Mo Qayoumi is vice president for administration and finance and chief financial officer at California State University, Northridge. He is the author of APPA's recent book, Benchmarking and Organizational Change, and can be reached at

[Editor's note: A new financial reporting change will require all public institutions to report all capital assets, including infrastructure, and account for depreciation. The first deadline of the phased-in GASB 34/35 program is June 15, 2001. The articles by Mo Qayoumi and Jerry Kokos are designed to give you the information you need to understand the new accounting requirements and to help you formulate a strategy and approach for your institution.]

Roughly 15 years ago the Governmental Accounting Standards Board (GASB) decided to review and analyze the financial reporting of public higher education and determine how this information can be incorporated with the primary state and local government. In June 1999, GASB issued its Statement No. 34, which addressed the financial reporting requirements for state and local governments. GASB Statement No. 34 fundamentally changed the financial reporting requirements and established new financial statements as well as management discussion and analysis for state and local government. GASB 34 excluded colleges and universities from these requirements. By November 1999, GASB issued its Statement No. 35, which amended its earlier statement, and includes higher education institutions to the same financial reporting requirements. Therefore, in order to understand GASB 35, it is essential that one must review GASB 34.

The adoption of GASB 35 significantly changes the financial reporting of public universities. Since private colleges and universities follow FASB (Financial Accounting Standards Board) guidelines, with the adoption of FASB 117 it will be easy to perform comparisons between public and private colleges and universities. With the issuance of GASB 35 public colleges and universities are required to report all capital assets, including infrastructure, and account for depreciation. Therefore, for the first time facilities officers in public universities will be playing a critical role in providing key information for the campus annual financial statements.

The implementation of GASB 35 will pose a series of significant challenges for chief financial officers in public colleges and universities. However, this article is prepared to give facilities manager a brief overview of the new financial reporting requirements for public colleges and universities, and highlight action steps they need to take to be prepared for the implementation of GASB 35, specifically in the areas of capital asset reporting requirements.

Basic Elements of GASB 35 Financial Reporting
The significant elements of the financial reporting include three basic financial statements, Management Discussion and Analysis (MD&A), other required supplementary financial statement (RSI), and segment reporting. The basic financial statements consist of Statement of Net Assets, Statement of Revenues, Expenses, and Changes in Net Assets, and Statement of Cash Flows. Let us briefly review the highlights of these statements as well as the other elements of the financial reporting.

Statement of Net Assets
This statement is presented with three major categories, namely assets, liabilities, and net assets. The assets should be broken into current and non-current assets. The current assets include cash and cash equivalence, short-term investments, account-receivable, inventories, etc. The non-current assets include long term elements, such as endowments, investments, and capital assets and should be displayed separately. The capital assets includes land and improvements, buildings and equipment, infrastructure, and construction-in-progress. It is critical to note that buildings, equipment, and infrastructure must be reported as net figures. In other words, with these assets depreciation must be taken into account. This is a major change that is discussed in more detail later.

The liabilities should also be broken into current and non-current subcategories. There is no appreciable change in this area. Finally, net assets should be separated as restricted and unrestricted areas. Furthermore, the restricted should be expendable and non-expendable.

Statement of Revenues, Expenses, and Changes in Net Assets
This statement should display operating revenues and expenses, non-operating revenues and expenses, capital contributions, net assets at the beginning of the period, and net assets at the end of the period. Revenues and expenses should be reported directly as net of discount and allowances. For instance, revenues such as student tuition, fees, gifts, grants, investment income, and costs will be reported as net value. This is a departure from current practice by almost all colleges, where tuition and fees are booked at full value and any discounts are booked as an expense. The current GASB statement treats such discounts as contra-asset.

The non-operating revenues and expenses include elements such as state and/or local government appropriations, gifts, grants, investment income, capital appropriations, etc. There are two major elements that are important to note. First, the state appropriations both for operating and capital appropriation should be reported separately. Secondly, it requires that institutions must clearly separate gifts and contract. As pronounced in GASB Statement No. 33, gifts and grants should be distinguished by whether the transaction was based by an exchange and non-exchange. In other words, if there was an exchange of economic resources or service between the grantor and grantee, or the grantor hold the first right of refusal, it must be classified as a grant (contract) and not a gift.

Statement of Cash Flow
GASB 35 amends its earlier statement No. 9, and supersedes GASB 34 to include colleges and universities and require these institutions to use a direct method in presenting cash flows from their operating activities. The cash flow statement is very critical in determining the institution's ability to meet its obligations, and is used to determine if the institution needs external financing. The main classifications for cash flow statement include operating activities, non-capital financing activities, capital and related financing activities, and investing activities.

Management's Discussion and Analysis (MD&A)
This section of the financial report provides an opportunity for the financial managers to present key information in a general rather than specific manner. The institution is expected to state the most relevant information concerning the short-term and long-term analysis of the activities rather than providing "boilerplate" discussion. More specifically, data provided should reinforce analysis and result of the operation, as well as any information or condition that is expected to significantly impact the financial position of the institution. A comparative analysis between the current year and prior year's positive and negative results, with an emphasis on the current year performance, should be discussed. At a minimum, MD&A should provide the following data:

Finally, MD&A should state what management believes are any distinctive features of the annual financial activity and its relationship to institution mission. Furthermore, in contrast to the financial statements, MD&A is subject to a lower level of audit requirement.

Required Supplementary Information (RSI)
In addition to MD&A, the financial report should contain a separate statement as RSI. In this section the institution should present a budgetary comparison schedule between the original budget (including the general fund and any special revenue funds) and final budget. Moreover, if the institution is utilizing a modified approach for reporting infrastructure, the three-year asset condition assessment, as discussed below, should also be incorporated in the RSI.

Segment Reporting
GASB 35 requires that institutions must report financial activities of its segments. GASB 34 defines a segment as "an identifiable activity reported as or within an enterprise fund or an other revenue backed instrument (such as debt certificate of participation)". In other words, a segment has identifiable related expenses, gain or losses, assets, and liabilities. It is important to recognize that an institution can have debt without segment, but can not have segments without debt.

Segment reporting, including a note about the goods and services provided, is similar to the three primary statements namely condensed statement of net assets; condensed statement of revenues, expense, and change of net assets; and condensed statement of cash flow. This reporting requirement was primarily instituted in GASB 34 so the state and local governments could report information about utilities owned by municipalities. The original interpretation of segments would have required most colleges and universities to report every debt series as a different segment. This is an area that GASB is reviewing, and further interpretation is forthcoming.

Reporting Capital Assets
Since under this new reporting structure, colleges and universities should include buildings and infrastructures and account for depreciation, it is important to briefly elaborate on this issue. Capital assets, such as land, buildings, equipment, infrastructure (i.e., roads, bridges, tunnel systems, utility distribution systems, cable plant, etc.), are reported based on historical cost, including the construction cost and other ancillary expenses, such as freight costs, interest costs (if eligible), etc. If the asset is donated, fair market price at the time of the acceptance plus ancillary costs should be reported. The fair market value can be derived from manufacturer's catalogues, construction databases, price quotes of comparable assets, etc. Except for inexhaustible assets, such as land, all other assets should be depreciated in accordance to the useful life of the asset. Institutions do not have to calculate depreciation on individual assets. In fact they can calculate depreciation for an entire class of assets, subsystems, or individual assets based on their own choice.

GASB 34 does not prescribe any particular depreciation method. In fact an organization has the choice of using any rational and systematic approach, such as the straight line, double declining balance, sum-of-the-year digits, annuity method, units of production method, hours of use, etc. Similarly, GASB 34 does not recommend any specific schedule for the useful life of any capital asset. In fact, it relegates this role to industry and professional organizations for guidelines.

Depreciation allocation for the reporting period should be expensed during the same period. Therefore, assets should be reported as in net value, namely the original-value minus the accumulated depreciation. If an institution does not want to depreciate these assets, GASB 34 enables institutions to address depreciation reporting in a different manner, which is discussed below as the modified approach:

The Modified Approach
An institution does not have to depreciate infrastructure assets if it can document that these assets are being preserved roughly at or above the condition level established and disclosed. Secondly, if the organization has an asset management system that meets the following conditions, namely having an accurate and timely inventory of the assets, conduct condition assessment using a measurable scale, and determine the yearly cost to maintain and preserve the assets in question.

This requires that a complete condition assessment of these assets needs to be done every three years at minimum. Moreover, the three recent condition assessments give adequate assurance that the assets have been preserved at or above the base level. Therefore, funds used to bring these assets to their original conditions must be expensed, except for any portion that is used for improvement or additions to any of the assets in question.

Timeline for the Implementation
These new requirements became effective in a three-phase plan based on the total institution's revenues after June 15, 1999.

Similarly, infrastructure assets for these institutions grouping should be reported retroactively beginning the reporting period after June 15, 2005 for institutions with more than $100 million revenues, and after June 15, 2006 for institutions with revenues ranging between $10 million to $100 million. Institutions with less than $10 million revenues are encouraged, however they are not required, to report their infrastructure assets retroactively.

The Impact on Facilities Managers
With the advent of GASB 35, facilities managers in public colleges and universities play a critical role in providing the relevant information in the preparation of the institution's financial statement. This is because the functional area that is best equipped to gather the necessary information concerning the capital assets, possibly with the exception of the equipment, is the facilities unit. Although many colleges and universities may have the original construction costs of buildings and major campus infrastructure, they may not have a consistent practice in systematically collecting information about any subsequent minor renovation.

The reason is many colleges and universities either do not have any clear policies on when to capitalize and when to expense maintenance and improvement expenditures. For instance, if a roof is replaced, are the funds capitalized or expensed? If the answer is positive, then how about if 50 percent of the roof is replaced? What is the institution's policy and practice if boiler tubes or a chiller compressor in central plant is replaced? Does the institution use any dollar threshold on when to capitalize and when to expense these transactions? If any of these projects are capitalized, is there a robust procedure in place to assure the information is recorded in the institution's capital asset inventory.

These questions can be compounded by the fact that in some campuses various minor building modifications are funded by a variety of sources such as project funds from academic departments, the maintenance department, special state appropriation, etc. Moreover, on some campuses different buildings and infrastructures may be operated and maintained by other units in the university.

For instance, at some universities part of campus roads may be managed by the parking department, the conduit system and communication infrastructure more than likely is managed by telecommunication, and certain buildings, such as residence halls, student unions, etc. may be managed by other campus auxiliaries. Therefore, the collection and consolidation of the data related to capital assets may pose a significant challenge.

Concluding Remarks
Based on the information presented above, it behooves every facilities manager in public colleges and universities to begin taking a proactive and leadership role in working with campus financial areas on GASB 35. The first step should include reviewing the accuracy of the data concerning physical assets and campus capitalization policies.

If the campus does not have clear policies in capitalizing versus expending, facilities managers should play an active role in the formation and implementation of this area. If the institution already has a capitalization policy, it is important to make sure that the appropriate staff are aware of this. Also institute processes safeguard the integrity of capital asset data.

Since the financial reports of individual campuses or systems will be audited annually by outside auditors, steps must be taken to ensure the institution can secure an unqualified opinion by them. The key element that outside auditors look for is whether an institution has clear, rational, and written policies concerning capital assets. Also, do they have procedures in place that implement these policies. The most fundamental concept to remember is consistency. Auditors will always examine procedures to ensure consistency.

In conclusion, GASB 35 creates new and significant challenges for public colleges and universities. However, it also provides an excellent opportunity for campus facilities managers to play a leadership role in the financial reporting needs of the university. If we miss this opportunity, we have no one to blame but ourselves.

For more information:
Federal Accounting Standards Board
Governmental Accounting Standards Board
National Association of College and University Business Officers