of short-term results on the long-term prospects of an institution. Furthermore, as seen by the implementation of FASB Statement 117, when provided a choice, private institutions opted to focus on the EWP. NACUBO believes that this is the appropriate focus for examining public institutions’ financial performance as well. Finally, we agree completely with the explanation provided in paragraph 39. Although some user benefit may be provided through continued reporting of fund group information, this does not outweigh the burden imposed if it were required of all preparers.

Incorporating Public Colleges and Universities in
the Reporting Model for Other Governments

The Board’s analysis and explanation presented in paragraphs 40 through 44 appropriately identifies the key considerations in support of the decision to permit BTA reporting by public institutions. NACUBO especially appreciates that the Board sees the benefit of continuing to recognize higher education as a unique industry. The importance of comparability between public and private institutions cannot be overstated. The Board’s actions in this ED recognize the importance of eliminating, to the extent possible, unnecessary differences between reporting standards for public and private institutions.

Management’s Discussion & Analysis (MD&A)

One issue not covered in the ED should be addressed before the final standard is issued. As explained in paragraph 36, the utilization of budgets by public institutions is significantly different from that of public governments. Paragraph 36 discusses this and identifies the key differences. Because of these differences, NACUBO believes that paragraph 11.e. of Statement 34 should be modified to confirm its inapplicability to higher education. The MD&A requirement for public institutions are substantially similar to governments in all other areas and the distinction regarding budgets should be explicit.

Statement of Net Assets

NACUBO supports the option to use either a balance sheet or net asset format in the Statement of Net Assets. We believe that a classified statement will provide users with better information, particularly with regard to debt and investments.

Statement of Revenues, Expenses, and Changes in Net Assets

NACUBO supports the presentation of an activities statement with an operating measure. We have been working for quite some time to develop an appropriate measure of operations for higher education. During this process, we have discovered widely varying opinions about what should be included or excluded from operations. We plan to conduct additional research of current practice in anticipation of recommending a standard operating measure for higher education. We support the Board’s decision to provide options for such measures via paragraph 102 of Standard 34.

Similarly, NACUBO is examining issues related to the classification of expenses (or expenditures). Historically, higher education has reported expenses by functional classification. This has led to problems with comparability because of the assignment of different activities to various functional categories. NACUBO’s Accounting Principles Council has proposed that expenses be reported according to natural classification, and this recommendation is in its final review stages. This should enhance comparability since there is less disagreement about the categorization of compensation or utilities. Regardless of the final decision about the appropriate classification to be provided in the activities statement, we anticipate recommending the inclusion of a reconciliation between functional and natural classification in the footnotes.

Segment Information

NACUBO has reviewed the requirements of paragraphs 122 and 123 of Statement 34. We have a concern regarding the amount of reporting that may be required given the criteria that have been established for defining segments. In some cases, institutions may have dozens of activities with revenue-backed debt. If each activity requires condensed financial statements, we believe that a tremendous volume of required disclosures will place an onerous burden on financial statement preparers in excess of reporting obligations to bondholders. Further, we are concerned that combining information about multiple debt-supported activities of the same nature (e.g., dormitories) may distort and potentially provide misleading information if all reported revenues are not cross-pledged. We believe that additional guidance is necessary for financial statement preparers to define the reportable segments and the level of aggregation of data that is appropriate.

Appropriations as Operating Revenues

Although we are very supportive of the overall effort of the Board in determining the appropriate reporting model for higher education, NACUBO is extremely concerned that the proposed reporting model would require all state appropriations to be categorized as nonoperating revenue. We recognize that, for many BTAs, an appropriation is a mere subsidy intended to cover a deficit. The funding model for higher education is significantly more complex than that of most BTAs. There is no doubt that operating appropriations help prevent deficits, but they do much more than that. Along with other operating revenues, they help establish the scope of operations. For public institutions, revenues from operating appropriations are considered in the same way as tuition and fees, annual giving, investment income, etc. Although for some institutions it may be a very large source of revenue, it still is only one of many.

Revenues are defined as the inflow of economic resources resulting from the delivery of services or activities that constitute the organization’s major or central operations. For general purpose financial statements, state and local governmental appropriations should be considered operating revenues because their purpose is to provide support for operations. It’s important to note that the majority of states utilize a funding model that considers operating measures such as enrollment, employment, square footage, etc. when making funding determinations. Clearly, these factors define the character of the appropriation as operating and disclose the government’s intention to finance their related activities. Additionally, the majority of states differentiate between appropriations for operating purposes and those for other purposes. Treatment of appropriations as nonoperating revenue implies that appropriations are one-time events or are determined by analysis unrelated to operational activities. Appropriations are the result of a conscious public policy decision by legislators to balance how much of the costs of higher education should be borne by all taxpayers, and how much should be borne by current consumers of education (i.e., the tuition payer). In most cases, legislators regard this as the primary trade-off in determining allocations for operating purposes.

There are relatively few differences between the conduct of operations at private and public institutions. We can identify only three differences, as follows. Some public institutions are required to comply with a series of state regulations in the conduct of operations, although this varies greatly from state to state. Second, the portion of operations financed from private giving or endowment income is significantly lower, on average, at public institutions than at private institutions. Third, and this applies in all cases, tuition levels at public institutions are lower than those at comparable private institutions. The primary reason that tuition is lower at public institutions is that the operating appropriation enables the institution to charge a lower rate. In essence, the appropriation is a substitute for tuition and, therefore, should be treated as a source of operating revenue in the same way as tuition.

It is interesting to note that the Board’s illustrative financial statements reflect gifts as both an operating revenue and a nonoperating revenue. Presumably the gifts reported as operating revenues are the result of annual giving solicitations for the support of operations, while the nonoperating gifts are those for capital purposes (e.g., endowment or facilities acquisition or construction). We believe this is an appropriate distinction to make and that it applies to appropriations as well. In the same way that annual gifts for operations are solicited from donors and treated as operating revenues, appropriations for operations should be classified as operating revenues. Similar to gifts received for endowment purposes and classified as nonoperating revenues, capital appropriations should be treated as nonoperating revenues.

There is also the issue of the users’ needs for information. When NACUBO learned of the Board’s belief that state appropriations for operating purposes should be classified as nonoperating revenues, we raised the issue at a forum of users that had been convened for another purpose. To a person, these individuals indicated their belief that there is no merit to the classification of operating appropriations as anything other than operating revenues. In fact, they went so far as to indicate that they would ignore the measure of operations if it excluded operating appropriations. We believe the Board would be serving the needs of users by providing, at a minimum, the option for operating appropriations to be classified as operating revenues. We think this is totally consistent with the guidance in paragraph 102 of Statement 34, which specifies that "Governments should establish a policy that defines operating revenues and expenses that is appropriate to the nature of the activity being reported…"

In summary, we believe the Board has erred in treating operating appropriations to public institutions in the same way that they are treated for other single-purpose BTAs. These appropriations should be considered operating revenue, and we strongly urge the Board to reconsider its conclusions in this area.

Statement of Cash Flows

We support the requirement of this statement at the EWP. We continue to object, however, to the requirement to use the direct method. Some institutions have indicated that the direct method can be prepared without major cost for systems changes, but others have estimated significant cost for systems changes to support the direct method presentation. It appears that the costs for this segment of our membership will outweigh the benefit of the information provided. A major improvement in reporting will occur by requiring the cash flow statement—irrespective of the method used to prepare it. Therefore, we suggest that the Board express its preference for the direct method but allow for presentation using the indirect method.

With respect to the statement of cash flows included with the illustrated financial statements in Appendix D, NACUBO recommends eliminating the line captioned "Gifts and grants received for other than capital or endowment purposes" under the heading Cash Flows From Noncapital Financing Activities. We believe that inclusion of this example will tend to confuse readers, as it is difficult to envision gifts that would not be for operations, capital, or endowment purposes.


We wish to offer one relatively minor editorial comment. NACUBO does not think the Board’s assessment of public institutions’ practices relative to the levying of taxes is accurate. The wording in paragraph 36 states that "…and many public institutions do not directly levy taxes." We recommend modifying the wording as follows: "….and the vast majority of public institutions do not directly levy taxes."

Before closing, NACUBO wishes to express its agreement with the observation offered by the Board in paragraph 24. That is, few resource providers or others have demonstrated interest in the financial activities of public colleges and universities because of the lack of information contained in the institutions’ external financial reports. We believe the Board’s efforts with respect to the new reporting model will significantly enhance the overall utility of public institutions’ financial statements. This should improve the level of interest on the part of resource providers and others. In addition, due to the Board’s decision to afford institutions various options, we believe that NACUBO is in an excellent position to establish industry guidance to build on the Board’s efforts.

* * * * *

We appreciate this opportunity to comment on this ED and look forward to answering any questions the Board or the staff my have about the above comments. We are especially interested in meeting with the Board, if appropriate, to further discuss our concerns regarding the classification of appropriations as nonoperating revenues. Please contact me at 202-861-2548 or if you have any questions about this response.


Larry Goldstein

Senior Vice President and Treasurer