Accounting Standards for Higher Education Institutions in India

ACCOUNTING STANDARDS FOR HIGHER EDUCATION INSTITUTIONS IN INDIA

SYNOPSIS

submittedin partial fulfilment of the

DOCTOR OF PHILOSOPHY

TO

MANAV RACHNA INTERNATIONAL UNIVERSITY

BY

PRADEEP KUMAR CHAWLA

Registration No-10029990071

Under the supervision of

Dr. SURESH BEDI

DEAN-FCA, MRIU

FARIDABAD

Faculty of Management Studies

Manav Rachna International University

Sector-43, Faridabad, Haryana, India

CERTIFICATE

This is to certify that this Synopsis entitled -“Accounting Standards for the Higher Education Institutions in India” by Mr. Pradeep Kumar Chawla submitted in fulfilment of the requirement for the Degree of Doctor of Philosophy underFACULTY OF MANAGEMENT STUDIES of Manav Rachna International University, Faridabad during the academic year 2010 is a bonafide record of work carried out under my guidance and supervision.

Dr. Suresh Bedi

Dean-FCA

Faculty of Computer Applications

Manav Rachna International University

Faridabad

TABLE OF CONTENTS

Content Page no

1. Cover Page
2. Certificate of supervisor i
3. Abstract ii
4. Content 1
5. Introduction 2
6. Literature review 6
7. Objectives of research 8
8. Methodology 9
9. Proposed outcome of research 10

References 11

Abstract

To run any organisation, there has to be inflow and outflow of liquid cash or through banks for buying plant and machinery, raw material to manufacture goods, finished goods for resale, capital assets, to incur expenses on repairs and maintenance and pay salaries and wages and other day to day expenses.

The major objectives of the study are to review the prevailing practices of higher education system and to highlight major challenges in classification of financial transactions and prescribe the best accounting practices. To develop a legal compliant model for higher educational institutions which is in consonance with the best accounting practices.

The data collection shall be both by primary as well as secondary sources. Financial data of major category of educational institutions and published reports and various methods of treatment of similar transactions in various institutions of same category shall be studied and analyzed. Secondary data will be sourced from law books, publications, annual reports of various institutions, industry portals, government agencies etc. Analysis methods include Item Analysis, Cronbach’s Alpha to confirm the reliability of questionnaire, experts attitudes to confirm the validity of questionnaires. The data from questionnaires would be prioritized using Multiple Attribute Decision Making (MADM) approach (TOPSIS method) and depending upon the availability of data a comprehensive model would be prepared. The data will be shared amongst financial experts of private/central/state govt. universities, govt. officials of UGC and employees working in educational institutions for taking their expert opinion.

The outcome of the financial transactions may show different results depending upon the accounting practices, methods, accounting standards followed by that unit. Therefore, there is need to device a uniform system of accounting for specific category of institutions so that the similar types of transactions do not result to different results

Keywords – Accounting standards, Higher education, generally accepted accounting principles (GAAP), International Financial Reporting Standards (IFRS), Annual Reports, Financial Transactions.

Introduction

In any commercial/non-commercial organisation, accounting for of all types of financial transactions is done based on double entry system, generally accepted accounting principles (GAAP), as per conventions of any trade in that country,accounting standards as prescribed by Institute of Chartered Accountant of India (AS) in India and by the statutes of respective countries as applicable on accounting of particular types of institutions.

The entry of all types of transactions in a unit would result to two types of major financial statements.

1)Profit and loss account showing profit earned or loss incurred during any range of period.

Or

Income andexpenditure A/C showing excess of incomes over expenditure or vice versa.

2)Balance sheet showing the financial health of any organisation at any point of time.

In order to harmonise, the treatment of financial transactions in books of accounts is done based on the accounting standards as prescribed by the accounting statutory bodies of the country where the organisationsare located. To illustrate, Institute of Chartered Accountants of India (ICAI) in India is the statutory Body which prescribes accounting standards for various types of commercial/non-commercialorganisations. Some of the standards are mandatorily required to be followed whereas others may be optional. The ICAI is governed by the parliamentary act of our country.

The higher education system has grown in remarkable way, particularly in post-independence period. This is the third largest system in the world, after China and the United States.

Table showing University level Institutions in India

Type of Institution / 2002 / 2006 / 2007 / 2009 / 2010
Central Universities / 18 / 20 / 25 / 40 / 41
State Universities / 178 / 217 / 231 / 234 / 257
Inst. Deemed to be Universities / 52 / 102 / 102 / 128 / 130
Institutes of National Importance-Central Legislation / 5 / 5 / 5 / 5 / 5
-State Legislation / 12 / 13 / 33 / 39 / 39
Private Universities / - / 10 / 21 / 21 / 61
Total / 265 / 367 / 367 / 467 / 533

The total grant from Ministry of Finance to Department of Higher Education in budget 2011-2012 for plan expenditure is Rs.13100 crores and for non-plan expenditure is Rs. 8812 crores, total amounting to Rs. 21912 crores.

Central Government is responsible for framing major policy relating to higher education in the country.

World economy is changing very fast. Many stakeholders have interest in business ventures. For example, shareholders, debenture holders, banks, sundry creditors, sundry debtors, employees, foreign institutional investors and so many others.

Types of Educational Institutions:

Private universities are constituted under Indian Societies Registration Act, 1960 or Indian Trust Act, 1882. However, the approvals to run the institutions are granted only if guidelines as prescribed under UGC are complied with and a certificate is obtained from UGC.

The types of higher educational Institutions are mentioned as under:

1. Central universities run by Central Government.
2. State Universities run by State governments.
3. Institutes of national importance-Central Legislation
4. Institutes of national importance-State Legislation
5. Private Institutes deemed to be universities- Central Legislation
6. Private institutes/universities as approved by state governments
7. Colleges affiliated with universities
8. Franchisees attached with universities for conducting part time or distance learning programmes.

Due to various different conventions, not following of accounting standards, adopting different methods of treatment of transactions, adoption of various types of accounting like cash or accrual, the financial statements of various educational institutions are incomparable.

The educational institutions are treated as non-profit organisation and therefore avail so many privileges in regard to income tax and wealth tax as compared to the commercial organisations. Section 11 and Section 12 of Income Tax Act, 1961 mention the exemptions given to the societies and trusts formed under this act subject to fulfilment of certain conditions.

In private universities we may find certain financial transactions which can be treated as commercial in nature but presented in such a manner that the same does not appear to be so to safeguard themselves from withdrawal of the privileges given to the societies as per IT Act, 1961.

A need is, therefore, being felt for improved accountability of the financial resources usedby the educational institution. A sound accounting and financial reporting framework acts as an important ingredient for promoting accountability and for development of education sector.

There arevarious factors indicating the diversity in accounting practices being followed by the educational institutions:

Lack of awareness as to benefits of adopting sound accounting practices on applicability of accounting standards formulated by the ICAI. Second factor is adoption of different basis of accounting - Current accounting practices by various educational institutions vary from that on cash basis, accrual basis to a hybrid form of accounting i.e. a mix of both cash and accrual basis of accounting. Third factor isimpact of other laws - The existing accounting practices in the educational institutions are generally driven by the requirements of the tax and other laws such as Indian Trust Act, 1882, various state trusts Act, Societies Registration Act, 1860 rather than with a view to reflect a true and fair view of the state of affairs and results of the activities carried on by the institution during the year. As a result of the above factors, the existing accounting practices of the educational institutions have the following characteristics:

a) There is no standard basis of accounting being followed by educational institutions. Cash, hybrid, accrual and modified cash/accrual basis of accounting are being followed.

b)The Accounting Standards formulated by the Institute of Chartered Accountants of India, are generally not being applied.

c)There is lack of uniformity in presentation of financial statements.

d)There are different disclosure practices being followed.

Fourth factor is there is diversity in terminology and accounting policies being adopted. Fifth factor is there is no proper reporting, whereby end-use of earmarked or restricted funds can be verified. In view of the above, information provided by the financial statements of different educational institutions is not uniform or comparable. This has given rise to confusion and misunderstanding among the users of financial information provided by educational institutions.

Here, it may be emphasised that wherever the educational institution is incorporated under section 25 of the Companies Act, 1956 they are already required to prepare the financial statements as per Schedule VI to the companies act and accounting standards are already applicable to them. Moreover, ‘Preface to the Statements of Accounting Standards’ issued by the ICAI clarifies that even if a small portion of a charitable organisation is considered to be commercial, industrial or business in nature, then it cannot claim exemption from application of accounting standards. In that case, accounting standards shall apply to the entity as a whole and not only to commercial, industrial or business transactions. This para assumes significance in the light of the fact that many educational institutions which are otherwise being run on grants, subsidies, etc. are running various management or certificate courses; executive development programmes which are earning substantial sums for the institutions. Such institutions cannot claim exemption from application of accounting standards citing their status of charitable or non-commercial organisation.

Sixth factor is the campus and corporate offices are located at different places. The requirements of campus may differ from H.O’s. To illustrate, at campus level, the students’ related information may be more relevant whereas for financial accounting, the total amount of collections, outstanding is relevant.There is no uniformity in designing chart of accounts. Designing of chart of accounts is of vital importance in any organisation whether commercial, NGO or any other institution. The more elaborate accounting chart it is, at more levels the reports/information could be drawn from the system.

There is no uniformity in dealing with the exchange rate for NRI students who are liable to deposit fee in US Dollars or any other currency. The exchange rate may differ every day. A proper accounting method on dealing with such types of transactions is required.

Seventh factor is to find out broader categories of financial transactions affecting accounting model under study.To have transparency in financial transactions, to avoid fraud and misrepresentation of facts in financial statements, to avoid generation of black money through the fake financial transactions and to make fair comparison of financial statements amongst various educational institutes.

The scenario after privatisation of universities has totally changed. Basically, the educational institutions are considered as non-profit organisations. In practical situations, the private management cannot act like Govt. aided universities as they are the stakeholders and have indirectly invested huge money in the venture and indirectly have profit earning motive.

The stakeholders work in the capacity of members of the societies or the trusts as the case may be.

Private stakeholders would like to have fair and as much as information as possible on Fees, Head wise Expenses, comparison with budgets apart from proper compliance of the requirement of Indian Societies Registration Act, 1960 Act or Indian Trust Act, 1882.

In the past, there had been many cases where the Management had presented the books of accounts/financial statements for the purpose of conducting statutory audit which fulfilled the statutory requirements, but actually there were many flaws. The auditors to save themselveshad submitted many undertakings and confirmations given by the management and therefore, the audit report was not qualified by the auditors. To illustrate, the case of Satyam Computers.

Literature Review

Sarbanes Oxley Act in USA was introduced to curb such types of malpractices and fix responsibilities of the management, auditors, CFO and other persons working at various levels in the organisation.

The act is applicable in all companies incorporated in USA as well astheir subsidiary companies, branches whether located in USA or other countries and the companies/institutes having financial interest of other kind abroad.

Twelve years ago, the US capital markets were roiled by revelations of financial wrongdoing at numerous major companies. The damage to investors, pensioners, communities and markets was historic. Corporate executives were jailed. One of the nation’s largest companies and one of the largest audit firms went out of business. After hundreds of corporate earnings restatements, confidence in financial markets was shaken to the core. To restore public confidence in the reliability of financial reporting, the US Senate and House of Representatives passed the Sarbanes-Oxley Act of 2002, by votes of 99-0 and 423-3, respectively, sending it to President George W. Bush, who signed the reform measure into law on July 30, 2002.

The main features of Sarbanes Oxley Act, are described as under-

1) Enhancing the reliability of financial reporting and audit quality.

2) Enhancing the reliability of financial reporting and to improve

audit quality.

3)To strengthen corporate governance, shifting responsibility for the external auditor relationship away from corporate management to independent audit committees.

4)To institute whistle-blower programs, CEO and CFO certification

requirements and stricter criminal penalties for wrongdoing, including lying to the auditor.

5)To gear up toward improving the reliability of corporate financial reporting.

Accounting Standards on Educational Institutions:Accounting standards as applicable on educational institutions as prescribed by the accounting statutory bodies governed by parliamentary Acts of the countries mention the treatment of various types of transactions happening in various types of higher educational institutions organisations.

The Income Tax Act, 1961prescribes rules applicable on all types of persons which come under the purview of tax payment which include persons, HUF, partnership concerns, association of persons, trusts, societies and companies formed under the law of the country.

The Wealth Tax Act,1957prescribes the rules applicable on all types of persons on applicability of wealth tax, exemptions, deductions etc.

Indian Societies Registration Act, 1960 prescribes the rules and conditions under which any institutions can be registered under this Act for availing exemptions, deductions, concessions and other privileges which are not applicable to the Commercial organisations.

Indian Trust Act, 1882prescribes the rules and conditions under which any Institutions can be registered under this act for availing exemptions, deductions, concessions and other privileges which are not applicable to the Commercial Organisations.

Indian Partnership Act, 1872 prescribes the rules and conditions on regulation and the formation of various types of partnerships, dissolution and others.

The Companies Act, 1956 prescribes the rules and conditions on formation and regulations of various types of companies.

Objectives of the research study:

Objectives of the study are as follows-

1) To review the accounting practices of higher education system in India.

2)To highlight the major challenges in the classification of financial transactions and prescribe the accounting practices more suitable to the institutions.

3)To prescribe legally compliant fair-practice model which meets the requirements of all types of regulatory bodies.

4)To develop accounting standards for major categories of higher educational institutions in consonance with the best accounting practices.

Methodology:

Data Collection Method:

The data will be collected using both by primary data collection methods as well as secondary sources.

Primary Data-

Major Category of educational institutions shall be studied to know the method of financial accounting practices followed by them. Published reports i.e. annual reports of various universities, institutions and colleges to know which data is not adequately published. Analysis of reports and the data. Detailed study of the practices followed by the educational institutions, assumptions and presumptions while treatment of financial transactions, inclusion or exclusion of certain costs keeping in view the development of accounting standards.

After development of model of accounting standards, the same will be shared amongst 50-60 financial experts including UGC officials, AICTE, CFOs working in educational institutions, chartered accountants, cost and works accountants and company secretaries and discuss with them item wise item treatment of financial transactions, incorporation of their suggestions and presentation of information in a particular manner.

Heads of incomes and expenditure of various categories of educational institutions shall be analyzed and a uniform mode of presentation of financial information shall be devised which would suit all types of educational institutions, rejecting of unrelated expenses.

Opinions of different experts for deciding rates of depreciation on various assets used in the institutions viz., librarian for books, users of furniture, laboratory items, equipment and instruments and such other items shall be taken to have a realistic amount of depreciation.

Proposed outcome of the study:

a)Educational Institutions are considered as non-profit organisations. The basic objectives are social in nature. The organisations are required to provide all types of academic related facilities viz., the number of rooms, teachers, lab related facilities, sports etc. Audit by UGC are conducted on regular intervals to check whether all the requirements as prescribed under the act are complied with. To have parameters and checklists to ensure that all the requirements are complied with.

b)Malpractices in regard to the guidelines relating to the number of seats sanctioned for each programme under various faculties shall be avoided.

c)To have clarity on the treatment of transactions of same nature.