Balance Sheet Substantiation

Prerequisites

Prior to reading the instructions on the Balance Sheet Substantiation document, it is beneficial to review the below sections to gain foundational information:

  1. Accounting Fundamentals
  2. Chart of Accounts and General Ledger
  3. Financial Statements Section

Preface

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. 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 is also a crucial part of the audit process and the substantiation must be made available to auditors annually. Please read the instructions below and ensure the procedures are followed in detail when performing this closing process.

Introduction

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. Balance sheet substantiation must be available as part of the external audit procedures as well. 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. IU’s inability to provide substantiation can lead to misrepresentation of balances and potential audit findings. 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 (see requirements section below) 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 The Office of the University Controller 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

  1. Run the entity balance sheet for the required period. For instructions on how to run the balance sheet, please see Financial Statements Report Instructions.
  2. 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
8000 Cash
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
9045 Invoices Payable
9050 Accrued Payroll
9056 Accrued Vacation Liability
9058 Accrued Sick Liability
9060, 9065 Bursar Payables
9120 Notes Payable-Lease Purchase
92-- Bond Payable Level
9465 Bursar-Deferred Income
96-- Notes Payable-Capital Lease
98-- Fund Balances

A balance sheet substantiation template has been made available for users to reference and use during this process.

Acceptable Substantiation

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
Sub-ledger transactions

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 .

Illustration of a balance sheet and the different supporting tabs labelled by object code

Campuses may have additional requirements and submission deadlines in place, verify submission guidelines with the specific campus office and fiscal officer.

Requirements & Best Practices

This section outlines requirements and best practices related to balance sheet substantiation. 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 so that they can be remedied quickly and prevent larger issues down the road .

Requirements

  1. Run the balance sheet and perform a balance sheet substantiation review quarterly.
  2. 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 greater than $1,000,000.
  3. 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.

Best Practices

  1. Run the balance sheet and perform a balance sheet substantiation review on a monthly basis. Please refer to Financial Statement Report Instructions for more information on how to pull a balance sheet.
  2. 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.
  3. 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.