Institutions of Higher
Education Audit Guidance –
This guide is meant to compliment the Government Accounting Standards Board
(GASB) Statement 35 implementation guide issued in 2002, which is documented in
various other policies and procedures, including, but not limited to, fixed assets
guidance. This guide is being issued to implement GASB Statement 39 for fiscal year
2004 and forward and to reissue policies on required documentation with regard to
the Commonwealth’s issuance of its Comprehensive Annual Financial Report (CAFR).
The Office of the Comptroller prepares a CAFR annually.
Reporting standards require that all Higher Education Institutions’ financial statements be included as part of the Higher Education discrete presentation. Due
to the tight timetable of completing the CAFR and the large number of
Higher Education Institutions, we are requesting that each audited
Institution read and complete the financial statement package.
Statement 39 requires that private foundations related to Institutions of Higher
Education and other related entities (hereafter referred to as “Component Units”) of
the Institutions of Higher Education be reported in the audited financial statements
of the Institutions. To facilitate this reporting, these entities’ audited financial
statements are recommended to be submitted on a timely basis to the Institution,
(typically one month prior to October 15, the due date for the Institution’s completed audited financial statements to be received at the Office of the Comptroller).
Completed audits are defined as audits in final form, represented to the Office of the Comptroller as ready for acceptance by or accepted by the Board of
Trustees of the Institution. Various reporting changes and footnote disclosures are
necessary for proper reporting.
FY 2006 GUIDANCE
Reporting requirements require entities that receive federal funding must
be audited in accordance with generally accepted governmental auditing
standards. The audit opinion of these entities should read, “audited in
accordance with Governmental Auditing Standards.”
The Commonwealth is required to complete its Statutory Basis Financial Report
(SBFR) no later than October 31 annually. Included in these statements are all the
financial information related to Leases and Fixed Assets. This information is a copy of the Institution’s applicable footnotes. In order to complete these statements
on time, the due date for submitting the information is September 15 for leases
and for fixed assets, (again, typically those draft footnotes,) in advance of the submission of an annual report from the Institution represented to the
Office of the Comptroller as ready for acceptance by or accepted by the Board of Trustees of the Institution.
The Commonwealth is scheduled to issue its audited CAFR no later than stDecember 31, annually. As the Institution’s audited financial statements
will be included as part of the Commonwealth’s, the Institution’s copy of the financial statements must be submitted to the Office of the Comptroller by
the due date of October 15 annually. The financial statements of the
Institution must be received by the Office of the Comptroller in a form ready
for acceptance by the Board of Trustees or audited and have received an
unqualified audit opinion. The Commonwealth’s financial statements are at
risk of being qualified by our auditors if you do not meet the above
The Institution’s audited financial statements must be transmitted to the Office of
the State Comptroller with an Independence Letter (Attachment A.) It is
necessary for your auditors to confirm to our auditors, (currently Deloitte) their
independence with regard to your financial statements. This requirement is
mandatory and any lack of response may result in a qualification of the
Commonwealth’s CAFR audit opinion. As the component units of the Institution are
also audited, these component units must also transmit their audits to the
Institution’s auditor containing a similar letter. The letter that the Institution needs
to transmit to the Commonwealth’s auditors and the component unit(s) need(s) to
transmit to the Institution can be found at the end of this document. In the case of
a letter from the Institution’s auditor to the Commonwealth, the addressee would
change if addressed from the component unit of the Institution to the Institution’s
Relevant GASB Standards
The financial statements must be prepared in accordance with Generally Accepted
Accounting Principles (GAAP) as promulgated by the Governmental Accounting
Standards Board (GASB). All relevant standards must be followed.
Standardized Financial Reporting Items
For Institutions receiving federal funding:
Reporting requirements require entities that receive federal funding need to be
audited in accordance with generally accepted governmental auditing standards. The
audit opinion of these entities should read, “audited in accordance with
Governmental Auditing Standards.”
Specific Implementation Guidance for GASB Statement 39
GASB Statement 39 brings the concept of component units to Institutions of Higher
Education. Typically these component units will include, but are not limited to,
private foundations that support the Institutions’ activities. In no way is the legally
separate status of the foundation being called into question. The guidance for the
implementation of this statement is as follows:
Fiscal Year End of Component Unit
Statement 39 allows a fiscal year end of a component unit to be different than the
Institution’s. The financial statements of the component unit can be issued as much thas 11 months prior to June 30 and still be eligible for inclusion. The fiscal year end
of the component unit must be disclosed in a new “reporting entity” section of the
Institution’s summary of significant accounting policies footnote.
All component units are combined and presented in a single column. Should a
combining schedule be necessary, one should be presented as other supplementary
information, following the footnotes to the financial statements.
Required Elimination Schedule
Eliminating entries are necessary for transactions between the Institution and the
component unit to forestall the possibility of doubling revenue and expenses. A
schedule of these eliminating entries, including the accounts they effect and amounts
must be forwarded to the Office of the State Comptroller on or before October 15 as
part of the package of audited financial statements. It is not necessary to have this
Reformatting of Component Unit Financial Statements
In all likelihood, the financial statements of the component unit are presented in
accordance with Financial Accounting Standards Board (FASB) Statements 116 and
117. Reformatting is sometimes necessary to be presented in accordance with GASB
standards. Do not change the underlying basis of accounting for the Component Unit
from FASB to GASB. These entries will largely consist of geographical moves of
information within the statement of net assets. The independent auditor of the
Institution will take responsibility for these changes in disclosure. Communication
between the auditor of the Institution and the auditor of the component unit is
absolutely vital for an unqualified opinion for the Institution.
Management’s Discussion and Analysis
The Management’s Discussion and Analysis (MD&A) of the Institution is typically
limited to discussion of the Institution’s activities. Only a very significant or unusual transaction involving the Component Unit needs to flow up to the MD&A of the
Institution. For all years, the relationship and the nature of transactions between the
Institution and the Component Unit should also be discussed.
The opinion for all years will reference the work of the auditor of the Component
Units and the level of reliance on that work. Finally, the component unit’s opinion must reference Government Auditing Standards.
A draft opinion for the Institution is attached as Attachment B.
Footnote Disclosures from Component Units
Statement 34 and Statement 14 require that an overview of the Institution should
distinguish between the Institution and the Component Unit(s). For each major
component unit, the nature and amount of significant transactions with the
Institution should be disclosed, along with any other transactions between
Disclosures for the Component Units should be limited to those that are essential to
the fair presentation of the Institution’s basic financial statements. This needs to be
done on a case-by-case basis. Typically though, for a foundation, cash, investments,
receivables, fixed assets, payables and debt, if applicable, would be disclosed. The
focus on disclosure needs to be on information from only major Component Units.
Finally, a reference needs to be made in the Institution’s footnotes as to how to
obtain the Component Unit’s audited financial statements in describing the Component Unit relationship.
Other Financial Reporting Guidance
The financial statements should include all of the Institution's activities, which is to say it should include all appropriated and non-appropriated activity as
measured and reported in conformity with GAAP, including any component
unit(s) of the Institution.
The following items should be excluded from the Institution’s financial statements:
? For State Colleges, the State College Building Authority should be excluded from
an individual Institution's financial statements. These authorities are included in
the Commonwealth’s CAFR as blended component units. However, individual
State College financial statements should reflect payments to the State College
Building Authority in the appropriate expenditure category. In some cases, this
may be reported in auxiliary enterprises. Please review this with your auditor.
? Employee deferred compensation plan assets will be carried by the
Commonwealth as an Expendable Trust fund item. Individual Institutions should
not carry the assets on their Financial Statements.
The following items must be included in the Institution’s financial statements:
? Accounts Payable - The portion of this liability to be paid from state
appropriations should be offset by an asset labeled "Cash held by The State
? Compensated Absences - Institutions must accrue the vacation and sick leave
buyback liability related to all employees, i.e., employees paid from appropriated
and non-appropriated funds without regard to the future funding mechanism. This
liability should be calculated in accordance with GASB Statement No. 16, Accounting
for Compensated Absences, and displayed consistent with the guidance in GASB
Technical Bulletin 92-1, Display of Governmental College and University
Compensated Absences Liabilities. The HRCMS statewide system includes all
Institutions of Higher Education and is the official books and records of the
Commonwealth with regard to payroll. Compensated Absences are reported from
this system on the report HMBEN008 on view direct.
? Fringe benefit expenditures - Institutions must record expenditures for the cost
of fringe benefits. For employees paid from non-appropriated funds, fringe benefits
have already been charged against these funds at the approved fringe benefit rate.
? Liability for Workers’ Compensation - Institutions must record this information
derived from reports prepared from information available from the Human
Resources Division. This information is disseminated to Institutions in early
Forthcoming GASB Standards
The following standards have been issued as of the date of posting and will be
implemented in the following fiscal years:
Statement Description Implementation FY
40 Deposit and Investment 2005
Risk Disclosures – an
amendment to GASB
Statement No. 3
42 Accounting and Financial 2006
Reporting for Impairment
of Capital Assets and for
44 Economic Condition 2006
46 Net Assets Restricted by 2006
GASB Statement 40 – Deposit and Investment Risk Disclosures amends GASB 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements),
and Reverse Repurchase Agreements and GASB 28, Accounting and Financial
Reporting for Securities Lending Transactions. GASB 40 updates the custodial credit
risk disclosure requirements of GASB 3 and addresses other investment risks,
including credit concentration, interest rate and foreign currency risks. Portions of
the traditional statement 3 disclosures have been modified or eliminated. The
custodial credit risk portion (the traditional 3 category disclosure) has been modified
greatly, limiting required disclosures to:
? Deposits that are not covered by FDIC / DIFM and are (a) uncollateralized, (b)
collateralized with securities held by the pledging financial institution, or (c)
collateralized with securities held by the pledging financial institution’s trust
department or agent, but not in the government’s name.
? Securities that are unregistered or uninsured and are held by either (a) the
counterparty or (b) the counterparty’s trust department or agent but not in
the government’s name.
These two items are the traditional category 3 GASB 3 investment disclosures. The
statement however, does not change the required disclosure of authorized
investments or the requirements for reporting repurchase agreements or reverse
repurchase agreements. Most of the level of detail disclosure requirements of GASB
3 also remain. Implementation is for periods beginning after June 15, 2004
GASB Statement 42 – Accounting and Financial Reporting for Impairment of Capital
Assets and for Insurance Recoveries: This Statement establishes accounting and financial reporting standards for impairment of capital assets. A capital asset is
considered impaired when its service utility has declined significantly and
unexpectedly. This Statement also clarifies and establishes accounting requirements
for insurance recoveries. The provisions of this Statement are effective for fiscal
periods beginning after December 15, 2004. Earlier application is encouraged.
GASB Statement 44 – Economic Condition Reporting: The Statistical Section: This
Statement amends the portions of NCGA Statement 1, Governmental Accounting and
Financial Reporting Principles, that guide the preparation of the statistical section. The statistical section presents detailed information, typically in ten-year trends, that
assists users in utilizing the basic financial statements, notes to basic financial
statements, and required supplementary information to assess the economic
condition of the government.
The statistical section is a required part of a comprehensive annual financial report
(CAFR), although governments are not required to prepare a statistical section if
they do not present their basic financial statements within a CAFR. These
circumstances are not altered by this Statement. However, this Statement does
apply to any statistical section that accompanies a government’s basic financial
statements. The provisions of this Statement are effective for statistical sections
prepared for periods beginning after June 15, 2005.
GASB Statement 46 – Net Assets Restricted by Enabling Legislation: GASB
Statement No. 34, Basic Financial Statements - and Management’s Discussion and
Analysis – for State and Local Governments, requires that limitations on the use of
net assets imposed by enabling legislation be reported as restricted net assets. In
the process of applying this provision, some governments have had difficulty
interpreting the requirement that those restrictions be “legally enforceable.” The
confusion over this phrase has resulted in a diversity of practice that has diminished
This Statement clarifies that a legally enforceable enabling legislation restriction is
one that a party external to a government – such as citizens, public interest groups,
or the judiciary – can compel a government to honor. The Statement states that the
legal enforceability of an enabling legislation restriction should be reevaluated in any
of the resources raised by the enabling legislation are used for a purpose not
specified by the enabling legislation or if a government has other cause for
reconsideration. Although the determination that a particular restriction is not
legally enforceable may cause a government to review the enforceability of other
restrictions, it should not necessarily lead a government to the same conclusion for
all enabling legislation restrictions.
This Statement also specifies the accounting and financial reporting requirements if
new enabling legislation replaces existing enabling legislation or if legal enforceability
is reevaluated. Finally, this Statement requires governments to disclose the portion
of total net assets that is restricted by enabling legislation. The requirements of this
Statement are effective for financial statements for periods beginning after June 15,
Reconciliation of the Institution’s Financial Statements to the MMARS
appropriated fund activity
In order to prepare the Institutions of Higher Education audited financial statements,
the Institutions must combine internal activity (non-appropriated) with the activity
posted to MMARS (appropriated) and controlled by the State Comptroller. The
Comptroller’s Office then compiles all audited financial statements for the CAFR. An
important part of this process is to have the same activity reported consistently
between Institutions. The footnotes refer to the fact “no right to offset exists under
State statute” and therefore no “offsetting” is done. The authoritative literature
referencing “offsetting” relates only to balance sheet items where two entities owe
each other money. In addition, the Institutions of Higher Education are not separate
legal entities (Component Units) but are presented as business – type activities on
an aggregate basis by system in the Commonwealth’s CAFR.
An example is attached as Attachment C.
Fixed Assets on MMARS / NewMMARS (NOTE THAT THIS DOES NOT EFFECT
FUND 900 / 901 ACTIVITY)
Guidance was released in February 2004 on whether or not schools qualify for removal
of fixed asset information from MMARS. In general, Institutions of Higher Education
that issue separate, independent audits, completed and filed with the Office of the thComptroller on or before October 15 annually, may choose not to record fixed
assets on MMARS or NewMMARS. These eligible Institutions must have an auditable
fixed assets system available for inspection by the State Auditor’s Office and / or the
Office of the State Comptroller. At a minimum, the system must be capable of
tracking additions, betterments, changes, disposals, with gains and loses thereon.
Institutions must follow other guidance related to fixed assets issued by the Office of
the Comptroller with regard to, but not limited to:
? Accounting and Management
? Infrastructure (if applicable)
? Depreciation and Useful Lives
Via their independent audits and their footnote disclosure, Institutions are
representing that they comply with these practices.
Non – Compliance
If an Institution decides not to comply with these practices, they must use MMARS as
the record repository for their fixed asset information.
Choosing Not to Use MMARS / NewMMARS for Fixed Asset Reporting
Effective July 1, 2004, the majority of institutions have confirmed to us that
they will not use MMARS / NewMMARS for their fixed asset recordkeeping.
Choosing to remain using MMARS
If an Institution decides to continue using MMARS, MMARS will be the official record
of the Commonwealth. All information on MMARS must be reconciled to information
that is kept in Institution financial systems. All applicable MMARS policies and
procedures must be followed. The fixed asset balances in MMARS must be the GAAP
fixed asset balances reported in the Institution’s audited financial statements.
Instructions for Facilities to be Constructed by, or in conjunction with, the Division of
Capital Asset Management (DCAM)
Because long – term construction in process (CIP) will still be audited at the
Commonwealth, slightly different reporting, accounting and MMARS set-up will need
to occur based on the anticipated project spending. The two scenarios are below.
Institution Projects less than $1 Million where DCAM delegates Authority
If an Institution is delegated by DCAM to construct a project that is less than $1
million, DCAM and the Executive Office for Administration and Finance (ANF) will
create a major program and appropriations on NewMMARS for this construction for
the purpose of controlling allotments and spending. However, the setup of this
program will not create a fixed asset in NewMMARS. It is up to the Institution to
record this construction in process activity as it is spending these funds. The audit of
this activity will also be done at the Institution level.
Projects greater than $1 Million
If an Institution is approved for a project that is GREATER than $1 million, DCAM and
ANF will create a major program in NewMMARS, again not resulting in a fixed asset.
DCAM will also be responsible with ANF to create spending accounts and work with
OSC to record revenue that is contributed by Institutions to help facilitate the project.
If a betterment project is constructed on an asset that was removed from MMARS,
DCAM will assign the old statewide fixed asset number for its internal tracking
stAnnually, on or about August 31, DCAM will certify to each Institution the amount of
construction in process by project to help facilitate the audit of CIP. Upon
completion of the project, DCAM will send a final certification to the Institution
detailing the following:
1. The required asset identification number that is needed for DCAM
purposes for the project.
2. The cost of the project.
3. The date of the memo – which will serve as the “in service date” for
It will be on this certification date that the construction in process is intended to be
transferred from NewMMARS.
Impairment of Fixed or Other Assets and Insurance Recoveries
The Government Accounting Standards Board (GASB) has released Statement No. 42
Accounting and Financial Reporting for Impairment of Capital Assets and for
Insurance Recoveries, applicable starting in FY06. The Commonwealth is required to
evaluate prominent events or changes in circumstances affecting fixed or other
assets, such as cash, to determine whether impairment has occurred.
In the case of theft, fire, flood, obsolescence or other event regarding the usefulness
of an asset, be it fixed or non-fixed such as cash, departments need to evaluate the
usefulness or availability of that asset in the future. This may require outside
assistance from an appraiser and or the Office of the Comptroller (CTR) to determine
significance and applicability. Impairment must be conspicuous – e.g. known to the
Commonwealth that a material event has occurred. These events may be known by
management or the media.
All impaired assets if significant (greater than $100,000 in value) need to be
reported to the CTR General Accounting Bureau within 7 days of event occurrence.
For all unaccounted for variances, losses, shortages or thefts of funds or property,
the rules established under Chapter 647 of the Acts of 1989 apply. The CTR General
Accounting Bureau will work with you to determine if impairment exists and if there
is an event that needs to occur in MMARS.
Other Footnote Disclosure Requirements of a Higher Education Institution
Please be reminded that the financial statements must, at a minimum, include the
following footnote disclosures:
? Summary of Significant Accounting Policies
With respect to the Component Unit, the Summary of Significant Accounting Policies should include:
? A description of the Component Unit
? The relationship between the Component Unit and the Institution ? The criteria for inclusion of the Component Unit in the financial statements of the
? How the separately audited financial statements may be obtained. This is a general
reference to the Chief Financial Officer of the Institution.
If there are different fiscal year ends for the Component Unit and the Institution, a reconciliation of significant transactions between the Component Unit and the
Institution needs to be included for the period between the Component Unit’s year-end thand June 30.
Other GASB note disclosures for the Component Unit are generally NOT required. If there are significant items that are found in the Component Unit’s footnotes, they would translate up to the Institution’s footnotes in their applicable sections. If they
are presented, do NOT reformat their footnote from FASB to GASB format. Instead, present a separate subsection within the footnote clearly labeled “discretely
presented component unit(s).”
Other footnotes for the Institution should be:
? Disclosures for Cash Deposits and Investments ? Receivables
? Fixed Assets
? Advance Refunding and Short and Long Term Debt ? Leases
? MMARS Reconciliation (see above)
? Related Party Disclosures
? Subsequent Events
? Commitments and Contingencies
This should include lawsuits pending against the Institution and a disclosure of the lawsuits possibility of success categorized as probable or reasonably possible. Suits categorized as remote can be ignored. The estimated costs of lawsuits deemed
probable must be accrued as a liability.
If an attorney other than a special assistant attorney general represents the
Institution, note this in a transmittal to the Comptroller. Note that other attorneys have no authority to represent the Commonwealth.
? HEFA Agreements
The agreements within Massachusetts Health and Educational Facilities Authority will be treated as a lease purchase of fixed assets. In other words, the asset and the liability for the payment should be recorded as a fixed asset and a capital lease payable. Fees pledged to support principal and interest payments should also be recorded.