Standards
OVERVIEW OF variance analysis
Prior to reviewing this standard, it is important to understand the process of closing and the parties responsible for completing the closing process.
Closing refers to the process of finalizing an entity’s financial information and creating reports after a specified accounting period has ended. Closing procedures are performed on an interim and year-end basis to keep accounting data organized and ensure all transactions for the period are properly accounted for and recorded on a timely and accurate basis. The Office of the University Controller requires Constituent Reporting Units (CRUs) to submit closing documentation on an interim and year-end basis. A CRU is determined by meeting a $35,000,000 threshold in revenues, expenses, or net assets for a minimum of 2 consecutive years. A CRU will be removed from the list if the threshold is not met for 3 consecutive years. Review the internal controls and roles and responsibilities IU accounting standards book for a detailed explanation of a Constituent Reporting Unit and a List of Active CRUs at Indiana University. Key fiscal officers within a CRU are responsible for several items at interim close including reviewing IU accounting standards, reviewing system and user roles, financial statement variance analysis, balance sheet balance substantiation, posting and reviewing accruals, and account reconciliation. Key fiscal officer responsibilities included in year-end close procedures consist of interim closing activities in addition to specific year-end items such as org reversion, covering cash balances, and sub-certification. Both interim and year-end closing procedures are accompanied by a checklist to be submitted by the CRU alongside required materials. The list and relevant scope are subject to change annually and individual specific requirements as determined by each campus and/or RC need to be considered in addition to this checklist.
Review the UCO Fiscal Officer Calendar for closing deadlines. It is important to note that several KFS e-docs are due by a specific date. If you use Financial Processing (FP) e-docs in KFS, these documents must be in the system and fully approved by 10:00 p.m. for the entries to be processed by the accounting cycle and reflected in the closing reports. Because some KFS e-docs require additional administrative approvals, on the day of each closing, e-docs should be completed by 12:00 p.m. to allow for all necessary routing and approvals. If you require access to KFS, please contact your RC fiscal officer.
Variance Analysis
Prerequisites
Prior to reading the Variance Analysis Standard, it is beneficial to review the below standards to gain foundational information:
- Accounting Fundamentals Standards
- Chart of Accounts and General Ledger Standards
- Financial Statements Standards
Preface
This standard discusses what a variance analysis is and how it is used internally at Indiana University. Information presented below will walk through a general understanding of how to use IU’s financial reports to pull a variance analysis along with why a variance analysis is important and how it is conducted throughout the university. Additionally, this standard will help users and entities throughout Indiana University analyze variances correctly to ensure that management can understand why variances are present within IU’s financial statements.
Introduction
In accounting, a variance is a difference between a budgeted, planned, or standard cost and the actual amounts on the financial statements. While there are multiple types of variances, the most common variances include prior year to current year balances or budgeted to actual amounts.
At Indiana University, variance analysis most commonly compares fiscal periods, typically analyzing prior year to current year balances which can help identify various trends. In addition, financial statement users compare current year actuals to budgeted amounts. This comparison is a requirement of both the Office of the University Controller (UCO) and University Budget Office (UBO). This analysis is used to identify any large differences in an entity’s actual and budgeted financial activity so issues can be resolved and improved. The more detailed the analysis, the better management can understand why different fluctuations occur within the entity.
The quarterly variance analysis is a tool that is used to explain significant variances in the financial statements of each organization. Performing a variance analysis internally at the account or organization level also helps identify errors and explain any variances that impact IU’s consolidated financial statements and the university budget. Variances that are found within the financial statements must then be investigated by the RC or fiscal officer to get a better understanding of why the variance occurred and if steps need to be put in place to remedy the variance moving forward.
Importance and Impact of Variance Analysis
Variance analysis is an important tool for management and for external audit. By completing the variance analysis by entity, documentation to support some of IU’s largest fluxes are easily accessible and can be provided to auditors upon request.
Variance analysis is used to identify and explain overarching trends on the financial statements which in turn helps identify accounting errors. Determining trends within the financial statements allows campus leaders to provide comprehensive financial information to the EVPFA. This information is used to create consolidated financial statements that help IU executive leadership make decisions for the future of the university. Additionally, variance analysis of budgeted to actual amounts help units to determine areas in which they have over/underspent. This helps management determine how funds should be allocated in the future.
How to Perform a Variance Analysis
Quarterly Variance Analysis Timeline
The quarterly variance analysis is completed by every IU entity. This analysis is performed the month following the end of each fiscal quarter. In order to identify errors and appropriately account for budgeted variances, analysis should be completed prior to period close. Refer to the UCO Fiscal Officer Calendar for detailed dates. Any material variances along with specifically required variances by the applicable RC’s should be available upon request on the 10th of every month as part of the monthly closing procedures.
Running the Appropriate Reports
After pulling the income statement and balance sheet, refer to the following list when performing a variance analysis.
- A variance analysis should be completed on all three of an entities’ financial statements. However, users should compare each individual financial statement based on the criteria below:
- Balance Sheet – Analyze variances between prior year and current year financials.
- Income Statement – Analyze variances between prior year and current year as well as budgeted vs actual financials.
- Cash Flow Statement– Analyze variances between prior year and current year financials. While the comparative year cash flow statement is not currently available, comparing multiple years of information should be considered a best practice. Review information at the highest level – changes in cash flow from operations, investments, and financing.
- Variances should be analyzed at different levels for varying financial statements. There are three reporting levels within IU’s financial system consisting of object code, level, and consolidation. While the primary focus is on the level code, units may choose to complete a variance analysis at any or all three levels. Refer to the requirements and best practices portion of the standard for further detail on IU specific requirements.
- Instructions on how to pull the three reports can be found in the Financial Statement Reports Instructions.
How to Use the Reports and Complete Variance Analysis
Variances are automatically identified within each financial statement report and are highlighted for the user to identify.
Balance Sheet (excluding Fund Balance) – Balances that have not changed since the prior year or are negative, with the exception of the below object codes:
| Object Code Names | Object Code Numbers |
| Accumulated Depreciation | 8901, 8904, 8905, and 8910 |
| Allowance for Uncollectable | 8900 |
| Allowance for Doubtful Accounts | 8950 |
| Allowance for Inventory Shrinkage | 8955 |
| Capital Assets | Multiple Accounts from 8601 – 8665 |
| Cash Revolving Funds | 8001 |
RCs and campuses may require more detailed analysis – refer to your local campus or unit fiscal officer for further detail. For specific thresholds for the current fiscal year, refer to the Closing Checklist.
Income Statement – Object level variances to budget and/or prior year greater than or equal to the materiality for the organization will require detailed explanations. Materiality thresholds will automatically calculate and appear at the bottom of the income statement if the user selects the “Display Materiality” parameter. The income statement calculates materiality by taking actual year-to-date total revenue and multiplying it by 10%. For specific thresholds for the current fiscal year, refer to the Closing Checklist.
Appropriate Variance Explanations
The variance explanations should be as detailed as possible. Suitable explanations will provide details of WHY the variance occurred.
- If the variance is mainly related to a specific transaction(s), indicate the relevant amount(s), and other details specific to the transaction.
- If the variance is related to a change in business conditions/operations, then please note the change and, if possible, quantify the effect.
- If the variance was due to an accounting error, please provide detail for the related transaction(s) and KFS documents that explain why the variance occurred. Provide documentation that focuses on the cause of the variance, not just ending balances or general ledger transactions.
Examples of Appropriate Variance Analysis Explanations
As a general note, explanations provided should explain a majority (in this case, at minimum 80%) of the total variance. Multiple explanations may be needed to fully explain the cause of a variance. This portion of the standard will present several good examples of variances on the balance sheet and income statement with explanations and the documents provided to explain the variance. For specific information regarding appropriate documentation for substantiation of variances, refer to the Balance Sheet Substantiation or Material Transactions Substantiation standards.
Accounts Receivable
| Actual | Prior Year | Variance |
| $400,000 | $325,000 | ($75,000) |
Explanation: In the fiscal year, we began doing business with ABC Company. On 06/30, this company had a $63,500 invoice, invoice #124562, outstanding.
Documentation Provided: Invoice dated 5/21 directed to ABC Company for consulting work provided by IU totaling $63,500 and payable by 7/15. In addition, an email is included noting that the invoice had been received by ABC Company who plans to make full payment on 7/2.
Accounts Payable
| Actual | Prior Year | Variance |
| $250,000 | $500,000 | ($250,000) |
Explanation: We purchased a $200,000 fax machine in May 20XX, the invoice for which was not paid until 20X1.
Documentation Provided: Purchase order from BUY.IU for a new fax machine purchased through Brothers USA totaling $200,000 which was approved by the department head and IU’s purchasing department.
Tuition and Fees
| Actual | Prior Year | Variance |
| $15,000,000 | $20,000,000 | ($5,000,000) |
Explanation: IU experienced a 25% decrease in enrolled students in comparison to prior year due to an economic recession.
Documentation Provided: Student roster for current and prior year and bursar documents showing tuition revenue in both years.
Sales and Services
| Actual | Prior Year | Variance |
| $50,000 | $40,000 | $10,000 |
Explanation: 10% increase in occupancy across campus in room and board. Therefore, dorm room rate * 10% = $XXX.
Documentation Provided: A detailed bursar bill sent to students in addition to a document or screenshot showing the published occupancy rates and student roster showing total headcount for students that purchased on campus housing.
Supplies and Expense
| Actual | Prior Year | Variance |
| $2,500,000 | $3,000,000 | ($500,000) |
Explanation: A grant used for the purchase of supplies ended in FY20X1. As the grant was nearing its end, spending was reduced to the remaining amounts ($500,000) to avoid overspending.
Documentation Provided: A copy of the grant showing the start and end dates along with the total cost reimbursable amount awarded. In addition, the financial statements for the prior year showing the ending balance on the grant and calculation of remaining grant amount for 20X1.
Examples of Inappropriate Variance Explanations
Inappropriate and/or incomplete examples of explanations to support variances on the financial statements include:
Sales Revenue
| Actual | Prior Year | Variance |
| $1,500,000 | $1,000,000 | $500,000 |
Explanation: In the fiscal year, sales decreased by 33%.
Why the response isn’t sufficient: It doesn’t explain WHY sales went down. Include additional information like which line of sales revenue decreased and what caused the decrease to strengthen this explanation.
Appropriate Explanation: In the current fiscal year, the sale of IU merchandise such as T-shirts and banners decreased by roughly $450,000 due to a limit on production of these items as a result of factories closing for a majority of the fiscal year.
Tuition Revenue
| Actual | Prior Year | Variance ($) |
| $11,000,000 | $10,000,000 | $1,000,000 |
Explanation: $11,000 x 1,000 = 11,000,000.
Why the response isn’t sufficient: This explanation doesn’t provide any context. Typically, math alone as an explanation is not sufficient.
Appropriate Explanation: Tuition revenue increased by $1,000,000 from prior year due to the annual tuition increase of $1,000 per student. Student enrollment stayed constant from prior year at 1,000 students.
In conjunction with the balance sheet or income statement substantiation, users should provide physical support (i.e. copies of invoices, inventory counts, spreadsheets and contracts) to corroborate an explanation. Examples of inappropriate documents to provide as explanations include, but are not limited to, the following:
| KFS general ledger entry or balance screenshots | Any documents that do not apply to the balance being explained |
| Post-it® Notes/scrap paper notes | Controller Toolkit reports |
| IUIE reports | Repetitive documents (i.e. Excel documents with calculation for the ending balance) |
Requirements and Best Practices
This portion of the standard outlines requirements related to the variance analysis, as well as best practices. While not required, the best practices outlined below allow users to gain a better picture of the entity’s financial health and help identify potential issues on a more frequent basis. This allows organizations to identify errors, mistakes, and pitfalls which can be remedied quickly and prevent larger issues in the future.
Requirements
- Complete a variance analysis for all operating accounts on a quarterly basis for the income statement and balance sheet prior to the closing date.
- Run the three financial statements (income statement, balance sheet, and cash flow statement) and perform a variance analysis review quarterly. Please refer to the Financial Statement Reports Instructions for more information on how to pull these financial reports.
- Provide detailed explanations of variances detailing WHY the variance occurred. An internal investigation will allow the entity to better explain why the variance occurred and if any additional steps should be taken to avoid future variances. The Accounting and Reporting Services team can be consulted if needed at uars@iu.edu.
- Ensure documentation/substantiation is available upon request for variances.
- Ensure any identified errors have been corrected prior to closing.
Best Practices
- Complete a variance analysis for all operating accounts on a quarterly basis for the statement of cash flows prior to the closing date. The statement of cash flows reports individual transactions, making the object code level the best option for variance analysis.
- The RC fiscal officer is responsible for reviewing and analyzing the documentation and working papers of the RC/organization. Analyzing the quarterly variance analysis allows the fiscal officer to determine if there are problems with the entity’s financial reports or if the entity’s operations need to be improved. The questions that need to be asked will vary depending on the RC/organization; however, the following questions are some common examples:
- Were there unusual or atypical transfers during the period being analyzed? In some instances, transfers may have been booked in error to wrong object codes or in the incorrect period.
- Is the unit meeting budgeted targets? By knowing if the unit is meeting budgeted targets, explanations may be easier for variance analysis.
- Has the unit searched for transactions that were erroneously recorded to the wrong accounts, object codes, org codes, etc? By ensuring financial transactions are being properly recorded, it eliminates potential variances and better aligns to budgeted amounts for the period. It also ensures proper recording of financial transactions at the unit and consolidation levels.
- Has the unit performed any sort of trend analysis or forecasting for the fiscal period? Performing trend analysis or forecasting can help units identify areas they expected to be higher or lower than budgeted and/or prior year balances. It allows units to better track transactions and explain current and future variances.
- Has the unit considered using lower materiality levels to ensure accuracy based on their fiscal transactions? While UCO has specified a minimum materiality level to conduct variance analysis, a unit may require a lower materiality based on its overall transactions (i.e. a unit’s total revenue may be below the UCO threshold). The unit has the best understanding of the volume and amounts of transactions. Proper review ensures correct recording all the way through consolidation.
- Complete a high-level variance analysis at the object level on all reports on a monthly basis.
- Follow up internally (employees/students) and externally (vendors/contractors) for any unexplained variances.
A fiscal period at Indiana University is broken out into 12 separate periods based on months in the calendar year. Period one is equivalent to July during the fiscal year.
A balance sheet, also known as the statement of financial position, is a financial statement that reflects the overall financial position of an organization at a specific period in time.
An income statement, also known as the statement of revenues, expenses, and changes in net position, is a financial statement that summarizes the revenue streams, expense categories, and overall profitability of an entity.
A cash flow statement, also known as statement of cash flows, is a financial statement that summarizes the amount of cash and cash equivalent entering and leaving an entity.
An object code is used to organize and catalog financial data. An object code classifies a financial transaction as income, expense, asset, liability, or fund balance.
An object level is a grouping of object codes for reporting purposes.
An object consolidation is a grouping of object levels for reporting purposes.
Highlights any variance that meets the specified materiality threshold specifically for the income statement. Materiality is set at 10% of the associated revenue stream.