Condition and Cause
Unrelated to the administration of sponsored programs, including federal grants and contracts,
The
Research Foundation for The State University of New York (the RF) is party to a lease for space in the
NanoFabXtension (NFX) facility from Fuller Road Management Corporation (FRMC), a related party.
Noting they relied on source documentation and representations of the lessor at the time the lease was
executed, management originally determined that the lease, as amended in 2012 and which is effective
from January 1, 2013 through December 31, 2028, was an operating lease. In 2016, management
determined, after considering the required accounting treatment of the lease under Financial
Accounting Standards Board (FASB) Accounting Standards Codification Topic 840, Leases, and the
terms in the written lease agreement, that the lease is a capital lease.
As a result, in preparation of its financial statements as of and for the year ended June 30, 2016, the
RF has restated its 2015 financial statements to properly account for and present the NFX facility lease
as a capital lease.
The restatement of the 2015 financial statements indicates the RF has a material weakness in its
internal control over financial reporting. Here, the RF did not maintain an effective control over the
review of contracts between the RF and FRMC, resulting in the execution of an agreement that did not
contain all negotiated terms and conditions. The execution of the agreement without the appropriate
vetting and authorization led to the RF not appropriately considering the written contractual terms of the
NFX facility lease arrangement and, instead, relying upon representations of the lessor and other
available information that supported what management believed were the intentions of the parties. This
overreliance on information outside of the written contract prevented the correct assessment under
GAAP, which would have been the contract’s classification as a capital lease, and instead resulted in
operating lease accounting at that time and caused the improper deferral of certain non-federal
revenues tied to lease expenses recognized.
Ref:
https://www.rfsuny.org/media/RFSUNY/Documents/Internal-Audit/single-audit-report-fy2015-16.pdf pages 140-141
