18 TH IDP Australian International Education Conference International Education: The path to cultural understanding and development 5 th 8 th October, 2004, Sydney Convention Centre, Sydney, Australia Paper: Author: Stream: Session: More Dollars and Sense in International Education Dr David Back of University of Canberra Managing International Education: Student and - Institution Perspectives More Dollars and Sense in International Education Date/Time: Thursday, 7 October, 02:00 PM - 03:00 PM
18 th IDP Australian International Education Conference 5-8 October 2004, Sydney, Australia Paper Title: Presenter: More Dollars and Sense in International Education Dr David Back of University of Canberra Abstract This paper is a follow up paper to Dollars & Sense in International Education 1 which was presented at the last year s conference. The new paper deals in greater depth with the accounting for and financial management of transnational education. After briefly summarising the findings of Dollars & Sense in International Education in relation to transnational education the paper explains a financial model which the author has developed for measuring the financial performance of transnational education. Through the use of this model and an example of a degree about to be offered in China by a hypothetical Australian university the paper explains errors commonly found in the measurement and prediction of financial performance. The paper concludes with recommendations of the approaches which institutions should be taking to ensure that they are taking advantage of modern accounting for and financial management of transnational education. Paper THE STORY SO FAR In a paper presented at last year s conference, entitled Dollars and Sense in International, David Back and Paridhi Rathore examined aspects of the accounting for and the financial management of international education in Australia institutions. The paper particularly dealt with: pricing of international student tuition fees, accounting for international education offices and capital budgeting for and financial management of international student programs offered outside Australia (transnational education). This earlier paper considered: the processes that accounting and financial management theory considers should be taken to each of these aspects of accounting for international education the processes that are actually being taken by Australian institutions the approaches that the authors recommend be taken in the light of circumstances existing within Australian education institutions. As its name implies the paper being presented today follows up the earlier paper however this paper restricts itself to accounting for and financial management of transnational education. Dollars and Sense in International Education summarised the results of a telephone survey of twenty two Australian tertiary institutions all of whom offered transnational courses. This research revealed that when it came to carrying out financial projections before offering offshore courses the vast majority of institutions surveyed projected both cash flows and revenues and expenses 1 Back D & Rathore P (October 2003), Dollars and Sense in International Education, Australian International Education Conference - Melbourne, IDP Education Australia
however amazingly two institutions indicated that they made no financial projections at all. 79% of the institutions projected for three or more years. 50% of those institutions who made financial projections limited their projections to one scenario. While all of the institutions measured cash flows from their transnational activities at least once per year 23% of those surveyed did not measure revenues and expenses at all and 18% made an attempt to do so but indicated that they did not do so accurately. Typically those who did measure revenue and expenses did so once a year. Although Dollars and Sense in International Education did not extend to examining the financial performance of Australian institutions transnational education activities anecdotal comments to the interviewer from different institution included: Many of our offshore programs are run for charity Our program in China is a loss leader None of the programs are making money Many of the offshore programs that were doing very well earlier have started making losses as a result of the Asian economic crisis. WHAT SHOULD BE MEASURED At the very least institutions should be measuring: cashflows revenues and direct expenses When there are either substantial assets or liabilities involved, as there is when an Australian institution has an overseas campus rather than using the premises of another party, it is also important that assets and liabilities be measured. Cash flows are the lifeblood of any organisation and it is necessary for institutions to measure them. However given that for the vast majority of institutions transnational activities are small compared with their overall activities most institutions are in a position to easily fund temporary cash deficits in transnational activities. While measures of liquidity, particularly cashflows, are important the key to measuring financial success is to measure the financial contribution that transnational activities make towards institutional overheads and surpluses. To do so means that institutions have to measure revenue and direct expenses. In the long term over the whole of the life of a project net cashflows and net contributions are equal but in the short term they can be very different. Details of how revenues and expenses should be measured are set out in the Appendix to this paper. In summary: revenue for the particular period needs to be measured the direct expenses involved in earning this revenue needs to matched against this revenue so that the contribution to institute overheads can be measured direct expenses not only include disbursement to outside bodies but includes other expenses, such as salaries of existing staff, that directly relate to the transnational activity expenditure incurred on the project before the revenue is earned should be treated as an asset in the year it is incurred and then treated as an expense at an appropriate time expenditure incurred after the revenue is earned, such as graduation expenses, needs to be brought to account when the revenue is incurred, and expenses not only include expenditure but also included losses. For example if a course has to be taught out and a loss is incurred in the teach out this loss needs to be brought to account in earlier years not in the years the loss is incurred. What should not be included, but which are frequently and incorrectly included as a direct expense, are charges imposed on a project by units within the Australian institution, for example a central administration
charge. Unless these charges reflect direct expenses, rather than overheads, they are simply internal transfers and should not be included in any measure of the contribution to overheads.
THE FINANCIAL MODEL The financial statements resulting from the financial model proposed by this paper are set out below. The model is simply one of a number of models which can be used but it does take into account the factors that need to be considered in measuring cashflows and revenues & expenses and the particular circumstances associated with measuring the financial performance of transnational programs. The financial statement of cashflows is relatively simple reflecting the cash inward and outward flows during the periods being measured. University of XXX Statement of Cashflows for the XXXX project for the year ended 31 December 200X Cash received by Australian institution Less Cash disbursements Teaching and assessment salaries and oncosts Examination costs Travel and accommodation costs Legal costs Other salaries and oncosts Promotional costs Freight costs Communication costs DEST levy Graduation costs Taxation costs Other costs Net cash flow (Some readers may be surprised to see taxation as a cost. While most Australian institutions are exempt from Australian tax this exemption does not extend to all overseas jurisdictions. Australian institutions need to ensure that they are meeting their legal obligations and paying overseas tax when required) The financial statement of financial contribution takes into account revenues and direct expenses. It is as follows:
University of XXX Statement of Revenues and Direct Expenses for the XXXX project for the year ended 31 December 200X Australian institution s share of revenue Less Direct expenses Teaching and assessment salaries and oncosts Examination expenses Travel and accommodation expenses Legal expenses Course coordination salaries and oncosts Other salaries and oncosts Promotional expenses Freight costs Communication expenses DEST levy Graduation expenses Taxation expenses Other expenses Amortisation of establishment costs Share of future losses Contribution to overheads ENDEAVOUR UNIVERSITY Now to illustrate the financial model let s introduce Endeavour University. Endeavour University, an Australian university based in Melbourne. Endeavour has decided to offer a twelve subject Master of Information Technology in collaboration with the Chinese University of Information Technology (CUIT) in Beijing. The duration of the course is three semesters over a period of eighteen months. Subjects are jointly taught by both institutions with a third of each subject being taught by Endeavour and two thirds by CUIT. The syllabus for the degree is identical to that taught in Melbourne. The contract with CUIT provides: that there will be a minimum of three intakes, one per semester, after which either party may terminate the contract in the event that either party terminates the contract the subjects will be taught out. a graduation ceremony will be held in Beijing each year which has to be attended by a member of Council of Endeavour University and a member of the University s Executive. Endeavour s progressional rules provide that a student may have two attempts at each subject before being excluded from the course. In 20X0 Endeavour negotiates with CUIT and enters into an agreement for the two institutions to jointly offer the MIT in 20X1. Details of cash payments to outside bodies by Endeavour are set out below In 20X0 a Senior Lecturer in IT spends 30% and a HEW 6 spends 10% of their time on the CUIT project. In the next two years these change to 20% and 25% and for the rest of the project are 10% and 20% respectively. Details of the student intakes and total student numbers are set out below. Endeavour s share of tuition fees for each subject per student is $870.
At the end of the third intake CUIT gives notice of termination of the contract. It takes until the end of First Semester 20X4 before the course is taught out. Student, subject details & tuition fees Students 1/20X1 2/20X1 1/20X2 2/20X2 1/20X3 2/20X3 1/20X4 Intake 35 40 30 0 2 nd Semester 26 31 21 5 3 3 rd Semester 22 24 17 6 2 Total 35 66 82 45 22 9 2 Number of subjects taught 4 8 12 8 7 4 2 Share of tuition fees $121,800 $229,680 $285,360 $156,600 $76,560 $23,490 $1,740 The cash flows from 20X0 to 20X4 for Endeavour University are as follows. Endeavour University Statement of Cashflows for the CUIT project for the years ended 31 December 20XO to 20X4 Cash receipts 20X0 20X1 20X2 20X3 20X4 Total Tuition fees 0 121,800 515,040 233,160 25,230 895,230 Less Cash payments Teaching and assessment salaries and oncosts 78,624 131,040 72,072 13,104 294,840 Examination costs 8,200 12,400 7,800 800 29,200 Travel and accommodation costs 13,100 67,800 99,800 59,800 23,800 264,300 Legal costs 10,500 10,500 Promotional costs (brochures, web etc) 5,100 2,000 2,100 2,300 100 11,600 Freight costs 1,200 1,800 2,300 1,300 250 6,850 Communication costs 1,200 700 600 600 200 3,300 DEST levy 17,574 22,098 5,003 87 44,762 Graduation costs 2,300 2,600 3,200 8,100 Taxation costs 0 0 11,200 24,321 0 35,521 Other costs 1,400 1,600 1,300 1,200 200 5,700 Total payments 32,500 178,298 285,138 176,996 41,741 714,673 Net cashflows (32,500) (56,498) 229,902 56,164 (16,511) 180,557 These cashflows do not include other direct costs such as the share of Course Convenor s and the Project Manager s salaries and oncosts. They do include payments to teaching staff who are paid additional sums over and above their normal salaries to teach overseas. If the course coordination and other salaries are deducted the net cash flows less these costs amounts to: 20X0 (67,490) 20X1 (92,395) 20X2 192,082 20X3 30,719 20X4 (43,579) Total $19,337 What is apparent from these figures is that while they are very favourable in 20X2 and 20X3 the net figures for the five years is only $19,337, which represents less than two students total fees for their course. This needs to be compared with the Statements of Financial Performance for the project.
Endeavour University Statement of Revenues and Direct Expenses for the CUIT project for the years ended 31 December 20X1 and 20X2 Revenue 20X1 20X2 Tuition fees 351,480 441,960 Less Expenses Teaching and assessment salaries and oncosts 78,624 131,040 Examination costs 8,200 12,400 Travel and accommodation costs 67,800 99,800 Course coordination 20,352 21,500 Other salaries and oncosts 15,545 16,320 Promotional costs (brochures, web etc) 2,000 2,100 Freight costs 1,800 2,300 Communication costs 700 600 DEST levy 17,574 22,098 Graduation costs 2,400 3,400 Taxation costs 11,200 24,321 Other costs 1,600 1,300 Amortisation of establishment costs 33,745 33,745 Future losses 70,820 70,819 Total expenses 332,360 441,743 Contribution to overheads $19,120 $217 Sure you may be saying the total net cash flows, after taking account of all direct salaries, for the project of $19,337 are equal to the total contributions for 20X1 and 20X2 but what about the Statement of Financial Performances for 20X0, 20X3 and 20X4. Well in each year the expenses exceeded revenue. The establishment costs of 20X0 of $67,490 should be capitalised and written off at a later stage. In 20X3 and 20X4 the losses were $77,570 and $64,069 respectively and as previously mentioned once a future loss is recognised it must be brought to account. Does all this matter you may be asking. After all if the net cash flows less direct international salaries for the project as a whole are equal to the total contributions. The problem is that many institutions will not bring into account establishment costs and future losses in 20X1 and 20X2 and will report surpluses of $123,685 and $104,781 respectively which against revenues of $351,480 and $441,960 looks remarkably healthy. Indeed if this method of accounting is used after three years it would seem that the project had made a total contribution of $160,976. How wrong can they be. Only when the accounting for transnational activities is accurate and appropriate can more sophisticated financial techniques be used. If not the results of these techniques is only as good as original data. This illustration also points out the importance of ensuring that agreements provide for a minimum fee for each subject irrespective of how many students are enrolled in the subject. CONCLUSIONS Transnational education is an important and growing part of the Australian education scene. It is vitally important that the financial performance of these activities is accurately measured.
This paper explains one financial model that can be used to measure the financial contribution of transnational education within an education institution and has illustrated this model using a hypothetical course offering in China by a hypothetical Australian university. As a result of this paper and its predecessor it is recommended that institutions: 1. in addition to carry out due diligence and other risk management activities before entering into an agreement to offer a course offshore all institutions project: cashflows revenues and expenses and if they are material assets and liabilities 2. before entering into an agreement to offer an offshore course figures be projected at least until the first cohort of students has completed their course 3. before entering into an agreement to offer an offshore course institutions calculate at least three scenarios of projections - pessimistic, realistic and optimistic 4. that a financial model be used to project and measure the financial performance of all transnational activities. 5. That any financial model that is used: measures revenue for the particular period; matches the direct expenses involved in earning this revenue against this revenue so that the contribution to institute overheads is measured; includes all direct expenses not only include disbursement to outside bodies but includes other expenses, such as salaries of existing staff, that directly relate to the transnational activity; treats expenditure incurred on the project before the revenue is earned as an asset in the year it is incurred and as an expense at an appropriate time during the life of the project; brings to account expenditure incurred after the revenue is earned, such as graduation expenses, when the revenue is incurred, and includes future losses as well as expenditure in measuring expenses. We know from our research that 23% of institutions don t measure revenues and expenses and that a further 18% admit that they don t accurately do so. I suspect that many of the remaining 59% would not follow the principles described in this paper. We can only be left to wonder what the financial performances of Australian institutions transnational activities really is. It will be interesting to see if AUQA s country wide audits of Australian universities transnational activities will provide us with the answer for the university sector.
Appendix To measure financial contribution we need to measure revenue and appropriate expenses and here, for a moment, we need to be a little technical. The Australian Accounting Standards Board (yes, there is such a body) defines revenue as: inflows or other enhancements, or savings in outflows, of future economic benefits in the form of increases in assets or reductions in liabilities of the entity, other than those relating to contributions by owners, that result in an increase in equity during the reporting period The Australian Accounting Standards Board defines expenses as: consumptions or losses of future economic benefits in the form of reductions in assets or increases in liabilities of the entity, other than those relating to distributions to owners, that result in a decrease in equity during the reporting period. The Australian Accounting Standards Board defines assets as: "future economic benefits controlled by the entity as a result of past transactions or other past events. Therefore expenditure on a project before revenue is, in the year it is incurred, provided that it will bring future benefit. It is only in later years that it becomes an expense. But what kind of costs should be included the expenses being measured? There are many types of costs including total costs, direct costs and marginal cost. Total cost is all direct costs and indirect costs associated with an activity. Direct cost is expenditure which can be economically identified with and specifically measured in respect to a relevant cost object (Chartered Institute of Management Accountants definition). Marginal cost is the additional or incremental cost that will be incurred as a result of an increase in a particular activity. All are important. Ultimately if an organisation s total revenue does not cover both its total indirect and total direct costs it will make a loss. Marginal cost is important when an institution is considering an increase in a specific activity or recruiting a particular cohort of students. But the key is direct cost. If a course s revenue exceeds its direct costs it is making a positive contribution towards overheads. While it is desirable that tuition fees for a particular course cover total costs, unless an institution has specifically decided to run a course at a loss, it is essential that revenue from a particular course covers the direct costs. To measure a course s contribution to institution s overheads you need to take the revenue for the transnational activity for the period being measured and deduct the direct expenses for this activity for this same period. Direct costs not only include disbursements to outside bodies. If an academic spends a percentage of their time coordinating a course the proportion of their salary and oncosts that can be attributed to that course is a direct cost. (Some would argue that salaries and oncosts of existing staff are sunk costs and therefore should not be included in direct costs. While this is true in circumstances where there is excess staff capacity who has recently heard of an Australian education institution with excess staff capacity in the disciplines which are in demand overseas.) Nor are expenses limited to expenditure incurred in the year the revenue is earned. For example the direct cost of the graduation ceremony needs to be brought to account in the period the revenue is earned not when the expenditure takes place. Similarly the costs of establishing the course need to be allocated, or amortised, over the period that the course is being offered. There are a number of different ways in which this can be done. Typically it will be spread equally over the years of the contract however an alternative is to amortise the establishment costs using the number of subjects being offered in the year compared with the total number of subjects that will be offered during the
contract. This latter system has the benefit of the expense being less at the beginning and end of the contract when limited numbers of subjects are being offered and therefore revenue is lower than when the course is at full flight and therefore more closely matching expenses to revenue. Finally if the expenses of teaching out a course are greater than the revenue that will be earned in the same period accounting rules require that this cost be brought to account as an expense in earlier years. (Those who have ever been involved in the teach out of a course will know that this can be a very heavy expense.) It is also important to determine the accounting entity for whom revenue and expenses are being measured. If central administration is placing a levy to cover general overheads this is an expense for the School involved but it is not an expense for the institution as a whole. So often it is assumed that internal charges within a institution are expenses for the institution as a whole when they are merely an internal transfer of funds.