Chapter 8.3
Inclusion of Component Units & Other Entities in the CSU Consolidated Financial Statements
Overview
Beginning with the 1996/97 fiscal year, component units were required to provide information for inclusion in the combined financial statements of the California State University (CSU).
Beginning with the year ending June30, 2002, the CSU adopted Governmental Accounting Standards Board (GASB) Statement No.35, Basic Financial Statements-and Management's Discussion and Analysis-for Public Colleges and Universities. With minor exceptions, this statement provides that public colleges and universities are subject to the financial reporting requirements of GASB Statement No.34, applicable to state and local governments. Subsequently issued were GASB Statement No.37, Basic Financial Statements-and Management's Discussion and Analysis-for State and Local Governments: Omnibus, and GASB Statement No.38, Certain Financial Statement Note Disclosures.
These changes, commonly referred to as "GASB Nos.34/35," have in turn impacted the component units and other related entities identified as 'component units' per GASB Statement No.14, The Financial Reporting Entity, and GASB Statement No.39, Determining Whether Certain Organizations are Component Units, an amendment of GASB Statement No.14, and have therefore defined the financial reporting entity to be the CSU and the listed organizations. In November 2010, GASB issued Statement No. 61, The Financial Reporting Entity: Omnibus to improve financial reporting for a governmental financial reporting entity. This Statement addresses reporting entity issues that have arisen since the issuance of GASB Statement No. 14, The Financial Reporting Entity, and the related financial reporting requirements of GASB Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis – for State and Local Governments. In March 2016, GASB issued Statement No. 80, Blending Requirements for Certain Component Units—an amendment of GASB Statement No. 14 to amends the blending requirements for the financial statement presentation of component units of all state and local governments. The additional criterion requires blending of a component unit incorporated as a not-for-profit corporation in which the primary government is the sole corporate member. Therefore, in the component units’ separately issued financial statements, each named organization must provide the supplementary information in the form shown in Chapter 8.3.1, accompanied by an "in relation to" independent auditors’ report.
The adoption of GASB Statement Nos.34/35 and 61 has not changed the following current practices:
1. As appropriate, component units must report as either FASB (Financial Accounting Standards Board) or GASB-subject organizations. GASB Nos.34/35 does not require that the component units change to the basis of accounting used by the primary government, i.e., the CSU and its campuses. As noted above, the component units must provide the required information in the form shown in Chapter 8.3.1 via audited supplementary information in their separately issued financial statements. The proforma electronic template must be used in preparing the supplementary information schedules.
2. All component units are required to classify certain information in the supplementary information schedules in order to conform to the campus’ required line item reporting categories.
3. All component units are required to provide additional supplementary information for inclusion in the notes to the financial statements of the CSU consolidated issued financial statements.
Audit Firm Qualifications
Beginning FY 2011/2012, the Office of the Chancellor (CO) reviews the selection of external auditors by the discretely presented component units and their auditors’ qualifications. The new policy was established in the Integrated CSU Administrative Manual (ICSUAM) 13175.00 under policy title “Auxiliary Organization External Auditor Firms Qualifications.” The objective is to facilitate discretely presented component units’ audit firm selection process by developing standards to ensure that the discretely presented component units are contracting with audit firms that possess industry-specific proficiencies and experience to best evaluate management’s assertions in the financial statements.
Both the California State University and each discretely presented component unit’s governing board have the responsibility to ensure that audits are performed professionally and by qualified accounting firms as described in Education Code Section 89900 and California Code of Regulations Title 5 Section 42408.
Discretely presented component unit’s auditors must meet the following minimum proficiencies and experience:
· Demonstrated experience in auditing 501(c)3 Not-for-Profit Organizations;
· Demonstrated proficiency in both the FASB and GASB accounting and reporting requirements related to both Not-for-Profit Organizations and Public Universities;
· Demonstrated experience and proficiency in performing OMB Circular A-133 Audits (“Single Audits”), including federal and state grants and contracts, if applicable to the discretely presented component unit;
· Possess the qualifications and training to perform the discretely presented component unit audits in accordance with Governmental Auditing Standards, issued by the Comptroller General of the United States; and
· Demonstrated track record of providing quality financial statement audits for not-for-profit organizations.
In order to evaluate potential external auditors’ qualifications for performing the audits, discretely presented component units’ managements must minimally gather information set forth in this policy. Additionally, the Campus’ Chief Financial Officer must submit the qualifications review questionnaire for proposed audit form for the external audit firm selected by the discretely presented component unit to the CO. Please refer to the “Master Audit and Reporting Timeline” for more details regarding deadline and submission process.
The most recent form can be downloaded in the following URL: ICSUAM 13175.00 Auxiliary Organization External Auditor Firms Qualifications.
Review of Component Units’ Financial Statements by the Campus President
This is a reminder of the existing policy and practice regarding the annual review of the campus component units’ financial statements. Each campus president is responsible for reviewing and accepting the complete audited financial report of each campus component unit to ensure each audit is conducted according to the accounting and reporting instructions described below.
The campus President and Chief Financial Officer (CFO) are responsible for promptly notifying the Executive Vice Chancellor/CFO and CO of changes to the list of component units and other component units.
The campus President, subsequent to receiving and reviewing the component unit annual audit reports, shall provide a summary letter to the CO. The letter should be addressed to the Executive Vice Chancellor/ CFO (electronic copy to Systemwide Financial Standards and Review) by the due date stated in the Master Timeline. See example format of summary letter in Chapter 8.3.2. The summary letter shall:
1. Indicate that the campus President or designee has reviewed the audit report(s), or shall state the reason(s) why any audit report has not been reviewed, and what action is being taken to remedy the situation.
2. List the campus component units and the type of opinion ("unmodified" previously “unqualified”, "qualified", or "adverse") issued for each entity.
3. For audit report(s) with qualified or adverse opinion(s), and for any other audit report(s) that are not acceptable as to form and content, indicate what actions are being taken regarding those that are deficient.
Review of Component Unit Financial Statements, Audit Findings, and Auditor Selection by the CO
In addition to the campus president’s review, the CO will selectively review certain campus component units’ audited financial statements.
The CO will also review component unit’s audit findings, especially material weaknesses and significant deficiencies and monitor the completion of the remediation plans. As applicable, the discretely presented component units need to submit their Single Audit financial statements to the CO. For those that do not issue Single Audit financial statements, they need to submit a summary of audit findings with management responses and corrective actions to the CO. Please refer to the year-end PBC list for the due date.
Supplementary Information in the Component Units’ Financial Statements
Proforma electronic templates for the component units’ supplementary information required for inclusion in the CSU financial statements are included. The component unit/other entity must forward these templates to its external audit firm as soon as possible, with the following information regarding each set of financial statements. Ensure to use the most recent attached template as updates are made annually.
The independent auditors’ report on the supplementary information included in the financial statements of the discretely presented component unit need not be a full scope opinion. Independent auditors’ report that refer to the supplementary information required for inclusion in the CSU consolidated financial statements may be an “in relation to” report.
Note: If the basic financial statements of the component unit utilize, and therefore fulfill the CSU template reporting requirements exactly, inclusion of the supplementary information schedules are not necessary. Please note that the CO is NOT prescribing the format of the component unit’s primary financial statements or notes to the financial statements. The component unit MUST follow the relevant accounting literature for their entity.
In fiscal year 2012-2013, the CSU has implemented the requirements of the following GASB pronouncements:
a. GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, Issued June 2011. Effective for periods beginning after December 15, 2011.
This Statement provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. Concepts Statement No. 4, Elements of Financial Statements, introduced and defined those elements as a consumption of net assets by the government that is applicable to a future reporting period, and an acquisition of net assets by the government that is applicable to a future reporting period, respectively. Previous financial reporting standards do not include guidance for reporting those financial statement elements, which are distinct from assets and liabilities.
Concepts Statement 4 also identifies net position as the residual of all other elements presented in a statement of financial position. This Statement amends the net asset reporting requirements in Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments, and other pronouncements by incorporating deferred outflows of resources and deferred inflows of resources into the definitions of the required components of the residual measure and by renaming that measure as net position, rather than net assets. Much of the changes made on this GAAP Manual are a result of the implementation of this new GASB standard. Additional guidance can be found in Chapter 14 GASB Updates and Other Information.
b. GASB Statement No. 65, Items Previously Reported as Assets and Liabilities, Issued March 2012. This is effective for periods beginning after December 15, 2012 (for CSU, effective for fiscal year ending 2014; CSU elected early implementation in fiscal year ending June 30, 2013).
This Statement establishes accounting and financial reporting standards that reclassify, as deferred outflows of resources or deferred inflows of resources, certain items that were previously reported as assets and liabilities and recognizes, as outflows of resources or inflows of resources, certain items that were previously reported as assets and liabilities. This Statement also provides other financial reporting guidance related to the impact of the financial statement elements deferred outflows of resources and deferred inflows of resources, such as changes in the determination of the major fund calculations and limiting the use of the term deferred in financial statement presentations. Additional guidance can be found in Chapter 4.2.1 of this GAAP Manual.
Schedule of Net Position
The Schedule of Net Position is classified, i.e., broken down into current and noncurrent. As a result, there are reporting categories, such as short-term investments, restricted cash and cash equivalents and short-term and longterm accrued compensated absences.
While the component unit is not required to change its basis of accounting, it will be required to classify balance sheet items in conformance with the templates for the supplementary information. In consultation with its independent auditor, the component unit should refer to the relevant accounting literature for guidance. As examples, generally accepted accounting principles (GAAP) concerning current assets and current liabilities are found, among other sources, in ARB No.43 and APB No.10; compensated absences are addressed in SFAS No.43 (pre-FASB codification) and GASB Statement No.16. Therefore, the following comments are meant to provide guidance only when the accounting literature is not definitive to the CSU financial statements:
Assets
· Cash and cash equivalents: Includes demand deposits and all highly liquid investments with an original maturity date of three months or less.
· Short-term investments: Investments that are used for current operations should be classified as short-term investments. This includes investment accounts that may be accessed on a shortterm basis (i.e. within the next 12 months) even if the underlying pool is invested in long-term securities. However, if its use is 1) restricted for withdrawal or use for other than current operations (i.e. endowments or Perkins loans), 2) designated or restricted for the acquisition or construction of noncurrent assets, 3) designated or restricted for the liquidation of the noncurrent portion of long-term debt, or 4) restricted as to the liquidity of the investments, it should be classified as other long-term investments.
Amounts held in split interest agreements can be classified in other longterm investments.
Net Position
Net Position: In order to conform to the GASB-required net position categories, FASB organizations will be required in the supplementary schedules to (1)break out net position, net investment in capital assets[1], then (2)classify the balance of permanently restricted net position to Restricted: nonexpendable net position, (3)classify the balance of temporarily restricted net position to Restricted: expendable net position, reporting uncollected pledges under “other” and (4)classify the balance of unrestricted net position as Unrestricted.
Schedule of Revenues, Expenses and Changes in Net Position
The Schedule of Revenues, Expenses and Changes in Net Position requires major classification categories, i.e., Operating Revenues, Operating Expenses and Non-operating Revenues (Expenses). Again, the component unit is encouraged to consult with its independent auditor and utilize the relevant accounting literature for their entity. However, in order to ensure consistent classification, the following definitions are provided:
Revenues
· Student tuition and fees: Includes mandatory fees paid by students to attend the CSU or a particular class. Voluntary user fees and penalty fees should not be included in this category. Tuition and fees are to be shown net of scholarship allowances and bad debt allowances, with parenthetical disclosure of the scholarship allowances. Scholarship allowances are defined as the difference between the stated fees and the amount that is billed to the student and/or third parties making payments on behalf of the students.