(GEN-24-11) Long-Term Debt Used for Property, Plant, and Equipment -- Treatment of Non-bond and Bond Indebtedness, and Treatment of Leases

Publication Date
December 20, 2024
DCL ID
GEN-24-11
Subject
Long-Term Debt Used for Property, Plant, and Equipment -- Treatment of Non-bond and Bond Indebtedness, and Treatment of Leases
Summary
This letter provides several scenarios to clarify how property, plant, and equipment (PP&E) and non-bond long-term debt are treated for the composite score calculation. It also provides alternative options for the treatment of bond long-term debt. In addition, it provides information about pre- and post- implementation leases.

This DCL supersedes the April 9, 2020, Electronic Announcement (updated on August 20, 2020) with attached Q&As, except for LTD Q&A 10.

Dear Colleague:

The U.S. Department of Education (Department) is aware of some confusion regarding the correct manner in which to calculate the impact of long-term debt as it relates to PP&E for determining an institution’s composite score.

Background

The Department issued a Dear Colleague Letter (DCL), GEN 03-08 on July 15, 2003, that established guidance that all long-term debt could be included in the Primary Reserve Ratio used to determine an institution’s financial responsibility, but such debt could not exceed the amount of the institution’s PP&E.

The Department issued final regulations on September 23, 2019 (84 FR 49788) (2019 Regulations), which among other things, superseded the guidance issued in GEN 03-08, and updated the calculation of the composite score. (The composite score calculation for proprietary schools is found here. The composite score calculation for private nonprofit institutions is found here.)

Those regulations went into effect on July 1, 2020, for financial statement submissions on or after that date. These regulations remain in effect and are the source of all of the requirements set forth below.

The 2019 Regulations established a line of separation between long-term debt and PP&E that had been reported on an institution’s financial statements submitted to the Department prior to July 1, 2020, (referred to as “pre-implementation debt” and “pre-implementation PP&E”) and debt that is reported on financial statements submitted to the Department on or after July 1, 2020 (referred to as “post-implementation debt,” “post-implementation PP&E with debt,” and “post-implementation PP&E without debt”) (see 34 CFR 668 subpart L, appendices A and B). In audited financial statements that are submitted by the institution on or after July 1, 2020, the amount of pre-implementation PP&E and pre-implementation long-term debt can never exceed the amount of the PP&E recorded in the audited financial statements submitted before July 1, 2020.

Pursuant to the 2019 Regulations and 34 CFR part 668, subpart L, appendices A and B, for refinanced debt to qualify as pre-implementation long-term debt, any refinanced or renegotiated debt (recorded in audited financial statements submitted on or after July 1, 2020) cannot be greater than the ending book value at the time of the refinancing of the pre-implementation long-term debt. This means that if a pre-implementation long-term debt was refinanced and produced even $1 of proceeds (i.e.,funds in excess of the outstanding balance of the pre-existing long-term debt), the refinanced amount of the debt reported in the financial statements is not qualified to offset pre-implementation PP&E used in the composite score calculation. (The use of the term "qualified long-term debt" in this DCL means the amount of the pre- or post-implementation long-term debt that can be used to offset the associated PP&E in the composite score.) The institution may not use the amount of pre-implementation debt recorded in prior financial statements to offset PP&E.

However, if the proceeds are used for the acquisition of post-implementation PP&E, those proceeds would qualify as post-implementation long-term debt up to the book value of the newly acquired PP&E. 

Costs of refinancing are not considered proceeds because the financial institution will pay any costs before proceeds are distributed. However, only the outstanding balance of the loan at the time of refinancing would be pre-implementation long-term debt. For example, if the outstanding balance was $10,000 and $800 in fees is added to the balance for a total of $10,800, only $10,000 would be qualified pre-implementation long-term debt.  

The Department has included various scenarios below that describe the treatment of pre- and post-implementation PP&E, pre- and post-implementation long-term debt, and debt for construction in progress (“CIP”), in audited financial statements submitted on or after July 1, 2020. All of these scenarios apply the principles set forth in appendices A and B to part 668, subpart L. Following the scenarios, the Department also provides information about bond refinancing.

Please note:  The scenarios provided below are illustrative only, and each transaction will be evaluated on a case-by-case basis.  

Scenarios

Scenario 1:

The institution’s audited financial statements submitted to the Department prior to July 1, 2020, reported $100,000 in PP&E and $200,000 in long-term debt. On or after July 1, 2020, the audited financial statements did not report any PP&E acquired during the fiscal year. The financial statements reported that the outstanding balance of the loan was paid down to $85,000. The book value of the PP&E reported in the financial statements was $90,000 (as a result of $10,000 in depreciation). The financial statements also reported that the institution had refinanced its $85,000 outstanding balance of long-term debt for $85,000. No additional long-term debt was assumed during the fiscal year. $85,000 of the refinanced debt qualifies as pre-implementation long-term debt since no proceeds were received and it does not exceed the book value of the PP&E.

Subsequent year:  In addition to the pre-implementation PP&E and long-term debt, in the subsequent year the institution purchases newly acquired PP&E and incurs additional long-term debt. Each new purchase of PP&E and its associated long-term debt must be treated separately:

    • The book value of the pre-implementation PP&E (original value of $100,000) has been further depreciated and is recorded in the financial statements as $80,000. The outstanding balance of the pre-implementation long-term debt that was refinanced in the prior year ($85,000) has been paid down by $15,000 and is recorded in the financial statements as $70,000. The $70,000 remaining balance of the refinanced debt qualifies as pre-implementation long-term debt because it does not exceed the current book value of the pre-implementation PP&E ($80,000).

    • The institution purchases $50,000 in newly acquired PP&E and incurs $40,000 in new long-term debt for the acquisition of that PP&E. At the end of the fiscal year, the newly acquired PP&E has an ending book value of $48,000 ($50,000 minus $2,000 in depreciation), and no payments have been made on the $40,000 of new long-term debt. The $40,000 of new long-term debt qualifies as post-implementation long-term debt because it does not exceed the current book value of the post-implementation PP&E ($48,000).

    • The institution purchases $20,000 in newly acquired PP&E and incurs $20,000 in new long-term debt used for the acquisition of that PP&E. At the end of the fiscal year, the newly acquired PP&E has an ending book value of $18,000, and no payments have been made on the $20,000 of new long-term debt. Only $18,000 of the new long-term debt qualifies as post-implementation long-term debt because post-implementation long-term debt cannot exceed the ending book value of the post-implementation PP&E ($18,000).

    • The institution also takes out an additional long-term loan for $45,000. It is not used for the acquisition of PP&E. No portion of this loan qualifies as post-implementation long-term debt.

    In that subsequent year’s financial statements:

    Pre-implementation PP&E is $80,000
    Qualified pre-implementation debt is $70,000

    Total post-implementation PP&E is $66,000
    Total qualified post-implementation debt is $58,000

    Scenario 2:

    The institution’s audited financial statements submitted to the Department prior to July 1, 2020, reported $100,000 in PP&E and $200,000 in long-term debt. On or after July 1, 2020, the audited financial statements did not report any PP&E acquired during the fiscal year. The financial statements reported that the outstanding balance of the loan was paid down to $85,000. The book value of the PP&E reported in the financial statements was $90,000 (as a result of $10,000 in depreciation). The financial statements also reported that the institution had refinanced its $85,000 outstanding balance of long-term debt for $90,000. This resulted in proceeds from the refinancing in the amount of $5000. No additional long-term debt was assumed during the fiscal year. Even though the book value of the PP&E recorded on the audited financial statements is $90,000, and the refinanced long-term debt is $90,000, none of the refinanced debt qualifies as pre-implementation long-term debt since proceeds were received.

    Scenario 3:

    The institution’s audited financial statements submitted to the Department prior to July 1, 2020, reported $100,000 in PP&E and $200,000 in long-term debt. On or after July 1, 2020, the audited financial statements reported PP&E as $4,500 acquired during the fiscal year. The financial statements reported that the outstanding balance of the loan was paid down to $85,000. The book value of the PP&E reported in the financial statements was $94,500 (as a result of $10,000 in depreciation plus $4,500 in acquired PP&E). The financial statements also reported that the institution had refinanced its $85,000 outstanding balance of long-term debt for $90,000. This resulted in proceeds from the refinancing in the amount of $5,000. No additional long-term debt was assumed during the fiscal year. None of the refinanced debt qualifies as pre-implementation long-term debt since proceeds were received. However, if the $5,000 in proceeds from the refinanced debt was used to purchase the $4,500 of newly acquired PP&E, then $4,500 of the refinanced debt qualifies as post-implementation long-term debt. Conversely, if the $5,000 in proceeds was not used to purchase any PP&E, then none of the refinanced debt qualifies as pre- or post-implementation long-term debt. The same is true if the institution plans to use the refinanced debt to purchase PP&E. As noted in this scenario, the newly acquired PP&E has to be purchased prior to the fiscal year end.

    Scenario 4:

    The institution’s audited financial statements submitted to the Department prior to July 1, 2020, reported $200,000 in PP&E and zero in long-term debt. On or after July 1, 2020, the audited financial statements did not report any PP&E acquired during the fiscal year. The financial statements reported that $200,000 in long-term debt was assumed in the fiscal year but not for the purpose of acquiring PP&E. The existing PP&E reported in the financial statements was used as collateral for the loan. None of the debt qualifies as pre- or post-implementation long-term debt.

    General Notes on Scenarios 1-4

    • Refinanced debt does not need to be refinanced with the same lender/creditor.

    • Refinanced debt must reflect an arms-length transaction.

    • Refinanced debt may not be a credit facility or a related party debt.

    • Refinanced debt does not need to have the same repayment terms. Original debt with a balloon payment can be refinanced over a new extended period of time or with another future balloon payment.

    Additional Notes on Credit Facilities

    As stated in the General Notes, a credit facility may not be used to refinance an existing debt instrument – these additional notes explain how qualified debt is calculated when the institution has a credit facility.

    For a credit facility, any payments in the fiscal year of implementation or later fiscal years would be first applied to the beginning balance of pre-implementation debt until the total amount of pre-implementation debt is zero. Any payments after pre-implementation debt is zero, should be applied first to the oldest balance of eligible post-implementation debt associated with PP&E and subsequent years of eligible post-implementation debt associated with PP&E until those balances are also zero.

    Any new draws on the credit facility in the fiscal year of implementation and future fiscal years would be considered new post-implementation debt. The only amount from the credit facility that would be included in adjusted equity or expendable net assets is the amount of the post-implementation ending balance that the institution can show that it used to purchase PP&E, making that debt eligible post-implementation debt. The PP&E must have been purchased with proceeds from the credit facility during the fiscal year or prior fiscal years for post-implementation PP&E.

    The ending balance of any eligible pre-implementation debt associated with the credit facility that has not been repaid, and other qualified debt up to the amount of pre-implementation PP&E included in the audited financial statements prior to implementation, would also be included in the determination of adjusted equity or expendable net assets.

    If there is no longer any eligible pre-implementation debt from the credit facility in the first fiscal year following July 1, 2020, in fiscal years subsequent to that first fiscal year, the beginning balance will be made up entirely of post-implementation debt and the institution must be able to identify PP&E that it purchased with funds from the credit facility for that beginning balance to determine eligible post-implementation debt. Any payments on the credit facility in a fiscal year after eligible pre-implementation debt has been eliminated must first be applied to the beginning balance of the post-implementation debt associated with PP&E, starting with the oldest balance of eligible post-implementation debt associated with post-implementation PP&E.

    For purposes of calculating the composite score, any amount of draws on the credit facility during the fiscal year will be considered new post-implementation debt up to the amount of PP&E that was purchased with those draws.

    Construction in Progress ("CIP")

    Scenario 5:

    For financial statements submitted to the Department prior to July 1, 2020, CIP was included in expendable net assets, which is an element of the Primary Reserve Ratio. The 2019 Regulations excluded CIP from expendable net assets, but also addressed the situation where a short-term loan and/or line of credit obtained for CIP could be converted to long-term debt or refinanced to long-term debt once the amount of CIP is placed in service (and therefore recorded in the financial statements as PP&E) (see 34 CFR 668 subpart L, appendices A and B). The following is an additional scenario describing the treatment of CIP for financial statements submitted on or after July 1, 2020:

    • The institution’s audited financial statements submitted to the Department prior to July 1, 2020, reported CIP for $75,000 for build-out of a student lounge with an associated short-term loan of $65,000.

    • The audited financial statements submitted on or after July 1, 2020, reported additional CIP for $40,000 for the ongoing build-out of the student lounge, for a total book value of CIP of $115,000.

    • Those audited financial statements also reported the short term-loan for CIP for $65,000 reported on the prior financial statement, as well as a new CIP line of credit for $35,000 which was assumed at the end of the fiscal year. No payments were made on the CIP line of credit, or on the short-term loan of $65,000.

    • The prior CIP short-term loan for $65,000 and new CIP line of credit for $35,000 equal a total CIP indebtedness of $100,000.

    • Under the 2019 Regulations, the book value of CIP is removed from expendable net assets. (Part 668, subpart L, Appendices A and B). The institution may add back the lesser of the total CIP indebtedness or the CIP book value, which in this case is $100,000 (the total CIP indebtedness recorded in the financial statements). (Part 668, subpart L, Appendices A and B).

    The second-year’s financial statements submitted after July 1, 2020, reported the following for PP&E and CIP:

    • An additional $20,000 in CIP (the prior year’s book value of CIP was $115,000).

    • $100,000 of the prior $115,000 in CIP was placed in-service, leaving $35,000 of CIP reported in the financial statements.

    • The $100,000 of in-service CIP is reported as post-implementation PP&E.

    • Newly acquired PP&E of $10,000 with depreciation of $1,000 for a book value of $9,000 at the end of the fiscal year.

    • Total PP&E ($109,000) + CIP ($35,000) is $144,000:

      • $100,000 of prior CIP placed in service and reported as post-implementation PP&E + $9,000 in newly acquired PP&E + $15,000 in CIP remaining from the last fiscal year + $20,000 of new CIP

    The second-year financial statements submitted after July 1, 2020, reported the following for debt:

    • The prior CIP short-term loan for $65,000 and $25,000 of the prior $35,000 CIP short-term line of credit were refinanced for a new long-term loan of $90,000.

    • The remaining $10,000 outstanding balance of the short-term line of credit remained in the short-term line of credit, with additional drawings on the short-term line of credit for $20,000 for CIP, leaving a $30,000 outstanding balance on the short-term line of credit at the end of the fiscal year.

    • A new long-term loan for $10,000 for the newly required PP&E, for a total indebtedness of $130,000 ($90,000 qualified post-implementation debt + $10,000 in a new long-term debt for the newly acquired PP&E + $30,000 for the short-term line of credit)

      • The new-long term loan for $10,000 is qualified for only $9,000, because the ending book value of the associated newly acquired PP&E is $9,000 (due to $1,000 in depreciation).

    • Total qualified post-implementation debt is $99,000 ($90,000 qualified new post-implementation debt + $9,000 qualified new post-implementation long-term debt).

    • Total qualified CIP debt is $30,000.

    • Total qualified indebtedness reflected on the financial statements for the second year is $129,000 ($99,000 qualified new post-implementation debt + $30,000 qualified CIP debt). There is $1,000 in unqualified debt.

    Recap of second year:

    • The $100,000 of CIP placed in service during the second year has converted to $100,000 of post-implementation PP&E. The associated long-term debt with this PP&E is $90,000 because the prior CIP short-term loan for $65,000 and $25,000 of the prior $35,000 CIP short-term line of credit were refinanced for a new long-term loan of $90,000. The qualified post-implementation long-term debt associated with this $100,000 in PP&E is $90,000, which is the lower of the ending book value of the PP&E ($100,000) or the long-term debt associated with the PP&E ($90,000).

    • During the second year, there was newly acquired post-implementation PP&E of $10,000 which had an ending book value of $9,000 (resulting from $1,000 of depreciation). The long-term debt associated with this PP&E is $10,000. The qualified post-implementation long-term debt associated with this $9,000 in PP&E is $9,000, which is the lower of the ending book value of the PP&E ($9,000) or the long-term debt associated with the PP&E ($10,000).

    • During the second year, there was $20,000 of new CIP and $15,000 in carryover CIP from the prior year for a total of $35,000 CIP. The associated debt with this CIP is $35,000. The qualified CIP debt is $35,000, because the ending book value of the CIP ($35,000) is the same as the debt associated with that PP&E ($35,000). If the values were not the same, the qualified CIP debt would be the lower of the ending book value of the CIP or the debt associated with that CIP.

    Treatment of Bond Indebtedness

    There are four bond options:

    Option A – Bond Refinancing (Original and Refinancing Bond Not Restricted to PP&E):

    If the institution acquires or acquired PP&E (either pre or post implementation) that was financed by a bond issuance, the original bond may be refinanced (up to the outstanding balance of the original bond) by a refinancing bond (either by replacing or renegotiating the original bond). So long as the refinancing bond does not result in any proceeds in excess of the outstanding balance of the original bond at the time of the refinancing and any associated costs, the refinancing bond indebtedness will continue as either pre- or post-implementation long-term debt (depending on when the PP&E was acquired).

    • If the original bond was pre-implementation long-term debt, the qualified pre- implementation long-term debt is the lower of the ending book value of the pre-implementation PP&E or the outstanding balance of the refinancing bond.

    • If the original bond was post-implementation long-term debt, the qualified post-implementation long-term debt is the lower of the ending book value of the original PP&E purchased with the original bond or the outstanding balance of the refinancing bond.

    • If there were any proceeds in excess of the outstanding balance of the original bond at the time of refinancing and any associated costs, then the bond would not continue to qualify as pre-implementation, and only the portion of the proceeds (if any) that was used to purchase PP&E would qualify as post-implementation long-term debt, which would be limited to the lower of then ending book value of the purchased PP&E or the outstanding balance of the refinancing bond at the end of the year.

    Option B – Bond Refinancing (Original and Refinancing Bond Restricted to PP&E):

    If the refinancing bond indebtedness resulted in proceeds, then the bond can qualify as post-implementation long-term debt subject to the limitation of the associated PP&E, if the following conditions apply:

    • The original debt must be a bond and both the refinancing bond and original bond must each have a restriction that it can only be used for PP&E.

    • If there are cash proceeds obtained from the refinancing bond, the Statement of Financial Position or the Balance Sheet must have a restricted cash account and a clear audit trail/note in the audited financial statements that records the following information:

      • total amount of the refinancing bond(s) and date of refinancing bond indebtedness;

      • total amount used to pay off the original bond(s);

      • the identification of the specific PP&E purchases made with the original bond and their book value as of the time of the refinancing;

      • the identification of the specific PP&E purchased with the refinancing bond(s) (purchased with refinancing proceeds);

      • the ending book value of PP&E purchased with the original bond and the refinancing bond (less any depreciation or disposals) reflected in the financial statements; and

      • details of the refinancing and PP&E acquisition transactions in the restricted cash account during the fiscal year.

    • Any refinancing bonds with proceeds in financial statements submitted after July 1, 2020, can only qualify as post-implementation PP&E and post-implementation long-term debt. The PP&E originally purchased with the original bonds under this option would move to post-implementation PP&E. Both the PP&E and refinancing bonds must follow the post-implementation regulations.

    • The allocation for the long-term debt must be done on a pro-rata basis for each PP&E item. For example, the total refinancing bond was $50,000,000, with $20,000,000 used to pay off the prior PP&E bond, $17,000,000 used for new PP&E purchases, and $13,000,000 held in a restricted cash account for future PP&E purchases. During the course of the year, the institution made $5,000,000 in payments on the refinancing bond, leaving an outstanding balance at the end of the year of $45,000,000. The outstanding balance is allocated based on the relationship between the amount of the refinancing bond and the uses of that bond. In this example, the refinancing bond is $50,000,000, with $20,000,000 (40%) for the payoff of the balance of the original PP&E bond, $17,000,000 (34%) for the purchase of newly acquired PP&E, and $13,000,000 (26%) in a restricted cash account for future PP&E. Therefore the $45,000,000 is allocated as follows:  $18,000,000 ($45,000,000 x .40) for the amount used to pay off the prior bond, $15,300,000 ($45,000,000 x .34) for new PP&E purchases with the refinancing bond proceeds during the year, and $11,700,000 ($45,000,000 x .26) for the restricted cash account. The ending book value of the PP&E purchased with the prior bonds was $17,000,000 and the ending book value of the new PP&E purchases was $16,000,000. The allowable add back for the bonds refinanced after July 1, 2020, would be based on the following considerations:

      • By comparing the lesser of the ending book value of the PP&E acquired with the original bond ($17,000,000) and the allocated amount ($18,000,000) related to the payoff of the original bond ($20,000,000), which is $17,000,000 (the lesser of $18,000,000 and $17,000,000).

      • By comparing the lesser of ending book value of the PP&E purchased with the refinancing bond ($16,000,000) and the allocated amount ($15,300,000) related to the new PP&E purchased ($17,000,000) with the refinancing bond, which is $15,300,000 (the lesser of $16,000,000 and $15,300,000).

      • Therefore, the allowable add back for the PP&E bonds refinanced after July 1, 2020, would be $32,300,000 ($17,000,000 plus $15,300,000).

    In any future years, a similar allocation must be done. Any purchases of new PP&E from the restricted cash account must be allocated separately – i.e., the ending book value of the PP&E purchased in subsequent years cannot be combined with pre-implementation PP&E or PP&E that was initially purchased with the refinancing bond.

    For this refinancing option (Option B), the institution must provide the Department:

    • A copy of the original bond which clearly states that the bond must be used only for PP&E.

    • A detailed list of PP&E that ties the original bond disbursements and PP&E purchases. If multiple original bonds were issued, a separate listing is required for each bond disbursement.

    • A detailed list of PP&E purchased with the original bond that shows the date of purchase(s), total purchase price, and book value of the PP&E at the time of refinancing.

    • A copy of the refinancing bond that clearly states that the bond must be used only for PP&E.

    • A detailed list of all new PP&E that was purchased with the funds from the refinancing bond(s).

    • Bank statements for the restricted cash if the restricted cash is maintained in a separate account. If the restricted cash is not maintained in a separate bank account, bank statements that show that the bank account has maintained a balance at least equal to the restricted cash account.

    • The general ledger printout of the activity for the restricted cash account.

    • The annual financial statements must show a restricted cash account for the refinancing bond and must include a clear audit trail/note that describes and supports the details of the financing/refinancing, with the current balances of PP&E, the outstanding balance on the bond, and the amount of restricted cash related to the refinancing bond.

    The supporting documentation must be submitted as “other information” via the eZ-Audit system with each annual submission for any year when there is a remaining balance in the restricted cash account or bond liability.

    Option C – New Bond – 100% of Disbursement Used to Purchase PP&E with No Excess Proceeds (Bond Use Not Restricted to PP&E):

    On or after July 1, 2020, the institution issues a bond, and the institution uses the full amount of the bond disbursement to purchase PP&E. The bond indebtedness would qualify as post-implementation long-term debt, and the allowable amount of the long-term debt is the lower of the ending book value of the PP&E purchased or the outstanding balance of the bond at the end of the year.

    Option D – New Bond – Excess Proceeds (Bond Use Not Restricted to PP&E)

    • On or after July 1, 2020, an institution issues a bond, and the institution does not use any of the bond disbursement for PP&E. None of the bond indebtedness qualifies as post-implementation long-term debt.

    • On or after July 1, 2020, an institution issues a bond, and the institution uses part of the disbursement for PP&E and part of the disbursement for other operations or acquisitions. None of the bond indebtedness qualifies as post-implementation long-term debt.

    The Department will issue an Electronic Announcement to provide guidance to institutions on how to submit the documents and information that are required for Option B.

    General Notes on Leases

    • The Department is not retroactively applying the requirements of the Accounting Standards Update (ASU 2016-02) to pre-implementation leases. As a result, December 15, 2018, (the earliest effective date of ASU 2016-02) is the date that all institutions must use to distinguish between their pre- and post-implementation leases, should they elect to make that distinction. Any leases entered into by an institution prior to December 15, 2018, are pre-implementation leases and any leases entered into or modified by an institution on or after December 15, 2018, are post-implementation leases. This date is merely the date used to distinguish between pre-implementation and post-implementation leases for the composite score and not the implementation date of ASU 2016-02.

    • An institution may opt-out of differentiating between pre- and post-implementation leases, but it cannot later change its reporting to include pre- and post-implementation leases. The Department will assume that an institution has opted-out of treating a lease entered into before December 15, 2018, as a pre-implementation lease if it does not provide the appropriate disclosures that make the pre- and post-implementation distinction in the first year it was required to, or did, implement ASU 2016-02.

    • For changes of ownership and control occurring on or after July 1, 2020, all leases will be post-implementation regardless of when the entity entered the lease, including if it was entered into before December 15, 2018. As discussed in the Preamble to the 2019 Regulations (84 FR 49871), the Department decided, in part, to allow institutions to treat a lease entered into before December 15, 2018, as a pre-implementation lease, based on reasonable business decisions made by an institution prior to ASU 2016-02. The Department views a transaction where the institution is later acquired by another entity, or otherwise undergoes a change in ownership, as representing a new business decision based on existing accounting standards.

    • For a lease with a renewal option, if the value of the renewal option is reflected on the balance sheet or statement of financial position, then the signing date of the renewal option has no impact on whether the lease is pre- or post-implementation as long as there is no change in the value of the option from when the “right-of-use” asset and lease liability were first recorded. If the value of the lease option was not included in the “right-of-use” asset and lease liability prior to signing the renewal option, the resulting lease would be a post-implementation lease.

    Please send questions regarding topics discussed in this Dear Colleague Letter to FSAFinancialAnalysisDivision@ed.gov. When submitting a question, please enter your name, email address, topic, and question. In addition, please indicate if your question relates to an open financial statements review.

    Sincerely,

    Dr. Nasser Paydar,
    Assistant Secretary
    Office of Postsecondary Education