A recent change to state law in Florida will likely affect certain direct-support organizations (DSOs) of universities within the State University System of Florida. Under the Florida Excellence in Higher Education Act of 2018, DSOs that have previously followed the financial accounting framework prescribed by the Financial Accounting Standards Board (FASB) may be required to change to the accounting framework prescribed by the Governmental Accounting Standards Board (GASB). This was designed to strengthen the accountability of state university DSOs to their respective university board of trustees. As part of this legislation, the university board of trustees must now approve all appointments to the board of directors of any DSO. This new, increased level of authority of the board of directors of DSOs affects the determination of which financial reporting framework an entity follows, in this case GASB framework.
To determine whether the state and local government accounting hierarchy (GASB) or the nongovernmental accounting hierarchy (FASB) applies to a particular entity, the entity must be classified as governmental or nongovernmental. In most instances it is obvious how an entity should be classified, but there are occasions in which classification is not so obvious. The GASB codification defines “governmental entities” as “public corporations and bodies corporate and politic.” In addition, other entities are governmental if they have one or more of the following three characteristics:
- Popular election of officers or appointment (or approval) of a controlling majority of the members of the organization’s governing body by officials of one or more state or local governments;
- The potential for unilateral dissolution by a government with net position reverting to a government; or
- The power to enact and enforce a tax levy.
Previously, certain DSOs in the state of Florida had determined that none of the three characteristics above were true for their organization, and thus these organizations were not considered governmental entities and as a result followed the FASB for financial reporting purposes. With the change to Florida state legislation, item number one in the above list of characteristics will now apply to all DSOs, thereby making all DSOs “governmental entities” for financial reporting purposes and thus requiring adherence to GASB framework.
While there are numerous differences in the financial reporting requirements under GASB vs. FASB, the following are some of the more significant differences affecting university DSOs:
- Endowment pledges that are recognized by nongovernmental not-for-profit entities (those following FASB) will not be recognized by a comparable governmental not-for-profit entity (those following GASB). The FASB recognizes endowment pledges as permanently restricted net assets, whereas the GASB prohibits the recognition of endowment pledges, and endowment contributions are not recognized until cash or other resources have been received to satisfy the pledge. This difference affects the recognition of assets, contribution revenues, and net assets, and results in nongovernmental not-for-profits reporting a larger total assets amount than governmental not-for-profits.
- Management’s Discussion and Analysis is a required element of the financial statements for entities following GASB and is not required for entities following FASB.
- Other differences between FASB and GASB include changes to the statement of cash flows and other recognition and presentation differences between the two frameworks.
Each individual organization will need to review their financial statements to identify changes that will be necessary as a result of switching financial reporting from FASB to GASB framework.
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