Accounting matters in higher education

Revenue recognition in the context of zero-percent fee increases

The announcement of a zero-percent student fee increase for the 2016 academic year, coupled with confirmation that students eligible for the National Student Financial Aid Scheme (NSFAS) will not be required to pay registration fees, has accounting implications for universities.

As institutions that report under International Financial Reporting Standards (IFRS), universities are required to measure their revenue from tuition fees in accordance with International Accounting Standard (IAS) 18 Revenue. This Standard requires revenue to be measured at the fair-value of the consideration received (cash) or receivable (the student).

By not increasing fees for the 2016 academic year, the amount to be recorded as revenue will not be impacted. This will, however, result in a strain on budgets and liquidity and possibly impact the ability of a university to continue as a going concern, in the absence of government funding to reduce the shortfall.

Universities regard the registration fees as a ‘first payment’ for tuition fees per the payment terms communicated in the student fee handbook. The reprieve for students eligible for NSFAS funding from paying registration fees, has an impact on the initial measurement of student revenue. Coupled with this, NSFAS-funded students may also be exempted from interest on overdue accounts (overdue referring to the non-payment per the agreed payment terms). As a consequence, universities might in fact be providing interest-free ‘financing’ to students while waiting for NSFAS allocations to be paid out.

In such a scenario, the time-value of money should be accounted for in determining the fair value of the receivable, when there is a time-lag in receipt of payments or where student accounts bear no interest. For fee revenue from NSFAS-funded students, this requires the initial measurement of revenue to be lower than the course or other fees as stipulated in the student fee handbook, when the effect of these relaxed terms are material. Materiality will differ from institution to institution.

It is up to each university to consider the fair value of revenue, in light of the timing of cash receipts.


Collectability of student debt in the context of the Fees Must Fall campaign

The Fees Must Fall campaign that began at the end of 2015, and its ongoing aim to see free higher education become a reality, has left universities asking the question:

How should student debt at the end of the 2015 financial year be assessed for collectability given the expectation from students that ‘free higher education’ is their right?

We explore this question below.

When assessing the collectability of student debt, student debtors are mostly grouped together with others (e.g. NSFAS students in second year) where they share similar risk of not paying.

Under IAS 39 Financial Instruments: Recognition and Measurement, a financial asset or group of financial assets is impaired, and impairment losses are incurred, if there is objective evidence of impairment as a result of one or more events that occurred after the asset’s initial recognition. This raises the question whether the demand for free higher education is ‘objective evidence’ that students will not repay debt?

Info graphic elaborating a zero percent increase

IAS 39, paragraph 59 provides examples of factors that may, either individually or taken together, provide sufficient objective evidence that a student debtor or group of student debtors is impaired. This includes observable data that comes to the attention of the university. Examples of this include:

  • Significant financial difficulty of the student;
  • A breach of contract, such as a default or delinquency in interest or principal payments;
  • The university, for economic or legal reasons, granting the student a concession that the university would not otherwise consider;
  • It becomes probable that the student will enter bankruptcy or financial reorganisation;
  • Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of student debtors since the initial recognition of those debtors, although the decrease cannot yet be identified with the individual student debtors in the group, including: 
    • Adverse changes in the payment status of student debtors in the group (for example, an increased number of delayed payments); or
    • National or local economic conditions that correlate with defaults by the student debtors in the group (for example concessions in respect of the Fees Must Fall campaign, an increase in the unemployment rate in the geographical area of the students, or adverse changes in higher education that affect the student debtors in the group).

In terms of the examples outlined above, it may be possible that some of the examples of observable data already existed at 31 December 2015 ‑ particularly the granting of concessions in direct response to the Fees Must Fall campaign’s demands as well as the worsening economic conditions in South Africa.

Concerns about the recoverability of student debt is at an all-time high in 2016. Universities should tread with caution.

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