Prepayments

Vendors supplying the University with goods and services, and institutions incurring expenditures in advance of the complete business cycle on behalf of the University, may request prepayment.

Prepayment of purchases refers to payments made before receipt of the related goods or services.

Prepayment of expenditure recoveries refers to payments made before the expenditures are incurred by the other institution.

The following sub-sections address the financial objectives and the accounting treatment for prepayments:

Financial Objectives

Acceptable Payment Terms

Payments to Hospitals or Other Institutions to Recover Expenses

Accounting for Prepayments

 

Financial Objectives

University Financial Objectives:

  • In accordance with sound risk management, the University should issue payment only when the vendor has delivered the goods or services as ordered.
  • Effective cash management practices include issuing payment no sooner than industry practice demands.

Departmental Financial Objectives

  • Avoid committing to payment terms which disadvantage the University.
  • Where circumstances support a prepayment, take appropriate steps when the vendor does not meet its commitment for delivery of goods or services.
  • Where expenditure recoveries are pre-billed, ensure that subsequent billing(s) reflect an adjustment to reflect actual expenditures.

Acceptable Payment Terms

Types of payments where prepayment terms are standard:

Standard post-delivery terms:

For most other purchases, the University standard payment term is net 35 days, i.e. 35 days after the vendor invoice date which generally corresponds to the shipping date.

* Often an invoice is not issued for these types of payments, especially for the initial request for these goods/services. For more information, please refer to Payments Without Invoices Processed Through FIS or the Purchasing Card.

Payments to Hospitals or Other Institutions to Recover Expenses

Expenditure recoveries

The majority of billings for expenditure recoveries come from hospitals.

The objective of the billing institution in these cases is to avoid financing expenditures incurred on behalf of the University, i.e. to have the necessary funds on hand when expenditures occur. Accordingly, the institution wishes prepayment.

The objective of the University is to avoid prepaying expenditures which the institution has not yet incurred, thereby effectively financing other expenditures of that institution. Accordingly, the University wishes to pay the institution after expenditures are incurred.

The optimum solution should minimize financing costs to each institution and should not favour one institution over another.

Recommendation for Expenditure Recoveries

In the case of annual expenses, the University department or principal investigator should arrange to have the other institution issue invoices at the beginning of the quarter for the first two quarters and at the end of the quarter for the two final quarters. Where total annual expenses must be estimated for the two advance billings, adjustments to actual expenses should be reflected in the final invoice.

Avoid annual invoicing, as this will significantly disadvantage the University if done in advance and will disadvantage the other institution if done at the end of the year.

See Payments to Hospitals or Other Institutions to Recover Costs for further discussion on this type of payment.

Accounting for Prepayments

Prepayments are recorded in University expense accounts and thus are reported as expenses for the period. This is an acceptable accounting practice if the goods and services are received in the fiscal period in which payment is made.

In accordance with generally accepted accounting practices, however, amounts paid for services or goods to be received in a future fiscal period should be recorded as prepaid expenditures and excluded from reports of current expenses.

Where prepayments cannot be avoided, year-end adjustments can be made to the accounts, i.e. for significant prepayments. However, it is preferable to limit prepayments to goods and services which will be received or recoveries of expenditures incurred before the end of the University’s fiscal year, April 30.

Prepayments with respect to subscriptions which may cover several fiscal periods are generally not of concern from an accounting perspective because the amounts are not material.

Refer to Fiscal Year-end Closing Procedures for details on year-end procedures for significant prepaid expenditures. Contact the Manager, Operating Accounting and Financial Analysis at 416-978-8185 if you would like to discuss the accounting treatment of a specific prepayment.

Last revision: May 11, 2010