Accounting Practices & Financial Close Process

Policy Overview

Financial accounting information must be assembled and reported objectively. Third parties who rely on such information have a right to be assured that the financial data is free from bias and inconsistency. For this reason, financial accounting relies on certain standards or guides that are called "Generally Accepted Accounting Principles" (GAAP). All accounting practices within the Office of the CIO (Tub 175) are in accordance with GAAP as it pertains to non-profit organizations.

Principles and Definitions

Accounting Periods

In general, an accounting period is the time period reflected by a set of financial statements and ends on the passing of 12 months from the beginning of the accounting period. The University’s accounting period is consistent with the academic calendar, beginning July 1st of one calendar year and ending June 30th of the next calendar year.

Financial Statements

Financial Statements are written reports that quantitatively describe the financial health of the organization. The underlying source of the data on the financial statements is the general ledger system. Financial Statements include an income statement and a balance sheet, and may also include a Change in Net Assets Report. They are compiled and distributed to business management and financial staff on a monthly and annual basis.

Assets

An asset is anything owned which can produce future economic benefit, whether in possession or by right to take possession, and the measurement of which can be expressed in monetary terms. Assets are listed on the balance sheet and normally have a debit balance.

Liabilities

A liability is a present obligation of the organization arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits. Liabilities are listed on the balance sheet and normally have a credit balance.

Income Definition and Recognition Principle

Income is defined as funds received for goods and services rendered to customers. Income is accounted for in the period where the sale is made or when services are provided, rather than when the related bill, charge or cash, is rendered. If a financial transaction has not yet occurred, the business unit shall provide an accounting estimate equal to the services of goods provided for the period to date. Examples of typical income accruals include:

• Billing for services already performed
• Balance of monthly revenue when billing is cut off before month end
• Customers deposits

“Pass-through” items are not considered income but serve as a "depository" for assets or services, the costs of which are then passed on to the user.

For more information on income recognition, please see the Revenue Recognition and Billing Periods Policy.

Expense Definition and Recognition Principle

Expenses are costs incurred for business purposes during an accounting period (e.g. salaries, cost of goods sold, rent, supplies, etc.). Expenses should be itemized and accounted for in the period in which the goods are used or services provided. A reasonable estimate is acceptable when real values cannot be obtained.

For more information on expense recognition, please see the University’s Expense Recognition Policy.

Prepaid and Accrued Expenses

It is not uncommon for the actual payment of goods and services to take place in a different accounting period from the consumption of those goods and services.

Prepaid expenses are expense that have been paid for but have not yet been fully used or consumed at the end of the accounting period. Examples of typical prepaid expenses include:

• Annual maintenance contracts
• Dues and memberships
• Rents

Accrued expenses are expenses that have been incurred but have not been paid for at the end of the accounting period. Examples of typical expense accruals include:

• Consulting
• Salaries due at month end
• Current year portion of annual contracts

The threshold for all prepaid and accrued expenses is greater than or equal to $5,000 at fiscal year-end. For more information, please see the University's policies on Prepaid Expenses and Accrued Expenses .

Cost Principle

Assets acquired should be accounted for at the actual cost incurred regardless of estimated market values. For example, a piece of equipment acquired at a deep discount over current prevailing prices will be valued on the books at the amount paid to obtain it, not the current market price whether higher or lower. It is important to apply the Cost Principle to all charges incurred.

Matching Principle

The matching principle states that when it is reasonable to do so, revenues should be matched with expenses associated with generating those revenues. When expenses are matched with revenues, they are not recognized until the associated revenue is also recognized.

Conservatism

Where more than one accounting or measurement alternative is permissible, the one having the least favorable net income impact should be selected.

Materiality

Materiality is an important consideration when applying Accounting Principles. For example, accruals and prepaid expenses should be reported if they change the net position of any one business unit significantly. In this case, the University has set a materiality threshold of $5,000.

Timeliness

Accruals and prepaid expenses should not remain on the books as liabilities or assets after the period where they have been used or consumed. Department Finance should follow up to ensure that transactions are recorded in the proper accounting period.

Journal Entries

Overview

Journal entries are transactions to the general ledger to record certain events or activities. They can include certain automated or system generated transactions such as the recording of payroll, vendor payments, or customer billings. They may also include manual transactions such as expense accruals, overhead allocations, or reclasses/corrections. All journal entries should have supporting documentation that demonstrates proper application of accounting policies and practices. Below are the most common journal entries used by UIS/OAS.

Standard Recurring Entries

Standard recurring entries are those that occur at the same amount on a monthly basis. The journal entry files are established at the beginning of the fiscal year and are posted monthly. Examples of recurring entries include: space costs, technology costs, and the allocation of some prepaid expenses which are posted directly to the balance sheet (account 0540) at the time the invoice is paid and are added to the standard recurring entry file so that the cost is spread evenly over the proper period.

Non-Standard Recurring Entries

Non-standard recurring entries are those that occur on a monthly basis, but at different amounts each month. The journal entry templates (including description and account coding) are established at the beginning of the fiscal year. The amounts are input monthly and then posted to the general ledger. Examples of non-standard recurring entries include depreciation, indirect allocations, customer billings, lease agreements, and some prepaid expenses.

Accruals

Accruals are reversing entries that are posted at the end of the month, and reversed in a subsequent month when either the expense is paid, the revenue has been billed, or a new year-to-date amount is computed. Expense accruals can consist of unpaid payroll at month-end, indirect cost allocations that are based on expenses to-date, or accounts payable vendor accruals. The information for recording monthly accounts payable accruals is provided by the Accounts Payable system. At the end of each month, A/P generates the monthly accrual report, which details each transaction posted to the Accounts Payable system with a prior month invoice date. Finance and Planning reviews the transactions, identifies those items that should be accrued, and creates an ADI file that is forwarded to accounting for posting. In addition to the monthly accrual report, the Financial Partner may need to accrue for expenses incurred where an invoice was not received prior to the Accounts Payable cutoff. All expense accrual files are reversed (i.e. backed-out) of the General Ledger at the beginning of the next month. Income may also be accrued if the actual billing has not yet taken place, but the services have been rendered. These are also reversed in the next month, and rebooked accordingly.

Correcting, Non-recurring and True-up Entries

Correcting, non-recurring and true-up entries represent reclassifications of previously posted transactions into accounts that are either more reflective of cost ownership or expense classification, or are a more accurate distribution of the costs. These types of entries would be created as needed by the Financial Partners and Accounting Manager.

Financial Close Processes

Closing Schedules and Deadlines

The Summary Month-End Closing Schedule (including all relevant deadlines) is published on an annual basis and communicated to all financial staff and business management as part of the Financial Handbook, which is distributed at the start of the fiscal year. The Summary Closing Schedule is also posted on the UIS/OAS Financial Services website.

The Summary Year-End Closing Schedule, which provides the deadlines for each of the University closings is published in June of each year and distributed via email to the entire organization. The Detailed Year-End Closing Schedule includes a list of all transaction categories and is created and distributed to the financial organization in June. This schedule is reviewed by the UIS/OAS Financial Services and updated at weekly year-end closing meetings during the closing process.

Roles & Responsibilities

Accounting Staff and Management: It is the responsibility of the accounting staff to ensure that all transactions are posted in a timely manner and that all exceptions are identified for inclusion during the closing processes. Accounting staff are responsible for:

• Uploading manual journal entries both directly to Oracle and through ADI files, and verifying posting to the general ledger
• Transmitting invoices for payment to Central Accounts Payable and compiling a listing of vendor invoices to be reviewed by the Financial Partners during the closing process
• Ensuring all AP invoice batches are posted to the general ledger
• Reconciling all interdepartment/affiliate billings, posting them to the general ledger, and accruing as needed
• Ensuring all petty cash, Pcard, and UEF (corporate credit card and out of pocket) transactions are reviewed, approved and posted
• Reconciling daily cash and credit card deposits and accruing anything that does not get deposited by the month end deadline
• Entering assets and loan information into the UIS/OAS capital asset/debt management databases, posting depreciation journals, and reconciling database to OTM records.
• Maintaining the Month End Checklist and discussing the status monthly with Finance and Planning staff during the Month End Accrual Meeting

The Accounting Manager is responsible for reviewing and approving all transactions for accuracy and completeness as well as compliance with GAAP and University Policies. These transactions include but are not limited to: cash and receivables, accounts payables, and customer billings, etc. Accounting Manager is responsible for:

• Reconciling balance sheet accounts including prepaid and accrued expenses, receivables, inventory as well as any other miscellaneous accounts
• Reviewing all AP items from $50,000 to $250,000 and documenting approval via Payment Approval Form – Goods and Services.

Finance and Planning Staff: It is the responsibility of the Finance and Planning staff to understand the business operations of the groups they support and to apply that knowledge to all aspects of the closing and reporting process. Financial Partner’s are responsible for:

• Creating appropriate business related journal entries including reclasses, accruals, use of reserves, etc.
• Reviewing and approving UEFs
• Reviewing each YTD general ledger transaction affecting the business’s income statement and balance sheet
• Researching variances to determine if accruals or adjusting entries are needed
• Reviewing and creating accruals
• Ensuring inventory balances agree to supporting documents
• Analyzing and booking of cost allocations
• verseeing capital transactions including close out of new capital assets, establishing new loans, loan paydowns, placing assets in service, and asset transfers and write-offs.
• Ensuring all transactions are in compliance with GAAP and University Policies

Finance Director: It is the responsibility of the Finance Director to understand the business operations for all of the groups in the organization and to apply that knowledge in the oversight of the closing and reporting process. The Finance Director is responsible for:

• Reviewing and approving all journal entry transactions and all balance sheet account reconciliations
• Evaluating and approving all non-routine events and all permissible policy overrides
• Ensuring all unusual items and exceptions are identified, investigated, and properly resolved and recorded in the general ledger in the appropriate accounting period
• Reviewing and approving all Departmental Financial Statements, Flux Analysis, Budget Office Year-end Summaries, and Management Representation Letters
• Monitoring changes in authoritative guidance and regulations that affect the entity and making the appropriate changes to the entity’s accounting policies and procedures on a timely basis
• Ensuring all transactions are in compliance with GAAP and University Policies
• Reviewing all AP items greater than $250,000 and documenting approval via Payment Approval Form – Goods and Services.

Business Management: It is the responsibility of the business management to understand the financial operations for all of the groups in their organization and to apply that knowledge during the closing and reporting process. The business management is responsible for:

• Ensuring invoices from vendors and consultants are received and accurate according to the purchasing agreement
• Approving and delivering invoices to the UIS/OAS AP office by the month-end deadline
• Notifying Financial Partner of any expense or revenue accruals
• Ensuring revenue and expense is recorded on a timely basis
• Performing inventory counts and providing support to the Financial Services Organization for inventory adjustments
• Reviewing the General Ledger for accuracy
• Managing significant contracts and agreements and communicating the details to their Financial Partners
• Timely communication of planned and completed capital purchases to Financial Partner

OAS Director, Executive Director, and CIO: It is the responsibility of the OAS Director, Executive Director, and CIO to understand the financial operations for all of the groups in the organization and to apply that knowledge during the review of the financial information provided at the end of the closing and reporting process. The executive management is responsible for:

• Reviewing department financial statements
• Reviewing and approving periodic publications on budgeting and financial performance
• Informing financial staff of business decisions and initiative with potential financial impact
• Reviewing business rate models before public communication and rate changes
• Reviewing capital purchases, invoices and contracts based on the appropriate thresholds for each
• Reviewing financial and operational status of businesses with the appropriate business management personnel

Journal Entry Posting Process

All journal entries in Tub 175 are prepared and posted using the University ADI (automated data interchange) process. All ADI files are managed through the Sr. Financial Applications Analyst function as the single source for maintaining and posting of journal entry transactions. All ADI files should be reviewed as evidenced by sign-off by the Finance Director. Direct postings to the general ledger through the Oracle system are not standard practice of UIS/OAS Finance, and all such transactions must receive prior approval of the Finance Director.

Accounting for Non-routine Events

Non-routine items include management estimates (e.g. accruals) and adjusting and non-recurring journal entries. Some examples of non-routine events include, but are not limited to: asset write-offs, contingent liabilities, customer rebates, inventory write-offs, etc. Each non-routine event or transaction should have the following:

• Supporting analysis prepared and documented in accordance with relevant GAAP and internal accounting policies
• Data that is relevant, sufficient, reliable, valid, accurate and complete
• Analysis that is prepared on a timely basis
• Adequate supporting documentation
• Review by management for validity and completeness
• Independent review and approval by Finance Director
• Escalation to senior management as required

Assets and Loans

The UIS/OAS Capital Asset and Debt Management System are used to manage all Tub 175 capital assets and associated loans. The process and systems are managed and administered through the Sr. Financial Applications Analyst function, with oversight by a Sr. Financial Partner. Assets and loans are added to the database following the Capital Process Management Policy when the assets have been placed in service and the loan has been created. Transaction files to post depreciation and debt service are established at the beginning of the year and are updated as new assets come on board throughout the year. A depreciation “catch-up” file is also established to post prior month depreciation for mid-year assets in accordance with the University's full-year convention policies. All depreciation files and reconciliation schedules are sent to the Office of Treasury Management (OTM) on a monthly basis for posting and reconciliation with the University's central system. UIS/OAS relies on OTM to post loan principal and interest entries on a monthly basis.

Internal Reconciliations and Audit Schedules

Balance Sheet Accounts

All Tub 175 assets and liabilities are reconciled on a monthly basis, and include, but are not limited to the following accounts:

• Prepaids and Accruals
• Receivables
• Inventory
• Cash and Receivables

Capital & Debt

The Sr. Financial Applications Analyst along with the Sr. Financial Partner reconciles the UIS/OAS Capital Asset and Debt Management System to the general ledger bi-annually. The general ledger details for all current year capital asset, accumulated depreciation and loan object code transactions are compared to the UIS/OAS Capital Asset and Debt Management System to ensure the new asset/loan amounts agree to the general ledger and proper recording of depreciation expense and loan payments have occurred. All discrepancies discovered are communicated to Finance and Planning Staff and OTM in order for correcting adjusting entries to be posted to the general ledger prior to the currently fiscal year end.

Reserves

Reserve accounts include designated balances (3710) and business unit balances (3700). Transactions are posted to these accounts twice a year: through the year-end closing process administered by the Central University Financial Offices and through the internal annual balance re-distribution process performed with support of the Office of Fixed Asset Accounting. The balance re-distribution process simply moves the funds from the Tub level Org to the individual department level Orgs that are responsible for the separate fund balances. These accounts are reconciled on an annual basis by a Financial Partner during the year-end close process. For additional information, please see the Business Unit Balances & Reserve Policy.

Reviews and Approvals

All journal entries and non-routine events are reviewed through the following process:

• The Sr. Financial Application Analyst maintains copies of all journal entries uploaded during the closing process.
• The Financial Director compares these copies to a system generated report to ensure completeness.
• Journal Entry backup is requested by the Financial Director as appropriate.
• The Financial Director’s review is documented for subsequent independent review by signature and date on the bottom of each journal entry.

All Accounts Payable items are reviewed through the following process:

• Accounting Staff reviews all AP invoices for appropriate approval and compliance with AP Policies.
• Accounting Staff traces approximately five invoices from each batch to ensure posting to the general ledger.
• Financial Partners review the general ledger detail to ensure all AP items have posted, are coded correctly, and are recognized in the appropriate accounting period.
• Accounting Manager reviews all AP items from $50,000 to $250,000 and documents approval via Payment Approval Form – Goods and Services.
• Financial Director reviews all AP items greater than $250,000 and documents approval via Payment Approval Form – Goods and Service.

All department wide consolidated financial statements are reviewed through the following process:

• Office of the University CIO Financial Summary (CIO Summary) is prepared monthly from the general ledger by a designated Financial Partner.
• Each Financial Partner is responsible for reviewing the Financial Statements for his/her business units and ensuring that these amounts are adjusted to include all un-posted transactions.
• Once the Financial Partners have completed their review, the Financial Director is presented with and approves the CIO Summary by signature.
• Once approved by the Financial Director, the CIO Summary, as well as other business specific reports, is distributed by the Financial Partners based on the UIS/OAS distribution list.
• Business Management is expected to review their business unit’s financial statements and bring any issues forward to their Financial Partner in a timely manner.

Permissible Overrides Policy

Permissible overrides to existing policies and procedures for the financial closing and reporting process require properly evidenced authorization. This authorization must be documented for subsequent independent review and monitoring by completion of a Request for Deviation from Policy.

Reporting Package

Financial Statements

On a monthly basis and after year-end close (in accordance with the monthly and year-end closing schedules), all Tub 175 Business Managers receive a financial reporting package that includes a Departmental Summary Report, individual business unit income statements and a detailed transaction listing report. Additional balance sheet, capital and debt, and other ad hoc reports are also available upon request. For more information on Tub 175 reporting, please see the Financial Reporting Policy.

Summary of Annual Operating Results

After the fiscal year is closed, it is important for the organization to document the financial and operational results of that year. Therefore, on an annual basis, the Finance and Planning group manages the process to summarize this information, both at an organization level and at a group level. Managers and Directors are asked to provide written documentation supporting the:

• Operating Performance and Achievements
• Financial Results
• Rates
• Capital Investments
• Business Unit Balances & Reserves

This publication is distributed to the CIO, all Executive Directors, Directors and business managers, the University Budget Office and Vice President for Finance, the Office for Sponsored Programs - Cost Analysis and Compliance, and the Provost.

External Information Requests

Mid-year and Year-end Flux Analysis

Three times per year, Tub 175 is asked to complete a fluctuation analysis on the income statement and balance sheet. After running detailed reports comparing accounting periods, variance explanations are provided to the Office of the Controller.

Balance Sheet Reconciliation

University Budget Office – Summary of Year-end Results

After each year-end close in July, the UBO sends out requests for explanations of each Tub’s year-end financial results. In general, material fluctuations when comparing the year-end results to the prior forecast or budget are explained, and business unit balances and reserve uses are also explained.

Management Representation Letters

At the end of each fiscal year, each group director within Tub 175 is asked to complete and sign a management representation letter to attest to the timely and accurate reporting of financial transactions within their areas for the entire previous fiscal year. Each Director’s representation letter is then consolidated into one representation letter for the entire tub, and is signed by the Finance Director, Executive Director and CIO, and then submitted to the Vice President for Finance.

Core Funded IT Project Audits

After the third quarter and again after fiscal year end, worksheets are prepared and submitted to Office of Fixed Asset Accounting (OFAA) for use in the annual financial audit relating to the core-funded capitalized software development. OFAA provides the worksheets to the external auditors and arranges discussions with UIS/OAS Finance to address any specific questions. The purpose of the audit is to confirm software development projects were capitalized in compliance with Statement of Position (SOP) 98-1 and University capitalization policies.

Service Center Audits

Periodically UIS service centers are selected for an A-133 audit performed by University Risk Management and Audit Services. Their review includes calculation of rates and distribution of cosst. The purpose of the audit is to ensure compliance with the United States Government's Office of Management and Budget (OMB) Circular A-21 Cost Principles for Educational Institutions and Cost Accounting Standards, as it pertains to service centers in section J.44. For more detailed information on A-21 requirements please refer to the UIS Service Center Policy.

Unrelated Business Income Tax (UBIT)

After the close of each fiscal year the Tax Compliance Office reviews activities where unrelated business income may exist. The Tax Compliance Office will consult with any department that has unrelated business income to identify all reporting requirements and facilitate calculation of income and expenses for tax reporting purposes. For more information regarding unrelated business income please refer to the UBIT and Sales Tax Policy.

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