- Start planning your fiscal year-end financial reporting now as you may need more time to address changes and enhance your reporting, given the impacts of COVID-19.
- Leverage the direct versus indirect method to bring clarity around where cash was generated and spent.
- Consider adjusting your financial statement presentation and footnotes to better tell your institution’s story.
Need help with your financial reporting?
To say spring 2020 has been abnormal is an understatement. Spring exams, graduation preparation, and year-end planning for higher education institutions have been replaced with vacant dorms, virtual education sessions, and online graduations. However, one thing remains a constant: year-end planning. Many institutions have had more conversations with their trusted advisors in an effort to successfully plan for a strong future.
Our recent article, “Accounting and Financial Reporting Considerations for Stimulus Relief Dollars,” discussed broad accounting considerations for COVID-19 relief funds. We now address specific items for higher education institutions to consider for year-end reporting — items that can enhance the story your institution tells to close out the year.
Financial statement presentation: statement of activities
Financial reporting is often an afterthought when new circumstances arise, but adjusting your financial statement presentation now allows you to capture activities through the year and make your year-end reporting easier. To begin, consider creating operating and nonoperating sections on the statement of activities.
Dividing operating and nonoperating activities presents a clearer picture of actual operations and actions that were taken throughout the year — including during the COVID-19 pandemic. This presentation allows you to separate costs that are outside of the institution’s normal operations, based on the policy of the institution.
Some common examples of nonoperating costs include:
- Investment losses
- Additional IT infrastructure expenses
- Additional faculty salaries that were required to develop new online course curriculums
- Additional pay to critical maintenance workers that were needed to maintain the campus
- Additional funding received under the CARES Act (specific guidance on the CARES Act funding reporting is still being developed)
Financial statement presentation: statement of cash flow
When the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities, was initially presented, it recommended that the statement of cash flow be presented in the direct method versus the indirect method. Although this was removed before the final standards were issued, the direct method is still an option and no longer requires an additional reconciliation to the change in net assets.
There are three sections in the statement of cash flow: investing, financing, and operating. Investing and financing remain the same in either method, while operating changes. The widely used indirect method starts with the changes in net assets, which adds or removes the impact of noncash items and changes in accruals in the operating section.
The direct method presents cash received and paid in the operating section, which could bring clarity to where cash was generated and spent in your institution’s operations without the additional commentary needed on the noncash and accrual impacts.
Expanded footnote disclosures: liquidity and subsequent events
Leverage the financial statement footnotes to help your institution better tell its story to the users of the financial statements. Consider expanding the liquidity and subsequent events footnotes to include current and future plans as a result of COVID-19, to provide additional clarity to your institution’s financial statements and available resources going into the next fiscal year.
Some things that could be included are:
- Additional expansions on line of credit secured or in process
- Sales of investments and noncurrent assets
- Additional authorized endowment withdrawals
- Use of the deferral of payroll taxes
- Received Paycheck Protection Program details and expected forgiveness amount
For some institutions, this section may be significant and the aftermath of COVID-19 may bring concerns to the surface. Our recent “Impact of COVID-19 on Going Concern” article emphasizes the importance of understanding and modeling the impact of the pandemic in the short and long term to help plan for the future. Consider the impact of increased regulatory scrutiny if you received federal relief funding.
Management’s discussion and analysis
Unlike the Governmental Accounting Standards Board (GASB) that govern public institutions, FASB doesn’t require a private institution to include the management’s discussion and analysis (MD&A) section in the institution’s financial statements. Nevertheless, some institutions may find an MD&A section to be a useful synopsis to help set the stage for the users of the financial statements.
The MD&A section shows the organization’s performance (current and trailing two years, typically) and can include a discussion of compliance, risks, challenges, future plans, and goals of the institution, without having to comply with any specific standards (like in the footnotes). However, because it represents the thoughts and opinions of management, it is not audited.
How we can help
CLA is here to help you navigate the accounting and audit process, as well as keep you informed on updates and considerations posed by COVID-19. If you have additional questions about year-end reporting, please contact us for more assistance.