Policy
Overview
Harvard’s Service Center departments function as business units, where the majority of the operating
funds for these departments are provided through some form of fee-for-service
charge to its customers. The schools are rarely required to use University
services, and many of the services face direct competition from outside the
University. Therefore, Service Center departments must be competitive,
self-supporting, and operate only on a cost-recovery basis. They are not
intended to be profit centers. However, surpluses and deficits may be
generated from time to time.
Additionally, depending on the
nature of the business, some service departments may also carry balances in
accounts to fund additional needs as they arise in the business operations.
These reserves, allowances, contingent liabilities and/or accrued expenses must
be documented and substantiated, and are subject to A-21 Service Center
scrutiny.
This policy provides an
understanding of unrestricted business unit balances, unrestricted designated
reserves, and contingent liabilities & allowance accounts and the
corresponding accounting treatment of each.
Unrestricted
Business Unit Balances
Definition
Unrestricted business unit balances
represent the accumulation of surpluses and/or deficits generated by a business
unit from year to year. At the end of each fiscal year, each business unit’s
“bottom line” is added or subtracted from the prior year’s carry-forward
balance to obtain the businesses’ current fund balance.
Break-even
Concept
Although, in most cases, it
is ideal for a business unit to break-even each year, several factors may result
in a business generating a surplus or deficit, either intentionally or
unintentionally, including:
Intentional
Surpluses or Deficits:
- To return or recover a
prior year surplus or deficit to customers
- To provide working capital
for ongoing operations
Unintentional
Surpluses or Deficits:
- When rates are based on
customer volumes that fluctuate from original estimates
- When changes to customer
bases or services provided result in unplanned revenue shifts
- When unplanned increases
or decreases in expenses occur
When a business unit creates
a surplus or deficit, the balance will be transferred from the operating
accounts into the balance sheet and will be carried in an interest bearing
account until it is off-set in future years. The business unit must develop
and/or adjust rates so that revenues offset expenses over a reasonable period
of time.
Types
of Unrestricted Balances
1. Working Capital
- In addition to full recovery of
actual costs, service centers may also establish and maintain a Working Capital
fund balance for immediate spending needs. Working capital funds are intended
to ensure that the Service Center has the ability to pay short-term obligations
(e.g. payroll, operating expenses, cost of goods sold, debt maintenance, etc.),
as they arise. The working capital allowance should not exceed 60 days of
annual operating expenditures and should be tracked and adjusted to appropriate
levels annually.
2. Business Balances
- Business unit balances represent
the “roll-forwards” of the prior year surplus or deficit for each Tub 175
business or project unit, and as such, represent the true position of each
business at the end of each fiscal year. They are comprised of balances
maintained in accounts 3700 (unrestricted/undesignated balances), 3800 (funds
invested in facilities) and 3810 (funds invested in equipment). Service
Center policy requires that each business track these
balances and refund or recover the surplus or deficit in subsequent fiscal
years.
Surpluses
and Deficits
Surpluses and Deficits Less that 10%. The
surplus or deficit for a given fiscal year should not exceed 10% of annual
operating expenses. To the extent that a surplus or deficit is within the break-even
range of +/- 10%, that surplus or deficit must be carried forward and the
rates adjusted in the following period.
Surpluses and Deficits
in Excess of 10%. When it appears at mid-year that the operating
results will exceed the 10% break-even range, the service center should adjust
its rates mid-year.
If, at fiscal year end, the
service center's operating results exceed the 10% break even range: surpluses
beyond the 10% range must be eliminated through retroactive adjustments to
users, or deficits beyond the 10% must be funded by another non-federal
source and transferred into the service center account.
Service centers may also
negotiate a long-term break-even agreement with the University's federal
cognizant agency so that rates reflect actual costs over an accepted period of
time.
Long-Term Break-Even
Agreements. In unique situations, when a service center requires
a multiple-year period in which to recover its operating costs, a long-term
break-even agreement can be negotiated. This usually occurs when operations
require initial large capital equipment and building costs. Such agreements
must be negotiated with the University's federal cognizant agency. The need for
such an agreement must be presented to and reviewed by the School Finance
Officer and the Office of Cost Analysis.
Transfers. Service centers which have accumulated surplus funds
through billings to internal users may not transfer these funds out of the
service center operating account. The balance must be carried forward and used
to adjust subsequent billing rates.
Tracking
Balances
At the end of each fiscal year, a Business Unit Balance
Summary Table is published by UIS/OAS Financial Services as part of the Summary
of Annual Operating Results Report. This table details all the activity
related to each Business Unit, and is comprised of balances maintained in
accounts 3700 (unrestricted/undesignated), 3800 (funds invested in facilities),
and 3810 (funds invested in equipment). Business Managers are responsible for
tracking their individual business unit balances to ensure compliance with Service Center policies outlined above. A sample of the year-end report is shown below.
Estimating Appropriate Balances
In order to ensure rate stability over multiple periods,
businesses that are capital intensive, businesses in a technology transition,
businesses with reorganization plans or other significant cost activity should
target larger business unit balances than others that do not have costly future
plans.
Rate Adjustments
Annual Rate Changes
Because the Harvard community
is very sensitive to rate volatility, every effort should be made to ensure
that rates remain stable and do not grow more than a reasonable increase for
University departments. The rationale for higher increases (e.g. required
capital investments, changes in technology, increased security requirements,
etc.) should be well understood and approved by the Executive Director, the
CIO, and the Rate Advisory group, prior to implementation. Rate decreases or
rate rebates can occur from time to time; however, before giving a rate
decrease, a director must do a multi-year rate model to demonstrate that rate
stability over multiple years can be maintained, and that future rate spikes
will not occur.
Mid-year Rate Changes
Mid-year changes to customer rates are
rare and should only be provided in the following circumstances:
- When mid-year surpluses are
greater than 10% of total expenses and Service Center Policy requires a
reduction or rebate
- When an increase/decrease
in volume significantly changes the cost per unit
- When a change to the rate
methodology or unit cost can save the University significant amounts of
money by promoting leveraging or avoiding duplicate environments
- When other extraordinary
changes occur in the business
For more information on
mid-year rate changes, please see the UIS Rate
Development Process policy.
Unrestricted Designated Reserves
Reserve
Definition
Unrestricted Designated
Reserves are allowable accumulations of funds that have been set aside (i.e.
designated) for a specific purpose in account 3710. The purpose, use and
optimal balance of the reserve must be clearly defined at the time the reserve
is established.
What
is Allowable
Service Center Policies do
not allow for the accumulation of reserves to pay for future events (e.g.
equipment upgrades), therefore, only certain areas/activities can maintain
these types of funds in a designated account. UIS maintains allowable reserves
for interest earned on business balances, auxiliary services, building renewal
and infrastructure upgrades, and core funded IT Projects.
Contributions/Uses
Business units cannot spend
directly out of their reserve accounts, nor can they contribute to them
directly from operating funds. Contributions and uses are recorded in the
general ledger annually (usually at year-end) through the use of transfer
accounts (i.e. 9300 object codes range), and are reported below the businesses’
net operating position for the year.
Tracking
Balances
At the end of each fiscal year, a Reserve Summary Table is
published by UIS/OAS Financial Services as part of the Summary of Annual
Operating Results Report. This table details all the activity related to each
account, including beginning balance, contributions/uses, and ending balance.
Business Managers are responsible for tracking their reserve balances to ensure
compliance with Service Center policies. A sample of the year-end report is
shown below.
Estimating Appropriate Balances
The target balance for designated reserves should be at a
level consistent with the needs of the specific project or initiative for which
the money was set aside. The target for designated balances associated with
specific buildings should be equivalent to potential mid-term planning needs
for items such as maintenance or infrastructure improvements that are not
covered in the lease agreement.
Contingent Liabilities and Allowance Accounts
Definition
Contingent liabilities result
from the possible outflow of cash that may or may not be incurred by a business
and which is dependent on the outcome of a forthcoming event. Examples of
contingent liabilities include potential contract liabilities or outstanding
legal cases. In order to be placed on the balance sheet, a contingent
liability must be probable, material and quantifiable.
Allowance for Uncollectible Receivables
An Allowance for
Uncollectible Receivables measures receivables recorded, but not expected to be
collected. Often, it is not known which specific accounts receivable invoices
will be uncollectible. An allowance is therefore established to estimate the
value of those receivables believed to be uncollectible.
Allowance for Inventory Write-offs
An Allowance for Inventory Write-offs measures inventories
on the books, but not expected to be sold. These inventories may not be sold
due to obsolescence, shrinkage, damage, etc. Often, it is not known which
specific inventory items will be sold. An allowance is therefore established
to estimate the value of those inventories that are likely to be written off.
Estimating Appropriate Balances
For contingent liabilities,
the estimated balance should be equal to the estimated future cash outlay. For
allowance accounts, the estimated balance should be determined using historical
write-off averages over several years. For example, if annual inventory
write-offs average $10,000 and annual sales average $100,000, then the
allowance account should maintain a balance of 10% of sales, or $10,000. If
inventory write-offs in a given year are only $5,000, then that particular
year’s contribution into the reserve would only need to be $5,000 in order to
maintain the $10,000 level.
Interest Income/Expense on Balances
Interest
Policy
Some unrestricted balances
sit in interest bearing accounts and are subject to University interest
transaction rules, while others do not. Interest bearing accounts with
surpluses (i.e. credit balances) at fiscal year end earn interest income, while
those with deficits (i.e. debit balances) are charged interest expense. The
University calculates interest income and expense once the general ledger has
closed for the fiscal year, and posts it in the subsequent fiscal year. Business
managers are responsible for understanding the balances in their accounts,
including the potential impact of interest.
For
More Information
Should you have any questions or concerns, please contact
your Financial
Partner.
