How can colleges and universities keep the accounting and reporting differences between GASB and FASB straight? Here’s a crash course on the standards and their significance for campuses.
By Larry Goldstein and Sue Menditto
Colleges and universities are entrusted with educating America’s future generations, conducting research, and serving local communities. It naturally follows that many stakeholders seek increased accountability and clear financial information from higher education institutions. As recipients and stewards of federal funding for student aid and research, private donations, and tuition payments, colleges and universities are accountable to students, parents, boards of directors, donors, state legislatures, federal agencies, and policymakers.
Public institutions follow Governmental Accounting Standards Board (GASB) standards, and independent institutions follow Financial Accounting Standards Board (FASB) standards. The coexistence of two standards boards, each with its own distinct mission, results in disparity in recognition, measurement, display, and disclosure that challenges comparable financial reporting transparency.
Many people familiar with the sweeping accounting and reporting changes resulting from GASB statements 34, “Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments,” and 35, “Basic Financial Statements and Management’s Discussion and Analysis for Public Colleges and Universities,” looked forward to enhanced comparability between the annual financial statements of public and independent institutions. However, accounting and reporting differences still exist.
NACUBO’s Accounting Principles Council began examining and enumerating the accounting and reporting differences in preparation for a meeting with the standards boards in 2003. The purpose was to raise the standards boards’ awareness of how the differences impact the higher education industry. The longer-term goal was twofold:
- educate stakeholders, including rating agencies, federal agencies, and general financial statement readers, and assist with interpretation of financial statement data made by users such as the rating agencies, the National Center for Education Statistics, or analysts working with the Integrated Postsecondary Education Data System.
Users of such data need to be aware of the financial reporting differences between public and independent institutions.
The Road to the Rift
Public and independent institutions followed similar reporting models and had comparable financial statements between 1973 and 1997. In 1973, the American Institute of Certified Public Accountants (AICPA) issued formal guidance in the College and University Audit Guide, the foundation of which was fund-based reporting. Comparability between institutions began to change in the late 1980s with FASB’s not-for-profit agenda. FASB addressed depreciation, contributions, investments, and the financial reporting model. AICPA reacted to the issuance of FASB landmark statements 116 (contributions) and 117 (the reporting model) by issuing an audit guide. Consequently, independent institutions’ required adherence to the not-for-profit audit guide (in 1997) began the official accounting and reporting separation between public and independent institutions. Independent institutions began following FASB 117 and the AICPA not-for-profit audit guide, while public institutions continued to follow the older fund-based college and university audit guide.
GASB was created in 1984. All governmental organizations, except the federal government, are subject to GASB standards. The part of GASB’s agenda that impacted colleges and universities addressed deposits; the prohibition of adopting FASB guidance regarding depreciation; the reporting entity; Pell grants; nonexchange transactions; and the financial reporting model. Public institutions had two reporting options: the governmental model or the 1973 fund-based AICPA College and University Audit Guide model. Beginning in 2002, higher education was forced to abandon fund-based reporting and follow the groundbreaking GASB statement 35, which made the fund-based college and university audit guide obsolete.
What do all these standards and rules mean? Publicized corporate and accounting scandals have caused shareholders, rating agencies, stakeholders, financial institutions, taxpayers, and general readers of financial statements to plead for greater transparency. If transparency is needed and desired, why are the rules and requirements issued by the two standards boards so different? The answer lies in mission differences between the boards. FASB has a decision utility focus; its mission is to help investors and creditors make decisions. In contrast, because the vast majority of financial resources used by governments comes from the public or taxpayers, GASB’s mission revolves around accountability. Although each board has its respective primary focus, they both take into consideration the other focus as well as additional factors when setting standards.
Here’s a look at how the standards differences play out for various accounting transactions and financial reporting elements.
Contributed services. FASB has a provision for recognition, offering criteria for recognition and measurement. GASB has not addressed this topic, although it may do so in the future. The impact for independent institutions is to recognize both contribution revenue and a corresponding expense equal to the fair value of the contributed services, with no effect on net assets.
Restricted cash contributions. FASB standards recognize cash
contributions as temporarily or permanently restricted. GASB standards require recognition as deferred revenue if use of the resources is restricted to a future period. The result of the difference affects liabilities, revenue, and deferred assets.
Endowment pledges. There are notable differences between the standards boards with respect to endowment pledges. FASB recognizes these pledges as permanently restricted net assets. GASB prohibits recognition of endowment pledges because the primary restriction on an endowment—that it be invested in perpetuity—cannot be satisfied until the funds have been received. This recognition difference will impact total assets, gift revenue, and net assets.
Restricted non-endowment pledges. FASB recognizes these as temporarily restricted revenue with the pledge discounted to present value if they are due beyond one year from the date of the financial statements. GASB prohibits recognition if the pledge is for resources that will not be available for use in the current fiscal year. This difference affects total assets, gift revenue, and net assets.
Investment income. Per GASB, net investment income and realized gains and losses must be reported as a single amount, while FASB allows separate display. Additionally, investment income can be operating revenue only when the source is from student loan programs, according to GASB. FASB does not prohibit recognition as operating revenue. In fact, independent institutions that display operating results typically report the spending portion of endowment and other investment income as an operating revenue amount.
Pell grants. FASB treats these grants as a balance sheet pass through only, whereas GASB regards these grants as an activity statement transaction. For public institutions following GASB, grant revenue will be higher, net tuition revenue will be lower, and liabilities and net assets will be different.
Perkins loans. FASB treats these loans as a balance-sheet transaction with the federal portion as a liability. GASB currently allows differing treatment. It is acceptable to use the balance-sheet approach employed by independent institutions, or the activity-statement approach, which treats the federal portion as revenue, resulting in net assets rather than a liability.
Funds held in trust by others. There are recognition and display differences between the boards. FASB offers guidance for the calculation and display of such funds as an asset. There is no basis in GASB literature that would allow an entity to record and report these assets. (Assets held by affiliated foundations, however, will be reported under GASB 14 and GASB 39.) This accounting and reporting difference will impact assets, revenues, and net assets.
Definitions of restrictions. In FASB literature, only donors can impose restrictions. In the GASB environment, donors and any external party can impose restrictions. The difference in the standards boards’ perspective on restrictions is rooted in GASB’s focus on accountability. From GASB’s perspective, if creditors or legislation impose a restriction, it makes sense to identify it and be accountable to those that imposed the restriction. In FASB’s view, a reader must be informed that an externally imposed restriction will affect the use of resources. The reporting difference will impact the categorization of net assets.
Use of restricted funds. If both restricted and unrestricted resources are available for a given expense, the FASB reporting model requires that restricted net assets be reduced—even when unrestricted resources were used. This concept is known as first dollar release. GASB recognizes that there are many approaches to releasing restrictions, so it requires a disclosure explanation for how funds are being released from restriction.
Other post-employment benefits. Within the FASB reporting model, pensions and other post-retirement benefits are treated consistently. The same is true for GASB’s reporting model—that is, pensions and other post-employment benefits are accounted for using consistent methodologies. The divergence stems from differing FASB and GASB measurement methodologies.
Software. FASB organizations are required to capitalize investments in major software systems purchased or developed with in-house resources. GASB currently does not have a similar requirement, although this is being considered as part of a project focused on intangible assets. NACUBO’s advisory report on this subject recommends that public institutions follow the same guidance as independent institutions.
Asset impairment. FASB requires that future cash flows be measured to determine impairment losses. GASB’s measurement of impairment focuses on an asset’s service utility. The result of the differing approaches is that the same event may result in the reporting of a different amount of impairment loss.
Management’s discussion and analysis. GASB requires that institutions present explanatory information with the financial statements; FASB has no similar requirement. The GASB requirement is satisfied by public colleges and universities including a section titled management’s discussion and analysis. This is a plain-language presentation of information explaining the financial statements, usually supplemented with tables, charts, and graphs.
Key FASB - GASB Accounting Differences