001.9 Basis of Accounting

Owned by Chad
Last updated: May 21, 2021
5 min read

BASIS OF ACCOUNTING AT PSU: PSU is considered a special purpose governmental entity engaged only in business-type activities. Accordingly, PSU follows the economic resources measurement focus and accrual basis of accounting. The accrual basis recognizes revenue when earned and expenses when incurred, regardless of when the funds are actually received or disbursed.  
The determination of revenue earned and expenses incurred may be inexact and may require estimates. Estimates of revenue and expense accruals must be supported by adequate documentation showing the methodologies and calculation of the estimates.  At a minimum, all year-end balances in the accounting records must be on the accrual basis. Fiscal year-end accrual of revenue earned but not received, and expenditures incurred but not yet paid, must be supported by auditable records.

To the extent feasible, PSU encourages and supports (but does not require) full accrual-based month-end accounting. Full-accrual monthly accounting records are not always feasible. For example, tuition and fees are generally recorded as revenue at the beginning of term even though the revenue is technically earned over the course of the term. Subscriptions expense may be recorded in month one even though the subscription is not fully used up until a later month. Therefore, a requirement for full-accrual monthly accounting would force additional estimates and accounting entries, which could further complicate the accounting records and further increase the risk of error. Therefore, to the extent feasible, PSU encourages and supports (but does not require) full-accrual based month-end accounting.

The primary government and its component units are separate legal entities and have separate financial statements. Revenue of a component unit is not automatically recognized as revenue of PSU until a transaction occurs between the component unit and PSU.  The university foundation provides donations, gifts, and other revenues to the university, but is a separate legal entity and issues its own audited financial statements. For accounting and financial reporting purposes, PSU recognizes revenue from the university foundation similar to recognizing revenue from other donors and in accordance with the provisions of GASB Statement No. 33 – “Accounting and Financial Reporting for Non-exchange Transactions.” 

REVENUE RECOGNITION: Revenue is recognized by the university under any one of the following conditions:

  • Funds are received from the university foundation.
  • The university has made expenditures that per formal agreement are to be reimbursed by the university foundation.
  • The university has a written pledge document from the university foundation, and the university has met the conditions of the pledge document.

UNIVERSITY FOUNDATION: Although the university foundation raises funds for the benefit of the university, the funds at the foundation are generally not considered revenue to the university until one of the above conditions occur.  At end of fiscal year, gift revenue recognized but not received in cash results in an accounts receivable from the university foundation. GASB Statement No. 33, paragraph 25, requires that non-exchange transactions such as promises to give be verifiable, measurable, and probable of collection.

ACCRUAL OF RECEIVABLES: Absent a verifiable contractual agreement, the accrual of a receivable may be made if all of the following conditions are met:

  • The university had incurred expenses in the fiscal year that met the restrictions that donors to the university foundation placed on their donations.
  • The amount to be accrued was on hand (in the form of cash, cash equivalents, and/or short-term investments) in the appropriate fund at the university foundation at the close of the fiscal year.
  • The university had requested reimbursement of said expenses in a timely fashion (before fiscal year-end close of period 14).
  • The monies requested are actually received by the university in a timely fashion.

The accrual of a receivable and recognition of revenues, in the absence of a verifiable contractual agreement, is justifiable in this instance (above conditions have been met) because the only event necessary for the revenue to have been recognized by the university without an accrual was the making of a transfer by year end.

Two conditions help support the validity of the accounts receivable accrual:

  • The university foundation reports a corresponding payable to the university in its annual audited financial statements, and/or
  • The university foundation has forwarded the funds to the university at the beginning of the following fiscal year. We presume that the funds should be forwarded by the close of period 02 (August).

If neither of the above has occurred, other information and support is needed to support the validity of the accounts receivable accrual. This would require a confirmation request from our external auditors to the university foundation to confirm both the amount of cash donations on hand in the applicable foundation fund as of fiscal year end, as well as the amount the university foundation owes from that fund to the university at fiscal year end. The information received will serve as sufficient verification and will be used as the basis for the receivable accrual.

ADDITIONAL GUIDANCE: The following provides additional guidance to the recognition of different types of revenue and expenses in the PSU accounting records:

  • Revenue may be recognized when initially billed so long as the entire revenue is earned before the close of the fiscal year. Billings comprising both revenue of the current fiscal year and revenue of the following fiscal year would be divided into revenue and deferred revenue.
  • To the extent feasible, PSU  encourages and supports (but does not require) full accrual-based month-end accounting. Expenditures may be expensed at the beginning of the year so long as the expense will be fully incurred before the end of the fiscal year. For year end, expenditures for expenses that cross into the subsequent fiscal year should be divided into expense and prepaid expense.
  • Payroll expense is considered incurred as of the time the payroll services are performed, regardless of the benefit the work performed will have on operations in the subsequent fiscal year. For example, payroll amounts for services performed at the beginning of summer session in the last two weeks of June would apply to that same fiscal year and not to the subsequent fiscal year. Payroll amounts for services performed during July would be recognized as expense in the subsequent fiscal year.
  • Hourly payroll for the period June 16 through June 30, but not paid until the July month-end payroll distribution is recorded as a July expense in the Banner FIS accounting records but is a June expense for financial reporting purposes. The Controller's Office makes an adjustment to the financial statements.
  • Depreciation expense for fixed assets is allocated/amortized over the estimated service life of the asset. Due to materiality, practicality, and ease of the accounting records, fixed assets expenditures less than a capitalization threshold are expensed at the time of purchase and not allocated to depreciation expense. The capitalization threshold amount varies depending on the type of fixed asset. Refer to the procedures manual for more information. 
  • Exchange-like transactions (funds in support -- of but not in direct exchange -- for services e.g., state general fund appropriations) are recognized as revenue when received or when formally pledged to cover specific expenses.