U.S. Department of Education



Financial Responsibility Questions and AnswersEffective DatesED-Q1: The Financial Responsibility provisions of the final regulations published on September 23, 2019 become effective on July 1, 2020, but institutions may early implement the regulatory provisions for leases (found at § 668.172(d)) and Appendix A or B items. Can the Department clarify what it expects from institutions that submit their annual audited financial statements on or after the effective date of the regulations or choose to early implement those provisions?ED-A1: As a general matter, an institution is required to implement the regulatory provisions for leases, Appendix A or B items, and all required disclosures for any audited financial statements submitted to the Department on or after July 1, 2020. However, if the institution is not required by the Financial Accounting Standards Board (FASB) to adopt the lease reporting requirements under ASU 2016-02 until a later date, the institution is likewise not required to include that reporting in an audit submitted to the Department until that time.An institution that chooses to early implement the regulations must implement all of the specified provisions, including the applicable disclosures, for any audited financial statements it submits to the Department on or after September 23, 2019. However, if the institution is not required by FASB to adopt the lease reporting requirements for a given audit year, then the provision related to ASU 2016-02 in the final regulation would not apply to the institution. ED-Q2: Some institutions wish to early adopt the lease reporting provisions, but since their financial statement audits are finished, or close to being finished, the audited financial statements do not include the new disclosures and Supplemental Schedule. Will the Department accept an auditor attestation on information on a Supplemental Schedule or additional disclosures that were not included in the audited financial statements?ED-A2: No. The Department evaluates audited financial statements only on the basis of a single complete submission. The new additional disclosures must be line items in, or notes to, an institution’s audited financial statements. eZ-Audit EZ-Q1: What are the Department’s plans for revising the eZ-Audit template to accommodate the new Financial Responsibility provisions? When will the revised template be available? For institutions that do not early implement the regulations, will the Department continue to use the instructions issued in the EA dated August 29, 2018? ().[Updated 8/20/2020] EZ-A1: The Department is currently revising the eZ-Audit templates and anticipates having the revised templates in Spring 2020. However, the Department will calculate composite scores for institutions that choose to early implement the regulations whether or not the revised templates are available. The Department expects institutions that early implement the regulations to use the instructions issued in the EA dated August 29, 2018 () when they submit their audited financial statements to the Department. As of August 2, 2020, revised templates are available in eZ-Audit. ?LeasesL-Q1: For an institution that entered into a new lease on or after December 15, 2018, will the Department apply the standards of ASU 2016-02 in calculating the institution’s composite score if the institution is not required to adopt the FASB reporting requirements for “right-of-use” asset and lease liability under that ASU? L-A1: If an institution is not required to adopt, and opts not to early adopt, the standards of ASU 2016-02, the Department will not apply those accounting standards in calculating the institution’s composite score. We wish to clarify that the December 15, 2018 date is the date that all institutions must use to distinguish between their pre- and post-implementation leases, should they elect to make that distinction. Any leases entered into by an institution prior to December 15, 2018 are pre-implementation leases and any leases entered into or modified by an institution on or after December 15, 2018 are post-implementation leases. The Department is not retroactively applying the requirements of ASU 2016-02 to pre-implementation leases. This date is merely the date used to distinguish between pre-implementation and post-implementation leases. L-Q2. May an institution opt out of the grandfathering provisions in the regulations and treat all leases as post-implementation leases, so that it does not have to track pre- and post-implementation lease amounts?L-A2: Yes. However, after an institution opts-out, it cannot later change its reporting to include pre- and post-implementation leases. The Department will assume that an institution has opted-out of the grandfathering provisions for leases, if it does not provide the appropriate disclosures that make the pre- and post- implementation distinction.L-Q3: How will the Department treat a lease that an institution entered into before December 15, 2018 (a pre-implementation lease) if that institution undergoes a change of ownership that results in a change in control? L-A3: If the change in ownership occurs on or after the effective date of the regulations, July 1, 2020, all leases would be post-implementation leases. As discussed in the Preamble to the Final Regulations (84 FR 49871), the Department decided, in part, to grandfather pre-implementation leases based on reasonable business decisions made by an institution prior to ASU 2016-02. We view a transaction where the institution is later acquired by another entity, or otherwise undergoes a change in ownership, as representing a new business decision based on existing accounting standards.L-Q4: If an institution that must adopt ASU 2016-02 for its fiscal year ending December 31, 2019 audited financial statements opts not to early implement the regulations, how will the “right-of-use” assets and lease liabilities, that are required to be disclosed by ASU 2016-02, be used to calculate the composite score for that fiscal year? In the subsequent fiscal year ending December 31, 2020, what must an institution do regarding the “right-of-use” assets and lease liabilities to meet the requirements in the regulations for audits submitted on or after July 1, 2020? L-A4: For an institution that must adopt ASU 2016-02 and opts not to early implement the regulations, the “right-of-use” assets for the pre-implementation fiscal year for the leases should be included in eZ-Audit as “capital leases” and the lease liability should be included in eZ-Audit as “capital lease obligations.” The institution would not include the disclosure identifying pre-implementation leases and post-implementation leases. In the subsequent year - the implementation year - if the institution wishes to take advantage of the grandfathering of leases, it would need to disclose the remaining value of the “right-of-use” assets and lease liabilities for leases that existed prior to December 15, 2018, and the remaining value of any “right-of-use” assets and lease liabilities for leases entered into on or after, December 15, 2018. If an institution does not provide the disclosures, the Department will assume that the institution does not want to take advantage of the grandfathering of leases. The Department will consider that assumption to be final. All audited financial statements, regardless of when they are submitted, must be GAAP compliant.L-Q5: If an institution has a pre-implementation lease (prior to December 15, 2018) which has a renewal option and the institution considers that renewal option in recording the ”right-of-use” assets and lease liabilities when it is required to adopt, or early adopts, ASU 2016-02, does the actual signing of the renewal option post December 15, 2018 change the status of the lease as a pre-implementation lease? L-A5: If the value of the renewal option is reflected on the balance sheet or statement of financial position, then the signing of the renewal option has no impact on whether the lease is pre- or post-implementation as long as there is no change in the value of the option from when the “right-of-use” asset and lease liability were first recorded. If the value of the lease option was not included in the “right-of-use” asset and lease liability prior to signing the renewal option, the resulting lease would be a post-implementation lease.Long-term DebtLTD-Q1: How does an institution identify pre-implementation and post-implementation debt?LTD-A1: For the year in which an institution early implements or is required to comply with the regulations, pre-implementation debt is the ending balance of debt reflected in the institution’s previously accepted audited financial statements up to the total amount of property, plant, and equipment (PP&E) in those audited financial statements. Any debt that the institution acquires in the fiscal year it implements the requirements of the regulations, and any debt in future years, is post-implementation debt. Only the amount of post-implementation debt that is used to purchase PP&E may be included in adjusted equity or expendable net assets. Post-implementation and pre-implementation debt must be reduced by any payments or other reduction. The value of pre-implementation debt that may be included in adjusted equity or expendable net assets cannot be greater that the value of pre-implementation PP&E. The value of post-implementation debt that may be included in adjusted equity or expendable net assets cannot be greater than the value of the post-implementation PP&E the debt was used to purchase. Post-implementation and pre-implementation PP&E balances must reflect all adjustments required by GAAP. LTD-Q2: In a situation where an institution has existing debt that was used for PP&E and the debt has a balloon payment, if the debt is refinanced after the last audited financial statements submitted to the Department prior to July 1, 2020, is this refinanced debt still qualified debt? Does it matter if the same creditor or a different creditor is utilized?LTD-A2: To the extent that the refinanced debt has not increased, the debt may be included in adjusted equity or expendable net assets as pre-implementation debt up to the value of pre-implementation PP&E. Whether the creditor is the same or a different creditor does not matter as long as the refinancing is not a credit facility, is an arms-length-transaction, and/or is not a related party debt. As noted in the Preamble to the Final Regulations (84 FR 49873) “[a]ny refinancing or renegotiated debt cannot increase the amount of debt associated with previously purchased PP&E. No pre-implementation debt required to be disclosed can increase. For each debt to be considered for the composite score, the individual debts must be disclosed [as required by the regulations].” LTD-Q3: In a situation where existing qualified debt is refinanced and the new proceeds exceed the balance of the previous qualified debt, is the amount which refinanced the previous qualified debt still considered to be qualified debt as it was related to the original purchase of PP&E? LTD-A3: No, the amount refinanced would be considered post-implementation debt and would need to be associated with post- implementation PP&E. As we stated in the Preamble to the Final Rule “[a]ny refinancing or renegotiated debt cannot increase the amount of debt associated with previously purchased PP&E. Nopre-implementation debt required to be disclosed can increase. For each debt to be considered for the composite score, the individual debts must be disclosed [as required by the regulations].” LTD-Q4: In cases where pre-implementation debt related to the purchase of PP&E is refinanced by post-implementation debt (such as when pre-implementation debt was fully paid-off, but refinanced for better terms), would this still be qualified debt as the original debt related to PP&E? LTD-A4: To the extent that the refinanced debt has not increased, the debt may be included in adjusted equity or expendable net assets as pre-implementation debt up to the value of pre-implementation PP&E, as long as the debt is not a credit facility, is an arms-length-transaction, and/or is not a related party debt. As noted in the Preamble to the Final Regulations (84 FR 49873) “[a]ny refinancing or renegotiated debt cannot increase the amount of debt associated with previously purchased PP&E. No pre-implementation debt required to be disclosed can increase. For each debt to be considered for the composite score, the individual debts must be disclosed [as required by the regulations].” LTD-Q5: In a situation where pre-implementation debt is extended after the last audited financial statements submitted to the Department prior to July 1, 2020 and no other changes occur, would this still be qualified debt if the debt does not increase and the term is just extended?LTD-A5: This situation appears to be a change in the terms of an existing pre-implementation debt. As such, it would retain its pre-implementation status in the subsequent fiscal year, to the extent that it is not a credit facility, it is considered an arms-length transaction, and/or is not related party debt. LTD-Q6: If an institution has a pre-implementation credit facility and this credit facility is increased after July 1, 2020, is the remaining balance which was considered to be pre-implementation qualified debt still treated as qualified debt and would the new additional amount not be qualified debt, if it is not tied to the acquisition of PP&E?LTD-A6: To be clear, compliance with the requirements is based on when the audited financial statements are submitted and meet the Department’s requirements for an acceptable audit, as defined in 34 C.F.R. 668.23. So, it depends on when the institution’s fiscal year ended and when the institution submitted its most recently accepted audited financial statements prior to the effective date of the regulations. For example, if 1)an institution has a December 31, 2019 fiscal year end, 2) the audited financial statements are submitted and accepted prior to July 1, 2020, and 3) the institution did not opt to early implement, there is no change from what the institution is currently required to do concerning debt obtained for long-term purposes. For institutions such as the one described above, the determination of pre-implementation debt for its fiscal year ending December 31, 2020 would be based on the institution’s December 31, 2019 audited financial statements. The Department realizes that there may be some confusion on how credit facilities should be treated for the composite score because of the nature of credit facilities where portions of the credit facility and associated PP&E may be tied to different fiscal years.The determination of pre-implementation debt, regardless of whether an institution opts to early implement the regulations, is based on the amount of debt reflected in the audited financial statements of the institution prior to implementation. The ending balances from the audited financial statements for the fiscal year prior to implementation become the beginning balances in the year of implementation.For a credit facility, any payments in the fiscal year of implementation or later fiscal years would be first applied to the beginning balance of pre-implementation debt until the total amount of pre-implementation debt is zero. Any payments, after pre-implementation debt is zero, should be applied first to the oldest balance of eligible post-implementation debt associated with PP&E and subsequent years of eligible post-implementation debt associated with PP&E until those balances are also zero. Any new draws on the credit facility in the fiscal year of implementation and future fiscal years would be considered new post-implementation debt. The only amount from the credit facility that will be included in adjusted equity or expendable net assets is the amount of the post-implementation ending balance that the institution can show that it used to purchase PP&E making that debt eligible post-implementation debt. The PP&E must have been purchased with proceeds from the credit facility during the fiscal year or prior fiscal years for post-implementation PP&E. The ending balance of any eligible pre-implementation debt associated with the credit facility that has not been repaid and other qualified debt up to the amount of pre-implementation PP&E included in the audited financial statements prior to implementation would also be included in the determination of adjusted equity or expendable net assets.Example – Institution AInstitution A is a non-profit institution with a December 31st fiscal year end. It decided not to early implement and submitted its fiscal year 2019 audited financial statements that were accepted by the Department in August 2020. The fiscal year 2019 audited financial statements would be the audited financial statements used to determine the pre-implementation long-term debt. To determine the beginning balance for eligible pre-implementation debt for its fiscal year 2019 audited financial statements, the institution would use the ending balances of debt from its fiscal year 2018 audited financial statements. The fiscal year 2018 ending balance of Institution A’s only credit facility was $25,000,000. The limit on the credit facility was $25,000,000. The 2019 beginning balance of the credit facility was $25,000,000. On January 7, 2019, Institution A made a payment on its credit facility of $20,000,000. On December 17, 2019, Institution A drew down $20,000,000 on its credit facility and used the proceeds to purchase $1,000,000 in PP&E. For purposes of what to include in adjusted equity or expendable net assets for the 2019 Composite Score, Institution A would include $5,000,000 of eligible pre-implementation debt, because the payment of $20,000,000 on January 7, 2019, was applied first to the eligible pre-implementation debt beginning balance of $25,000,000 and only $1,000,000 as eligible post-implementation debt because only $1,000,000 of the $20,000,000 December 17, 2019 draw could be directly associated with the purchase of PP&E. None of the remaining $19,000,000 outstanding on the credit facility on December 31, 2019, would be included as debt obtained for long-term purposes in determining adjusted equity or expendable net assets. At the end of fiscal year 2019, the ending balance of the credit facility would be $25,000,000, consisting of $5,000,000 of eligible pre-implementation debt, $1,000,000 of eligible post-implementation debt, and $19,000,000 of debt that does not qualify for the modification to adjusted equity or expendable net assets.In the first fiscal year after implementation, fiscal year 2020, the beginning balance of eligible pre-implementation debt is $5,000,000 and the beginning balance of eligible post-implementation debt is $1,000,000. On February 19, 2020, Institution A makes a payment on its credit facility of $20,000,000. On May 4, 2020, Institution A draws down $500,000 which it uses to cover operational expenses. There is no other activity concerning the credit facility during the remainder of fiscal year 2020. As far as what to include in adjusted equity or expendable net assets, there would be zero eligible pre-implementation debt and zero eligible post-implementation debt to include in the modification to adjusted equity or expendable net assets because the $20,000,000 payment on February 19, 2020, would have been first applied to the $5,000,000 eligible pre-implementation debt and then to the $1,000,000 eligible post-implementation debt. In the first fiscal year, when there is no longer any eligible pre-implementation debt from the credit facility and years subsequent to that year, the beginning balance in the fiscal year will be made up entirely of post-implementation debt and the institution must be able to identify PP&E that it purchased to the credit facility for that beginning balance to determine eligible post-implementation debt. Any payments on the credit facility in a fiscal year after eligible pre-implementation debt has been eliminated must first be applied to the beginning balance of the post-implementation debt associated with PP&E starting with the oldest balance of eligible post-implementation debt associated with post-implementation PP&E. Any amount of draws on the credit facility during the fiscal year will be considered new post-implementation debt up to the amount of PP&E that was purchased with those draws for calculating the composite score. LTD-Q7: In a situation where an institution that borrows new long-term debt that is reflected in its audited financial statements submitted to the Department prior to July 1, 2020, will the Department treat this debt as qualified debt? LTD-A7: It depends on whether the institution opted to early implement the regulations. In the year of implementation, whether early or not, the determination of the amount of pre-implementation qualified debt would be based on the ending balances of PP&E and debt in the previously accepted audited financial statements. If the institution opted to early implement the regulations and had a December 31, 2019 fiscal year end, and those audited financial statements were submitted and accepted by the Department prior to July 1, 2020, the amount of pre-implementation qualified debt would be based on the December 31, 2018 fiscal year end audited financial statements. If the institution opted not to early implement the regulations, the long-term debt reflected in the audited financial statements submitted and accepted by the Department prior to July 1, 2020, would be treated as debt obtained for long-term purposes is currently treated. LTD-Q8: If an institution has a credit facility that allows for a drawdown of the entire amount in year one (for example, $25,000,00) but a covenant restricts PP&E acquisitions to $5,000,000 per year, is the total long-term debt qualified debt limited to $5,000,000 or can it increase by $5,000,000 each year?LTD-A8: It would depend on what is happening within the credit facility and what the ending balance of the credit facility is. The qualified debt would be limited to the amount actually used to purchase PP&E in each year. Please see our answer to LTD-A6.LTD-Q9: When an institution refinances its pre-implementation debt for the same amount as that debt and incurs refinancing or issuance costs which are amortized over the life of the debt, would those costs be considered an increase in the pre-implementation debt such that it would lose its pre-implementation status and be considered post-implementation debt?LTD-A9: No. Only the proceeds from debt refinancing would be considered in evaluating whether the debt has increased or not to the extent that the refinancing or issuance costs are normal and reasonable. The amount of refinancing or issuance costs is not used as long-term debt in calculating the composite score. LTD-Q10: When “Other Components of Net Periodic Pension Costs” has a credit balance, how will that be treated in calculating the composite score?LTD-A10: The credit balance will be treated as a gain and be included in total revenues and gains or total revenues without donor restrictions and gains without donor restrictions. This is consistent with how the Department treats other gains and losses other than investment gains and losses which are netted. ................
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