Don’t Underestimate Revenue Recognition’s Impact on Your College or University
Many higher education institutions have been led to believe that FASB’s impending revenue recognition standard won’t affect them as dramatically as other industries, but nothing could be further from the truth. A startling number of colleges and universities aren’t as prepared for its sweeping changes as they should be.
Accounting Standards Codification (ASC) 606 introduces a fundamental change to the way revenue is evaluated, recorded, and disclosed. Implementing the new revenue recognition standard is a challenge for all entities, big or small, and your auditors will be evaluating your efforts.
The standard will be effective for private higher education institutions carrying public debt that also fall under a definition of a public business entity (PBE) beginning with fiscal year 2019. For those with public debt and who are not PBEs, as well as those without public debt, it will be effective beginning in fiscal year 2020.
We’ve offered several practical examples of the new standards application at colleges and universities, specific guidance on tuition and housing revenue, and numerous other materials and events for a variety of industries. But here are some additional insights that may be useful to your school as you undertake this major accounting change.
Be diligent in assessing the impact of the new standard on your institution
Do not fall into a trap of dismissing the new standard’s impact at your college or university. Some administrations have been told that it does not apply to higher education institutions because they do not have long-term contracts, but ASC 606 in fact applies to all contracts, regardless of their duration. You are required to take inventory of all of your contracts and their terms and determine whether their revenue recognition will change under the new standard. No institution is exempt from that requirement; the assessment needs to be performed and documented, whether revenue recognition changes or not.
Many schools are also under the wrong impression that the change is not material to the industry. But FASB has illustrated through various examples (both in the standard itself and subsequent updates and communications) that ASC 606 impacts a number of typical transactions in higher education. The determination of the material versus nonmaterial change, as it relates to those transactions, requires thorough analysis and documentation. Remember, your auditors are responsible for evaluating your implementation process and its results as part of their review.
Consider lessons learned from early adopters
There is an abundance of articles, implementation stories, and examples from for-profit companies that undertook early adoption of the standard. While their business models do not necessarily align with the mission-driven varieties in higher education, the lessons they learned from the overall process can indeed be quite enlightening.
- Financial statement disclosures — Early adopters all agree that, even for those companies that did not have a significant change in their revenue recognition process, preparing all the additional disclosures involved a substantial effort. It took time and manpower to understand and apply them and determine which are mandatory, optional, or expedient. It also took considerable time to determine what new information needed to be collected for those disclosures and establish controls for ensuring the reliability of that information.
- Transitional year disclosures — Many early adopters overlooked the required transitional year disclosures. If the impact of the new standard implementation is material, it requires additional disclosures in the financial statements in the year of transition, irrespective of the implementation method chosen.
- Internal controls — Early adopters identified a number of areas within the internal controls environment that required changes, including, but not limited to, re-assigning contract evaluation and approval responsibilities considering the new five-step model, modifying annual financial statement closing processes, establishing controls for the preparation of the financial statements disclosures and corresponding review and approval responsibilities, and re-designing certain IT-related processes and controls to align with the new model.
Communicate with your auditors throughout the entire implementation process
Successful implementation requires the consideration of the views of all the parties involved. Your auditors must evaluate your implementation efforts, but that doesn’t mean that they will only be involved at the end of your journey. In fact, most successful early implementers had the exact opposite experience on purpose. Those companies involved their auditors from the beginning. They discussed with them the interpretation of the new standard, presented the project management plan, explained judgment calls, asked about their auditor’s expectations related to the implementation process and deliverables, and retained an audit trail documentation for the entire process.
Consider getting outside assistance
Most of your organization’s personnel have their own responsibilities, and at least once a year, they also get to prepare for the audit. Then comes the need to implement a fundamental change in the accounting model. Do your employees have enough continuous availability to see the implementation process from the beginning through to the end? Do your employees have sufficient knowledge and understanding of the new standard? These are important questions to ask before making a decision to use internal resources only.
Independent help with the process and its outcome may be a worthwhile investment. Independent consultants can help with project management, contract inventory, drafting implementation memorandum and new required disclosures, and recommending internal controls and IT-related changes.
Take action now
Implementation of a fundamental change is not an easy task, but the clock is ticking. For the earliest year-end (June 30) adopters in the higher education industry, the standard becomes effective in less than a year.
How we can help
CLA’s higher education professionals performed in-depth review of the new standard and its impact on the industry. We have published materials and hosted events to help you make the change. We can also work directly with your institution to establish a project management plan, train your employees on the new standard, and provide valuable assistance throughout your implementation process.