Policy Notes: Revenue Recognition – Auxiliaries and Service Centers
The purpose of this policy is to define revenue recognition for the auxiliaries and service centers and to provide guidelines for recognizing such revenue in accordance with generally accepted accounting principles (GAAP).
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Revenue Recognition Overview
Auxiliaries are self-funded entities that support the University's teaching and research mission. Revenue is generated from the services provided to faculty, students, staff and the Stanford community.
Service centers are organizational units of the University that provide a specific service, group of services, or products to users principally within the University. Their source of revenue is direct charges to users for their services and/or products based on a nondiscriminatory rate. Service center revenue must be no more and no less than the estimated aggregate cost of the service or product over a fiscal year (an over- or under- recovery that is within 5% of total expenses is allowed for nonacademic service centers and within 15% for academic service centers).
Revenue recognition – Revenue should be recognized based on accrual accounting in accordance with GAAP. Revenue should be recognized when earned, and expenses should be recognized when incurred. Revenue is considered earned when the University has substantially met its obligation to be entitled to the benefits represented by the revenue. Revenue should be recorded when earned, regardless of the timing of cash receipts. Deposits (whether refundable or non-refundable), early payments and progress payments should not be recognized as revenue until the revenue producing event has occurred.
Deferred revenue – Deferred revenue results when cash is received in advance of revenue being earned. Deferred revenue is recorded as a liability until it is earned. Once earned, the liability is reduced and revenue is recorded in the general ledger. When recording cash receipts, it is important to determine whether the cash represents payments for recognized revenue or deferred revenue.
Accruals and cut off – Revenue should be recognized in the period in which it was earned regardless of the timing of billing. At the end of each month, revenue that has been earned but not billed or received should be accrued and recorded as revenue in that month. An asset (accounts receivable) is recorded on the balance sheet for the revenue that has been earned but for which payment has not yet been received.
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External, intercompany, interdepartmental and intradepartmental revenue – Revenue should be recorded based on the revenue source. Revenue earned from external parties (also known as third parties), should be recorded as external revenue. External parties are persons or entities over whom Stanford has no fiduciary control. This category includes commercial enterprises, other universities, and also Stanford faculty, staff or students if revenue is for personal goods or services.
Revenue earned from separate legal entities that are owned by Stanford should be recorded as intercompany revenue. Examples of intercompany entities are the hospital entities and the Stanford Linear Accelerator Center.
Revenue earned between separate departments of the University should be recorded as interdepartmental revenue.
Revenue earned within a single department of the University should be recorded as intradepartmental revenue.
Invoicing and Cash Receipt
Revenue recognition, invoice processing and cash receipts may or may not occur at the same time. Revenue should be recognized when earned, while invoicing and cash receipt may occur independently of the earning process. For example, cash may be received prior to the service center or auxiliary's performance of a service and/or incurring of any expense. When cash is received in advance, cash is recorded and a deferred revenue liability are recorded. Revenue is not recognized until the performance of the service or sale is complete. Conversely, if a service has been completed, revenue should be recorded whether or not billing has occurred or payment has been received.
Development of Desktop Procedures
Due to the unique nature of each auxiliary and service center, it is not practical in this document to provide the detailed guidelines for each department implementing this policy. However, each department should create a written set of desk procedures that provides a detailed guideline for properly recognizing and recording revenue in accordance with this policy.