New Reporting Guidelines SFAS No. 124: Compliance by Private U.S. Colleges and Universities

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ABSTRACT

The purpose of this study was to examine at a descriptive level the reporting compliance by private U.S. colleges and universities with Statements of Financial Accounting Standards (SFAS) No. 124 - Accounting for Certain Investments Held by Not-for-Profit Organizations. Using content analysis, the annual reports, financial statements and notes to the financial statements of 61 colleges and universities were examined. The study concluded that compliance across schools was inconsistent. Based on the current level of compliance as observed in this study, both within the letter and spirit of the new standard, quality of financial reporting by colleges and universities could be improved.

INTRODUCTION

Not-for-profit organizations, including privately funded institutions of higher education, report financial information under the standards promulgated by the Financial Accounting Standards Board (FASB). The focus of reporting for not-for-profit organizations, including private colleges and universities, is on disclosing information that can help providers make rational decisions about resource allocations to the institutions (FASB, 1980). Prior to the release of FASB Statement of Financial Accounting Standards (SFAS) No. 116, 117 and 124, however, not-for- profit organizations followed different accounting principles depending on AICPA audit guides for hospitals, higher education, health and welfare, and "other" nonprofit entities as well as other industry-specific guidelines. The FASB's goal was to resolve the many inconsistencies and to improve the accounting and reporting of not-for-profit entities.

Prior to December 31, 1996, all colleges and universities reported under rules prescribed by the AICPA's 1973 Audits of Colleges and Universities for reporting the financial results of colleges and universities. Beginning with fiscal 1996, nongovernmental not-for-profit institutions are required to implement several new standards, including SFAS No. 124. These new standards constitute generally accepted accounting principles (GAAP) for private, not-for-profit colleges and universities (C&Us) and differ from earlier GAAP in several important respects. SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations (FASB 1995) requires most investments to be reported at fair values with unrealized gains and losses included in the statement of activities and several new mandatory and discretionary disclosures.

Prior to SFAS No. 124, nonprofit entities could report investments at cost, lower of cost or market, or market. SFAS No. 124 extends to not-for-profit entities the basic concepts that were applied to for-profit entities SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (Stevens, 1996.) However, SFAS No. 124 makes no distinction between trading, available for sale, or held-to-maturity securities. Therefore, all marketable securities must be reported at fair value, instead of some debt securities accounted for at amortized cost as required by SFAS No. 115. Unlike SFAS No. 115, SFAS No. 124 requires that all gains and losses on investments resulting from their measurement at fair value are to be reported in the statement of activities and closed to net assets at year end. Therefore some gains and losses are not reported in an equity holding account. In addition, SFAS No. 124 mandates certain disclosures related to the statement of activities (i.e., the composition of investment return) and information related to the statement of financial position (i.e., the aggregate carrying amount of investments by major type), which are not required by SFAS No. 115.

As with many implementations, SFAS No. 124 have created confusion among preparers and resulted in reporting practices with potentially disparate results (Locklear, 1997). This study investigates the extent to which 61 private colleges and universities complied with new standard in their 1997 annual reports. …