As a result of the COVID-19 pandemic, business officers at higher education institutions are stretched thin with the varied operational and financial issues they are facing now that may continue into the next semester. With many lingering uncertainties headed into next academic year, here are a several practical items higher education leaders and business officers should keep in mind as institutions undergo year-end audits.
1. New accounting standards relief
On June 3, 2020, the Financial Accounting Standards Board (FASB) issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities. The new ASU provides optional deferrals related to ASC 606, Revenue from Contracts with Customers and ASC 842, Leases due to the COVID-19 pandemic. The decision to take advantage of the optional deferrals requires careful consideration.
2. Higher Education Emergency Relief Fund (HEERF) grants
Institutions should carefully document the process used relative to both the institutional and student portion of HEERF grants. For the institutional piece, documentation should be retained to show that expenses reimbursed with those funds were directly related to disruption of campus operations due to COVID-19. The distribution of student grants should be even more carefully documented as reporting related to those funds is required to be made available on the institution’s website in a manner easily accessible by the general public. Institutions should also document the accounting considerations for the institutional and student HEERF funds received.
On an overall basis, those funds should be evaluated in light of ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, and recognized as grant revenue when the institution has overcome the barriers to entitlement related to those funds and a right of return or release no longer exists.
Finally, consideration should be given the functional reporting of the grant expense associated with the student portion of the HEERF funds. HEERF student grant aid should be recorded as student aid expense and, to the extent those funds are material, be shown as a separate line with the title “scholarships and fellowships” as the functional classification.
3. Discount rates
With the Federal Reserve reducing interest rates to near zero percent, discount rates used to measure post-retirement plan obligations will also decline, which will result in an increase in post-retirement benefit obligation liabilities and related non-operating losses within the financial statements.
4. Ongoing considerations
For many institutions that were previously struggling with declining enrollment, the COVID-19 crisis could not have come at a worse time. The predicted negative impact on enrollment for the coming semester, coupled with room and board refunds and exacerbated by investment market declines may lead to a liquidity crisis for many institutions. As a result, management may be required to provide the auditor with cash flow projections, complete with stress tests to prove financial viability. If the auditor determines there is substantial doubt that an institution cannot continue as a going concern for at least one year from the financial statement opinion date, the opinion on the financial statements will be modified and additional disclosures will be added to the footnotes describing the reason for the substantial doubt.
Institutional officials are encouraged to work with their auditors early in the audit process to ensure that potential issues are identified early. Frequent and open communication is the key to ensuring that the audit process goes smoothly and is without unexpected issues.
Joe Peplin is a partner in The Bonadio Group’s Higher Education practice, specializing in the business and accounting needs of colleges and universities. His experience includes financial statement audits, tax reporting, compliance and consulting for a wide variety of institutions.
