Question

Write a 700- to 1,050-word paper that analyzes the differences between generally accepted accounting principles for public and private colleges and universities. Explain why it is important to identify whether the institution is Public or Private. Clarify which of the two—public or private—follow the same reporting guidelines as nongovernmental not-for-profit organizations. Analyze, in general terms, the financial statements that must be prepared by a private college or university and those that must be prepared by a public college or university. Identify the major format differences in financial reporting for public and private colleges and universities. Formulate an opinion about which statement provides more transparent information regarding revenues and on the amounts of restricted resources.

Answer 1

*FINANCIAL REPORTING ASPECT:-

There are two accounting standards for reporting in higher education: the FASB standards
required for private institutions and the GASB standards used by public institutions.
However, between 1973 and 1997, both public and private higher education institutions
generally followed similar reporting guidelines under the American Institute of Certified
Public Accountants’ (AICPA) College and University Audit Guide, developed in 1973. This
changed when a not‐for‐profit audit guide was developed in 1997 to address issues like
depreciation, contributions, and investments. In 2002, public institutions were required to
transition to GASB reporting standards following the issuance of GASB Statement 35, which
made the 1973 AICPA audit guide “obsolete".

*CONSIDERATION FOR REPORTING WITHIN PUBLIC AND PRIVATE SPHERES:-

Private:-

At the NACUBO Higher Education Accounting Forum in 2013, the National Industry Director
for Higher Education at KMPG, Lou Mezzina, presented a review of trends in financial
statements among private colleges and universities of all sizes based on 2011 and 2012
audited financial statements. He noted trends in different aspects of financial reports,
including the statement of financial position, statement of activities, endowment return
reporting, statement of cash flows, and use of footnotes.
Within the statement of financial position, about 10 percent of statements noted use of a
“Balance Sheet,” and 5 percent noted a “classified” presentation. About 20 percent of
financial statements disaggregated items under net assets to some degree, and Mezzina
noted that many reports had the opportunity to reduce the number of line items to present
information more effectively.
For the statement of activities, the most common format used was columnar by net asset
category, with only the total for the previous year as a full columnar or a separate page.
Only about 10 percent of statements of activities used the single column or “pancake” style
format. Almost all statements distinguished operating from non‐operating expenses;
however, how institutions defined “non‐operating” varied widely from report to report.

Public:-

Public institutions prepare financial statements according to GASB standards, but also use
financial statements for reporting key ratios, debt ratings, and interim financial reporting.
Financial statements typically include a letter of transmittal, management’s discussion and analysis (MD&A), statements of net position, revenues, expenses, and changes in net
position, cash flows, and footnotes.
Including an MD&A can be very beneficial to financial statement users when executed
effectively. This section is a narrative description of the following detailed financial
statement that is intended to tell your “business story” through a concise summary of key
points.It should include trend information that guides the reader in understanding the
overall implications of the financial information and should also be creative and engaging.
Common pitfalls for MD&A discussion are awkward wording, including too many statistics,
and struggling to summarize a large amount of information effectively. Accounting experts
from Plante and Moran, PLLC and Grand Valley State University suggest the following
strategies for an effective MD&A:
*Be concise and stick to the main message.
*Graphs can tell your story with minimal words.
*Include strategic information that the Board or public will want to know, such as
enrollment, state appropriations, capital plans, endowment growth and support,
and debt.

*KEY PERFORMANCE INDICATORS:-

Private institutions ratios:-

There are three main HLC ratios for private institutions: primary reserve ratio, equity ratio,
and net income ratio. The primary reserve ratio addresses how long an institution could
potentially operate with its expendable reserves. The equity ratio assesses the proportion of
assets that the institution owns. Finally, the net income ratio assesses if unrestricted
activities resulted in a surplus or a deficit.

Public institutions ratios:-

Public institutions have a different set of HLC ratios that can be used to evaluate financial
wellbeing for the institution. The four HLC ratios for public institutions are: primary reserve
ratio, viability ratio, return on net assets ratio, and net operating revenue ratio. The first
ratio of primary reserve serves the same function at public institutions as at private. The
viability ratio measures the amount of expendable net assets that would be available to pay
off debt at any given time. The return on net assets ratio measures returns on net asset
investments for the year, and the net operating revenue ratio assesses whether operating
activities provided a surplus or deficit for the year.