Harvard Case - Stanford University: Implementing FASB Statements 116 and 117
"Stanford University: Implementing FASB Statements 116 and 117" Harvard business case study is written by Christopher Canellos, David W. Hoyt. It deals with the challenges in the field of Accounting. The case study is 42 page(s) long and it was first published on : Feb 20, 2002
At Fern Fort University, we recommend a phased approach to implementing FASB Statements 116 and 117, focusing on a robust activity-based costing system to accurately allocate costs and improve financial performance measurement. This approach involves a combination of change management, employee training, and IT management to ensure a smooth transition and successful adoption of the new accounting standards.
2. Background
This case study focuses on Stanford University's decision to implement FASB Statements 116 and 117, which significantly changed the accounting treatment of depreciation and amortization for long-lived assets. The university, facing pressure from its board and external stakeholders, recognized the need to update its accounting procedures and policies to comply with these new standards.
The main protagonists in the case are:
- The Controller: Responsible for overseeing the university's financial reporting and ensuring compliance with accounting standards.
- The University's Board of Trustees: Responsible for the university's overall governance and financial oversight.
- The Faculty: Directly impacted by the new standards as they use university resources for research and teaching.
- The Staff: Responsible for managing and maintaining the university's physical assets.
3. Analysis of the Case Study
Stanford University's situation presents a classic example of the challenges faced by organizations when implementing new accounting standards. The university needs to:
- Understand the impact of the new standards on its financial statements: This includes analyzing the impact on depreciation expense, net income, and balance sheet values.
- Develop a cost allocation system that accurately reflects the use of assets: The traditional allocation methods may not be sufficient under the new standards, requiring a more sophisticated activity-based costing system.
- Communicate the changes effectively to all stakeholders: This includes educating faculty, staff, and the board about the new standards and their implications.
- Ensure compliance with the new standards: This requires careful planning, implementation, and ongoing monitoring.
4. Recommendations
Implement an Activity-Based Costing (ABC) System: Stanford should adopt an ABC system to accurately allocate costs based on the actual use of assets. This will provide a more precise understanding of the cost of each activity and improve cost analysis for decision-making.
Develop a Phased Implementation Plan: The implementation should be phased to minimize disruption and ensure a smooth transition. This could involve:
- Phase 1: Training and education for key personnel on the new standards and the ABC system.
- Phase 2: Pilot implementation of the ABC system in a specific department or area.
- Phase 3: Full-scale implementation across the university.
Invest in IT Infrastructure: Stanford should invest in appropriate IT management tools to support the ABC system and streamline data collection and analysis. This will enhance the efficiency and accuracy of the cost allocation process.
Communicate Effectively: Open and transparent communication with all stakeholders is crucial. This includes:
- Regular updates: Providing regular updates on the implementation progress to the board, faculty, and staff.
- Training sessions: Conducting training sessions to educate all stakeholders on the new standards and their implications.
- Feedback mechanisms: Establishing feedback mechanisms to address concerns and ensure buy-in from all stakeholders.
Develop a Strong Internal Control System: Stanford should strengthen its internal controls to ensure compliance with the new standards and prevent potential white-collar crime. This includes establishing clear policies and procedures for asset management, depreciation accounting, and financial reporting.
5. Basis of Recommendations
These recommendations are based on the following considerations:
Core Competencies and Consistency with Mission: Implementing the new standards and adopting an ABC system will enhance Stanford's financial reporting and improve its ability to allocate resources effectively, supporting its mission of academic excellence.
External Customers and Internal Clients: The new standards and the ABC system will provide a more accurate picture of the university's financial performance, which is important for attracting external funding and demonstrating value to internal stakeholders.
Competitors: Stanford's competitors are likely adopting similar accounting standards and cost allocation systems. Implementing these changes will help Stanford remain competitive in the higher education landscape.
Attractiveness ' Quantitative Measures: While the case study does not provide specific financial data, the implementation of the new standards and the ABC system is expected to improve profitability and enhance decision-making by providing more accurate cost information.
6. Conclusion
Implementing FASB Statements 116 and 117 presents a significant opportunity for Stanford University to improve its financial performance measurement, enhance asset management, and strengthen its corporate governance. By adopting a phased approach, investing in IT management, and prioritizing effective communication, Stanford can successfully navigate this change and achieve its financial reporting goals.
7. Discussion
Alternative approaches to implementation include:
- Immediate full-scale implementation: This could lead to significant disruption and potential resistance from stakeholders.
- Outsourcing the implementation: This could be costly and may not provide the same level of control and ownership.
Key risks associated with the recommendations include:
- Resistance to change: Some stakeholders may resist the implementation of the new standards and the ABC system.
- Cost of implementation: Implementing the new standards and the ABC system will involve significant costs for training, IT infrastructure, and ongoing maintenance.
- Data accuracy: Ensuring the accuracy of the data used in the ABC system is crucial for the success of the implementation.
8. Next Steps
- Form a project team: Assemble a cross-functional team to oversee the implementation process.
- Develop a detailed implementation plan: Outline the specific steps, timelines, and resources required for each phase of the implementation.
- Conduct training sessions: Provide comprehensive training to all stakeholders on the new standards, the ABC system, and the implementation process.
- Pilot the ABC system: Implement the ABC system in a pilot department or area to test its effectiveness and identify any potential issues.
- Monitor progress and make adjustments: Regularly monitor the implementation progress, gather feedback from stakeholders, and make adjustments as needed.
By following these steps, Stanford University can successfully implement FASB Statements 116 and 117, enhancing its financial reporting and achieving its strategic goals.
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Case Description
In 1993, the Financial Accounting Standards Board issued two statements--Number 116: Accounting for Contributions Received and Contributions Made and Number 117: Financial Statements of Not-for-Profit Organizations. These statements required significant changes to the financial statements issued by nonprofit organizations. This case discusses changes in the context of Stanford University, a private, not-for-profit educational institution. Discusses financial reporting prior to FAS 116 and 117, the objectives of FAS 116 and 117, and their implementation by Stanford. Prepares students for a discussion of nonprofit financial reporting, fund accounting, donor-imposed restrictions, the various stakeholders, and the advantages or disadvantages of financial statements prepared under the provisions of FAS 116 and 117.
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