External Revenues and External Expense Recoveries

This section provides guidance for the identification of and accounting for external revenues and external expense recoveries and the financial management objectives surrounding these transactions.

External Revenue/Recovery Transactions

Types of External Transactions

Financial Management of External Revenues and External Recoveries

• Limit Contractual Liability
• Set Prices Sufficient to Recover All Costs
• Direct and Indirect Costs
• Record Transactions in the Correct Period
• Collect Amounts Due

Payment Terms

Accounting for External Revenues and External Recoveries

Accounts Receivable, Collection Responsibilities and Uncollected Amounts

HST – University Sales

Additional Assistance

External Revenue/Recovery Transactions

An external revenue/recovery transaction meets the following criteria:

• General:
  • There are net cash implications for UofT; i.e. the transaction will eventually result in cash being deposited to the UofT bank account(s).
• The posting entry:
  • can involve more than one company code; i.e. UofT and FLDI (Fields Institute)
  • can be posted in non-CAD currency
  • will include a mix of balance sheet account activity (i.e. cash, A/R) and revenue or expense accounts.

If the transaction being considered does not meet the criteria for an “external” revenue/recovery transaction, refer to the section Internal Revenues and Internal Expense Recoveries.

Types of External Revenue/Recovery Transactions

External revenue/recovery transactions include income generating activity resulting in cash received (or to be received) by UofT as a result of negotiated agreements with organizations, agencies, corporations, and individuals considered external to the University:

• in exchange for goods and or services provided by UofT staff/departments
• for the support of ongoing University activities such as research, infrastructure renewal, etc.

An income generating activity is generally classified as either:

• External Revenue or
• External Expense Recovery

External Revenue

External revenues for UofT are generated through the following sources:

External Expense Recovery

External expense recoveries are generally recorded when a University department charges for or recoups the recorded cost of an expense item (e.g. payroll, equipment, supplies, etc.) from an external organization.

For example, the Faculty of Medicine may initially pay the salary costs of faculty members who have joint appointments at the University and a teaching hospital. The faculty would recover a portion of these costs from the respective hospitals.

Financial Management of External Revenues and External Recoveries

Whether providing goods and services to external customers on a sales or cost recovery basis, there are four key financial objectives which departments must consider:

• Limit contractual liability;
• Set prices sufficient to recover all costs;
• Record transactions in the correct period; and
• Collect amounts due.

Limit Contractual Liability

When transacting with external customers, it is important that departments:

• avoid unreasonable requirements for indemnification, and
• protect the University against loss associated with inadequate performance.

The University has review and approval procedures in place to protect against losses arising from contractual agreements. These are covered in Managing Risks – Insurance and Contracts. It is important that University departments proceed in accordance with these requirements for all agreements, including verbal agreements.

Set Prices Sufficient to Recover All Costs

The University generally does not have a “profit motive” as it is a not-for-profit organization. However, like a commercial enterprise, it must seek to keep its costs in line with its revenues.

For the most part the University has limited control over its revenues, the largest components of which are provincial government grants and student fees, the majority of which are controlled by the government. Therefore, the focus of the University is primarily on controlling costs, i.e. carrying out the University mission within its budgetary constraints.

However, in the case of divisional income and some expense recoveries, the divisions are able to exercise control by:

• negotiating financial agreements under which the University will be compensated for all costs of goods and services. Where the intention is to generate a profit to enhance the university mission (i.e. for self-funded units and ancillary operations), the ability to meet this objective must be determined with reference to all costs of the service (both direct and indirect costs), and
• declining arrangements which do not cover all costs

Direct and Indirect Costs

For any service provided by the University, there are both direct and indirect costs, both of which divisions should seek to recover.

Direct costs
The “selling” department should ensure that, as a minimum, all direct costs of the service are reflected in the charge to the customer. Direct costs are those which are traceable to the specific activity. For example, with respect to administrative costs, if the amount of secretarial time is such that it is reasonably measurable, e.g. hours or percentage of time, then it is a traceable and, therefore, a direct cost.

External expense recoveries very often deal with a specifically identified expense, e.g. a specific salary and related benefit costs. However, an expense recovery can also refer to the provision of a service on a cost recovery basis, i.e. with no recovery of indirect costs. In this case, the relevant direct costs are all costs traceable to the service.

Indirect costs
Departments which price their services on the basis of direct costs only, are under-pricing since the objective of full cost recovery is not met.

There are three levels of indirect costs which the selling department should consider:

• Departmental – Departmental costs which are not traceable to specific activities in the department, i.e. to research, instruction or a service. Indirect departmental costs include the salaries of chairs and administrative staff, regular telephone service, supplies not specifically charged out, etc.
• Faculty – Cost of faculty administration, i.e. the faculty office.
• University-wide costs should be considered when determining indirect cost.

Total cost

The total cost of the service is the sum of direct and indirect costs, and it is the total cost which should be used as the basis for the price of the service, whether charged on a cost or cost plus basis.

For assistance in calculating indirect costs in your particular unit, contact your divisional financial office.

Record Transactions in the Correct Period

Charges must be recorded in the fiscal period for which the goods are received or the services are rendered.

The primary concerns are:

• reporting accuracy
  • External revenue and expense recoveries and any related operating expenses must be recorded in the University fiscal year in which they occur, i.e. the year in which goods are delivered or services are rendered.
  • In addition, when payments are from research grants or other restricted awards, attention must also 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 – billing for goods or services to be delivered after the expiry date is a violation of award terms.

As a general rule, there must be no pre-billing for deliveries to be made (or services to be provided) beyond the fiscal period. However, if pre-billing is necessary,

• do not process an accounting entry in the current fiscal year
• send the accounting copy of the invoice to the Financial Services Department. These invoices will be recorded in a deferred income account and transferred to your income or expense recovery accounts at the beginning of the new fiscal year.

In addition, there should be no delay in billing beyond a fiscal period for goods delivered or services rendered in a previous fiscal period. However, it is expected that all sales invoices and internal revenues and recovery transactions will be processed by the year end cut-off and, therefore, it should not be necessary to accrue income. If an accrual is necessary, contact the Manager, Operating Accounting.

Collect Amounts Due

Refer to the section Accounts Receivable, Collection Responsibilities and Uncollected Amounts for more information on this financial management objective.

Payment Terms

When a department decides to sell goods or services to, or recover costs from, an individual or an external organization, it must also determine how the individual / organization will pay for these items. Will payment be required upfront via cash, cheque, credit card or debit card? Will credit be granted? Will the department receive payment by wire transfer?

The guidelines surrounding this topic are included in the section Payment Terms.

Accounting for External Revenues and External Expense Recoveries

External Revenues

Departments should record external revenue activity in FIS using the appropriate revenue general ledger account. These accounts are generally in the 746200-765100 and 783000-787100 series of accounts. For a complete listing of available accounts, refer to the Reference Guide for running a GL account list with additional text.

External Expense Recoveries

An important aspect of external expense recoveries is that “actuals will follow the budget”. Generally, the recording of the “actual” transactions will follow the budget strategy; i.e. if expenses were budgeted “net” of recoveries, then the “recovery” transaction will be recorded against the expense item.

If the “recovery” activity was not included in the original budget strategy, then there are 2 main strategies for the recording of external expense recoveries:

1. Leave the total cost of the expense item at 100% and record the “recovery” monies received as a REVENUE item using either the appropriate “7xxxxx” g/l or the same expense g/l and changing the commitment item to RECOVERY, thereby leaving the total EXPENDITURES recorded by the department at 100%, and highlighting the “recovery” activity in the revenue section for reporting. This is generally referred to as the “Expense Recovery” approach and used when it is determined that the University is ultimately responsible for 100% of the cost but managed to offset the cost through partial or total recovery.

2. Directly decrease the total cost of the expense item by recording the “recovery” monies received against the appropriate expense g/l thereby reducing the total EXPENDITURES recorded for the department. This is generally referred to as the “Cost Sharing” approach and used when it is determined that the University, as a whole, is ultimately responsible for only part of the cost.

Example – Expense Recovery versus Cost Sharing

The following example will help to illustrate the differences between the expense recovery approach and the cost sharing approach:

Scenario
A department purchases equipment for which 40% of the cost will be supported by an external source. The department has already recorded 100% of the cost of the purchase using the expense general ledger 8xxxxx and is now ready to record the receipt of the 40% reimbursement from the external source.

Under the Expense Recovery approach:
The department would maintain the cost of the purchase at 100% and record the 40% reimbursement in a separate expense recovery account using the appropriate recovery type general ledger (having an appropriate recovery type commitment item default, see g/l=77xxxx for examples); this indicates that the University was responsible for 100% of the cost and managed to reduce the net expense through the recovery of part of the cost.

Under the Cost Sharing approach:
The department would credit the reimbursement directly to the same general ledger expense account as the original purchase; this indicates that the University, as a whole, was responsible for only 60% of the cost.

External Salary Recoveries

If you want to track your external salary recoveries, the preferred method is to use the expense recovery approach, where a separate 7xxxxx g/l account is credited with the recovery.

Ensure that an appropriate provision is made for the recovery of the related benefit costs. The external 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. Refer to the reference Guide for running a GL account list with additional text for benefit recovery accounts available for use.

Accounts Receivable, Collection Responsibilities and Uncollected Amounts

When the department has decided to grant credit to external customers, it needs to be aware of specific issues and responsibilities. Refer to the section Accounts Receivable, Collection Responsibilities and Uncollected Amounts for guidelines and responsibilities in the area.

Additional Assistance

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

Last revision: September 8, 2010