To: Board of regents

From: Laurie Neils

Date: 6/22/00   

Re: GASB 34-35 

The Governmental Accounting Standards Board (GASB) issued Statement No. 34 in June 1999. According to GASB, when implemented, Statement No. 34 will "create new information and will restructure much of the information that governments have presented in the past. We developed these new requirements to make annual reports more comprehensive and easier to understand and use." GASB Statement No. 35, issued in November 1999, is an amendment of GASB Statement No. 34 that incorporates colleges and universities into the basic financial documents mandated by GASB Statement No. 34.

I recently attended a National Association of College and University Business Officers (NACUBO) class on implementing the Governmental Accounting Standards Board's Statement No. 35. GASB 35 will have a significant impact on colleges and universities specifically while GASB 34 affects governmental reporting entities in general. Through this memo I am trying to update you on what I believe to be the most critical or resource sensitive components. We in the Montana University System are just beginning to plan for implementation and we do not fully comprehend the cost in terms of financial and human resources. An administrator for the State of Montana Accounting Division told me that they had submitted an EPP (Executive Planning Process) Budget Request for $200,000 to implement GASB 34 but thought the costs would be higher. We (the MUS) did not submit an EPP item related to GASB No. 35, but when we have a better idea of the costs involved, we probably should try to piggyback with the state.

Implementation Date

The Montana University System must implement when the State of Montana is required to implement, for fiscal year 2002. Even if we were not a component unit of a primary government, based on total annual revenues, our universities would be required to implement by FY2002.

Government-Wide Financial Statements

Prior to GASB 35, the Montana University System campuses presented their financial statements in the aggregate by fund type, such as Current Funds broken down by "General Operating," "Designated," "Auxiliary Enterprises," "Restricted," and the other funds of "Student Loan Funds," "Endowment Funds," "Plant Funds," and "Agency Funds". GASB 35 collapses these into one column for the primary reporting entity. Major segments would be reported separately, but GASB has defined those as bonded activity. Fund group reporting as we now know it disappears. According to GASB, the government-wide financial statements will help users:

  • Assess the finances of the government in its entirety, including the year's operating results;
  • Determine whether the government's overall financial position improved or deteriorated;
  • Evaluate whether the government's current-year revenues were sufficient to pay for current-year services;
  • See the cost of providing services to its citizenry;
  • See how the government finances its programsthrough user fees and other program revenues versus general tax revenues;
  • Understand the extent to which the government has invested in capital assets, including roads, bridges, and other infrastructure assets;
  • Make better comparisons between governments.

Under GASB 34, the public colleges and universities would roll into the state's Comprehensive Annual Financial Report (CAFR) as a Business Type Activity (BTA) along with all of the state's other enterprise type funds like the liquor warehouse and the state lottery. Under GASB 35, colleges and universities will most likely report all activity in one column. The University System will have to work closely with the state to determine under which category of special-purpose government we fall. In addition to the BTA category there are other choices with further reporting requirements.

Reporting Capital Assets

GASB 34 requires significant changes regarding capital assets. The two changes that will probably affect us the most are the inventory of our infrastructure assets and the calculation of depreciation.

Infrastructure assets are defined as long-lived capital assets that are part of a network of assets that can have service potential for an extended period and that are normally stationary. Some examples of infrastructure assets are streets, curbs, sidewalks, street signs, lights, and fiber optic cables. GASB 34 requires us to value these assets at historical cost and to depreciate them. The difficulty is both in identifying these assets and in valuing them. We have the option in lieu of depreciation to report preservation costs as an annual expense. This, however, requires that we obtain a condition analysis every 3 years and provide funding to maintain the assets at optimal conditions. The latter alternative approach also requires an immediate implementation.

The MUS does not currently record depreciation. Under GASB 35, we must. We also have to go back to June 1980 to inventory our capital assets and determine the amount of depreciation that should have been recorded over that time period. Capital assets are valued at historical cost, and the salvage value and useful life of assets must be determined. This change in accounting for capital assets and infrastructure must be carefully reviewed as to the potential impact it may have on the Facilities and Administration Rate (previously defined as indirect costs.)

Tuition Discounting

Private colleges and universities were required to change their accounting for scholarship allowances for years ending after December 1996. GASB 35 now requires public higher education institutions to change their accounting for waivers and scholarship allowances. Revenues from exchange transactions (exchange of services for fees) must be reported net of discounts. Since amounts paid by students for educational and institutional services are exchange transactions, we must record them net of scholarships. Currently we record total tuition revenues (including fee waivers and tuition paid by scholarships) and total expenses (including fee waivers and financial aid expense).

With the implementation of GASB 35, the MUS must change the way we record fee waivers and scholarships awarded by the institutions to offset tuition and fees. Scholarships include PELL grants and SEOG. With GASB 35 we show the fee waivers and scholarships net of tuition revenue (with parenthetical disclosure of the scholarship allowances) or at gross with the related discounts and allowances reduced directly below. This will reduce both student financial aid expense and tuition and fee revenues. Only the financial aid amounts that are in excess of tuition and fees and institutional housing and meals should be treated as expense.

Fee waivers and scholarships that are applied to auxiliary enterprises (room and board) must be netted as well. The MUS will have to develop an allocation algorithm or a hierarchical refund policy so that the discounts are applied consistently throughout the system.

Statement of Cash Flows

The Montana University System does not currently produce a statement of cash flows as part of our financial statements. GASB 35 requires this statement. In order to produce the cash flow statement the MUS campuses will have to spend considerable resources analyzing our current financial records to determine a mechanism to distinguish cash from non-cash transactions. Extensive human resource and system enhancements will be required in order to produce cash flow statements.

Segment Reporting

According to GASB 34, a segment is defined as "an identifiable activity reported as or within an enterprise fund to which one or more revenue bonds or other revenue backed instruments are outstanding." This requirement will also cause the MUS to spend considerable hours analyzing our bond indentures to determine what activities should be reported as segments. Segments require separate reporting in the new financial statements.

Management's Discussion and Analysis (MD&A)

This goal of GASB with the MD&A requirements is to "provide objective and easily readable analysis of government's financial activities based on currently known facts, decisions, or conditions." Both positive and negative results should be discussed. GASB's goal is that this information be presented in a format that is easy to read and understand. Although it is not required, the use of graphs, charts, and tables is encouraged. GASB views this as an opportunity for the financial managers to present their views and insights concerning the financial status of their institutions. According to GASB, "This analysis should provide users with the information they need to help them assess whether the government's financial position has improved or deteriorated as a result of the year's operation."

I have provided you a summary of the most critical issues that I know of today. When we get into this process more deeply, other issues will certainly arise. The timing of this effort is unfortunate. The same people who have been relied on for extra time and efforts on the successful Banner financial implementation will again be called on to implement GASB 34-35. SCT is also just beginning to look at systematic changes as a result of GASB's requirements. The costs of terms of the morale and working conditions for our valued employees and the financial burden to our campuses may be significant