The Accounting Management of Research Projects
The introduction of accrual accounting in universities has been only a part of a thorough reconfiguration of the relationships between the central administration and peripheral units and has become one of the most complex situations universities had to face over the last few years.
At present, departments and other peripheral units (e.g. centres of excellence) are no longer independent as to accounting. The former budgeting and financial reporting documents have been unified at university level.
Therefore, the accounting information system of the universities had to be configured for the need to pass from the traditional public accounting to accrual accounting and to support the new competencies of peripheral units within the framework of the new accounting information system.
The main point is to define which economic and financial flows each unit can record autonomously and how they are interconnected at central level. To this purpose, it is essential for the accounting information system to reflect the delegation system, where powers are conferred upon units, and the reconciliation processes.
The choice of a more or less extended delegation between the central administration and peripheral units involves the management of universities, for example as regards payment of suppliers, treasury control, contract management, utility cost allocation and particularly the management of research projects.
Under this perspective, the accounting management of research projects takes on a crucial role due to the importance of research within the university and to the complexity of their accounting. The management of research projects entails the need to allocate tasks between the department that carries out the research activity and the central administration that has to report said activity in the consolidated financial statements and therefore determine its accrual in each financial year.
The accounting information system of universities is mainly dealt with in Ministerial Decree 19/2014, which imposes how to prepare the consolidated annual report.
The legislation identifies specific accounting standards for universities and refers, for any specific item not dealt with in the Ministerial Decree, to civil law provisions and the accounting practices defined by the Organismo Italiano di Contabilita (OIC), the Italian commission for accounting. We can, therefore, acknowledge how the lawmaker elected to intervene selectively on the preparation of the annual report by specifying only the criteria concerning those items that, being peculiar of universities, could not have been easily dealt with in the civil law or in the accounting standards established by the OIC.
Article 4 (letter g) of the Decree indicates annual report valuation criteria for the research projects. More specifically, the lawmaker highlighted how the valuation of accrued income or deferred income in the university takes on a peculiar significance in connection with the accrual of income derived from ongoing projects and research funded or co-funded by third parties.
The lawmaker identifies two types of research projects: “competitive” research projects and “commissioned” research or research deriving from “technological transfer”. The first type of project is usually accessed by taking part in competitive selection procedures that are generally proposed by international or national public institutions (European Union, Italian Ministry of University and Research, etc.) or by public or private foundations that have an interest in specific fields of research.
The second type of project consists of research activities commissioned to departments by external entities, called “outsourced research projects”.
Projects that start and finish within the same financial year are assessed on the basis of the cost criterion, where annual report items are valued based on cost. This cost “should be intended as the whole expense borne to procure a given good or service, including those that can be directly or indirectly allocated for the reasonably allocable portion” (article 2, Ministerial Decree 19/2014). Therefore, for annual research projects, valuation is quite easy because all the costs incurred for the implementation of the project accrue during that year and are allocated to it based on the pertinence between the costs and the revenues .
As regards multi-year research projects, each university can choose a valuation based on the cost criterion or as a function of the progress of works. We also point out that, once made, this choice will be univocal. This means that the choice will concern all the research projects of that university, subject to the condition that the Accompanying Notes will specify the method used and criteria adopted.
The valuation of multi-year research projects requires the identification of the portion of costs and revenues to be allocated to the year considered as distinguished from the portion that must be transferred to future years.
Between the two options above mentioned (cost criterion and work in progress criterion), the legislator seems to prefer the former solution. In detail, the adoption of the cost criterion consists in the determination of the portion to be allocated to the year considered by assuming that the revenue to be allocated corresponds to the costs incurred during the year and, consequently, proceeding by booking a deferred income (if revenue amount is higher than the cost incurred for the implementation of the project) or accrued income (in the opposite case).
This accounting method has two important consequences: firstly, this approach implies the income neutrality of the research projects during their implementation period. The revenues allocated during the various years always correspond with the costs of those years, so no impact is expected on the annual result. Any margin will emerge only during the closing year and usually in “outsourced research projects”. The second consequence regards the accrued income or deferred income that has originated from the progression of costs during the years (cost-to-cost method) rather than in connection with the time relevance of the economic component to the year, as traditionally happens.
Consequently, the accounting management of research projects first of all requires the definition of specific competencies between the departments or other peripheral units where the research activities are carried out and the central administration that takes care to reflect them in the consolidated annual report. Then the configuration of the accounting information system must ensure the allocation of the cost items to the different research projects, their subdivision by peripheral units and, finally, the determination of the portion of revenues to be allocated to the year considered and the closing of accounts at the end of the year .