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Public Institutions: Methodologies for Allocating Depreciation, Operation and Maintenance of Plant, and Interest Expenses to Functional Expense Categories

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This Advisory Report provides preferred industry practice for public institutions completing Part C, "Expenses and Other Deductions," of the Integrated Postsecondary Education Data System (IPEDS) Finance Survey. Part C of the Finance Survey was recently revised and adds columns that allow depreciation, operation and maintenance of plant (O&M), and interest expenses to be allocated to all other functional expense categories. Public institutions may use the revised Part C during the 2010 data collection period (for fiscal year 2009 financial information); however, the revised form becomes mandatory in the 2011 data collection period (for FY 2010 data).

Executive Summary

The Secretary of Education's Commission on the Future of Higher Education completed its work in September 2006 with the release of its final report, A Test of Leadership: Charting the Future of U.S. Higher Education. One of six recommendations was greater accountability and transparency aided by a publicly available database with comparable higher education financial information.

In an effort to make financial data between public and independent institutions more comparable, IPEDS will require public and independent institutions to use similar definitions for functional expenses in the FY 2010 Finance Survey. Public institutions have the option of allocating depreciation, O&M, and interest expenses among all remaining functional expense categories in the expenses section (Part C) of the FY 2009 Finance Survey (submitted in 2010). Public institutions are required to perform the allocation in the expenses section (Part C) of the FY 2010 Finance Survey (submitted in 2011).

Public institutions must follow the functional expense definitions as defined by NACUBO in its Financial Accounting and Reporting Manual (FARM) and included in Appendix B of this Advisory Report. A functional classification is a method of grouping expenses according to the purpose for which the costs are incurred. To assist public institutions with an effective, efficient, and economical approach to allocating depreciation, O&M, and interest expenses among the functional expense categories, this Advisory Report steps through a cost allocation approach. Because independent institutions have been allocating such costs for more than a decade, the Advisory Report focuses on methods currently used by independent institutions. The essential cost accounting process can be summarized in the following steps:

  1. Select consistent categories of cost.
  2. Identify costs to be allocated.
  3. Review recommended allocation methodologies.
  4. Analyze the availability of data for your institution that could support recommended allocation methodologies.
  5. Consider the mission, objectives, and operating practice of your institution.
  6. Document considerations and approach.
  7. Map the connection between available allocation data and the current functional expense categories of your institution, and assign depreciation, O&M, and interest expenses to the functional expense categories using a methodology or combination of methodologies that makes sense for your institution.

NACUBO's preferred industry guidance is solely for the purpose of completing the IPEDS Finance Survey. At this time there is no recommendation or requirement for expanding the functional expense footnote disclosure to include the allocation of depreciation, O&M, and interest expenses to the functional expense categories. Public institutions, however, should consider the many users of their external audited financial statements and evaluate the possible benefits of having Part C IPEDS survey allocation results, or methodologies, be consistent with, used, or disclosed in general purpose external financial statements or other external reports.

Full Advisory Report


Sue Menditto

Senior Director, Accounting Policy


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