Guideline 126.96.36.199 Auxiliary Fund Accrual Financial Statements and Multi-year Financial Planning
Chapter 7 - General Finance Provisions
for Board Policy 7.3
Purpose. These guidelines provide detail to assist colleges and universities in preparing auxiliary fund accrual financial statements in accordance with Generally Accepted Accounting Principles (GAAP), and multi-year financial plans based on those statements. These guidelines will also assist colleges and universities in developing their own procedures related to auxiliary fund accrual statements and multi-year financial plans.
Auxiliary Accrual Financial Statements- Definitions
Accrued Expense. Expense is recognized in the accrual based income statement for which cash has not yet been paid. This also results in a liability being recorded on the accrual balance sheet. An example of this is interest incurred but not yet paid; expense is recognized and an interest payable liability recorded on the balance sheet.
Accrued Revenue. Revenue is recognized in the accrual based income statement for which cash has not yet been received. This results in an asset being recorded on the accrual balance sheet. An example of this is Sales on Account; revenue is recognized at the time of the sale and a receivable asset is recorded on the balance sheet. When cash is received, the receivable asset is eliminated, and cash is recorded on the balance sheet, with no effect on the accrual income statement. Contrast this with cash basis accounting, which would record both the cash and revenue at the time the cash was received, and nothing would be recorded at the time of the sale.
Cash basis / Budgetary Financial Statements. Revenue is recognized when cash is received. Expense is recognized when cash is paid.
Deferred Expense. Expense recognition is deferred from the time of cash payment until the obligation is incurred for accrual statement purposes. A Deferred (Prepaid) Expense asset is recorded on the accrual balance sheet when cash is paid (no effect on the accrual income statement). When the expense is subsequently incurred, the Deferred Expense liability is removed from the accrual balance sheet and expense is recorded on the accrual income statement. An example of this would be prepayment of insurance for a set number of months; no expense is incurred or recognized until sometime in the future. Contrast this with cash basis accounting, which records the insurance expense on the income statement at time of cash payment, while no entry is required when the expense is actually incurred.
Deferred Revenue. Revenue deferred is recorded when cash is received but not yet earned for accrual statement purposes. A Deferred (Unearned) Revenue liability is recorded on the accrual balance sheet when cash is received (no effect on the accrual income statement). When the revenue is subsequently earned, the Deferred Revenue liability is removed from the accrual balance sheet and revenue is recorded on the accrual income statement. An example of this would be tuition payments collected prior to commencement of the semester. Revenue is earned and recognized when the semester starts. Contrast this with cash basis accounting, which records tuition revenue on the income statement at the time the cash is received, while no entry is required when the revenue is actually earned.
GAAP Accrual Basis Financial Statements. Revenue is recognized when it is 1) earned and 2) realized or realizable. Realized means cash is received, while realizable means that it is reasonable to expect that cash will be received in the future. Thus revenue is recognized when earned and collected or expectation of collection is reasonable in the near future. Expense is recognized in the period in which related revenue is recognized and/or incurred.
A template for creating an auxiliary accrual statement can be found on the Finance Division website at www.finance.mnscu.edu. The auxiliary accrual financial statements are a component and a starting point for the creation of the multi-year financial plan.
Multi-year Financial Plan. The purpose of a multi-year financial plan is to provide a framework for effective decision-making and efficient allocation of financial resources.
Typical components of such a plan include:
- Mission/Goals/Objectives. Examples of possible goals and objectives are achieving of certain growth rate per year, or planning for future investments. However, for some auxiliary funds that are not able to make a profit, the goal might be attaining self-sufficiency before making plans for future investment of excess revenues. Keep in mind any reserve fund balance level requirements in the Board Policies or Procedures that would limit the amount of funds that can be used for future investments.
- Time span. Determine a realistic time span for implementing your plan. While the first year can be planned with some degree of certainty based on current performance, planning beyond years four or five might not be as useful, if no reasonable assumptions can be made for that far in the future.
- Forecasting future performance. Both future revenues and expenses need to be forecasted in order to be able to make meaningful decisions related to maintaining adequate reserve, and use of excess funds for activities that benefit students. Typical expenses that will need to be forecasted include salaries, benefits, and cost of inventory purchased for resale. Typical revenues include sales and any services provided for which fees are charged. You should use your current and prior year financial statements as a starting point and adjust for future years based on reasonable assumptions developed in the planning process.
- Monitoring / Adjusting existing plans. Current performance should be measured against the multi-year plan developed, and the plan adjusted accordingly. Continual updating and incorporation of current performance and information would improve on the plan's reliability to forecast future financial performance.
Ownership versus Outsource. Unique for some auxiliary operations, such as a bookstore or food service, would be outsourcing versus ownership analysis in order to determine which strategy would be in the best interest of the college or university. Each college and university will periodically conduct a feasibility study that analyzes the merits of owning versus outsourcing an auxiliary operation. As part of their multi-year planning process, each college and university will determine how often the study will be conducted and for which auxiliary services. At a minimum, a feasibility study should be conducted at least every five years.
The feasibility study should, at a minimum, look at the advantages and disadvantages of both methods - outsource and ownership. A college or university should consider cost efficiency, capital investment requirements, management burden, competitiveness, quality of services/customer satisfaction, etc., in its feasibility study. The study should be documented and retained.
- Policy 7.3 Financial Administration
- Procedure 7.3.1 Accounting and Payroll
- Procedure 7.3.2 Auxiliary Operations
- Procedure 7.3.3 Purchasing Cards
- Procedure 7.3.4 Cost Allocation
- Guideline 188.8.131.52 Cost Allocation and Implementation
- Procedure 7.3.5 Revenue Fund Management
- Procedure 7.3.6 Capital Assets
- Guideline 184.108.40.206 Capital Leases Involving Tax-Exempt Interest
- Procedure 7.3.7 Impairment of Capital Assets
- Procedure 7.3.12 Scholarships
- Procedure 7.3.13 Surplus Personal Property/Building Disposal
- Procedure 7.3.16 Finance Exception Reporting
- Procedure 7.3.17 Electronic Payments
- Guidelines for 220.127.116.11 Guideline for Payment Card Acceptance, Processing and Security
Guideline History:Date of Adoption: 05/16/11,
Date of Implementation: 05/16/11,
Date & Subject of Revisions:
There is no additional HISTORY for guideline 18.104.22.168