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Internal Revenues and Internal Expense Recoveries

This section provides guidance for the identifying and accounting for internal revenues and internal expense recoveries and the financial objectives surrounding these transactions

Internal Transactions

Types of Internal Transactions

Financial Management of Internal Revenues and Internal Recoveries

Accounting for Internal Revenues and Internal Expense Recoveries

Processing Internal Revenues and Internal Expense Recoveries

Additional Assistance

 

Internal Transactions

An “Internal” transaction must meet the following criteria:

  • General:
    • NO cash implications for UofT, i.e. no cash is deposited, no A/R or A/P is recorded.
  • The posting entry:
    • Is restricted to a single company code; i.e. UOFT,
    • Is restricted to CDN$ currency,
    • Is used to record adjustments or corrections using combinations of balance sheet accounts and/or revenue and expense accounts,
    • Is used to record revenues or expense recovery transactions between University departments.

If the transaction being considered does not meet the criteria for an “internal” transaction as noted above, refer to the section External Revenues and External Expense Recoveries.

For more information on the importance of distinguishing internal and external transactions, see Why is the Distinction Between Internal and External Important in the section Revenues and Expense Recoveries.

 

Types of Internal Transactions

Corrections or adjustments to information contained in the FIS system:

  • are processed using the journal entry create/input screen.
  • examples include:
    • correction of tax codes, account coding (i.e. FM, CO, G/L, etc.), and
    • adjustment of financial information such as inventory balances, prepaid expenses or unearned revenues.

An example of where an adjusting entry is required could be the following:

  • A department manages a “stores” area and uses a balance sheet inventory account to track the purchase/sale of the “stores” inventory. Upon the sale of inventory, the department will process an adjusting journal entry transaction to record the movement of the cost of the inventory sold from the balance sheet inventory account to a departmental expense account.

Internal Revenues or Internal Expense Recoveries:

  • are processed using the Internal Revenues/Expense Recoveries input screen,
  • examples include the:
    • sale of goods/services between UofT departmental units, and
    • recovery of expenses already paid for/incurred* and allocated between UofT departmental units.

*The “recovery” transaction MUST NOT:

 

Financial Management of Internal Revenues and Internal Recoveries

The prime financial objectives for internal revenues and expense recoveries are:

  • to record transactions in the correct period, and
  • to maintain financial records which adequately support the legitimacy and appropriateness of the transactions.

Transactions are recorded in the correct period

Internal charges must be recorded in the fiscal period to which the goods are received or the services are rendered. The primary concerns are:

  • reporting accuracy – when payments are from research grants or other restricted awards, attention must be paid to the fiscal period of the award.
  • compliance with funding limitations – where restricted funding includes an expiry date – as it does with most research awards – internal billing for goods or services to be delivered after the expiry date is a violation of award terms.

Adequate Financial Records

The billing department should maintain adequate records to support the legitimacy and accuracy of the internal transactions recorded in the University’s accounts.

Internal revenues from the sale of goods and/or services:
When billing for goods and/or services, records should include:

  • a customer order
  • price lists
    • all customers should be billed in accordance with the price lists;
    • discounts, and the basis for those discounts, should be noted.
  • a detailed record of services provided and the date of delivery
  • a reasonable description of the goods or services should be provided. If the charges are not based on a price per unit, there should be an appropriate description of the level of service and the basis of arriving at the charge for that service.
  • the date or period the service was rendered.

Internal expense recoveries:

  • The billing department should maintain records which clearly identify the original payment(s) made on behalf of the internal customer and for which recovery is being made.
  • The guiding principle should be that the information links the charges to the original payment such that a reviewer, e.g. auditor, would have no difficulty in identifying the original payment(s).
    • for salaries and benefits, the name of the individual and the period in which salary was paid;
    • for long distance telephone charges, the month in which the related invoices were paid by the department;
    • for photocopying charges billed on a recovery basis, the unit charge, the number of copies and the period copies were supplied. Where there are detailed records of customer charges it is acceptable to identify only the month in the description;
    • for other expense recoveries, the document number of the original payment.

Supply Inventories:

  • Where supplies are provided from inventories on a sales or cost recovery basis, the department should have detailed records on items and quantities issued and their unit costs. The description should summarize this information and provide the following:
    • a general description of the delivered goods and an indication that goods were from inventory.
    • the date the goods were delivered.

Tax codes
Internal charges and credits are not subject to HST. However, these charges normally include any taxes net of HST rebate that may have been paid or collected. The normal tax codes used on journal entries for internal revenues, expense recoveries and cost sharing are S9 for revenue accounts and J9 for expense accounts.

For detailed information on processing internal transactions in FIS, see the following FIS Reference Guides:

Authorization

The head of the originating department is responsible for authorizing internal revenues and expense recoveries. However, the head may delegate this responsibility to a business officer in the department. See the GTFM section Delegation of Authority. The primary purpose of the authorization is to confirm that these charges are legitimate, accurate and in accordance with the financial objectives identified in this section.

Expense Allocation / Cost Sharing Arrangements

Cost sharing is common, particularly among researchers, and is to be encouraged. It results in better utilization of resources and reduces the cost to a single user who might otherwise be paying for some idle capacity. Cost sharing should reflect an objective determination of the respective utilization of resources by the sharing parties.

Business transactions should be processed in the most cost-effective manner. Ideally, the cost sharing arrangement should be planned in advance, and the cost allocation would be performed during the initial entry into FIS (e.g. purchase order account assignment, certified invoice account assignment, etc.) so that the allocation and payment are combined into one transaction.

The use of two transactions to record the allocation of the cost of a resource is much less efficient. In these cases, costs are initially charged to one account; in a subsequent step an internal expense recovery transaction is processed to reallocate a portion of the original cost to another account(s) according to a cost-sharing agreement.

If a reallocation of costs via FIS is unavoidable, the following should be taken into account:

  • it is necessary to specifically identify the document number of the original payment – this provides an audit trail for the transaction,
  • it is important that cost sharing be recorded in the correct reporting period of the award and, particularly, before the expiry date of grant funding.

Records Management and the U of T File Plan

Please note that financial documents must be retained according to the U of T File Plan: Finance.

Documents relevant to this section would include (but are not limited to) the journal entry form, where used, changing another U of T department, and backup to support the journal entry. The responsibility rests with the “selling” department (or “recovering” department) to maintain the records for the required period of time.

Generally, the above documents should be kept in your “Active” (office) files in the fiscal year in which the document was created (i.e. the “current” fiscal year). The document should then be placed in “semi-active” storage (a secure on-site storage area or an off-site storage facility, to be determined by the individual unit) for an additional six (6) fiscal years. Thereafter, the documents should be destroyed.

For example, a journal entry form entered into FIS in August 2006 (and supporting backup to the entry) would be retained in the office’s active files for the current fiscal year (2006/07). Once the annual audit is completed (in this case June 2007), the personal expense reimbursement forms (and supporting receipts) for fiscal year 2006/07 would be moved to semi-active storage through to the end of the 2012/13 fiscal year. These records should be destroyed after the 2012/13 annual audit (June 2013).

If you have any questions regarding the U of T file plan, please contact .

 

Accounting for Internal Revenues and Internal Expense Recoveries

Objective:

To facilitate the financial reporting for external stewardship requirements such that:

  • UofT departments can manage their operations effectively and efficiently, and
  • External financial reporting excludes Internal Revenue and Recovery transactions where required by legislation or standards.

Process:

  • Use the FIS transaction “Internal Revenues/Expense Recoveries” to record Internal Revenue and Recovery transactions so that:
    • University financial reporting processes will identify and eliminate these balances from the reports prepared for external users as appropriate, and
    • the departmental unit is not restricted in their selection of general ledger accounts for their Internal transactions.

Recording of internal revenue and internal expense recovery transactions and the impact on the FM Budget:
Where internal revenues and internal expense recoveries can be reasonably estimated, appropriate revenue/recovery budgets should be created either as part of the planning phase for the original budget for a department, or through the submission of a Budget Transfer / Revision form to the Planning & Budget Department.

 

Processing Internal Revenues and Internal Expense Recoveries

Internal Revenue transactions:
Represent the sale of goods/services from one departmental unit to another departmental unit. Although the form used to document the “sale” may resemble an “invoice” or “billing” document, the transaction is processed in FIS using the Internal Revenues/Expense Recoveries ¬†input screen. No A/R customer accounts are part of the transaction.

Internal Expense Recoveries:
Where possible, cost reallocations should be done at the source transaction, i.e. invoice payment, HRIS account coding, etc. When the cost recovery is done after the fact and is between two departmental units, the transaction is processed in FIS using the Internal Revenues/Expense Recoveries input screen.

For more information, refer to the FIS workshop “Recording Internal Revenues and Expense Recoveries in FIS“.

Salaries paid from operating accounts may be recovered in whole or in part from research or other restricted awards in respect to services provided. If so, ensure that an appropriate provision is made for the recovery of the related benefit costs. The benefit recovery should be credited to a separate benefit recovery account, using standard benefit rates, and should not be combined with the related salary recovery.

Additional Assistance

If you require assistance with accounting for internal revenues and internal expense recoveries, please contact your Faculty Financial Officer or your FAST Team Representative.

Last revision: April 13, 2007