chapter 4 chapter 4-gaap adjustments & reclassifications not requiring information from the c.o....

Chapter 4

Chapter 4-GAAP Adjustments & Reclassifications Not Requiring Information from the C.O.

KPMG LLP

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This Chapter describes GAAP entries that campuses must create from their own source records

Chapter 5 describes GAAP entries that campuses must record for which the C.O. has the source data

These entries convert accounting information from State legal/budgetary (modified accrual) to GAAP (full accrual) basis

All sections and entries will be covered – all questions welcomed

If questions arise after this session, post them to the Financial Standards list serve: [email protected]

mailto:[email protected]

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MODIFIED ACCRUAL

Expenditures

Recognized when purchase commitment (encumbrance) or payment is made

Revenues

Recognized when billing or receipt occurs

Budgets

Used to fund expenditures – externally provided

FULL ACCRUAL

Expenses

Recognized when payee has earned the right to receive payment from us

Revenues

Recognized when we have earned the right to be paid

Budgets

For internal use only – revenues fund expenses

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TYPES OF ADJUSTMENTS Permanent adjustments

Timing adjustments

Campuses that are using PeopleSoft Financials version 8.4 will create a separate business unit for the purpose of recording GAAP adjustments and then generating resulting financial statements from their adjusted PeopleSoft data.

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Section 4-1 – Net Assets: Validating Beginning Trial Balance

PS 8.4 campuses no longer need to make entries to “re-establish” beginning Net Assets if GAAP business unit was used to record or convert PY balances.

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If a GAAP business unit was not used to record or convert PY balances, then an analysis of PY GAAP adjustments must be performed to determine the effect on CY beginning Net Assets. CY adjustments need to be recorded to re-establish the CY beginning Net Assets. (See 2003-2004 GAAP Manual)

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After issuance of your PY GAAP Financial Statements, the prior fiscal year GAP ledger should be closed

This will establish you Beginning CY GAAP balances into Period 0 of the current fiscal year for the GAP Ledger

Queries should be immediately run to verify the completeness and accuracy of the closing

The CY Period 0 balances should agree to you “Final” PY GAAP Reporting Package balances

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If beginning GAAP Trial Balance does not agree to the preceding year’s final “Post Closing” Trial Balance, this situation indicates a problem with the Year-End Closing process for the preceding year GAAP Ledger. The problem could be the result of the following circumstances:

Not all prior year GAAP adjustments were posted before the Year-End Closing process was run.

The Year-End Close Rules have not been set up correctly.

The “Account Types” “Roll-Forward” checkbox has been incorrectly configured.

There is an application problem (“bug”).

After correcting the circumstances, the Year-End Close Request should be reprocessed and the beginning Trial Balance re-validated

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Sample Query for Validating Beginning Trial Balance:

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Section 4-1 – Net Assets: Validating Beginning Trial BalanceSample Query for Validating Beginning Trial Balance:

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Sample Query for Validating Beginning Trial Balance:

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Section 4-1 – Net Assets: Reversing PY GAAP Adjustments

Which of the following PY GAAP adjustments would require that a reversing adjustment be made in CY to properly report CY balances?

1. DR Accounts Payable, CR Operating Expense for $250,000

2. DR Tuition and Fees, CR Scholarships and Grants for $50,000

3. DR Investments, CR Fund Balance-Clearing for $750,000

4. DR Accts Receivable, CR State Appropriations for $25 MM

5. DR Interest on Capital Debt, CR Transfers for $25,000

6. DR Net Assets – Unrestricted, CR Operating Exp for $90,000

7. DR Operating Expenses, CR Prepaid Expenses for $100,000

8. DR Net Assets Invested in Capital Assets, CR Capital Lease Obligations for $500,000

?

?

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“Gross change” vs. “net change” adjustments

Can use either method –adjustments from C.O. using “net change”

COMPARATIVE EXAMPLE

Campus X had prepaid expenses of $100,000 at 6/30/PY and $150,000 at 6/30/CY. What GAAP adjustment(s) would it have recorded at 6/30/CY to reflect the $150,000 of CY prepaid expenses:

Using the “gross change” method? Using the “net change” method?

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COMPARATIVE EXAMPLE (cont.)

Both methods work – the key is to verify that after all CY GAAP adjustments have been made, the adjusted balances agree with the expected 6/30/CY amounts

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The following is a list of reversing entries and reference to the sections where these entries are illustrated:

Library Book Disposals (refer to Section 4-2)

Faculty Payroll Accruals (refer to Section 4-7)

Unrecorded (as of Legal CYE) Liabilities

“Gross Method” Entries: Prepaid Expenses and Inventories (refer to Section

4-6)

Compensated Absences (refer to Section 4-8)

Deferred Revenues (refer to Section 4-9)

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Section 4-2: Capital Assets and Depreciation

ADDITIONS

Legal – expense payments in operating net assets category, capitalize in Invested in Capital Assets category with offset to net assets.

GAAP – capitalize asset with offset to liability or cash.

GAAP permanent adjustment needed to eliminate entries to net assets and expense (see manual for full entry and net assets categories).

Dr. Net assets

Cr. Operating expense

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DEPRECIATION

Legal – record accumulated depreciation with offset to net assets.

GAAP – record depreciation expense and accumulated depreciation.

GAAP permanent adjustment required to record depreciation expense.

DR Depreciation expense

CR Net assets

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DISPOSALS

Legal – delete cost and accumulated depreciation, with offset to net assets.

GAAP – delete cost and accumulated depreciation, with offset to loss on sale.

GAAP permanent adjustment required to record loss on sale.

Dr. Other non-operating revenue/expense

Cr. Net assets

GAAP timing adjustment is often required to accrue library book dispositions recorded in the following fiscal year on legal basis books.

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Section 4-3: Accounts Payable: Encumbrances and Obligations

Encumbrances are no longer accounted for in the Actuals ledger; therefore, a GAAP adjustment is no longer required for governmental funds

In the first year of PS 8.4, one final adjustment is recorded to eliminate the current year reversal of prior year expenses related to encumbrances of governmental (General/Capital Outlay) funds 001, 574, 6028, 6041

Obligations are purchase commitments in which receipt of goods or services has occurred as of June 30

Recording of retention relating to capital projects are specific to each campus, but must be included as obligations.

Obligations and retention are timing adjustments, assuming that purchase commitments are valid and receipt ultimately occurs

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Section 4-4: State and CSU Receivables and State Appropriations

For legal (budgetary) basis accounting, State appropriations in governmental funds (e.g.: 0001, 0574, 6028) are neither revenue nor expense, but they allow campuses to charge expenditures up to the amount appropriated

For GAAP, such appropriations are treated as revenue – the GAAP entries reflect permanent differences from legal basis

GAAP revenue is either “capital” (e.g.: Funds 0574 and 6028) or “non-capital” (e.g.: Fund 0001) – different Net Asset Categories and Natural Classifications

Adjusted appropriation revenue must agree with amounts per C.O., except for de-allocations and reverting appropriations

Unexpended portion of appropriations becomes a receivable – must agree with 6/30 RSA per State Controller’s records

Lottery Fund no longer receives allocation orders – unexpended portion of previous appropriations should be recorded in Trust Fund 481 and treated as “Investments”

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Section 4-4: State and CSU Receivables and State Appropriations

“Net change” method for recording CY GAAP revenue provides more reliable results when appropriations may revert

Need to have SAM06 reports for current and prior year, and extract BBA at 6/30 for both years and CYTD actuals

Record 7/1/CY A/R per p. 4-20 (top), CY appropriations revenue per pages 4-20 (bottom) and 4-21

Appropriations receivable are reduced by 6/30/CY pre-closing balance of Fund Balance Clearing – discussed in Section 4-5

Allocation orders don’t always mean appropriation revenue for GAAP (e.g. for transfers to Fund 0576) – see page 4-21

Reclass Fund 0576 transfers to A/R (Restricted net assets)

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SECTION 4-5: Fund Balance-Clearing

Fund Balance-Clearing postings represent SCO revenues and expenses recorded on behalf of CSU – these SCO transactions either give the CSU more available money to spend through the State (e.g. remittances, interest income, transfers into a fund) or reduce what had been available to spend (e.g. claim schedules, payroll, fund transfers out)

For GAAP, these postings either add to or reduce campus assets (Appropriations Receivable, Investments, or Cash depending upon whether the fund receives State appropriations)

Need to reclassify Pre-Closing Fund Balance-Clearing to appropriate asset line by Net Asset Category

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SECTION 4-4 & 4-5: State AR/FBC Proof

1. Start with the 6/30/PY State AR GAAP Balance and 6/30/CY Pre-Close FBC Legal Balance

2. Record CY State Appropriation Revenue• DR – State Accounts Receivable

• CR – State Appropriation Revenue

3. Reduce State AR by SAM06 CY Expenditures (net)• DR – Fund Balance Clearing

• CR – State Accounts Receivable

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4. Increase/Reduce State AR by Revenues/Expenditures not yet known by the SCO (SAM99 CY Total Accruals)• DR/CR – State Accounts Receivable

• CR/DR – Fund Balance Clearing

5. Reduce State AR by SAM06 CY Expenditures (net)• DR – Fund Balance Clearing

• CR – State Accounts Receivable

6. Re-class Fund 0576 transfers to A/R (Restricted net assets)

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General FundFY 2002/03

GAAP Balance 6/30/PY

Pre-Closing CY LEGAL Activity

(Per 1 - 12)

ADD:SAM06 CY Budget

Allocations (All Years)

LESS:SAM06 CY

Expenditures, Net (All Years)

LESS:Reverted

Appropriations

SAM099 Net Expenditures Not

Yet Known

Reclassify Revolving Fund as

of 6/30/CY Total

Reclassify Residual Fund Balance

Clearing

State Approp A/R 110,721.64 188,727,647.00 (188,708,508.20) - 40,498,110.81 (20,000,000.00) 20,627,971.25 (33,647.22)

Fund Balance Clearing (168,244,044.61) 188,708,508.20 (40,498,110.81) 20,000,000.00 (33,647.22) 33,647.22 - - - -

State Appropriation (188,727,647.00) (188,727,647.00)

Institutional Support -

"Budget" column: "Total Year of Enactment YYYY" (all ACTIVE years) 6/30 Balance CY less 6/30 Balance PY.

"YTD Actuals" column: "Total Year of Enactment YYYY" (all years) 6/30 Balance CY.

SAM99: "GL Amounts (Actuals)" column: "TOTAL ACCRUALS" reverse sign

SAM99: "ADVANCES" column: "TOTAL ACCRUALS".

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SECTION 4-6: Prepaid Expenses and Inventories

Legal – most purchases are expensed.

GAAP – expense only goods and services used in the current year.

GAAP timing adjustment is required for unused goods and services.

Dr Prepaid expense

Cr Operating expense

• “Prepayments” to CSURMA – net against liability for insurance claims.

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SECTION 4-7: Faculty Payroll Accruals

Legal – expense salaries as paid.

GAAP – expense salaries earned in current year.

GAAP timing adjustments needed to accrue:

Fall and Spring semester salaries paid in July and August

Summer session salaries paid in July for June

Dr Salaries

Dr Benefits

Cr Accrued salaries and benefits

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SECTION 4-8: Compensated Absences

Legal – expense vacation pay when paid.

GAAP – expense as earned.

GAAP timing adjustment required to accrue earned but unused vacation pay.

Dr. Salaries

Dr. Benefits

Cr. Accrued compensated absences – current

Cr. Accrued compensated absences - noncurrent

Obtain data from CLAS “H46” report or campus leave accounting system.

Accrue vacation on vacation.

Allocate expense to programs.

Estimate current portion of liability based on amounts used – CY or average.

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SECTION 4-9: Deferred Revenues

Legal – record collections as revenue when received.

GAAP – record when earned.

GAAP timing adjustment needed for Summer (pro-rated) and Fall registration and housing fees collected before 7/1.

Dr. Student tuition and fees

Dr. Sales and services of auxiliary enterprises

Cr. Deferred revenue - current

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SECTION 4-10: Capital Lease Obligations

Legal and GAAP – leased assets are capitalized (see section 4-2) if one of four conditions is met.

Legal – no liability recorded; payments are expensed. GAAP – liability is recorded at inception; payments are

charged to principal and interest. GAAP permanent adjustment is needed at inception to

record the obligation.

Dr. Net assets

Cr. Capitalized lease obligations – current

Cr. Capitalized lease obligations - noncurrent

GAAP permanent adjustment is needed each year to reclassify annual payments (see manual for full entry and Net Asset Categories).

Dr. Capitalized lease obligations – current

Dr. Interest on capital related debt

Cr. Operating expenses

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SECTION 4-11: Tuition Discounting

In legal basis records, all scholarships and grants disbursed to or on behalf of students are recorded as expense, including the portion that is used to pay University fees

For GAAP, the portion that is used to pay fee charges is to be reclassed as a contra-revenue item, “Scholarship Allowances”

If a campus’ student information system can not directly determine the amount of Scholarship Allowances, an “Alternate Method” has been developed

GAAP Manual includes all steps in Alternate Method – the basic student account equation is (G) + (E) = (A) + (B) + (C) + (D) + (F)

(A), (B), (C) and (F) can result in refunds to students, (E)

(B) and (F) are reported as expenses or contra-revenue; (A) and (C) are not

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The sum of (B) and (F) must be reported either as contra-revenue (Scholarship Allowances) or expense (Scholarships and Grants)

(K) is the same % of (B) + (F)…as (G) is of (H) – makes sense!

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Things to remember in applying either “direct” or Alternate method:

Account for all sources of aid that might be used to pay fees or be given to students

Reclassify all fee waivers (whether or not given to employees) as scholarship/grant expense before doing calculation: debit expense, credit fees

Allocate scholarship allowances between tuition and fees and auxiliary enterprise revenue wherever possible

GAAP entries will cross net asset categories, as restricted scholarship and grants expense will become contra-revenue to unrestricted fee revenue – offset w/transfers

The GAAP adjustments related to Scholarship Allowances are reclassification entries that do not affect Net Assets

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SECTION 4-12: Other Accounting Topics

Record GAAP adjustments as necessary to eliminate double-counting of revenue and expense:

Reimbursed Activities (FIRMS Program 1100): auxiliary organization and interfund reimbursements

Student Union Fee Revenue: also reported by auxiliary

SUG/EOP Grants: revenue/expense recorded twice

GAAP adjustments needed re: SMIF Interest for 1/1/-6/30/CY if AD-NOAT issued after legal basis close

Treatment of student loans receivable – all noncurrent

Allowance for Uncollectible Federal Perkins or Nursing Loan Programs

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SECTION 4-12: Other Accounting Topics

Transfers between CSU entities (Lottery revenue and Debt Pool Subsidy)

Resident Assistant Fee Waivers-reclassification of compensation to housing revenue (exluded from tuition discounting calculation)

Elimination of nonexchange transactions between the campus and auxiliary organizations

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Chapter 4

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