Chapter 4: Governmental Accounting — Other Issues Affecting Educational Entities

School districts are the most common special governmental units. In some states, school districts operate as a fiscally dependent part of another local governmental entity, such as a city or county; in other states, school districts are legislatively independent, with authority to levy taxes and set budgets. School districts may or may not have common boundaries with another political subdivision. Regardless of whether they are component units of another financial reporting entity, are joint ventures of several reporting entities (such as consolidated education agencies), or meet the definition in GASB Codification, Section 2100, of a separate reporting entity, many school districts prepare separate financial statements to accomplish one or more of the following:

• support state or federal aid applications;
• report financial activities to parent, taxpayer, and citizen groups; or
• aid in preparing financial reports for use in an official statement for bond issuance purposes.

School districts face a number of unique issues that states, cities, counties, and other local governmental entities do not face. These issues often result in internal control and operational challenges that district management must address. Some of these issues are as follows:

• Attendance Reporting. Most school districts receive state aid on the basis of average daily membership (ADM), average daily attendance (ADA), or a similar pupil count method. ADM and ADA data typically are determined at individual school sites and then reported to a central attendance unit. That unit prepares reports for state aid and, in many cases, for federal aid, such as impact aid. Incorrect attendance reporting can lead to the allocation of too much or too little aid.
• Student Activity Funds. Most school districts have cash funds or bank accounts at individual schools under the control of school principals or club advisors. These funds may be excluded from the district's normal accounting controls. These funds present a unique control challenge to school districts, given their decentralized nature and the production of financial records and reports by nonaccounting personnel. Additional guidance on these issues is given in chapter 8.
• U.S. Department of Education Requirements. Federal reporting requirements and others mandated by state-level education agencies are typically more detailed than the account code structures of cities and other local governments. Thus, district accounting systems must have the ability to account for transactions at a level of detail beyond that required by other local governments. This issue is particularly complex for school district payroll systems, given the plurality of funding sources for district personnel and reporting requirements for personnel costs.
• School Lunch Programs. Most school districts participate in the U.S. Department of Agriculture (USDA) free or reduced-price food programs. These programs require school districts to segregate food service programs from other programs. School districts that receive federal commodities during the year should recognize the fair value as revenue in the period when all eligibility requirements are met—typically, when the commodities are received (Guide to Implementation of GASB Statement 34 and Related Pronouncements: Questions and Answers [GASB 2001], Q. 152; Comprehensive Implementation Guide—2005: Questions and Answers [GASB 2005b], Q. 239.39). Because the federal agricultural commodity program involves purpose restrictions on the use of resources, the value of inventory remaining on hand at fiscal year-end should be reflected as a reservation of fund balance/restriction of net assets (GASB Statement 33, Paragraph 14). USDA-donated commodities may also pose accounting and reporting problems because of restrictive federal rules regulating their use.
• Site-Based Management Initiatives. Over the past decade, many states and school districts have implemented site-based management initiatives. These initiatives have been designed to delegate to individual schools greater levels of authority over the use of financial resources. As a result, local administrators may control and report on the use of financial resources, even though they may lack financial management skills. This issue creates a challenge to district management in controlling financial resources and ensuring that reported results are correct.
• Educational Accountability. Educational accountability has become a key policy issue at both the state and national levels, resulting in a number of recent reforms. Several educational accountability reforms have required school districts to collect and present school-level financial information. Moreover, school-level financial information is often related to nonfinancial information (e.g., student achievement data) in published reports and used for comparison purposes. Thus, school districts must increasingly focus on ensuring that the financial information reported by schools is accurate and consistent across the district.

In conclusion, school districts, like other governmental entities, must annually compile financial data and report on their financial position. Accounting and reporting standards for this information are set forth by a number of oversight agencies, including GASB, FASB, and AICPA. Reporting requirements are constantly evolving, most notably as a result of GASB Statement 34, but also because of even more recent guidance addressing deposit and investment risk disclosures, other postemployment benefits (OPEB), and information included in the statistical section of Comprehensive Annual Financial Reports. In recent years, governmental agencies, including school districts, have had to significantly increase their financial reporting to include government-wide financial statements as well as traditional fund reporting. Although GASB Statement 34 did not change the basic internal control expectations for governments, it, as well as other recent changes in GAAP, continues to present new financial reporting challenges for school districts.

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