Balance Sheet Substantiation
Prior to reading the standard Balance Sheet Substantiation, it is beneficial to review the below sections to gain foundational information:
- Accounting Fundamentals Section
- Chart of Accounts and General Ledger Section
- Financial Statements Section
This section discusses the elements of the balance sheet substantiation document and how it is used internally within Indiana University. Information presented below will walk through what balance sheet substantiation is, how to complete this closing procedure, and requirements and best practices related to this process. For further information on how to pull the balance sheet report to conduct a balance sheet substantiation, refer to the Financial Statement Reports instructions.
The balance sheet substantiation is key during quarter and year-end close as it helps the responsibility center (RC), campus, and IU ensure the accuracy of their financial statements. Balance sheet substantiation within IU, refers to detailed documentation or work papers substantiating the non-system generated object codes balance sheet amounts. Non-system generated object codes are object codes manually added by a user and are not part of the initial system generated object codes. The supporting documentation or substantiation should be detailed enough that a person without extensive knowledge of the entity can review the support, understand the nature of the balance, and tie it to the amounts on the balance sheet. To ensure accuracy of balances, compliance with all local, state and federal requirements, auditors request substantiation showing how balances on the balance sheet are derived. In order to ensure all fiscal officers are familiar with the requirements for balance sheet substantiation, examples of appropriate support to provide are discussed below.
Importance and Impact of Balance Sheet Substantiation
A balance sheet provides a snapshot of an entity’s financial position or health at a given time. As a result, IU strives to be as accurate as possible in its financial reporting. To help increase accuracy, the Office of the University Controller (UCO) requires all non-system generated balance sheet amounts above a threshold (as noted in the closing checklist) be supported by detailed documentation at the object code level. System generated object codes are not included because they have system integrated internal controls in place and UCO has the ability to access the sub-ledgers to substantiate their balances. Supporting documentation for system generated object codes is only required when manual adjustments have been made by the entity. By providing this information, executive management is able to provide greater assurance that the financial statements are accurate, improve transparency, and help to reduce risk.
In addition, having the substantiation readily available assists in the audit both internally and externally. Balance sheet substantiation is a crucial internal control in financial reporting which is heavily reviewed in the audit process. Without substantiation, auditors are unable to verify balance sheet balances which could lead to a misrepresentation of the balance sheet and audit findings with major negative impacts. This may lead to issues concerning internal controls or the integrity of the financial statements which impacts future funding from government organizations, creditors, or individual donors.
How to Perform a Balance Sheet Substantiation
All university entities with accounts that have non-system generated asset and liability balances must be able to provide substantiation for the balances on their balance sheet. It is encouraged that entities complete balance sheet substantiation within five business days after the close of each fiscal quarter.
Instructions to Substantiate Balances
- Run the entity balance sheet for the required period. For instructions on how to run the balance sheet, please see Financial Statement Reports instructions.
- Highlight all non-system generated object codes. Please refer to the list of system generated object codes below to determine which object codes do not need to be substantiated.
List of System Generated Object Codes:
|Object Code||Object Code Name|
|8116||Payroll Deduction/Benefits Internal Receivable|
|8118||Accounts Receivable – Non-Student|
|8160, 8163||Bursar Accounts Receivable|
|86--, 89--||Plant Level Note: Substantiation for 8900 and 8950 (allowances) still required|
|9056||Accrued Vacation Liability|
|9058||Accrued Sick Liability|
|9060, 9065||Bursar Payables|
|9120||Notes Payable-Lease Purchase|
|92--||Bond Payable Level|
|96--||Notes Payable-Capital Lease|
A balance sheet substantiation template has been made available for users to reference and use during this process. The balance sheet substantiation template breaks out the most common non-system generated balances that need substantiation. Included in this template are examples of substantiation that the UCO deems acceptable for the most common non-system generated balances. This substantiation support should be placed in the same Excel file as the balance sheet as shown in the example below such that all information is kept in one place.
For reference of what is considered sufficient/appropriate substantiation and what is poor substantiation, please see the table below:
|Examples of Sufficient Balance Sheet Substantiation||Examples of Insufficient/Poor Balance Sheet Substantiation|
|Actual allowance calculations||KFS Screenshots|
|Supplier invoices or statements||Payroll Deduction/Benefits Internal Receivable|
|Inventory counts||Post-it® Notes|
|Aging Reports||Calculations in PDF format|
Below is an example of the Excel document containing the organization’s balance sheet at year-end and the subsequent tabs housing substantiation documents for the non-system generated object codes .
Campuses may have additional requirements and submission deadlines in place. Verify submission guidelines with the specific campus office and fiscal officer.
Requirements and Best Practices
This section outlines requirements related to the Closing Procedures – Balance Sheet Substantiation, as well as best practices. While not required, the best practices outlined below allow users to gain a better picture of the entity’s financial health and help identify potential issues on a more frequent basis. This allows organizations to identify errors, mistakes and pitfalls which can be remedied quickly and prevent larger issues in the future.
- Run the balance sheet and perform a balance sheet substantiation review quarterly.
- Provide substantiation for any non-system generated asset and liability object code balances on your balance sheet. The minimum university threshold for all balance sheet balances requiring substantiation is noted in the Fiscal Year-End Closing Checklist.
- Ensure the accuracy, reliability, and completeness of the balance sheet substantiation. The (RC) fiscal officer is responsible for ensuring the balance sheet substantiation is correct.
- Run the balance sheet and perform a balance sheet substantiation review on a monthly basis. Please refer to the Financial Statement Reports instructions for more information on how to pull a balance sheet.
- Provide substantiation for any non-system generated asset and liability object code balances on your balance sheet. Ensure that the supporting documentation is detailed and can be traced to the balance. Explain any discrepancies.
- Review and analyze the substantiation documentation and working papers of the entity. This is the responsibility of the fiscal officer. Analyzing the balance sheet substantiation allows the fiscal officer to determine if the current internal controls are efficient and effective enough for accurate recording of transactions. The questions that need to be asked will vary depending on the needs; however, the following questions are some common examples:
- Were there any manual adjustments done to the system generated object codes? In general, system generated objects codes should not be manually adjusted; however, if any manual adjustments were done, the supporting documentation is required.
- Are all non-system generated object codes over threshold substantiated? Only the object codes listed above are system generated; any object code not on the list should have supporting documentation for the balance.
- Are the closing balances equal to the supporting documentation balances? All balance should equal each other. If any discrepancies between closing balances and supporting documentations are found, the fiscal officer should review to determine what is causing the difference and correct.
- Are there any controls the department may require to increase the accuracy of the non-system generated object codes? The department needs to evaluate if there are any internal document controls they may need to have in place to substantiate the balances better.