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US GAAP: What it means for UK Universities

As the US quickly becomes a core market for UK Universities, Alex Foreman-Peck, InsightMSC Senior Consultant, looks at the accounting challenges of reporting under both UK GAAP and US GAAP and the implications for UK Universities.

Universities face a reduction in Higher Education Funding Councils (HEFCs) and research council funding that cannot be filled by increases in tuition fees.  Because of the tax payer subsidisation of UK students these numbers are capped.  Universities therefore will be facing deficits unless they export their services to non-EU students and focus on research in which they excel.

 

A core market, after China and India, is that of the USA.  Here the market in higher education has been subject to market forces from the beginning, with soft loans being given to students from the US Department of Education.  These customers are free to go to US institutions or abroad to a host of accredited teaching and research establishments.  Partly due to language and cultural similarity, and partly due to a reputation for quality, the UK is popular destination.  Astute universities will increase their marketing in the USA where tuition fees charges are not subject to price caps, and are still competitive against American alternates. 
 

However, the US Department of Education needs to know that the money is being used for the purpose it was given and that the recipient organisations can manage their finances well.  For Universities receiving over $10 million a year, annual financial statements must be submitted in UK GAAP and US GAAP.  These two accounting frameworks differ widely, and present a number of challenges to finance directors.

 

Therefore many Finance Directors will find that this revenue stream, while gaining importance, comes with a not insignificant compliance cost.
 

The table below shows what is required of higher education institutions:

 

$ Loan Funding	Frequency of annual accounts submission	UK GAAP	US GAAP
Less than 500,000	No requirement	No	No
500,000+	Annually	Yes	No
3,000,000+	UK - Annual, US - Tri-annually	Yes	Yes
10,000,000+	Annually	Yes	Yes

 

It should be noted that:
•      comparatives are required which increases the burden of tri-annual reporting; and
•      all financial statements, including US GAAP, must be audited.

 

In terms of timelines, the requirement came into effect on the 1st July 2010 and applies to the financial year ending 31st July 2011.  The deadline for submission is 31st January 2012.

 

The Challenge

While UK GAAP and IFRS are principle based accounting frameworks, US GAAP is rule based.  This means that balances and transactions may be treated differently depending on the rule applied.  These rules differ depending on the industry they are being applied to.   Definitions have different meanings between sections of the US GAAP codification.  Some areas are subject to intense prescription whereas others are fairly laissez-faire. Therefore US GAAP compliance presents a number of challenges unlikely to be faced by IFRS transition that are required to be met a lot sooner.

 

Universities will need to agree a set of US GAAP accounting policies and annual account presentation.  Both differ significantly from UK GAAP and will require thought and analysis, as well as discussion with auditors and consultants.  The areas of funds and income recognition on consultancy and research contracts are particular areas of complexity.

 

Once having agreed and documented the above, universities will need to convert their comparative data by assessing contracts, leases, invoices and other agreements to form their opening balance sheet under US GAAP and ‘shadow’ Income and Expenditure.

 

Having got the starting position, most universities should ensure that they have on-going capacity to produce US GAAP financial statements from their finance system; to have an annual conversion exercise would require an unsustainable increase in staff count.  This will mean assessing the Chart of Accounts and ledger set-up for adequacy, designing new reports for the primary statements and disclosure notes, and the alteration of the existing Year-end process.

 

Finance staff will need to be trained in the new system and process configuration and the basics of US GAAP.

 

How Insight can help

Insight has helped many public sector organisations deal with the complexities of IFRS transition in recent years and to optimise their systems to meet reporting needs, including IFRS, UK GAAP and US GAAP.  We provide a number of services that can benefit university finance directors, for example:

 

•      Initial impact assessment of changes on Institutions’ accounts
•      Project management over the conversion process
•      Conducting system adequacy review with recommendations
•      Chart of Account and report (re)design
•      Year-end Process mapping and improvement
•      Qualified accountants and PRINCE 2 project managers with specific expertise in public sector reporting to supplement your team 

 

For more information or to discuss any related requirements please contact us on 020 7952 4690 or at info@insightmsc.co.uk