Skip to Main Content


Higher education regulations: Financial responsibility composite scores


Deadline fast approaching! Changes will be effective for submission of audit packages after July 1, 2020. 

The regulations on how higher education institutions measure their financial health have been changed, and we have summarized key elements your institution needs to consider in the lead-up to the effective date of July 1, 2020—just a few short months away. Institutions must submit their audit packages using this new methodology in order to maintain compliance.

On September 23, 2019, the Department of Education finalized changes to revise the regulations that established the methodology to measure different aspects of the financial health of not-for-profit and proprietary institutions of higher education. They have created a composite score using three ratios: primary reserve ratio, equity ratio, and net income ratio.

The regulations were updated to reflect the impact of recent accounting changes related to the financial statement presentation of not-for-profit entities and leases, as well as other NFP accounting issues and changes since the regulations were first effective on July 1, 1998. The new regulation also clarifies the definitions of debt acquired for long-term purposes, total expenses, losses, revenue, and gains used in the ratio calculations.

The updated regulation also requires a new supplemental schedule to be included in the audited financial statement package that contains all of the financial elements required to calculate the three ratios included in the composite score. The supplemental schedule is required to provide a cross reference to the applicable financial statement line and page, or include a separate note disclosure that contains the applicable element. The supplemental schedule will be required to contain an auditor opinion that the information is fairly stated in all material respects to the financial statements or the information underlying the financial statements.

In order to get ready for the new supplemental schedule, there are a few elements of information that will need to be presented separately, and require special attention by management and the institution’s auditor:

  • Separately tracked depreciation or disposals of fixed assets on hand as of FYE 2019 during the FYE 2020
  • Long-lived assets acquired in 2020 with debt (will need to track this by fixed asset category), the accumulated depreciation taken on these assets during FYE 2020, and the year-end balance of the associated debt
  • Construction in Progress (CIP) acquired during FYE 2020 with debt and the year-end balance of the associated debt
  • Long-lived assets and CIP acquired during FYE 2020 without debt
  • Disclosure of terms of the current year debt and line of credit for long-lived assets (including CIP)
  • Lease right of use assets and liabilities (after the adoption of ASU 2016-02). If you choose to grandfather the leases, you will need to separate the asset and liabilities for leases entered into before December 15, 2018 from leases that were entered into after December 15, 2018

These changes will be effective for any submission of audit packages to the Department of Education after July 1, 2020. You will need to work with your auditor to prepare for these changes to your audit package.

BerryDunn is here to help. Contact Mark LaPrade for more information.

Related Professionals