Accounting for Higher Education Emergency Relief Funds Under the CARES Act
In March 2020, the World Health Organization declared the SARS-CoV-2 virus and the incidence of COVID-19 a pandemic. Since that time, COVID-19’s effect has been far reaching and devastating within the U.S., including most states prohibiting nonessential workers from leaving their homes except for limited activities. A portion of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) intends to provide relief to higher education institutions and their students through the Higher Education Emergency Relief Fund (HEERF). Some have asked how the HEERF funds get accounted for under the revised grant accounting guidance issued by FASB in 2018 and implemented by many colleges and universities in fiscal years 2019 and 2020.
Higher Education-Specific Grants
The HEERF comes in two parts. The first part is for student relief, and the second part is for institutional relief. The CARES Act requires higher education institutions to use at least 50 percent of the funds received to provide emergency financial aid grants to students for expenses related to the disruption of campus operations due to COVID-19.
The frequently asked questions (FAQ) about the emergency financial aid grants to students issued by the Department of Education (ED) states the student relief portion can’t be used to reimburse the institution for refunds it may have provided to students for tuition, room and board or other fees. It’s also not permitted to be used to refund the institution for costs such as IT hardware the institution provided to students to move to distance learning. The funds must go to the students for emergency relief. Emergency grants paid to students from institutional funds might be reimbursable to the institution if certain conditions are met. Only students who are or could be eligible to participate in Title IV aid are eligible to receive the funds. If a student has filed a FAFSA application, they have demonstrated eligibility to participate. In general, international students wouldn’t be eligible for the student portion of the grant. Students aren’t able to apply for grants directly with ED but rather need to apply through their school.
The grant’s institutional relief portion has greater flexibility in its use. The FAQ about the institutional portion of the HEERF states the institution may use the funds to reimburse itself for refunds to students for room and board, tuition and other fees as a result of significant changes to the delivery of instruction if the refunds are made to students on or after March 13, 2020. The institution also may use the funds for other purposes such as the purchase of laptops or other IT equipment and software so students can participate in distance learning. It’s not permitted to use the funds for things like marketing and advertising, endowments or capital outlays for athletics, sectarian instruction or religious worship.
More information about the grants can be found in the FAQ documents issued by ED.
FASB issued Accounting Standards Update (ASU) 2018-08, Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, in 2018. Higher education institutions with public debt were required to implement the standard for June 2019 or later year-ends. If the institution didn’t have public debt, it was required to implement the standard for year-end December 2019 or later. Many have asked how the HEERF grants should be accounted for under this new standard. As a reminder, for a grant to be conditional, it needs both a right of return or release from obligation and also must contain a barrier. Finally, generally accepted accounting principles state that if it’s unclear if something is conditional, the default position would be conditional.
The grant proceeds are at risk of loss if they’re not used as required by ED; therefore, there is a right of return for the funds. BKD also believes there are barriers to entitlement under the grant agreements. If both factors are met, BKD believes that both portions of the grant are conditional.
Institutions need to enter into the Funding Certification and Agreements to receive funds. Until the funding is approved for the institution and the barriers are overcome, the grant revenue shouldn’t be recognized. As clarified by ASU 2018-08, a probability assessment isn’t permitted to be performed. Knowing that the funds will be used as student aid and institutional costs isn’t adequate—rather, the funds need to have been used for student aid and institutional costs as well as overcoming other barriers.
BKD believes both portions of the grant have barriers to entitlement including entering into the Funding Certification and Agreements and incurring eligible costs. The institution has limited discretion in how it spends both the student and institutional portions of the grant as outlined in the Funding Certification and Agreements. There are limits to who’s eligible and the types of costs that are and aren’t permitted. The institutional portion has a clear requirement to be connected to COVID-19 disruption, and specific exclusions apply. Employees and contractors of the institution are to continue to be paid to the greatest extent practicable.
As stated above, the institutional portion can be up to 50 percent of the total grant. In other words, if a grant was awarded for $2 million, then no more than $1 million could be spent on institutional needs. Institutions should consider analogizing to the FASB Staff Q&A issued in June 2019 on cost share when evaluating the institutional portion of the grant. That document addresses the risk of loss of funding from a grant. The amount of funding subject to risk of loss would need to be considered when determining if funds are conditional and when barriers are overcome. Institutions should consider whether the institutional portion is at risk of loss until the student portion has been disbursed.
BKD has created a COVID-19 Resource Center to help disseminate important tax and accounting information as we evaluate ways to mitigate the inevitable financial effects. We’ll keep you up to date with relevant news, tax and compliance changes, new regulations and anything else we believe you need to know.
The views expressed above don’t constitute professional advice. You shouldn’t act on the information contained in this BKD Thoughtware® article without obtaining professional advice.
As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. To connect on this or other accounting matters affecting higher education, reach out to your BKD Trusted Advisor™ or use the Contact Us form below.