Financial Reporting

Financial Reporting

Financial Reporting Overview January 9, 2019 02/24/2020 1 Financial Review Committee (FRC) Composed of Board Members Responsible for reviewing and approving the financial information submitted Referrals to enforcement panel for enforcement action

02/24/2020 2 Who Needs to Submit Financial Statements? Applicants for a License Applicants for Renewal of License initially 1 year / then every 2 years Applicants for Scholarship Applicants for Change of Ownership Schools on Quarterly Reporting

NOTE: This Session does not cover Annual Statistical Survey reporting 02/24/2020 3 Who Submits Quarterly Report? New Schools Schools that have changed ownership Schools with financial concerns Identified in renewal Notification from accreditor or USDE

Legal action 02/24/2020 4 Quarterly Reporting Is a monitoring process Is not a sanction or punishment 02/24/2020

5 Types of Financial Reports New Schools Pro-forma Projections PDE-2006 Audited statement License Renewal/ Scholarship/ Change of Ownership

PDE-2006 (Annual) Quarterly Reporting PDE-2006 (Qtrly) 02/24/2020 6 Quarterly Reporting New Schools and Change of Ownership are automatically placed on quarterly

reporting 02/24/2020 7 PDE-2006 A guide for the FRC to assess the financial strength and solvency of a school 02/24/2020 8

Quick View of Instructions 02/24/2020 9 PDE-2006 Measures the current condition and ability to operate in the future through: Income Statement (page 1) Revenue and Expenses Balance Sheet (page 2) Assets, Liabilities and Stockholders Equity

Disclosure Information (page 3) Methodologies, Terms of Significant Notes, Parent Company Information, Pending Regulatory/Legal Issues and Explanations Key Indicators (page 4) Individual program information 02/24/2020 10 Income Statement 02/24/2020

11 Balance Sheet 02/24/2020 12 Disclosure Section 02/24/2020 13

Key Indicators 02/24/2020 14 PDE-2006 General Guidelines All financial information must conform with Generally Accepted Accounting Principles (GAAP) The common set of accounting principles, standards and procedures that companies use to compile their financial

statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information. Imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes. GAAP cover such things as revenue recognition, balance sheet item classification and outstanding share measurements. Still Room for interpretation and different methodologies within GAAP. 02/24/2020

15 PDE-2006 Accrual Accounting Key concept of GAAP is Accrual Accounting An accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received). This method allows the current cash inflows / outflows to be combined with future expected cash inflows / outflows to give a more accurate picture of a company's current

financial condition. 02/24/2020 16 Accrual Accounting Revenue Example Revenue A student starts a six month program on July 1. He/she pays his/her full tuition on October 1st. Recognized when earned

Cash Recognized when collected Revenue recognize 1/6th of the tuition each month for 6 months Revenue recognize the full tuition when paid in October Accrual 02/24/2020

17 Accrual Accounting Expense Example Expense A school pays their property insurance every year on April 1st. Insurance covers from May 1 April 30 of the following year. Accrual Cash Recognized when used

Recognized when paid Expense recognize 1/12th of the costs of the insurance each month from May through April Expense recognize the full cost of the insurance when paid in April 02/24/2020

18 PDE-2006 Balance Sheet Three Sections: Assets what a company owns Liabilities what a company owes Stockholders Equity the amount invested by shareholder(s) Measurement of a company at a particular point in time (e.g. June 30) Called a Balance Sheet because the 2 sides

must balance (Assets = Liabilities + Stockholders Equity) Balances are permanent 02/24/2020 19 PDE-2006 Assets Split into Current and Long-Term Current Assets can be converted to cash or consumed < 1 year Cash (on hand and restricted) Accounts Receivable (student and other)

Inventory Non-Current Assets - > 1 year Property and Equipment Prepaid Expenses Goodwill 02/24/2020 20 PDE-2006 Liabilities Split into Current and Long-Term

Current Liabilities need to be settled / paid < 1 year Accounts Payable / Notes Payable Tuition Refunds Payable Current Portion of Long-Term Debt Unearned Tuition Long-Term Liabilities - > 1 year Notes or Bonds Payable

Due To / From Parent 02/24/2020 21 PDE-2006 Stockholders Equity (also called net worth or owners equity) Equity represents the capitalization and the retained earnings of the organization Capitalization capital contributed to an organization (either through stock or direct paid-in contributions) Retained Earning the amount of net income that an

entity retains/re-invests back into its operations 02/24/2020 22 PDE-2006 Capitalization Ways to Capitalize Cash investment either through the purchase of stocks or direct capital contribution (Other Equity) Contribution of equipment, building, or other asset Note Cash or Contribution of an Asset represents a capital investment made in the organization to purchase assets, pay

expenses, or use in day to day operations of the business. Capital is not expected to be paid back. Issuance of a Note Payable Note Notes payable are recorded as a liability and are paid back over time and place an additional burden on the organization * Terms of the note payable must be disclosed on page 3 of the PDE2006 (example: 5 year, 8% note payable to Bob Smith, proprietor. Note due on demand.) 02/24/2020 23

PDE-2006 Retained Earnings Retained Earnings: Earnings (Loss) for Year reflects the net income / (loss) from the Income Statement Dividends the payout of any earnings to shareholders Retained Earnings: Ending Balance is closed out to the Beginning Balance each year 02/24/2020 24 PDE-2006 Retained Earnings Key Aspects

Balance Sheet must balance Retained Earnings for Current Year Must = Net Income for Current Year 02/24/2020 25 Error Messages 02/24/2020 26

PDE-2006 Balance Sheet Evaluation criteria Current Ratio > 1:1 Cash, Total Assets, Unearned Tuition, Retained Earnings and Total Stockholders Equity must be > $0 or provide explanation Capitalization How well and for how long can an entity sustain operations 02/24/2020 27

PDE-2006 Income Statement Represents the financial performance resulting from the operations of the entity Two Components Revenue Expense Measurement of a companys performance over a period of time Quarter Ending a three month period Year to Date range from 3 months to 12 months depending upon year end date

Balances are closed out every year 02/24/2020 28 PDE-2006 Income Statement PDE-2006 Income Statement is split into 2 sections: Educational Income tuition revenue less expenses incurred in operating (or running) the school Other Income and Expense revenue and

expenses recognized from non-school / operating activities (clinic revenues, contract training, etc.) 02/24/2020 29 Tuition and Other Income 02/24/2020 30

PDE-2006 Revenue Educational Revenue = Tuition In order to be compliant with GAAP, Revenue must be recognized when earned, not collected or billed (revenue recognition) Deduct any tuition refunds recognized in current period (regardless of who it is owed to or when it will be paid) Deduct cost of books and/or supplies given to students as part of the program 02/24/2020 31

Tuition Revenue Example Example School A starts 10 students on January 1. They charge $2,000 tuition for the 52 week program. There were no other starts in the year and half the students paid their full tuition by the end of the 1 st quarter. The schools financial statements would reflect the following on March 31: Balance Sheet Cash Asset $10,000 A/R Student Asset

$10,000 Unearned Tuition Liability $15,000 Gross Tuition 02/24/2020 Income Statement Revenue $5,000

32 Explanation of Example Why did we Recognize $5,000 of Tuition Revenue? 10 students * $2,000 = $20,000 (total revenue) $20,000 / 12 months (for the 52 week program) = $1,666.67 (revenue earned per month) $1,666.67 * 3 months (from January 1 March 31) = $5,000 02/24/2020 33

PDE-2006 Expenses Recognize all expenses incurred in operating the school: - Including but not limited to Salaries and Benefits, Classroom Supplies, Rent, Mortgage, Depreciation, Utilities, Bad Debt, Advertising and Taxes Include school related activity only Do not include consolidated results Do include schools portion of shared costs or management fees Expenses must be on accrual basis 02/24/2020

34 Accrued Expense Example Example School B pays their utility bill each month. The utility bill, which covered the period February 15 March 14, was $560. The schools financial statements would reflect the following on March 31: Cash A/P Utilities

02/24/2020 Balance Sheet Asset ($560) Liability $340 Income Statement Expense $900 35

Explanation of Example Why did we accrue $340? How it was calculated The $560 bill was for a 28 day period (February 15 - March 14). That works out to $20/ day ($560/28). There are 17 days remaining in the month (March 15 - March 31). 17 days * $20 = $340. The $340 represents that amount of utilities used by the organization but not yet paid. The amount will be paid with the next bill (around April 15). Any expense that is likely to occur and can be estimated, must be accrued. 02/24/2020

36 Accrued Expense Example #2 Example School C offers a $2,400 bonus to its school director is she achieves her targets. It is reasonable to expect that the director will earn her bonus. The bonus is paid out January of next year (once the results are final). The schools financial statements would reflect the following at the close of each month: Balance Sheet A/P Liability $200

Income Statement Administrative Expense Expense $200 02/24/2020 37 Disclosure Information Valuation Methodologies Inventory, Depreciation, Revenue

Default Rate Terms of Notes Payable / Receivable Parent Company Information Adverse Findings / Legal Action Explanations for Negative / $0 Balances 02/24/2020

38 Disclosure Section 02/24/2020 39 Key Indicators Measures the performance of each program

Accreditation Yes or No Ending Student Population Students on Temporary Leave Attrition Rate Graduation Rate Placement Rate Instructions on Key Indicator measurements are

meant to assist the schools. Use your accrediting / regulatory body calculations where possible 02/24/2020 40 Key Indicators 02/24/2020 41

Key Indicators Attrition Rate measures the % of students who permanently withdraw from a program 40 students withdraw during the year (120 students beginning+80 starts+10 re-entries) = 19% 02/24/2020 42 Key Indicators Placement Rate measures the proportion of students who receive full time employment in

their intended field compared to the number of graduates 70 students employed 90 students eligible for employment = 78% 02/24/2020 43 Summary of Financial Reports PDE-2006 Actual results only Balance Sheet

Income Statement Disclosure Section Key Indicators Quarterly/Annual Reports 02/24/2020 Pro-Forma Forecast (estimates) Income Statement only Filed only with a new

school application 44 Entry of Name, Address and Date Licensed 02/24/2020 45 Entry of Methods Used Page 3 02/24/2020

46 Unearned Tuition 02/24/2020 47 Parent Company Information 02/24/2020

48 Key Indicators 02/24/2020 49 Checklist for PDE-2006 Did you obtain the current, most up-todate form from the web site? Are year-to-date and quarter dates correct? Does quarter end date on balance sheet

match income statement? Did you enter all information, including school name, address, date licensed, etc.? 02/24/2020 50 Checklist Continued Does the balance sheet balance? Does income = retained earnings? Are entries included for methods used to determine inventory, depreciation, and

unearned tuition? 02/24/2020 51 Checklist Continued Are entries for methodologies accounting terms? not numbers or n/a, etc. Did you enter your business type? i.e. LLC, C-Corp, S-Corp, etc. Not school Did you include details on notes payable and notes receivable? Amount, Terms, Interest,

etc. Did you include parent company information? 02/24/2020 52 Checklist Continued Did you include your method of accounting for unearned tuition. Is it appropriate? Not none or n/a. Not a restatement of refund policy.

02/24/2020 53 Checklist Continued Did you complete Key Indicators section? Did you answer accreditation question accurately? Note accreditation is not the same as licensure. Did you include all programs, even if you are not currently enrolling? 02/24/2020

54 Lines with * Are there any zeroes in lines with *? If so, an explanation is required on page 3. 02/24/2020 55 Check List Did you put the name of the responsible

person in the signature block? Signature not possible on electronic form, but name of responsible person required. 02/24/2020 56 Name in Lieu of Signature 02/24/2020 57

Lines with * 02/24/2020 58 Explanations of Lines with * 02/24/2020 59

Sharepoint Submission of Financials Includes such documents as: Financials for ownership changes Quarterly reports Financials for scholarship applications 02/24/2020 60 Sharepoint Screen 02/24/2020

61 Upload Document Click Browse 02/24/2020 62 Choose Type of Submission 02/24/2020

63 Closing Thoughts Inaccurate Reporting Results in delayed approvals Results in follow-up questions May result in requirement of audited reports May result in referral for enforcement action Late Reports Late fees of $50 per day up to $500 02/24/2020

64 Questions Division of Higher and Career Education (717) 783-8228 02/24/2020 65 Contact/Mission

For more information on financial reporting please visit PDEs website at www.education.pa.gov/PLS The mission of the Department of Education is to ensure that every learner has access to a world-class education system that academically prepares children and adults to succeed as productive citizens. Further, the Department seeks to establish a culture that is committed to improving opportunities throughout the commonwealth by ensuring that technical support, resources, and optimal learning environments are available for all students, whether children or adults. 02/24/2020 66

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