Internal and External Financial Statements

Prerequisites

Prior to reading the Internal and External Financial Statements standard, it is beneficial to review the below sections to gain foundational information:

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

Preface

This standard discusses the differences between the internal and external financial statements for Indiana University. The University Internal Financial Statements that are published in the Controller’s Office Reporting Tools serve as the university’s official standard internal reports for actual financial results (e.g. not budgeted results). Information presented below will walk through a general understanding of the internal vs.external financial statements along with executive level presentation requirements specifically related to IU reporting. It will also specify requirements and best practices for users of the financial statements.

Introduction

What are Financial Statements?

Financial statements are reports which show the financial condition and performance of the university. They are used to assess an entity's overall financial health. Internal and external users (i.e., suppliers, creditors, state, and federal agencies) depend on these statements to analyze the entity’s financial position and make informed decisions. Financial information presented in the external audited financial statements may be presented differently than reports pulled internally. However, the transactions used to create internal financial information are the same as those used to create the audited external financial statements. Transactions booked by departments feed into the external financial statements, the accuracy of the external financial statements is dependent on the accurate recording of those transactions.

The Office of the University Controller is responsible for management of the Controller’s Office Reporting Tools which are utilized by internal users. However, fiscal officers are responsible for any modifications made to such reports and providing explanations for differences as discussed above.

External Financial Statements

External financial statements are used to provide financial reports that aid external users in decision making and to satisfy compliance requirements of external parties. Users of external financial statements include, but are not limited to, government agencies, bond rating agencies, accrediting agencies, suppliers, creditors, and other interested parties external to the university. The primary difference between the external and internal financial statements is that external statements are governed by external regulations.

• External financial reporting should adhere to all required accounting pronouncements, standards, rules, and or other regulations stipulated General Accepted Accounting Principles (GAAP), Governmental Accounting Standards Board (GASB), and other applicable standards.
• External financial reporting should reconcile to internal reporting utilizing the same underlying transactions.
• External financial statements are subject to audit under federal and state law.

University Internal Financial Statements

University Internal Financial Statements are used to provide financial reports that aid internal users in decision making. Users of internal financial statements include, internal groups including executive leadership, campus/department/division/school leadership, and any party internal to the university.

• University Internal Financial Statements under the Office of the University Controller are the official internal statements of campus and unit-level activities.
• Internal financial reporting may differ in format, level of detail, or include only subsets of financial data, but should always reconcile to external financial reporting utilizing the same underlying transactions.
• Internal financial reporting which contains differences to external financial reporting in substance or format should be accompanied with a variance analysis explaining the differences prior to publication of internal financial reporting to any internal or external audience.
• Internal financial data is the underlying data for external financial reporting and is subject to audit under federal and state law and other external agencies.

Requirements and Best Practices

Requirements

1. The University Internal Financial Statements are required to be used for all closing activities. These financial statements can be found in the Controller’s Office Reporting Tools.
2. It is the expectation of the Board of Trustees, executive leadership, auditors, and external regulatory bodies that actual internal financial results tie to the University Internal Financial Statements. Actual internal financial results that do not tie must be reconciled, disclosed as such and contain appropriate explanations.
   
   

Best Practices

1. University Internal Financial Statements run in the Controller’s Office Reporting Tools are the official financial statements for the university and should be used for financial decisions.