Given the complexity of community college ﬁnancial statements, management is tasked with providing considerable clariﬁcation for its board members. This can be a daunting job, as many board members lack the ﬁnancial background required to make sense of the pages and pages of ﬁnancial information that they are presented with. These are challenging times for higher education and today’s decisions will have a signiﬁcant impact on the future of the institution, particularly when these decisions relate to salaries and beneﬁts.
Two of the most challenging items to explain to the board are the accounting for pension and post-employment beneﬁts (generally health and life insurance). As many of the board members have a legislative background, they are accustomed to cash basis ﬁnancial statements. It is often difficult to explain the need for accrual basis accounting.
Both Government Accounting Standards Board (GASB) 45, “Accounting and Financial Reporting by Employers for Postemployment Beneﬁts Other Than Pensions” (soon to be amended by GASB 75) and GASB 68 “Accounting and Financial Reporting for Pensions-an Amendment of GASB Statement No. 27” require accrual basis accounting. In plain English, what does this mean? It means that beneﬁts are recorded in the ﬁnancial statements when they are earned by the employee, rather than when they are paid by the college. By recording beneﬁt expenses as they are earned, we are matching expenses with the tuition from students who beneﬁt from these expenses in the ﬁnancial statements.
Accrual accounting for pension and post-retirement beneﬁts provides transparency regarding the true cost of the beneﬁts that the college has agreed to. The cost of a pair of shoes isn’t any less because you pay in monthly installments with a credit card. It is critical that management and board members know the true cost of beneﬁts. Only then can they make informed decisions that will affect future students.
The confusion is exasperated by the fact that the internal ﬁnancial statements that colleges share with the board exclude pension and post-retirement accruals. The SUNY annual report excludes pension accruals and SUNY began excluding post-retirement accruals in 2013.
Not only is accrual basis accounting difficult for many board members to understand, but the accrual basis ﬁnancial statements are signiﬁcantly different from the ﬁnancial statements that are reviewed with the board on a monthly basis.
GASB has further complicated things with the issuance and later amendment of GASB 45. GASB originally allowed college’s to bring in initial liabilities over 30 years. With the implementation of GASB 75, the entire liability for other post-employment beneﬁts will be recorded in the ﬁnancial statements.
So how can management convey this critical information to the board? First, accept the fact that this is complicated. These concepts may have to be explained several times to the board. Second, meet separately with the ﬁnancial experts on the board. Take the time to ensure that they fully grasp the concepts involved. They will help you to explain these concepts to the full board. Third, put together clear and concise information for the board, showing the true cost of beneﬁts. This information should be communicated throughout the year, not just at year end. Fourth, put together reconciliations of your cash and accrual ﬁnancial information. Fifth, stress the importance of these items to the board. Board members need to be aware of the promises that the college is making and of the impact today’s promises will have on tomorrow’s students.
Jean Close is a partner based out of our Rochester, NY office.
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