Navigating the rules and guidelines around documenting and acknowledging revenue from school tuition and fees can be difficult. Luckily, SST Partner and K-12 financial expert Emily Cook compiled a few key guidelines to help you stay organized and up to date.
Tuition and fees are significant sources of revenue for private and independent schools of all sizes, but there can be confusion on how to determine, document and recognize revenue from these funding sources.
To help clear things up, the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 06: Revenue from Contracts with Customers provides relevant guidance on this topic. Last year, the FASB voted to extend the effective date for private companies and nonprofit organizations, including independent schools, to fiscal years beginning after Dec. 15, 2021, and interim periods within fiscal years beginning after Dec. 15, 2022.
The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The ASC also provides detailed, sequential steps on how to achieve this core principle:
- Identify the contract with the customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when (or as) the entity satisfies the performance obligation
When implementing Topic 606 and evaluating the steps above, some key factors to consider include:
- Based on your school’s tuition and fee structure, are there multiple identifiable contracts per student?
- For instance, if your school charges a registration fee to reserve a spot for a student for the upcoming school year, as well as tuition for educating a student, there are two identifiable contracts with different transaction prices. The revenue associated with the registration fee would be recognized when the obligation is met, and the tuition should be allocated over the number of months of education provided.
- If a student withdraws, when should revenue be recognized?
- In this case, the language of the contract is pertinent. Revenue recognition would differ if refunds are issued, the contract is cancelled or if the entire amount of tuition is still owed to the school.
- Should your school implement a portfolio approach to revenue recognition for multiple contracts with similar obligations or individually identify and recognize each student contract?
How could your financial statements and related disclosures be affected?
While there is still time before the official implementation date, it’s important to document your school’s reasoning, methodology and compliance with this standard to proactively prepare for the upcoming changes. This new guidance could also potentially affect how you structure your future tuition, fees and contract verbiage.