Date: June 26, 1997 Code: AD 97-06

To: Vice Presidents for Administration

From: George A. Pardon

Accounting Director

Business and Finance

Subject: Auxiliary Organizations: Supplementary Information to be Prepared for Inclusion in the Financial Statements of the California State University

In March 1996, BF 96-02 was sent to campus presidents delineating changes in the reporting requirements for all recognized campus 501(c)(3) auxiliary organizations. One of the changes was that campus auxiliary organizations would be included in the CSU's financial statements. This requirement is effective with the 1996/97 fiscal year audit. The auxiliary organizations will be shown in a discrete presentation rather than being blended into the CSU's financial statements. In order to achieve this presentation, each campus will have to combine the audited financial information from each of their auxiliary organizations into one column for inclusion in the combined systemwide statements and on the campus-specific financial statements, where applicable. The purpose of this memo is to provide the framework for the inclusion of the auxiliary organization financial information.

GASB Statement 14, The Financial Reporting Entity, establishes standards for defining and reporting on the financial reporting entity. Under this standard the financial reporting entity consists of: (a) the primary government, in this case the CSU; (b) organizations for which the primary government is financially accountable; and (c) other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity's financial statements to be misleading or incomplete. Based upon the nature and the magnitude of the services and functions provided by the CSU auxiliary organizations, the CSU recognized auxiliary organizations will be included in the CSU's financial statements on the basis that exclusion would cause the combined financial statements to be misleading.

In order to ensure that the financial statements of the CSU are as meaningful as possible, we are requesting that the financial statements of each auxiliary organization include Supplemental Information and that such information be covered by a full scope independent auditors' report. An example of an acceptable independent auditors' report is included as Attachment A. The information underlined on this example describes the required language. Other information, however, such as the title of the financial statements or the existence of any qualifications, will vary from organization to organization. Please provide a copy of this example to your audit firm.

Distribution: Presidents

Vice Presidents for Student Services

Accounting Officers

Auxiliary Organization Directors

KPMG Peat Marwick LLP (KPMG), the CSU's independent auditors, will reference the audit opinions of the auditors of the auxiliary organizations in their report on the combined financial statements of the CSU. Accordingly, each auxiliary organization's audit firm will need to consent to the inclusion of their report and will be required to furnish certain other information to KPMG with regard to their firm's independence from the CSU and other related matters. An example of this letter is included as Attachment B. Please provide a copy of this example to your audit firm.

The CSU recognizes that all of the auxiliary organizations do not prepare their financial statements on the same basis of accounting. Although the CSU will prepare its financial statements pursuant to the Governmental Accounting Standards Board (GASB), those auxiliary organizations that apply the standards of the Financial Accounting Standards Board (FASB) will not be required to adjust or convert their financial statements to GASB. However, the Supplemental Information that is referred to above will be requested in order that the financial information of the auxiliary organizations is consistent with the CSU's financial statement presentation. Examples of the Balance Sheet and Statement of Changes in Fund Balances that should be prepared are included as Attachments C and D. Please provide a copy of these examples to your audit firm.

The CSU has organized a committee (the GAAP Committee or the Committee) which consists of accounting and finance personnel from several CSU campuses and the Office of the Chancellor. The Committee consulted with members of auxiliary organizations on issues relating to them. One project of this Committee included identifying accounting and reporting issues between the auxiliary organizations and the CSU that need to be addressed to enhance the meaningfulness of including the auxiliary organization's financial statements in the financial statements of the CSU. This project resulted in the following reclassifications and other items that will need to be addressed by the auxiliary organizations in order to prepare the Supplementary Information referred to above.

1. Revenue Recognition

It is important that all revenue of the CSU be recorded in the financial statements at least once, but only once. In circumstances where an auxiliary organization may receive gifts or other receipts on behalf of the campus and records such gifts or receipts as an agency transaction, i.e., the auxiliary organization does not record the revenue, the campus must record such gifts or receipts in the period in which it was received or earned. It is important that the auxiliary organizations communicate the receipt of any such gifts or receipts to the campus as soon as possible.

2. Return of Surplus to Student Union Auxiliary Organizations

The amount of Student Union fees collected by the campus and remitted to the Chancellor's Office that are in excess of debt service payments are returned to the Student Union auxiliary organizations. These amounts are recorded as revenue on the financial statements of the auxiliary organization. Accordingly, such surplus amounts need to be eliminated from the fees initially received and recorded by the campus. The amount of such surplus can be determined by communication between the auxiliary organization and the campus.

3. Asset and Liability Classifications

The CSU's asset and liability classifications are illustrated on Attachment C.

• Investments - In those circumstances where the campus holds funds on behalf of the auxiliary organization, each of the entities will have investments recorded on their financial statements. In order that investments are not recorded twice in the combined financial statements of the CSU, the auxiliary organizations are being asked to provide an additional line item on the Supplemental Information entitled "Investments and other assets held by the CSU." These amounts will not be eliminated, but will be segregated on the face of the balance sheet so that the footnote for Investment Securities that will appear in the combined financial statements of the CSU will agree to Investments as reported on the balance sheet.
• Accounts Receivable and Accounts Payable - Accounts receivable and accounts payable among the auxiliary organizations and between the auxiliary organizations and the CSU will not be eliminated in the combined financial statements of the CSU. However, it will be necessary for the auxiliary organizations to segregate these amounts on the Supplemental Information and title such amounts as follows:
• Amounts receivable from other auxiliary organizations
• Amounts receivable from the CSU
• Amounts payable to other auxiliary organizations
  • Amounts payable to the CSU

4. Revenue and Expense Classifications

The CSU's revenue and expenditure classifications are illustrated on Attachment D to this letter. To assist the auxiliary organizations in preparing the Supplemental Information using these classifications, the following is a description of the types of revenues and expenditures, that may be applicable to the auxiliary organizations, that are included in each category.

Revenues

• Fees and Tuition - Includes mandatory fees paid by students, such as fees paid at the time of registration, lab fees and other fees required to be paid by the student to attend the CSU or a particular class. Voluntary user fees and penalty fees, such as library fees, child care fees, bowling alley fees and the like should not be included in this category.
• Investment Income - Includes all investment income including interest income, dividends, realized gains and losses and unrealized gains and losses.
• Endowment Income - Includes unrestricted income from endowments and similar funds, restricted endowment income to the extent expended for educational and general purposes, and income from funds held in trust by others under irrevocable trusts.
• Federal Grants and Contracts - Includes all unrestricted amounts received or made available by grants and contracts from Federal agencies for current operations and all amounts received or made available through restricted Federal grants and contracts to the extent expended for current operations. For auxiliary organizations managing Federal grants and contracts, this amount may be shown currently in Sponsored Programs Support on the Statement of Activities.
• State Grants and Contracts - Includes all unrestricted amounts received or made available by grants and contracts from State agencies for current operations and all amounts received or made available through restricted State grants and contracts to the extent expended for current operations. For auxiliary organizations managing State grants and contracts, this amount may currently be shown in Sponsored Programs Support on the Statement of Activities.
• Private Gifts, Grants and Contracts - Includes amounts from non-governmental organizations and individuals, including funds resulting from contracting or the furnishing of goods and services of an instructional, research or public service nature. It includes all unrestricted gifts, grants and bequests as well as all restricted gifts, grants and contracts from non-governmental sources to the extent expended in the current fiscal year for current operations. For auxiliary organizations receiving gifts and non-governmental grants and contracts, this amount may currently be shown in Sponsored Programs Support, Contributions and/or Pledges on the Statement of Activities.
• Sales and Services of Educational Activities - Includes revenues that are related incidentally to the conduct of instruction, research and public service and revenues of activities that exist to provide an instructional and laboratory experience for students and that incidentally create goods and services that may be sold to students, faculty, staff and the general public. Examples of revenues of educational activities are film rentals, sales of scientific and literary publications, testing services, sales of products and services of dairy creameries, food technology divisions and poultry farms. If sales and services to students, faculty or staff, rather than training or instruction, is the purpose of an activity, the revenue should be classified as sales and services of auxiliary enterprises, as described further below.
• Sales and Services of Auxiliary Enterprises - An auxiliary enterprise is an entity that exists to furnish goods or services to students, faculty or staff and that charges a fee directly related to, although not necessarily equal to, the cost of the goods or services. The distinguishing characteristic of auxiliary enterprises is that they are managed as essentially self-supporting activities. Examples are residence halls, food services, intercollegiate athletics (only if essentially self supporting), student unions, college stores, parking and faculty housing. Student health services, when operated as an auxiliary enterprise, should also be included. The general public may be served incidentally by auxiliary enterprises. Activities such as subsidized child care centers and other services that are not essentially self supporting should not be included in this category. This should be evaluated, to the extent considered significant, on a case-by-case basis.
• Other - This category should include all sources of revenues not included in other classifications. Examples would be subsidized child care centers and other services that are not essentially self supporting and certain other activities that may be unique to a particular auxiliary organization.

Expenditures

• Instruction - This category should include expenditures for all activities that are part of an institution's instruction program, with the exception of expenditures for remedial and tutorial instruction, which should be categorized as Student Services. Expenditures for credit and noncredit courses, for academic, occupational, and vocational instruction, and for regular, special, and extension sessions should be included. Expenditures for departmental research and public service that are not separately budgeted should be included in this classification. This category excludes expenditures for academic administration when the primary assignment is administration--for example, academic deans. However, expenditures for department chairmen, in which instruction is still an important role of the administrator, are included in this category.
• Research - This category should include all expenditures for activities specifically organized to produce research outcomes, whether commissioned by an agency external to the institution or separately budgeted by an organizational unit within the institution. Subject to these conditions, it includes expenditures for individual and/or project research, as well as those of institutes and research centers. This category does not include all sponsored programs (training grants are an example) and it is not necessarily limited to sponsored research, since internally supported research programs, if separately budgeted, might be included in this category under the circumstances described above. Expenditures for departmental research that are separately budgeted specifically for research are included in this category.
• Public Service - This category should include funds expended for activities that are established primarily to provide non-instructional services beneficial to individuals and groups external to the institution. These activities include community service programs (excluding instructional activities) and cooperative extension services. Included in this category are conferences, institutes, general advisory services, reference bureaus, radio and television, consulting, and similar non-instructional services to particular sectors of the community.
• Academic Support - This category should include funds expended primarily to provide support services for the institution's primary missions--instruction, research, and public service. It includes: (1) the retention, preservation, and display of educational materials--for example, libraries, museums, and galleries; (2) the provision of services that directly assist the academic functions of the institution, such as demonstration schools associated with a department, school, or college of education; (3) media, such as audiovisual services and technology such as computing support; (4) academic administration (including academic deans but not department chairs) and personnel development providing administrative support and management direction to the three primary missions; and (5) separately budgeted support for course and curriculum development. For institutions that currently charge certain of the expenditures--for example, computing support--directly to the various operating units of the institution, such expenditures are not reflected in this category.
• Student Services - This category should include funds expended for offices of admissions and the registrar and those activities whose primary purpose is to contribute to the student's emotional and physical well-being and to his intellectual, cultural, and social development outside the context of the formal instruction program. It includes expenditures for student activities, cultural events, student newspapers, intramural athletics, student organizations, intercollegiate athletics (if the program is operated as an integral part of the department of physical education and not as an essentially self-supporting activity), supplemental educational services to provide matriculated students with supplemental instruction outside of the normal academic program (remedial instruction is an example), counseling and career guidance (excluding informal academic counseling by the faculty), student aid administration, and student health service (if not operated as an essentially self-supporting activity).

Auxiliary organizations that provide services to students should report expenses for activities that are not self supporting in this category.

• Institutional Support - This category should include expenditures for: (1) central executive-level activities concerned with management and long-range planning of the entire institution, such as the governing board, planning and programming, and legal services; (2) fiscal operations, including the investment office; (3) administrative data processing; (4) space management; (5) employee personnel and records; (6) logistical activities that provide procurement, storerooms, safety, security, printing, and transportation services to the institution; (7) support services to faculty and staff that are not operated as auxiliary enterprises; and (8) activities concerned with community and alumni relations, including development and fundraising.

This category should only be used for those auxiliary organizations that provide administrative support services to a variety of different types of activities within their organization and where the administrative costs have not or cannot be allocated to the various categories (e.g., student services, auxiliary enterprises, etc.).

• Operation and Maintenance of Plant - This category includes all expenditures of current operating funds for the operation and maintenance of physical plant, in all cases net of amounts charged to auxiliary enterprises, hospitals, and independent operations. It includes all expenditures for operations established to provide services and maintenance related to grounds and facilities. Also included are utilities, fire protection, property insurance, and similar items. It does not include expenditures made from institutional plant fund accounts.

This category should only be used for those auxiliary organizations that provide plant maintenance support services to a variety of different types of activities within their organization and where these costs have not or cannot be allocated to the various categories (e.g., student services, auxiliary enterprises, etc.).

• Scholarships and Fellowships - This category should include expenditures for scholarships and fellowships in the form of outright grants to students selected by the institution and financed from current funds, restricted or unrestricted. It also should include trainee stipends, prizes, and awards, except trainee stipends awarded to individuals who are not enrolled in formal course work, which should be charged to instruction, research, or public service as appropriate.
• Auxiliary Enterprises - This category includes all expenditures and transfers relating to the operation of auxiliary enterprises, including expenditures for operation and maintenance of plant and for institutional support; also included are other direct and indirect costs, whether charged directly as expenditures or allocated as a proportionate share of costs of other departments or units.

Auxiliary organizations that report their revenues as auxiliary enterprises should report the related expenses in this category.

Timing

The timing of the issuance of the combined financial statements of the CSU is such that audited financial statements including the Supplemental Information requested above, as well as the auditor letter illustrated in Attachment B to this letter, must be submitted to the campus no later than October 31, 1997. (Individual campus presidents or auxiliary organizations may set earlier due dates.)

A GAAP listserver has been set up for the purpose of sharing information and discussing CSU financial statement issues. To subscribe, send a message to listserver@calstate.edu (no topic) with the following contents:

subscribe gaap first-your first name last-your last name

(example: subscribe gaap first-George last-Pardon)

To unsubscribe, send a message to listserver@calstate.edu with: unsubscribe gaap. When subscribing, use a plain e-mail form. Some of us have e-mail forms with fancy headings that will be rejected during the subscription process.

To post to the listserver, send the message to gaap@calstate.edu. Potential senders must first subscribe to the listserver before they can post to it. You will get a verification from the listserver that you have been added. You will also be informed if there was a problem. Once you have subscribed to the GAAP listserver, you will receive a copy of any e-mail that was posted to gaap@calstate.edu.

Please contact me or Ruth Stipp with questions regarding any of these issues at (562) 951-4610 or e­mail george_pardon@calstate.edu and ruth_stipp@calstate.edu, respectively.

GAP:RS:js AD 97-06

Attachments

Attachment A

The Board of Directors

CSU Auxiliary Organization:

We have audited the accompanying balance sheet of CSU auxiliary organization as of June 30, 1997, and the related statements of earnings, retained earnings, and cash flows for the year then ended and the supporting schedules 1 and 2 (supplementary information on pages _ to _). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement and schedule presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CSU auxiliary organization as of June 30, 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles, and the supporting schedules 1 and 2 (supplementary information on pages _ through _), in our opinion, present fairly, in all material respects, the information set forth therein.

Attachment B

Page 1 of 2

Date

Auxiliary Organization Auditor

(Address)

Dear ___________:

We have been engaged to audit the combined financial statements of the California State University as of and for the year ending June 30, 1997 for the purpose of forming an opinion as to whether the combined financial statements present fairly, in all material respects, the financial position and the results of operations of the California State University in accordance with generally accepted accounting principles.

In accordance with Governmental Accounting Standards Board Statement No. 14, "The Financial Reporting Entity", the audited financial statements of the recognized auxiliary organizations of the California State University will be included in the overall combined financial statements of the California State University.

We are writing to you to make you aware that KPMG intends to rely upon and refer to your independent auditors report on (Auxiliary Organization) in KPMG's overall independent auditors' report on the combined financial statements of the California State University. Information regarding the timetable for the audit and the reporting requirements will be communicated to (Auxiliary Organization) by the California State University's Chancellor's Office.

In accordance with AICPA Professional Standards AU Section 543, we request that you confirm to us in writing your independence from both the (Auxiliary Organization) and the California State University.

Also, in accordance with AICPA Professional Standards AU Section 543, we are informing you that we will review matters affecting eliminations of inter-entity transactions and accounts and, if appropriate, the uniformity of accounting practices among the auxiliary organizations included in the combined financial statements. If any matters come to your attention that you believe may have an important bearing on KPMG's audit of the California State University, I ask that you inform me immediately.

If you have any questions regarding the above, please do not hesitate to contact me at (XXX) XXX-XXXX. For your convenience in confirming your independence, we have provided a space below for you to sign. Please return your confirmation to my attention in the enclosed envelope.

Thank you for your cooperation.

Very truly yours,

KPMG Peat Marwick LLP

Attachment B

Page 2 of 2

John Doe

Partner

Confirmation

I have read and understand the above information. I am familiar with the Professional Standards regarding independence and I confirm as engagement partner for (Auxiliary Organization) that I and my firm are independent from both (Auxiliary Organization) and the California State University.

___________________________

Firm Name

___________________________

Partner/Proprietor Signature

Attachment C

Balance Sheet

Assets

Cash and cash equivalents

Accounts Receivable, net

Pledges Receivable, net

Amounts receivable from other auxiliary organizations

Amounts receivable from the CSU

Investments

Investments held by the CSU

Prepaid expenses and other assets

Property, plant and equipment, net

Total Assets

Liabilities and Net Assets

Liabilities:

Accounts payable

Accrued salaries and benefits payable

Amounts payable to other auxiliary organizations

Amounts payable to the CSU

Accrued compensated absences

Capitalized lease obligations

Depository accounts

Other liabilities

Total Liabilities

Fund Balances and Net Assets:

Fund Balances (GASB entities only):

Unrestricted

Restricted

Unexpended plant, restricted

Net investment in plant

Total Fund Balances

Net Assets (FASB entities only):

Unrestricted

Temporarily Restricted

Permanently Restricted

Total Net Assets

Total Fund Balances and Net Assets

Total Liabilities, Fund Balances and Net Assets

Attachment D

Statement of Changes in Fund Balances (Net Assets)

Revenues

State appropriations

Fees and tuition

Investment income

Endowment income

Federal grants and contracts

State grants and contracts

Private gifts, grants, and contracts

Sales and service of educational activities

Sales and service of auxiliary enterprises

Other

Total Revenues

Expenditures (Expenses)

Educational and general:

Instruction

Research

Public service

Academic support

Student services

Institutional support

Operation and maintenance of plant

Student grants and scholarships

Educational and General Expenditures (Expenses)

Other Expenditures (Expenses)

Auxiliary enterprise expenditures (expenses)

Loss on write-down of investments

Loan cancellations and write-offs

Capital outlay

Interest expense

Disposal of plant facilities

Other

Total Other Expenditures (Expenses)

Net Increase (Decrease) in Fund Balances (Net Assets)