Advisory Report 2000-7
September 8, 2000
Federal Appropriations for Land Grant Colleges and Universities
POSITION PAPER PREPARED BY NACUBO ACCOUNTING PRINCIPLES COUNCIL
The position paper that follows was approved in August, 2000 by the NACUBO Accounting Principles Council. The paper represents preferred industry practice, and in the absence of any guidance from the Financial Accounting Standards Board (FASB), the Governmental Accounting Standards Board (GASB), or the American Institute of Certified Public Accountants (AICPA), this document should be followed by all higher education institutions.
Purpose: This document addresses the accounting and financial reporting treatment of federal appropriations to land grant colleges and universities and NACUBO’s position pertaining to the classification as restricted or unrestricted.
Applicability: This position paper applies to all independent and public higher education institutions.
Scope: Independent or public institutions receiving federal appropriations to support land grant college and universities programs.
Significance: Land grant colleges and universities are currently classifying federal appropriations to support programs funded under the U.S. Department of Agriculture (USDA) (Smith-Lever, Hatch, McIntire-Stennis, and Animal Health) inconsistently as unrestricted or restricted. Due to the nature of the appropriation, higher education institutions may be required to change the classification of these federal appropriations.
Effective Date: The requirements of this document are effective for all higher education institutions for fiscal years beginning after June 15, 2001, with an earlier application recommended.
Land grant universities receive annual federal appropriations through the USDA to support the following programs.
- Smith - Lever - Cooperative Extension Service (Agriculture, Home Economics, Rural Development and 4-H Programs)
- Hatch (Agricultural Research)
- McIntire - Stennis (Forestry Research)
- Animal Health
These federal programs, administered through the USDA, support education and research programs at land grant universities.
The federal appropriations for these programs are distributed on a formal allocation basis. Each program requires an USDA approved plan of work for individual projects before resources are made available.
USDA programs supported at land grant universities have been funded for over 85 years. The accounting classification for public institutions with USDA federal appropriations are not recognized consistently as restricted revenue from state to state.
Federal legislation requires a USDA approved plan of work before funding is made available to the land grant institutions. Funding under these various acts and programs requires application of resources and expenditures within the approved programs. While funding is virtually never reduced unilaterally, any funding changes from an approved program to some other program, or a new program requires USDA approval. If a unilateral funding reduction is made, it is done before a resource allocation, not after assuming expenditure guidelines are followed. This process identifies a unique difference between the state and federal appropriation process.
Public College and Universities Reporting under GASB
Public colleges and universities receiving federal appropriations that support land grant institutions with external purpose restriction, should classify revenue as restricted.
GASB Statement 33, Paragraph 12–Purpose restrictions specify the purpose or purposes for which the resources are to be used.
GASB Statement 34, paragraph 34–Restricted Net Assets–Net assets should be reported as restricted when constraints on them are either:
a. Externally imposed by creditors (such as debt covenants), grantors, contributors, or laws or regulations of other governments.
b. Imposed through law through constitutional process or enabling legislation.
Federal appropriations under the USDA Plan of Work sets forth the quid pro quo [the reciprocal agreement]. Time or purpose restrictions do apply for USDA funded programs. See GASB Statement 33, paragraph 12.
Independent College and Universities Reporting under the FASB
Independent colleges or universities receiving federal appropriations that support land grant institutions will recognize the receipt of federal appropriations in the unrestricted net assets in accordance with SFAS 117.
SFAS 116 states that grants from governmental agencies and other organizations often have characteristics of an exchange transaction rather than a contribution. An exchange transaction is a reciprocal transfer in which each party receives and sacrifices approximately equal value.
SFAS 117 requires an organization report three classes of net assets and changes in those classes of net assets. The three classes of net assets–unrestricted, temporarily restricted and permanently restricted–are based on the existence or absence of donor imposed restrictions, either explicit or implicit. Definition of the three classes of net assets is as follows.
- Permanent restriction A donor-imposed restriction that stipulates that resources be maintained permanently but permits the organization to use or expend part or all of the income (or other economic benefits) derived from the donated asset.
- Temporarily restricted A donor-imposed restriction that permits the donee organization to use or expend the donated asset as specified and is satisfied either by passage of time or by actions of the organization.
- Unrestricted Assets and contributions that are not restricted by donors or for which restrictions have expired.
1996 AICPA Not for Profit Organization Audit Guide
Paragraph 111.03 states that the three net asset classes should be used in the financial statements. It goes on to state that net assets should be included in one of the three classes depending on the presence and type of donor-imposed restrictions limiting an organization’s ability to use of dispose of specific contributed assets or the economic benefits embodied in those assets. Donor stipulations should not be considered restrictions unless they include limitations on the use of contributed assets that are more specific than the broad limits imposed by the organization’s purpose and nature.
Exchange transactions are addressed in the Audit Guide in Chapter 5. Paragraphs 5.09 through 5.18 discuss exchange transactions and provide indicators useful in distinguishing exchange transactions from contributions.