Accounting and Auditing Updates
ASU 2016-02 Leases (Topic 842)
Many colleges and universities will be required to adopt Accounting Standards Update (ASU) 2016-02 Leases (Topic 842) for the year ending in fiscal 2021. If an institution is a “public non-profit,” defined as a college or university that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or over-the-counter market, adoption is required this year. This standard requires a modified retrospective adoption, whereby the lessee will recognize the effects of this standard in the financial statements as of the beginning of the earliest period presented. This may result in the presentation of a cumulative effect of accounting change in beginning net assets in the earliest period presented. From a practical perspective, some organizations may choose to present single-year statements for ease of adoption and presentation.
Generally, real estate leases will have the largest financial impact on the balance sheet. Leases for small equipment must be considered but may be deemed immaterial from a financial reporting perspective. Organizations must be sure to consider not only ‘typical’ leasing arrangements such as space rental and equipment, but also the following frequently occurring arrangements (list is not all-inclusive):
- Contracts with a service component and a leasing component (the ASU contains a practical expedient that allows an organization to bundle these arrangements).
- Contracts with “hidden” leasing components. On the surface, these may look like service contracts but upon further examination, include leases based on the new definition.
- Renewal options in leases, including evergreen leases (must be evaluated based on factors defined in the ASU to elect a lease term).
There are many moving parts to consider when adopting this standard, including impact on performance metrics and debt covenants. Be sure to connect with your auditor to discuss adoption.
Non-public colleges and universities may delay the adoption of Topic 842 until fiscal 2023.
ASU 2014-09 Revenue from Contracts with Customers (Topic 606)
Those institutions that have not yet adopted ASU 2014-09 will be required to adopt the standard in fiscal 2021.
ASU 2018-13 Fair Value Measurement (Topic 820) Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
This ASU removes, modifies, and adds certain disclosures related to fair value measurements. If a college or university has transferred assets or liabilities between fair value measurement levels 1 and 2, has disclosures related to level 2 and 3 fair value measurements, or disclosures related to net asset value used as a practical expedient, this standard will have an impact on disclosures. This standard is effective for all fiscal 2021 year-ends, and early adoption was allowed. Certain elements of the standard are adopted prospectively, and some retrospective to all periods presented.
Accounting for Other Pandemic Related Items
In addition to Higher Education Emergency Relief Funds (HEERF), there have been many other governmental programs offered to businesses, including Paycheck Protection Program (PPP) loans through the Small Business Administration, the IRS Employee Retention Credit (ERC), the option to defer employer social security taxes, and relief of self-insured unemployment costs for non-profit organizations. To the extent that these programs were applicable to a college or university, the disclosure should be present in the financial statements to ensure the users of the financial statements understand the terms of the program(s).
Most fiscal 2020 financial statements contained disclosures related to the pandemic, the impact on the institution’s operations, and a description of governmental and other aid received. We expect these contingency disclosures to be updated and remain in the fiscal 2021 financial statements.
2020 OMB Compliance Supplement Addendum
The 2020 Compliance Supplement Addendum was issued in December 2020, applicable for years ending June 30, 2020- June 29, 2021. No significant surprises related to testing or reporting were included in the Compliance Supplement Addendum, and guidance for the auditor’s testing of the Higher Education Emergency Relief Funds (HEERF) was contained therein.
The second round of HEERF funding was released through the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) in December 2020. As of the date of this publication, colleges and universities are awaiting further guidance regarding the time period for which eligible expense may be applied and certain key definitions, such as “lost revenue.” Once the Department of Education (ED) defines these key terms, institutions should begin to account for federal expenditures to be reported on the Schedule of Federal Expenditures (SEFA).
Generally, HEERF funds should also be reported on the fiscal 2020 SEFA, if expenditures covered by the HEERF funds were incurred in fiscal 2020, such as room and board refunds.
If you need further guidance on these topics, we’re here to help. Please do not hesitate to reach out to our trusted experts to discuss your specific situation.
The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We, therefore, make no warranties, expressed or implied, on the services provided hereunder.