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HARVARD UNIVERSITY FINANCIAL POLICY
Responsible Office: Financial Accounting and Reporting Date First Effective: 7/1/ 2007 Revision Date: 6/30/
Expense Recognition
Policy Statement
This policy establishes when operational expenses must be recorded at the University. The University reports its expenses on the accrual basis, meaning when the expenses are incurred, not necessarily when they are paid. Expenses are generally incurred when Harvard receives goods or services.
Reason for Policy
This policy exists to ensure adherence with Generally Accepted Accounting Principles (GAAP) and other regulatory requirements, to promote consistent accounting treatment across the University, and to ensure the operating results of University units are not misstated as a result of expenses unrecorded or recorded improperly.
Who Must Comply
All Harvard University schools, tubs, local units, Affiliate Institutions, Allied Institutions and University-wide Initiatives must comply.
Procedures
1. Understand accrual rules for expense recognition. A. Accrual accounting rules require Harvard to record expenses when they are incurred, meaning when the goods are received or the services are provided, whether or not an invoice has been received or payment has been made.
B. Balance sheet entries: if Harvard doesn’t pay for goods/services in the same quarter as it receives them, then Harvard needs to record an entry on its balance sheet. The type of balance sheet entry depends on when Harvard receives the goods/services relative to when Harvard pays for them. The tubs and Central administration are each responsible for recording balance sheet entries for certain types of expenses. See Appendix A.
C. Do not record balance sheet entries for internal transactions. No accruals or prepaid expense items should be recorded for internal transactions. See the University’s Internal Billing Transactions Policy.
2. Record balance sheet entries as needed. A. Central offices process certain types of expenses, such as accrued expenses for quarter-end salaries and wages. See Appendix B for school/tub responsibilities by expense type. B. Thresholds: At the end of each quarter, tubs must record certain manual entries for items not yet paid through the Central A/P system, if over the thresholds below (which exclude construction in progress (CIP) items). Smaller items may be recorded at each tub’s discretion. a. Quarter-end: manual entries are required for items of $50,000 or more ($100,000 for large schools – FAS, HMS, HBS, SPH). b. Year-end: manual entries are required for items greater than or equal to $10,000. 3. Apply special accounting rules for certain types of expenses. A. Expense credits a. Receipts that offset or reduce expense items are considered credits to expenses. Expense credits include purchase discounts; rebates and allowances; recoveries or indemnities on losses; and adjustments for overpayments or erroneous charges.
Title: Expense Recognition Page 1 of 2
HARVARD UNIVERSITY FINANCIAL POLICY
Responsible Office: Financial Accounting and Reporting Date First Effective: 7/1/ 2007 Revision Date: 6/30/
b. Unless a specific object code exists to record such expense credits, they must be recorded as credits to the original expense coding, (i.e., the 33-digit coding used to initially record the expense or payment that is being reimbursed), not as income or credits to object code 8880, “Expense Credits, Other, GENERAL."
B. Pass-throughs: DO NOT record revenue for pass-through expenses and expense reimbursements or recoveries, record these as credits to the original expense coding. For example: if Harvard partners with another university to hold a conference and receives reimbursement for some of the conference costs (i.e., NOT conference attendance fee revenue), the reimbursement should be credited to the appropriate expense object code or codes, not recorded as revenue.
4. Maintain appropriate supporting documentation.^ The tubs must maintain documentation supporting expense transactions that details the nature of the goods or services received (or to be received), such as account coding to charge, the date the goods or services were (or will be) provided, authorization from the approver ordering the goods or services, and vendor contact information. 5. Review and reconcile balances. All tubs must reconcile and maintain supporting documentation for manually-recorded quarter-end accrued expense, prepaid expense, and deposits paid balances. Investigate variances and take corrective action on a quarterly basis at minimum. 6. Reverse or reduce entries as needed. The unit that processes a manual accrued expense, prepaid expense or deposits paid entry is responsible for reversing the entry when payment is made or goods/services received.
Responsibilities and Contacts
Financial deans or equivalent tub financial officers are responsible for ensuring that local units abide by this policy and the accompanying procedures. The tubs have ultimate responsibility for accrued expense, prepaid expense and deposits paid balances.
Financial Accounting and Reporting (FAR), within the Office of the Controller, is responsible for maintaining this policy and for answering questions regarding the policy. Contact: (617) 495-
Central Accounts Payable Office (Central A/P) is responsible for paying invoices, based on information provided to their office by the tubs. Contact: (617) 495-
Office for Sponsored Programs (OSP) is responsible for providing guidance on and answering questions about A- classifications and unallowable expenses. Contact: (617) 496-
Definitions
N/A
Related Resources
Internal Billing Transactions: http://hwpi.harvard.edu/fad_policies/pages/internal-billing-transactions
Revision History
6/30/2013: Updated format, required material transactions to be recorded on a quarterly basis (instead of annually).
Appendices
Appendix A : Expense Recognition Quick Reference Guide Appendix B : Guide to Expense Recognition by Expense Type Appendix C : Examples of Proper Expense Recognition Accounting
Title: Expense Recognition Page 2 of 2
Appendix B: Guide to Expense Recognition by Expense Type
Tubs are responsible for recording the following types of accrued expenses:
Library purchases Due to limitations in certain library systems, units must develop processes to ensure purchases are recorded in the correct quarter.
Employee termination costs
If an employee is terminated, any termination costs (e.g., severance, enhanced severance, work security, career outplacement fees, training, and other severance-related costs including benefits) that will be paid after the fiscal year-end must be accrued if the following qualifications are met:
- Notice was given to the employee prior to quarter-end; and
- The University does not require the employee to work or otherwise provide services or consultation after quarter-end for more than two months’ time.
If a terminated employee continues to work for the University for more than two months during the subsequent quarter-end, a portion of the termination costs may be accrued. Consult Financial Accounting and Reporting in such cases.
Extra/additional compensation
Extra/additional compensation is not accrued by Central Administration as part of the year- end payroll accrual. To the extent that significant bonuses and other extra/additional compensation paid in July or later relate to the fiscal year ending in June, tubs must record an accrual at year-end. Payments that cross the calendar year may create deferred compensation that has income tax implications to the recipient; contact Tax Reporting for more information.
Insurance Insurance accruals must be recorded for policies managed directly by the tubs rather than through the Insurance Office. The accrual should be based upon the number of days/months in the policy period that fall into the current fiscal year as compared to the total contractual term for policies that are billed and paid subsequent to year-end.
Financial Aid Financial aid expense should be recognized in conjunction with the associated student revenue. See the Revenue Recognition policy, Appendix B.
Fellowships and stipends
To the extent that significant fellowships or stipends paid in July or later relate to the fiscal year ending in June, tubs must record an accrual at year-end.
Incurred but not recorded (IBNR) insurance claims
In order to account for the time lag in claims, both the University and UHS record “IBNR accruals.” These accruals estimate the amount of claims that will be received in the future relating to the current period. These accruals are recorded on a periodic basis throughout the fiscal year.
Other Accruals other than A/P accruals may be reduced as payments are made (i.e. severance or IBNR accruals). If the payment in the subsequent period is more or less than was accrued, the difference will be reflected in the following period’s results.
Expense Recognition – Appendix B Page 1 of 3
Central Administration is responsible for recording the following accrued expenses for the University:
Quarter-end salaries and wages
The portion of the weekly and biweekly payrolls paid in the subsequent month for the previous quarter (e.g., pay date in October for September work days). This accrual depends upon the number of days of pay for the current quarter that are paid in the first payrolls of the next month. For example, if June 30th falls on a Wednesday and seven out of ten days for the first biweekly payroll period of fiscal year 20X2 are within fiscal year 20X1, then 70% of that payroll would be accrued in fiscal year 20X1.
This accrual only includes regular, casual and less-than-half-time pay, and excludes other salaries and wages as well as extra compensation.
Employee benefits Including deferred compensation (savings and investment plans), as well as liabilities associated with the retirement plans, postretirement benefits and other costs.
Paid time off for outstanding employee vacation balances
For most units, the accrual is recorded at the University level based upon PeopleSoft data; certain units may have special processes and make manual accruals at year end. Sick time is not accrued, since employees are not paid for their outstanding balances when they leave the University.
Interest On external debt held by the Central Bank.
Insurance For policies managed by the Central Insurance Office. The accrual is based upon the number of days/months in the policy period that fall into the current fiscal year for policies that are billed and paid subsequent to year-end
Taxes Including taxes associated with payroll, unrelated business income and real property
Legal costs For outstanding legal bills and settlements. The Office of the General Counsel accrues both the Central Administration and tub portions of legal costs.
Environmental costs Including remediation, abatements, etc.
Expense Recognition – Appendix B Page 2 of 3
Appendix C: Examples of Proper Expense Recognition Accounting
Example: Accounting for Accrued Expenses
Example 1. The Commencement Office does not receive a bill for the Commencement tent rental prior to the year-end Accounts Payable close.
Fiscal year 20X1 Fiscal year 20X Debit/charge object code 6773: Rentals, Short Term^ Rentals of Equipment, Furniture+Fixtures, GENERAL
Debit/charge object code 2191: A/P Closing Accruals
Credit object code 2191: A/P Closing Accruals
Credit object code 6773: Rentals, Short Term^ Rentals of Equipment, Furniture+Fixtures, GENERAL
The tent rental expense and any known installation or other related costs must be accrued. The amounts of these costs are determined by contacting the vendor or by calculating an estimate based upon the terms of the rental contract. The entry is recorded as of June 30, 20X1 and reversed in fiscal year 20X2, when the rental company’s invoice will be paid. When the rental company’s invoice is paid in fiscal year 20X2, it would be charged to the same expense object code used in the accrual. The net effect of these transactions is to record the expense in fiscal 20X1 and zero out the expense in fiscal year 20X2, when the payment is made.
Example: Accounting for Prepaid Expenses
Example 1: Radcliffe enters into a six-month software maintenance agreement. When the initial payment is made in April of 20X1, it is fully expensed to object code 8092, “Software^Hardware, Software+Network Fees, Repairs, Maintenance Svcs.” At the end of June, three months of the contract term remain.
A prepaid expense asset must be recorded for half of the payment amount, given that three out of six months remain in the contract term. The entry is recorded as of June 30, 20X1 and reversed in fiscal year 20X2, when the remaining services will be provided. The net effect of the following two entries is to recognize the expense over the term of the agreement: three months’ worth in fiscal year 20X1 and three months’ worth in fiscal year 20X2.
Fiscal year 20X1 Fiscal year 20X Debit/charge object code 0540: Prepaid+Accrued Items
Debit/charge object code 8092: Software^Hardware, Software+Network Fees, Repairs, Maintenance Svcs Credit object code 8092: Software^Hardware, Software+Network Fees, Repairs, Maintenance Svcs
Credit object code 0540: Prepaid+Accrued Items
Alternatively, Radcliffe could have initially charged half of the payment to object code 8092, “Software^Hardware, Software+Network Fees, Repairs, Maintenance Svcs” and half to object code 0540, “Prepaid+Accrued Items,” thereby recording the prepaid expense asset upon payment and avoiding the need to record a journal entry at year-end. If the prepaid expense asset were recorded in this manner, a separate entry would need to be recorded after year-end to recognize the remaining three months of expense in fiscal year 20X2 and reduce the prepaid expense asset.
Expense Recognition – Appendix C Page 1 of 2
Example: Accounting for Deposits Paid
Example 1: HRES rents overflow office space. The rental agreement requires a security deposit of $10,000. HRES expenses the security deposit payment to object code 7230, “Rentals+Leases of Space, GENERAL.” The following entry is recorded to move the payment to object code 0550, “Security Deposits Paid.”
Debit/charge object code 0550: Security Deposits Paid
Credit object code 7230: Rentals+Leases of Space, GENERAL
This amount must be recorded as a deposit asset upon payment or no later than quarter-end. Alternatively, HRES could have initially charged the payment to object code 0550, “Security Deposits Paid,” thereby recording the deposit asset appropriately upon payment and avoiding the need to record a journal entry at quarter-end.
When a security deposit is returned to the University, HRES would fill out a Credit Voucher and submit it to the Cash Receipts department to credit the deposit to object code 0550, “Security Deposits Paid” in order to reduce the deposit asset.
Example 2: The Medical School leases an MRI machine from Brigham & Women’s Hospital (BWH). In connection with this lease, BWH requires a deposit of $10,000. The Medical School pays the deposit amount in February of 20X1 and charges the payment to object code 0550, “Security Deposits Paid.”
Debit/charge object code 0550: Security Deposits Paid
Credit object code 0010*: Cash (automatically credited when the payment is made)
This amount was correctly recorded as a deposit asset upon payment. If the Medical School had initially charged the payment to an expense object code, the Medical School would have needed to process a journal entry to credit the expense and debit the security deposit asset prior to quarter-end.
When the security deposit is returned to the University, the Medical School would instruct the Cash Receipts department to credit the deposit to object code 0550, “Security Deposits Paid” in order to reduce the deposit asset.
*Object code 0010 “Cash” is debited on the Central Bank’s balance sheet and a due to/from entry is created
crediting object code 0375 “CO^Due to/from Tub” on the Central Bank’s balance sheet and debiting object code
0375 on the appropriate tub’s balance sheet.
Expense Recognition – Appendix C Page 2 of 2
