FREQUENTLY ASKED QUESTIONS ABOUT IMPLEMENTING THE REGULATIONS PUBLISHED ON OCTOBER 31, 2023, WITH AN EFFECTIVE DATE OF JULY 1, 2024
FINANCIAL RESPONSIBILITY
FR-Q1 Must an institution change its fiscal year (FY) to match its year used for Internal Revenue Service (IRS) tax returns or can an institution change its IRS tax year to match its Title IV FY?
FR-A1 An institution may pursue either avenue so long as both years are aligned in accordance with 668.23(d)(1).
FR-Q2 Section 668.23(d)(1) requires that, "For fiscal years beginning on or after July 1, 2024, financial statements submitted to the Department must match the fiscal year end of the entity's annual return(s) filed with the IRS." How will the submission of audited financial statements be impacted by this rule while the institution/entity makes the choice to change its Title IV fiscal year (FY) transitions to a new FY?
FR-A2 There are two different categories of institutions when looking at audit submission requirements, those that are subject to the Single Audit Act and those that are not. Institutions not subject to the Single Audit Act are governed by one of the Audit Guides published by the Department's Office of Inspector General (OIG). Those guides include the Guide for Financial Statement Audits of Proprietary Schools and For Compliance Attestation Examination Engagements of Proprietary Schools and Third-Party Servicers Administering Title IV Programs, commonly called the Title IV Audit Guide and the Guide for Financial Statement Audits and Compliance Attestation Engagements of Foreign Schools commonly called the Foreign School Audit Guide. Single Audit institutions are subject to the audit submission rules published in 2 CFR 200. Single Audit requirements deal with the compliance audit and audited financial statements as different sections of a single audit. For purposes of this question, we will separate the requirements surrounding each of those sections and address financial statements in this Q&A and address the compliance audit section in FR-Q&A 3. Institutions not subject to the Single Audit Act submit audited financial statements and compliance audits as separate items.
If an institution or entity chooses to modify its FY previously used for the purposes of submitting required Title IV audits and audited financial statements to align with the FY used for IRS purposes (as opposed to changing its FY with the IRS), the following process must be followed:
Audited financial statements must be done for a twelve-month period of time. Therefore, for FYs starting on or after July 1, 2024, there may be an overlap of time between audited financial statements reflecting the activity during the legacy FY and the audited financial statements reflecting the new FY. For example, if an institution/entity has traditionally used Oct 1-Sep 30 as its FY for Title IV purposes but submits its annual tax returns based on the period Jan 1-Dec 31, it will submit its audited financial statements for the legacy FY, Oct 1, 2024-Sep 30, 2025, by the applicable due date for submission. The institution/entity will modify its FY to align with its year used for IRS purposes on July 1, 2024. It will submit its audited financial statements for its revised FY, Jan 1, 2025-Dec 31, 2025, by the applicable due date for submission. For this transition period, there will be an overlap where two different audited financial statements are covering a period of time that is contained in both the legacy and revised FYs. Subsequent audited financial statements will reflect the revised FY of Jan 1-Dec 31. Another example is where an institution/entity that traditionally has used the federal student aid award year as its FY but used the calendar year for IRS returns would undergo a similar transition. This institution/entity will submit its audited financial statements for the legacy FY, Jul 1, 2024-Jun 30, 2025, by the applicable due date for submission. The institution/entity will then modify its FY to align with its year used for IRS purposes on Jul 1, 2024. It will submit its audited financial statements for its revised FY, Jan 1, 2025-Dec 31, 2025, by the applicable due date for submission. For this transition period, as in the first example, there will be an overlap where two different audited financial statements are covering a period of time that is contained in both the legacy and revised FYs. Subsequent audited financial statements will reflect the revised FY of Jan 1-Dec 31.
FR-Q3 How will the submission of a Title IV compliance audit be impacted by this rule while the institution/entity transitions to a new FY?
FR-A3 There are two different categories of institutions when looking at audit submission requirements, those that are subject to the Single Audit Act and those that are not. Institutions not subject to the Single Audit Act are governed by one of the Audit Guides published by the Department's Office of Inspector General (OIG). Those guides include the Guide for Financial Statement Audits of Proprietary Schools and For Compliance Attestation Examination Engagements of Proprietary Schools and Third-Party Servicers Administering Title IV Programs, commonly called the Title IV Audit Guide and the Guide for Financial Statement Audits and Compliance Attestation Engagements of Foreign Schools commonly called the Foreign School Audit Guide. Single Audit institutions are subject to the audit submission rules published in 2 CFR 200. Single Audit requirements deal with the compliance audit and audited financial statements as different sections of a single audit. For purposes of this question, we will separate the requirements surrounding each of those sections and address financial statements in FR Q&A 2 and address the compliance audit section in this Q&A. Institutions not subject to the Single Audit Act submit audited financial statements and compliance audits as separate items.
If an institution or entity chooses to modify its FY previously used for the purposes of submitting required Title IV audits and audited financial statements to align with the year used for IRS purposes (as opposed to changing its tax year with the IRS), the following process must be followed:
The transition to a revised FY will create a stub period that is shorter than twelve months. An institution/entity must submit a Title IV compliance audit for the stub period by the applicable due date for submission. For example, if an institution/entity has traditionally used Oct 1-Sep 30 as its FY for Title IV purposes but submits its annual tax returns based on the period Jan 1-Dec 31, and elects to align its Title IV FY with the year used for IRS tax purposes, it will submit a Title IV compliance audit for its legacy FY, Oct 1, 2023-Sep 30, 2024, by the applicable due date. The institution/entity elects to change its FY to Jan 1-Dec 31 on July 1, 2024. The institution/entity will submit a compliance audit for the stub period Oct 1, 2024-Dec 31, 2024, by the applicable due date for submission. It will submit its Title IV compliance audit for its revised FY, Jan 1, 2025 -Dec 31, 2025, by the applicable due date for submission. Subsequent Title IV compliance audits will reflect the revised FY of Jan 1-Dec 31. In another example, the institution/entity has traditionally used Jul 1-Jun 30 as its FY for Title IV purposes but submits its annual tax returns based on the period Jan 1-Dec 31. In this case, the institution/entity will submit a Title IV compliance audit for its legacy FY, July 1, 2023-Jun 30, 2024, by the applicable due date. If the institution/entity elects to modify its FY to align with its year used for IRS tax purposes on Jul 1, 2024, it will submit a compliance audit for the stub period Jul 1, 2024-Dec 31, 2024, by the applicable due date for submission. It will submit its Title IV compliance audit for its revised FY, Jan 1, 2025 -Dec 31, 2025, by the applicable due date for submission. Subsequent Title IV compliance audits will reflect the revised FY of Jan 1-Dec 31.
Single Audit institutions may be exempt from submitting a compliance audit if its total federal awards fall below the threshold established by the U.S. Office of Management and Budget. Institutions seeking this exemption must apply to Department to have their request for exemption approved. More information about the exemption can be found at 2 CFR 200.501(d).
FR-Q4 The Financial Responsibility, Administrative Capability, Certification Procedures, Ability To Benefit (ATB) regulations are effective July 1, 2024. What is the effective date of the requirement for the expanded related party footnote? Does it mean financial statements submitted on or after July 1 must comply? Or does it mean that the expanded footnote requirement applies to financial statements submitted for periods beginning (or ending?) on or after July 1st?
FR-A4 As has been the Department's practice with regard to financial statement disclosures, the requirement for the expanded footnote applies to financial statements submitted to the Department on or after July 1, 2024, irrespective of when the fiscal year begins or ends.
FR-Q5 What happens in the event I submit audited financial statements on June 28th and the Department does not accept them until July 2nd. Am I required to submit the expanded related party footnote?
FR-A5 No. The institution would only be required to submit the related party footnote under the existing regulations in effect prior to July 1, 2024, as long as the financial statements are determined to be acceptable.
FR-Q6 When must existing situations and conditions that were not considered reportable financial triggers prior to July 1, 2024, but are considered reportable financial triggers upon implementation of the revised financial responsibility regulations, be reported to the Department?
FR-A6 With both the mandatory and discretionary triggers in existence on July 1, 2024, that were not considered reportable triggers prior to that date, but would be considered reportable upon implementation of the revised financial regulations, the institution must report any existing provisions within 21 days of the effective date of the regulation.
FR-Q7 My institution is a public institution. Does that mean we are exempt from the financial responsibility rules?
FR-A7 No, a public institution is not exempt from the financial responsibility rules. However, under those rules, the Department considers a public institution to meet the requirements of financial responsibility if it -
- notifies the Department that it is designated as a public institution by a State, local or municipal government entity, Tribal authority, or similar government entity, including a foreign government entity, that has the legal authority to make that designation;
- is backed by the full faith and credit of that government entity;
- is not subject to a condition of past performance under 34 CFR 668.174; and
- is not subject to an automatic mandatory or discretionary triggering event under 668.171(c) or (d) that have significant adverse effect on the financial condition of the institution.
If required to provide proof, and the institution cannot provide documentation that it has the full faith and credit backing of a government entity, its financial responsibility will be evaluated under the same standards as a private nonprofit institution. If it fails any of the financial responsibility standards, including if the institution is subject to a condition of past performance, an automatic mandatory or discretionary triggering event that has a significant impact on financial condition, or an audit opinion or going concern disclosure described under 668.171(h), it will be required to post financial protection. The institution must post financial protection to continue participation in either provisional or full certification, depending on the amount of financial protection that is posted.
However, even if the institution does have a letter of public status and is backed by the full faith and credit of the government entity, if it is subject to a condition of past performance, or an automatic mandatory or discretionary triggering event, it is not financially responsible. In that circumstance, it can participate under provisional certification and heightened cash monitoring, but it is not required to post financial protection.
FR-Q8 What does "backed by the full faith and credit of the state or equivalent government entity" mean?
FR-A8 The concept of an institution being backed by full faith and credit refers to a commitment by a State, local or municipal government entity, Tribal authority, or similar government entity, including a foreign government entity, to be responsible for the institution's financial obligations, including any debts, liabilities, obligations, or charges associated with that institution's participation in the HEA, Title IV programs. This would include utilizing the government entity's authority or revenue sources to satisfy the institution's unpaid liabilities.
FR-Q9 I am a public institution. When and how am I required to provide proof that my institution is backed by the full faith and credit of a government entity?
FR-A9 Section 668.171(g) details what an institution must do to demonstrate this status. The requirements include notifying the Department that it is designated as a public institution, and in certain circumstances described in the regulation, an institution must also provide a letter signed by an official of the government entity that confirms that the institution is public and is backed by the full faith and credit of the government entity. The circumstances described in the regulation for providing the proof of full faith and credit backing by the government entity include the initial certification as a public institution, a change in ownership that results in a transition from a private to a public status, or upon request by the Department.
FR-Q10 If a proprietary institution is granted an audit waiver, once the waiver period ends, does the institution have up to six months after the end of the final fiscal year that was covered in the waiver period... or does the new deadline described in 34 CFR 668.23(a)(4) apply to this situation?
FR-A10 A proprietary institution that has been granted an audit waiver under the provisions in 34 CFR 668.27 must include the waived period in a future compliance audit. According to 34 CFR 668.27, that audit is due either six months after the third fiscal year following the fiscal year for which the institution last submitted a compliance audit and audited financial statements, or six months after the second fiscal year following the fiscal year for which the institution last submitted a compliance audit and audited financial statements, if the award in which the institution will apply for recertification is part of the third fiscal year. The deadline described in 34 CFR 668.23(a)(4) does not apply to these audit waiver situations.
FR-Q11 If a public or private, nonprofit institution is granted an audit exemption as described in 2 CFR 200 what is the due date for financial statements they must still submit?
FR-A11 Institutions that are eligible for an exemption, due to their Federal awards being below the current threshold of $750,000, are exempt from submitting a compliance audit for the audit period. However, if the institution is one where a composite score is calculated (most private nonprofits are in this category), it must submit financial statements so that a composite score can be calculated by the Department. Financial statements are due to the Department no later than six months after the end of the institution's fiscal year. The request for exemption must be submitted prior to that date, as well. The deadline described in 34 CFR 668.23(a)(4) does not apply to these audit exemption situations.
FR-Q12 For foreign institutions' audit submission deadline, the Foreign School Audit Guide (last updated 2020) says the institution must submit within six months of its fiscal year end, but does the new deadline described in 34 CFR 668.23(a)(4) apply to foreign institutions, too?
FR-A12 With the implementation of the Financial Responsibility rules published on October 31, 2023, foreign institutions will be subject to the revised audit submission deadline described in 34 CFR 668.23(a)(4), which is the earlier of 30 days after the date of the auditor's report or six months after the end of institution's fiscal year. The Foreign School Audit Guide will be amended in the future to reflect any appropriate changes in regulations.
FR-Q13 Is it acceptable to disclose the related party and location, the bank account(s) name, the ending account(s) balance (or aggregate balance) as of the fiscal year end date, with an account description (for example, operating account(s) used for payroll, vendor payments, and revenue deposits)?
FR-A13 No. You must disclose the related party and location, the bank account(s) name, the total debits and credits for the fiscal year, with an account description (for example, operating account(s) used for payroll, vendor payments, and revenue deposits).
FR-Q14 An institution has a legacy defined benefit pension plan for which the university serves as trustee and administrator. Is it acceptable to disclose appropriate university leadership and a description of the plan, and to refer readers to the footnote disclosure in the financial statements that provides all funding, expense, and balance information?
FR-A14 This would be acceptable if the appropriate level of detail is included in the other financial statements disclosure and is referenced in the related party disclosure.
FR-Q15 Clarification is needed on the phrase found in 34 CFR 668.23(d)(1), "regardless of when the (related party) transaction occurred" and how it applies in the following example:
The institution's president's spouse established an endowment fund of $500,000 five years before the reporting year-end. The donor's relationship to the president and the president's relationship with the institution has not changed. Even though an endowment is a perpetual gift, there would be no related party disclosure in the current fiscal year because the contribution was made five years ago, correct?
FR-A15 It depends on whether the donor maintains any level of control over the endowment/donation/gift. For any period where control exists, it remains a related party transaction and must be reported.
FR-Q16 Clarification is needed on the phrase found in 34 CFR 668.23(d)(1), "regardless of when the (related party) transaction occurred" and how it applies in the following example:
A trustee promises to give $700,000 over three years in the current reporting year. Under GAAP, nonprofit institutions recognize contribution revenue, with a time restriction (three-year promise) and a pledge receivable. In the current reporting period, the $700,000 promise will be disclosed: pledge receivable and restricted revenue. In subsequent reporting years the institution would report cash receipts on the pledge and the reduced receivable balance. In other words, the institution reports the reduced receivable balance and the cash receipts every reporting year until the pledge is fulfilled. Correct?
FR-A16 Yes. This would be reported in all three years as a related party transaction, as indicated in the example.
FR-Q17 Clarification is needed on the phrase found in 34 CFR 668.23(d)(1), "regardless of when the (related party) transaction occurred" and how it applies in the following example:
The provost's adult daughter is the CEO of a financial institution that provided a line of credit to the college three years ago. The line of credit is a $1,000,000 liquidity facility that has not been drawn upon, but it is still available. The provost resigned last year, before the reporting period/fiscal year began. Is it correct that for the current reporting period, there is no related party disclosure because the provost is no longer employed by the college?
FR-A17 Yes, to the extent that the former provost has no association with the institution.
FR-Q18 If the provost, from FR-Q17, was still employed by the college, the off-balance sheet line of credit facility would be disclosed along with the name and location of the related party (the provost's adult daughter), correct?
FR-A18 Yes.
FR-Q19 For agreements that cross fiscal years, it appears that the reporting year drives whether there is a related party and transaction that needs to be disclosed. When there is an active related party for the audited reporting year, a disclosure is required if an off-balance sheet item has yet to mature or if a balance sheet receivable or payable has not been realized. Is that correct?
FR-A19 Yes.
FR-Q20 Some institutions have raised concern about the burden on institutions regarding what they referred to as the expanded related party disclosure requirement and asked whether the Department had adequately considered this burden in developing the regulation?
FR-A20 Yes. The related party disclosure requirement put into the regulations is not an expanded requirement, it has been the Department's practice of requiring the level of detail now specified in the regulations. To the extent that any Department regulation may introduce burden, the Department considered that burden and it is reflected in the Regulatory Impact Analysis in both the Notice of Proposed Rulemaking and Final Rule.
FR-Q21 Relating to the mandatory trigger for creditor actions (34 CFR 668.171(c)(2)(xi)) — if a loan agreement has a provision saying, for example, "it shall be an event of default if the Department of Education pursuant to Subpart G of 34 C.F.R. Part 668 (regarding the eligibility of the institution to participate in the Title IV Programs), notified the institution of any suspension, termination or limitation of Title IV Program funding" — would the mere presence of this provision be a mandatory trigger rendering an institution not financially responsible and require the posting of financial protection, as all mandatory triggers do under the new financial responsibility regulations?
FR-A21 Correct, because the provision incorporating a Department standard exists and it relies on the potential for the Department's action as the trigger for the event regardless of how likely the event is to occur or whether the Department takes such action.
FR-Q22 If a loan agreement has a provision saying, for example, "it shall be an event of default if the institution does not maintain a Department of Education Composite Score, measured as of the end of each fiscal year, to be less than 1.5" would the mere presence of this provision be a mandatory trigger even though the event of default relies on a Department standard (the composite score) which is unrelated to any action by the Department?
FR-A22 When a loan agreement contains a provision with an event of default that is absolute, rather than subject to the discretion of the creditor, it is a mandatory trigger. This is true even if the provision relates to a composite score that is less than 1.5, because that composite score failure will lead to the Department taking an action under Subpart L. Actions are not limited to actions such as a limitation, suspension, or termination, or being placed on the heightened cash monitoring payment method. This is a mandatory trigger even if the provision is waived by the creditor.
FR-Q23 Relating to the discretionary trigger for creditor actions (34 CFR 668.171(d)(2)(iv)) — if a loan agreement has a provision saying, for example, "the creditor may declare a default if the Department takes some action" -- does the mere presence of this provision constitute a discretionary trigger? And if so, what does that mean?
FR-A23 If the credit agreement states that if the Department takes an action or if the institution is not in compliance with one of the Department's standards, the institution may be subject to a declaration of default, the discretionary trigger is triggered even if the Department does not take the action described in the default provision. This type of default provision must be reported to the Department. as explained in FR-A24. The Department will then evaluate whether, in the event of a future declaration of default, that default would be expected to have a significant adverse effect on the financial condition of the institution.
FR-Q24 When would the institution need to report any existing creditor default provisions when the regulations are implemented on July 1, 2024?
FR-A24 With both the mandatory and discretionary triggers related to credit agreement default provisions referencing the Department's standards or actions, the institution must report any existing provisions within 21 days of the effective date of the rule and within 21 days after entering into the credit agreement on or after the effective date of the regulations.