with chose funds have previously been reported in a separate 

 column on the financial statements. 



SFAS 116 introduced a new concept for accounting for 

 restricted net assets (formerly referred to as restricted funds). 

 Two categories of restricted net assets must be reported: i) 

 temporarily restricted net assets, where a donor has required 

 that the funds be spenc for specific purposes or only at a 

 specified time, and 2) permanently restricted net assets, where 

 the donor has required that the funds never be spent, e.g., a gift 

 to the endowment where the original gift must be invested in 

 perpetuity and only the earnings can be spent. When the not-for- 

 profit organization fulfills the restrictions placed by donors on 

 temporarily restricted net assets, the net assets are reclassified to 

 unrestricted net assets. Spending temporarily restricted net assets 

 in accordance with the restrictions fulfills the restrictions, hence, 

 the expenses are reported as unrestricted expenses. No expenses 

 are reported as restricted expenses. 



SFAS 117 requires not-for-profit organizations to prepare 

 their financial statements using the three new net asset 

 categories: unrestricted net assets, temporarily restricted net 

 assets, and permanently restricted net assets. 



SFAS 114 requires not-for-profit organizations to record invest- 

 ments at market value instead of cost. The Smithsonian recorded 

 its investments by chis new method in fiscal year 1996 and 

 recorded an adjustment to net assets to record the impact of this 

 change related to investments purchased in prior years. This ad- 

 justment increased net assets by $52.9 million. 



Footnote 2 to the audited financial statements, which fol- 

 lows, describes the adjustments made to the financial state- 

 ments as a result of implementing these three new standards. 



Financial Position 



The Smithsonian Institution's Statement of Financial Posi- 

 tion presents the total assets, liabilities, and net assets of che 

 Institution. Total assets of Si. 4 billion far exceed total 

 liabilities of $385.0 million and are indicative of the financial 

 strength of the Institution. During fiscal year 1996, the most 

 significant change in the Institution's financial position was 

 the growth of the endowment by over S50.0 million through 

 investment earnings and realized and unrealized gains on the 

 endowment investments. Liabilities at September 30, 1996 of 

 S385.0 million were higher than the $198.0 million at Septem- 

 ber 30, 1995 due to the reclassification of unexpended federal 

 appropriations from net assets (formerly fund balance) to 

 liabilities in accordance with treatment of the federal ap- 

 propriations under SFAS 116 as exchange transactions (see Im- 

 plementation of SFAS 116, 117 and 124 above). 



Financial Aianagement 



The Institution was successful in implementing a new general 

 ledger, financial reporting and management information sys- 

 tem. The ledger was available in September to record advance 

 procurement documents for fiscal year 1997. This system 



replaces an almost 20-year-old ledger and moves the system 

 off an unreliable hardware platform. Significant advantages of 

 the new system are an automated funds control module, a new 

 coding structure that will provide new opportunities to report 

 on and analyze programmatic activities, on-line access to cur- 

 rent information, and flexible reporting capabilities to in- 

 crease the usefulness of financial data for decision making. 



As we move into next fiscal year, the final elements of the 

 general ledger will be put in place. In addition, work on a 

 new accounts receivable system and a new fixed asset system 

 will begin. 



Other financial management improvement initiatives un- 

 dertaken in 1996 included: 



• Development of a new, automated budget system 

 which will automate budgeting, operational planning, 

 access to Congressional appropriation history, strategic 

 planning and policy development components. In ad- 

 dition, it will assure greater accuracy, integrity and 

 utility of budget and planning data; streamlined 

 processes; and efficient interfaces with internal and ex- 

 ternal databases. Various elements of the system will 

 be broughc on-line throughout fiscal year 1997. 



• Improvements to enhance internal controls 

 throughout the Institution, consistent with the 

 Federal Managers Financial Integrity Act. An over- 

 sight council was established to monitor revised 

 processes and policies. A number of steps have been 

 streamlined while improving the effectiveness of the 

 internal controls review process. 



• Implementation of new not-for-profit organizations ac- 

 counting standards, Statements of Financial Account- 

 ing Standards Nos. 116, 117 and 124. 



• Modification of off-the-shelf software to provide a tool for 

 streamlining the generation of travel forms and improv- 

 ing their accuracy. The software will be rolled out to all 

 units beginning in fiscal year 1997. A project to electroni- 

 cally route the travel forms will begin in fiscal year 1997. 



• Using software for electronic preparation of time 

 sheets in order to eliminate duplicate data entry. Com- 

 pletion of the project for all units is planned for the 

 end of fiscal year 1998. 



Additional financial management improvement initiatives 

 planned to start in fiscal years 1997 and 1998 include the 

 following: 



• Development of a formal 5-year financial management 

 improvement plan. 



• Electronic routing of documents. 



• Streamlining of travel policies and procedures. 



• Increasing the use of electronic funds transfer (EFI) for 

 all payment types. 



• Training emphasis to assure that central as well as unit 

 financial and procurement staff have the skills, 

 knowledge, and ability to do a quality job. 



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