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Year-End Financial Responsibility Planning

Year-End Financial Responsibility Planning

McClintock Minute

Michael T. Wherry, CPA
June 23, 2020
Year-End Financial Responsibility Planning
An institution with a June 30 year-end should ensure a check of their financial responsibility is performed before the month of June is over. Once an institution is past its year-end, very limited options are available. At this point in time, the Department of Education (ED) has not waived any financial responsibility standards as a result of the Coronavirus.
Institutions should ensure these items have been reviewed and vetted:
  • Compute a composite score ratio using projected numbers for the entire fiscal year. Ensure the 2019 Borrower Defense to Repayment (BDTR) regulations are reviewed as these regulations changed the composite score ratio components for the treatment of debt and leases, if applicable. New components were defined related to pre and post implementation qualified debt and pre and post implementation leases. Also, the BDTR regulations changed the treatment of investment gains and losses, and pension obligations. The U.S. Department of Education issued a Financial Responsibility Questions and Answers on April 9, 2020 which provided further clarifications to these regulations.
  • Review compliance with debt covenants and, if failure is anticipated, initiate conversations with your creditor in regard to waivers or restructurings.
  • Review any financial ratios or covenants as required by your respective accrediting body.
  • Ensure any required reporting to ED under the current BDTR triggering events properly occurred during the fiscal year. Report any event which was overlooked to ensure the institution is on record even if the reporting is late.
  • Review and discuss the accounting treatment of any Paycheck Protection Program (PPP) loan and the Higher Education Emergency Relief Funding grants with your advisors. Whether these items are presented gross or net on the income statement depends on the accounting guidance which is applicable to the institution and may have a bearing on the composite score ratio if the calculation is close to a 1.5. In addition, ED’s May 15, 2020 guidance related to the Coronavirus (updated June 16, 2020), allows for institutions to treat the estimated amount of forgiveness under the PPP loan as equity in the primary reserve ratio and equity ratio components instead of as a loan in the composite score ratio regardless of the accounting treatment applied.
  • If the institution will not pass the composite score ratio, begin planning for any required Heightened Cash Monitoring (HCM) and, if applicable, a letter of credit. The BDTR regulations have added the ability for an institution to use a performance bond in lieu of a letter of credit.
  • ED’s May 15, 2020 guidance related to the Coronavirus (updated June 16, 2020), delayed the audit submission deadline for six months. However, the end date of this delay was not defined, and we have interpreted that the deadline will be in existence until December 31, 2020 or when the national emergency has been declared ended. Similarly, the Office of Management and Budget (OMB) has delayed the submission of Single Audit reporting packages for fiscal year-ends through June 30, 2020 to six months past their normal deadline. We are encouraging institutions and auditors to complete the audits by the normal deadlines, if possible, as “audit creep” could result in added stress and distraction from the daily operations of the institution.
  • Ensure the audit deadlines the institution’s accrediting and licensure bodies are reviewed to determine what the submission due date is as some of these extensions are not automatic. Institutions may need to continue to file information related to annual licensure and renewals include state surety fund programs.
As always, McClintock & Associates is here to assist in answering any questions you may have.  Please feel free to reach out at any time.

We have worked with schools across the nation who are accredited by national and regional agencies such as:

abhes
accet
accsc
ACICS
coe
deac
naccas
National Association of Schools of Art and Design
NASM
tracs
wasc