University Financial Statements, Operating Surpluses, and Student Fees

Prepared for some members of the councils of Tertiary Educational Institutions. (The choice of the VUW accounts to illustrate the general issues is fortuitous, and is not intended to reflect in any way – positively or negatively – on the university.)

Keywords: Education: Governance;

Statement of Financial Performance

Debates about student fees usually focus on the ‘Statement of Financial Performance’ which describes the revenue and expenditure of the Tertiary Educational Institution (TEI). However we shall see that other accounts are also important in order to understand this one. Table 1 shows the 2002 Statement of Financial Performance for the Victoria University of Wellington (VUW).[1] Its website is where you can find the details. (Attached to most line items is a ‘note’ which it is always wise to check when if you are interested in that line.)

(VUW: 2002)

$m %
Government Grants 76.0 49.2
Domestic Tution Fees 35.3 23.0
International Tution Fees 16.7 10.8
Research Support 3.7 2.4
Commercial 8.3 5.3
Student & Family 7.1 4.6
Other 7.2 4.6
Total Revenue 154.4 100.0
People 94.8 61.4
Occupancy 11.2 7.2
Equipment 1.2 .8
Information Technology 3.9 2.5
Operating 25.7 16.7
Depreciation 15.4 10.0
Total Expenditure 152.4 98.7
Surplus for the Year 8.8 1.3

These accounts tell very little about the management of the TEI. They dont tell how much is spent on teaching, how much on research or how much on teaching international students or how much on teaching domestic students; or how much on marketing; or the library and so on. None of the tables in the Annual Report tell much about such things.

But they tell some things about financial arrangements. Suppose that in 2002 VUW had raised its domestic student fees by 1 percent. Assuming no students were discouraged from attending (including going to cheaper TEIs), then the additional revenue would have been $355,000 representing a .23 percent increase in total revenue. The very small change reflects that domestic tuition fees are only 23 percent of total revenue. (In fact .23% = 23% x 1%).

Now what might the university have done with this extra revenue? It could have reduced other revenue (say cut the fees to international students) and it could have spent the money on other items (say staff salaries). However the most likely thing VUW would have done is increase its ‘surplus for the year’ from $8.8m to $9.1 or by 4 percent. (It is explained below why one might expect them to do this.)

Statement of Financial Position

Table 2, is a simplified version of the published ‘Statement of Financial Position’ (and again set out here is without the notes). It shows all the assets and liabilities of the university at the end of the 2002 and 2001 year. (Shortly we will explain how to get from Table 1 to Table 2 – via Table 3.)


(VUW: 2002)

Current Assets 36.1 50.1
Property Plant & Equipment 290.4 315.1
Development Costs .1 .0
Construction in Progress 1.5 8.2
Shares & Advances .2 .4
Total Non-Current Assets 292.3 323.7
Current Liabilities 30.7 33.4
Non-Current Libailities 6.1 7.5
Total Liabilities 36.8 40.9
Total Net Assets 291.6 332.9
Represent by
Community Equity
291.6 332.9

The table shows that at the end of 2002 the University had $332.8m of assets, up from $291.6m at the beginning of the year, and increase of $41.3m. Most of those assets (over 95 percent) are in the capital items of Property, Plant and Equipment. The university had substantial Current Assets (such as Cash in the Bank and Short Term Investments)of $50.1m but these were almost offset by its Liabilities (such as accounts owed) of $40.9m.[2]

Statement of Movements in Equity

How did the Net Assets (Community Equity) of the University increase by $50.1m over the 2002 year? The broad changes are set out in our Table 3, Statement of Movements in Equity. It shows that the increase came from a one of capital grant from the government, of $6.6m, an increase in the Revaluation Reserve of $25.9m, and ‘Surplus for the Year’ of $8.8m, which is exactly the item which appears in the Statement of Financial Performance. The revaluation reserve is a means of dealing with the rising value of capital items due to inflation. It does not tell a lot about the ability of the TEI to function better. (That the land a lecture theatre is on has gone up 20 percent does not tell a lot about the effectiveness of the lectures. Incorporating that increase in the accounts ensures the asset valuations are meaningful. Sometimes the university will think about selling the land in order to use the funds it represents more efficiently.)

(VUW: 2002)

Surplus for the Year 8.8
Increase in Revaluation Reserve +25.9
Capital Funds Received
from Government
Total Change in Equity =41.3
Total Equity at the
Start of the Year
Total Equity at the
End of the Year

Leaving aside price changes and special capital grants, the main source of VUW’s Net Assets (Community Equity) is the surplus recorded in the Statement of Performance. Had Domestic Tuition Fees been raised by 1 percent, the extra $355,000 would have increased the Net Assets by that amount or .1 percent (assuming it was not used for current spending or to reduce revenue elsewhere.)

Evaluating the Accounts

Thus far the accounts of the university are a set of numbers determined by the application of various rules, linked arithmetically together. That does not tell whether the university is in a healthy financial state (and of course the accounts tell very little about whether the university is in a healthy scholarly, teaching, or research state or in what ways it is contributing to the community and the nation).

The Tertiary Monitoring Unit (TAMU) of the Ministry of Education has set four criteria – minimum target thresholds – which allow some assessment of the state of an TEI’s finances. These are set out in Table 4.

(VUW 2002)

Cash Cover Liquid Funds Annual Cash
8% 32.6%
Asset Productivity Revenue Net Assets 40% 48.4%
Return on Assets Operating
Assets 1% 1.7%
Operating Surplus Operating
3% 3.9%

* Excludes the Trust Income adjustment

A simple interpretation is as follows.

Cash Cover (liquid funds as a percentage of annual cash operating outgoings). The incoming revenue and outgoing expenditure of an TEI never exactly match, so it needs a liquid reserve to cover a temporary gap between the two. (Suppose a government grant is a month late. The university can still pay its salaries on time by running down its liquid reserves.) TAMU recommends a Cash Cover ratio of at least 8 percent. The VUW ratio was 32.6 percent, more than four times the TAMU recommendation. We cannot tell from the accounts whether the excess is justified, but it suggests that the university may be holding too much of its assets in liquid funds and should be using some to fund buildings, and the like.

Asset Productivity (Revenue over Assets). Although described as a ‘productivity’ measure this also gives a sense of whether a university has enough assets relative to its size. TAMU recommends a minimum Asset Productivity Ratio of 40 percent. The VUW ratio was the higher 48.6 percent. Perhaps this is due to the University leasing some of its assets rather than owning them. It would also be useful to look at the ratios for other universities (after adjusting for leasing). The conclusion from this measure might be that VUW seems to have about enough assets relative to its revenue.

Return on Assets (Operating surplus as a percentage of assets – excludes the Trusts’ income adjustment). This is an important measure in a business whose purpose is to generate a return on its capital. It is less obvious that this applies for a TEI (unless one thinks it is a business) especially as a lot of the true capital of the TEI – in the staff and the students – does not appear in the financial accounts. (In any case the operating surplus is not the ultimate purpose of a tertiary TEI although, as the next criteria explains, it is a vital for the TEI’s sustainability.) TAMU set a minimum threshold of 1 percent and VUW exceeded this at 1.7 percent.

Thus far VUW has done well on all the TAMU indicators.[3] The biggie is

Operating Surplus (as a percentage of total revenue – excludes the Trusts’ income adjustment). While a TEI may not be a business it is a financial entity and it needs to run a financial surplus in most years, for at least two immediate reasons and a long run one. Some of the surplus will be used for further investment and it is also important because creditors see a surplus as ensuring that they will be paid. Without a surplus the capital will be run down, and businesses will refuse to advance goods and services except on strict cash payments terms. In the long run a TEI which failed to generate a financial surplus in most years would be have to run down its assets to fund its current activities, and would eventually have to give up – or be taken over by another TEI on humiliating terms. TAMU recommends a ratio of 3 percent, VUW attained 3.9 percent in 2002.

(While VUW comfortably exceed the target in 2002, it went though some really bad years in 1999 and 2000, when its operating surplus was negative. So much so, that its net assets at the end of 2002 were lower than they were at the end of 1998. Academics still tell of the terrible impact of the adjustment on the life of the university. They would not want to go through that again. Despite a recovery, the university spent less in 2002 than it did in 1999.)

The implication is that if TAMU sets a minium target of 3 percent, and that on occasions that will not be attained, in good years the target should be exceeded. But by how much? VUW has set its own target of Strategic Objective 16 (page 71 in the Annual Report), to

Ensure that the University generates by 2004 an annual operating surplus of at least 6 [sic] percent of revenue, in order to support enhanced capital developments and buffer against changes in the external investment.

That is double the TAMU target minimum, and is described elsewhere as a ‘medium-term strategic target’ (p.34) .Certainly any incoming Council Member, including student representatives, would want to be fully briefed and convinced that the doubling of the TAMU target minimum was a justified medium term goal.[4] It is significant for fee setting as the next few paragraphs explain.

Suppose that VUW had decided to attain its 6 percent target in 2002 and there had been no freeze on student fees. The additional revenue required is $3.6m.[5] Since all the other revenue sources were fixed, the only means of attaining the target would be to increase tuition fees. Let’s assume that the international tuition fees are already at the market maximum. (If not, why not?) Then the domestic tuition fees will have to be raised from $35.5m by $3.6m to a total of $39.1m, or by 10.1 percent.

The point of this calculation is to show that the student fees are important in determining the operating surplus for each TEI. In effect the fees are the part of revenue which covers the residual requirements of the TEI. The operating surplus target will be very influential on the level of fees.


The level of student fees affects the tertiary educational TEI’s revenue, operating surplus and, ultimately, financial viability and financial position. Council members need to understand the links.

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1. This is for the ‘consolidated account’, which includes Victoria Link Limited, a subsidiary of the University.
2. The $7.5m of non-current liabilities was ‘Provision for Retiring and Long Service Leave.’
3. Another useful ratio for some purposes is that of current assets to current liabilities. It was 150 percent in the 2002 accounts, which means that if all the university creditors insisted they were paid, the university had enough readily available funds to meet their requirements and would not, for instance have to raise a mortgage on a building.
4. There is a relationship between the growth of revenue, the operating surplus target, and the asset productivity. If VUW was to persist with the 6 percent target it is likely that its capital would grow faster than its revenue and asset productivity would fall.
5. The Operating Surplus excluding the Trust income adjustment amounts to $6.3m. The new Operating Surplus divided by the new Total Revenue equals (6.3 + 3.6)/(161.2 + 3.6) = 6.0 percent.

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