Beginning July 1, financial statements for higher education institutions were required to comply with the Department of Education’s newest regulation. The new regulation is an amendment to Title IV of the Higher Education Act of 1965, covering financial responsibility, administrative capability, certification procedures and the ability to benefit.
These amendments were made in an effort to financially protect students and taxpayers from high-risk events and also significantly expand related party disclosures.
With the regulation in full effect, it’s critical for colleges and universities to understand how to properly report related-party transactions. Below outlines the important information that higher education institutions must understand to ensure compliance with the new regulation.
What are related parties?
To start, leaders at higher education institutions must understand what falls under the category of related parties. The definition of related parties in accounting standards includes affiliates of the entity; principal owners of the entity and members of their immediate families; management of the entity and members of their immediate families; other parties that can significantly influence the entity; donors and grantors of the entity; and more.
What needs to be disclosed?
The new regulation requires basic information about the related party and their transaction with the college or university. The Department of Education now requires that higher education institutions disclose the name, location and description of the related party. Additionally, they must share the nature and amount of the transaction that occurred with the related party—regardless of amount, when it occurred or if the transaction was financial.
Should there be a fiscal year where there were no related party transactions or related party outstanding balances to report, the institution must also disclose this in its financial statements.
How can you prepare?
Now that you understand what you need to disclose, how can you prepare for accurate reporting? To start, strong internal control procedures are imperative. It’s critical to have a system in place to identify related parties and transactions, including organizing balance sheets, income statement items, and off-balance sheet agreements with related parties.
It’s also helpful to partner with a team of professionals that have experience in regulatory compliance for colleges and universities and can help you properly navigate updated requirements and the implementation of new controls.
Regulations are ever-changing, and it’s critical for higher education institutions to stay on top of new guidance as it’s released to avoid penalties down the road.
