Finance

Article Dean Dorton

Recent economic volatility, reduced government funding, and increased competition in the higher education industry has placed greater emphasis on managing resources and strategic decision making. Colleges and Universities that have active, qualified finance committees will have a competitive advantage in these uncertain times.

In this article we will explore the purpose and responsibilities of a finance committee, composition and structure of the committee and best practices.

Purpose and Responsibilities

The purpose of the finance committee is to ensure that the institution is operating in a financially sustainable manner by balancing short-term and long-term obligations and goals. In order to fulfill this purpose, the board has certain roles and responsibilities:

  • Carry out the governing board’s fiduciary responsibility to ensure the institution’s mission and purpose are fulfilled by:
    • Gaining an understanding of how the institution is financially supported/capitalized
    • Assessing risks, internal and external, that may have a financial impact on the institution
    • Monitoring the institution’s financial efficiency
  • Provide financial guidance to the board of trustees through:
    • Assessing how to protect the institution’s resources
    • Overseeing the budgeting process to ensure that they are based on reasonable assumptions, aligned with institutional goals and that they are properly monitored
  • Determine what is possible given the available resources of the institution
    • Stay involved with other committees regarding new projects and expenditures
  • Assist management in executing the strategic goals of the organization by:
    • Establishing guardrails for management regarding their financial decision making authority
    • Ensuring management has the resources and skills required to facilitate proper internal controls
  • Timely communication of all pertinent issues to the board of directors

Financial reports and budgets are two significant tools at the committee’s disposal to effectively and efficiently perform their vital governance role. Financial statements have a retrospective focus in that financial statements, for the most part, report what has already happened while budgets have more of a forward looking focus, projecting what will happen in the future.

Analytics, such as the Composite Financial Index (CFI), can be used to review the financial statements and analyze past performance and current health of the institution. Budgets should be reviewed by questioning the underlying financial assumptions of the budget and comparing them to historical data for reasonableness. Reconciliation between the financial statements and the budgets can also be an effective tool of the committee.

During this reconciliation, the committee works with management to explain significant variances. This process not only helps to understand past performance, but it is also useful in the development of the next period’s budget.

Composition and Structure

Since the finance committee plays such a vital role in the board’s governance of the institution, it is important to determine who should serve on the committee. The committee should comprise a chair and a vice chair for direction and focus. It should also include members of other key committees such as the student affairs committee, academic affairs committee, and other committees that oversee vital functions of the institutions. This will improve communication and cooperation between the finance committee and other committees.

Members should serve for terms of at least four to five years and the terms should be staggered to promote continuity. Often times, the chief financial officer, budget officer, and chief accounting officer will serve as staff of the committee, and the president of the institution will attend committee meetings. Once again, this serves to aid communication and cooperation between management and the finance committee which is integral to effective governance.

In general, the finance committee should have the skills necessary to fulfill its responsibilities and be structured in a way that fosters communication and cooperation between other committees, the board, and management.

Best Practices

Below are a list of best practices as outlined by the Association of Governing Boards of Universities and Colleges:

  • Chair of finance committee and board chair should define the scope and responsibilities of the finance committee
  • In spring or early summer, the finance committee chair and CFO should meet to coordinate the committee’s annual work and identify/discuss any key issues facing the institution
  • Chair should communicate the work plan to the rest of the committee and the board
  • At each board meeting, the finance committee chair should deliver a status update including information on budget to actual results, emerging trends, and expenditure recommendations

A typical work plan might include the following:

  • Late spring – Committee chair, CFO, and president meet to develop work plan and discuss key issues, internal and external, facing the institution
  • Early summer – Adopt annual budgets, both operational and capital
  • Fall – Review financial results for prior year and use to evaluate the reasonableness of the current budgets; discuss significant changes in key financial metrics
  • Winter – Re-examine revenue projections and discuss and agree on a set of budgetary assumptions for the following year
  • Spring – Study changes in revenue estimates and make recommendations for tuition rates

 

Article written by Tom Smither, Supervisor of Assurance Services

Citations

Stafford, Ingrid. “The Finance Committee”. AGB Effective Committee Series. 2013

Article Dean Dorton

On February 25, 2016, the Financial Accounting Standards Board (FASB) issued its new lease accounting guidance in Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842).

The ASU will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases, unless the lease is a short term lease.

Short term leases
A short term lease is defined in the ASU as “a lease that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise”.  The lease term is defined as the noncancellable period for which a lessee has the right to use an underlying asset, together with all of the following:

  • Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option.
  • Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.
  • Periods covered by an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the lessor.

For short term leases, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term.

Leases not considered short term
For all other leases, the lessee will be required to recognize the following at the commencement date of the lease:

  • A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and
  • A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease.  Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. Reasonably certain is a high threshold. In addition, a lessee (and a lessor) should exclude most variable lease payments in measuring lease assets and lease liabilities, other than those that depend on an index or a rate or are in substance fixed payments.

Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation in the statements of income and cash flows will depend on the lease’s classification as a finance or operating lease.

  • For finance leases, a lessee is required to:
    • Recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of income.
    • Classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows
  • For operating leases, a lessee is required to:
    • Recognize a single lease cost in the statement of income (which will include both the amortization of the right-of-use asset and the “interest” element associated with the lease liability), calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis.
    • Classify all cash payments within operating activities in the statement of cash flows.

The ASU also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.

Lessor accounting
Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.

Sale and leaseback transactions
The new lease guidance also simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing.

Effective dates
Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Nonpublic business entities should apply the amendments for fiscal years beginning after December 15, 2019 (i.e., year ending December 31, 2020 for a calendar year entity), and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted for all public business entities and all nonpublic business entities upon issuance.

Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.

If you have any questions regarding this new standard or would like assistance in implementing the new standard, please contact your Dean Dorton advisor, or:

David Richard, Director of Assurance Services: drichard@deandortonstg.wpenginepowered.com
Simon Keemer, Director of Assurance Services: skeemer@deandortonstg.wpenginepowered.com


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