| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Grand
Canyon Education, Inc. and its wholly owned subsidiaries.
Intercompany transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts in
the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The University invests a portion of its cash in excess of current
operating requirements in short term certificates of deposit and
money market instruments. The University considers all highly
liquid investments with maturities of three months or less at the
time of purchase to be cash equivalents.
Restricted Cash, Cash Equivalents and Investments
A significant portion of the University’s revenue is received
from students who participate in government financial aid
assistance programs. Restricted cash, cash equivalents and
investments primarily represent amounts received from the federal
and state governments under various student aid grant and loan
programs, such as Title IV. The University receives these funds
subsequent to the completion of the authorization and disbursement
process and holds them for the benefit of the student. The U.S.
Department of Education (“Department of Education”)
requires Title IV funds collected in advance of student billings to
be restricted until the course begins. The University records all
of these amounts as a current asset in restricted cash, cash
equivalents and investments. The majority of these funds remain as
restricted for an average of 60 to 90 days from the date of
receipt.
Investments
The University considers its investments in municipal bond, mutual
funds and municipal securities as available-for-sale securities.
Available-for-sale securities are carried at fair value, determined
using Level 1 and Level 2 of the hierarchy of valuation inputs,
with the use of quoted market prices and inputs other than quoted
prices that are observable for the assets, with unrealized gains
and losses, net of tax, reported as a separate component of other
comprehensive income. Unrealized losses considered to be
other-than-temporary are recognized currently in earnings.
Amortization of premiums, accretion of discounts, interest and
dividend income and realized gains and losses are included in
interest and other income.
Note Receivable
The University purchased a note receivable from a financial
institution at fair market value in the fourth quarter of 2012 for
$27,000. The note bore interest at 11%, which represented the
6% rate of the loan plus the 5% default rate. The principal
and most of the interest due on the note was paid in March 2013,
resulting in the full return on investment of the note receivable
and an additional gain in interest income and other income of
$2,187 on the loan. However, the borrower has disputed certain
amounts remaining due under the note agreement, including default
interest in the amount of $432, a late payment liquidated damage in
the amount of $1,392, and a statutory trustee’s fee in the
amount of $139. The funds disputed by the borrower, plus interest
thereon, were deposited into an escrow account with the clerk of
the Maricopa County Superior Court pending resolution of the
disputed issues. In the third quarter of 2013, the court ruled
in favor of the University with respect to the late payment
liquidated damage and default interest accrued thereon.
Accordingly, the University recorded interest and other income of
$1,459 for the year ended December 31, 2013. The court ordered
the late payment liquidated damage funds and interest thereon to be
released to the University on October 28, 2013 unless prior to
said date, borrower filed with the court a formal notice of appeal
and simultaneously deposited an additional $344 into escrow with
the clerk of the court representing continued interest accruing on
the late payment liquidated damage pending an appeal. On
October 28, 2013 borrower deposited with the clerk of the
court the required cash bond in the amount of $344 and filed its
formal notice of appeal. On January 29, 2015, the court ruled
in favor of the University with respect to the remaining default
interest and interest thereon. In January 2016, the Arizona
Court of Appeals issued a ruling reversing the Maricopa County
Superior Court’s award of the $1,392 late payment liquidated
damage and the Maricopa County Superior Court released to us the
remaining default interest and other fees due to the University
totaling $501. Although, the University intends to appeal the
late payment penalty decision to the Arizona Supreme Court, the
University reversed other income of $958 for the year ended
December 31, 2015 due to the uncertain outcome.
Property and Equipment
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line
method. Normal repairs and maintenance are expensed as incurred.
Expenditures that materially extend the useful life of an asset are
capitalized. Construction in progress represents items not yet
placed in service and are not depreciated. Internally developed
software represents qualifying salary and consulting costs for time
spent on developing internal use software and is included in
construction in progress until its completion. The University
capitalizes interest using its interest rates on the specific
borrowings used to finance the improvements, which approximated
1.9% in 2015, 2014, and 2013. Interest cost capitalized and
incurred in the years ended December 31, 2015, 2014, and 2013
are as follows:
Year Ended
December 31,
2015 2014 2013
Interest incurred $ 1,962 $ 2,180 $ 2,626
Interest capitalized 714 379 382
Interest expense $ 1,248 $ 1,801 $ 2,244
Depreciation is provided using the straight-line method over the
estimated useful lives of the assets. Furniture and fixtures,
computer equipment, and vehicles generally have estimated useful
lives of ten, four, and five years, respectively. Leasehold
improvements are depreciated over the shorter of their lease term
or their useful life. Land improvements and buildings are
depreciated over lives ranging from 10 to 40 years.
Leases
The University enters into various lease agreements in conducting
its business. At the inception of each lease, the University
evaluates the lease agreement to determine whether the lease is an
operating or capital lease. In addition, many of the lease
agreements contain renewal options and tenant improvement
allowances. When such items are included in a lease agreement, the
University records a deferred liability on the balance sheet and
records the rent expense evenly over the term of the lease.
Leasehold improvements are included as investing activities and are
included as additions to property, plant and equipment. For leases
with renewal options, the University records rent expense and
amortizes the leasehold improvement on a straight-line basis over
the initial non-cancelable lease term unless it intends to exercise
the renewal option. Once it extends the renewal option, the
University amortizes any tenant improvement allowances over the
extended lease period as well as the leasehold improvement asset
(unless the extended lease term is longer than the economic life of
the asset). The University expenses any additional payments under
its operating leases for taxes, insurance or other operating
expenses as incurred.
Other Assets
During 2010, the University entered into an agreement with an
affiliated entity to develop a new learning management system for
use by the University. Through this agreement, the University
prepaid perpetual license fees, acquired source code rights for the
software developed, and prepaid maintenance and service fees for at
least the first seven years of use for an aggregate amount of
$4,900, which was paid in full as of December 31, 2011. The
University commenced utilization of this software in October 2011.
Included in current other assets is the amount that will be
amortized in the next twelve month cycle for maintenance and
service fees and included in property and equipment is the amount
that will be amortized over fifteen years for the perpetual
licenses.
Long-Lived Assets
The University evaluates the recoverability of its long-lived
assets for impairment, other than goodwill, whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an
asset to undiscounted future net cash flows expected to be
generated by the assets. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value
of the assets.
Prepaid Royalties
In connection with the February 2004 acquisition of the assets
of Grand Canyon University from a non-profit foundation, the
University entered into a royalty fee arrangement with the former
owner in which the University agreed to pay a stated percentage of
cash revenue generated by its online programs. The University
settled all future royalty obligations with the former owner in
April 2008 when it finalized an agreement to pay $22,500 to the
former owner. Of this payment $5,920 was considered as settlement
of the future royalty payment obligation and is included in the
accompanying balance sheet as a component of “Prepaid
Royalty” and is being amortized over a period of 20
years.
In addition, in June 2004, the University entered into a
license agreement relating to the University’s use of the Ken
Blanchard name for its College of Business. Under the terms of that
agreement the University agreed to pay Blanchard a royalty
generated on net tuition from certain programs in the
University’s College of Business and to issue Blanchard
shares of common stock with the actual number of shares issued to
be contingent upon the University’s achievement of stated
enrollment levels in its College of Business during the term of the
agreement. The fair value of the shares issued to Blanchard as
part of the license agreement of $3,394 was determined at the date
it became probable that shares would then be earned and then
adjusted until the date the shares were vested. During 2014, the
University reached an agreement to cease the use of the Ken
Blanchard name for its College of Business when it renamed the
school the Colangelo School of Business; accordingly the remaining
balance of the prepaid royalty was expensed during the year ended
December 31, 2014.
Goodwill
Goodwill represents the excess of the cost over the fair market
value of net assets acquired, including identified intangible
assets. Goodwill is tested annually or more frequently if
circumstances indicate potential impairment. The Financial
Accounting Standards Board (“FASB”) has issued guidance
that permits an entity to first assess qualitative factors to
determine whether it is necessary to perform the two-step
quantitative goodwill impairment test. The University performed its
annual goodwill impairment test, by performing a qualitative
assessment. Following this assessment, the University determined
that it is more likely than not that its fair value exceeds its
carrying amount.
Share-Based Compensation
The University measures and recognizes compensation expense for
share-based payment awards made to employees, consultants and
directors, including employee stock options and restricted stock
awards. The University calculates the fair value of share-based
awards on the date of grant. The University calculates the fair
value of share-based awards to consultants on the date of vesting.
The University amortizes the share-based compensation expense over
the period that the awards are expected to vest, net of estimated
forfeiture rates. If the actual forfeitures differ from management
estimates, adjustments to compensation expense are recorded. The
University reports cash flows resulting from tax deductions in
excess of the compensation cost realized for those options (excess
tax benefits) as financing cash flows. The University reports cash
flows resulting from tax deductions that are less than the
compensation cost realized for those option (tax shortfalls) as a
noncash transaction in the consolidated statement of cash
flows.
For stock options, the University uses the Black-Scholes-Merton
option pricing model to estimate fair value. The option pricing
model requires the University to estimate certain key assumptions
such as expected life, volatility, risk free interest rates, and
dividend yield to determine the fair value of share-based awards,
based on historical information and management judgment. The
assumptions used in calculating the fair value of stock-based
awards represent the University’s best estimates, but these
estimates involve inherent uncertainties and the application of
management judgment. The fair value of the University’s
restricted stock awards is based on the market price of its common
stock on the date of grant.
Derivatives and Hedging
Derivative financial instruments are recorded on the balance sheet
as assets or liabilities and re-measured at fair value at each
reporting date. For derivatives designated as cash flow hedges, the
effective portion of the gain or loss on the derivative is reported
as a component of other comprehensive income and reclassified into
earnings in the same period or period during which the hedged
transaction affects earnings. Gains and losses on the derivative
representing either hedge ineffectiveness or hedge components
excluded from the assessment of effectiveness are recognized in
current earnings.
Derivative financial instruments enable the University to manage
its exposure to interest rate risk. The University does not engage
in any derivative instrument trading activity. Credit risk
associated with the University’s derivatives is limited to
the risk that a derivative counterparty will not perform in
accordance with the terms of the contract. Exposure to counterparty
credit risk is considered low because these agreements have been
entered into with institutions with Aa or higher credit ratings,
and they are expected to perform fully under the terms of the
agreements.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts
receivable, note receivable, accounts payable, accrued compensation
and benefits and accrued liabilities approximate their fair value
based on the liquidity or the short-term maturities of these
instruments. The carrying value of notes payable approximate fair
value based on its variable rate index. The carrying value of other
notes payable and capital lease obligations approximate fair value
based upon market interest rates available to the University for
debt of similar risk and maturities. Derivative financial
instruments are carried at fair value, determined using Level 2 of
the hierarchy of valuation inputs as defined in the FASB Accounting
Standards Codification (“Codification”), with the use
of inputs other than quoted prices that are observable for the
asset or liability. See Note 9, Derivative Instruments.
The fair value of investments, primarily municipal securities,
including municipal bond portfolios and a mutual fund holding
municipal securities, were determined using Level 1 and Level 2 of
the hierarchy of valuation inputs, with the use of quoted market
prices and inputs other than quoted prices that are observable for
the assets. The unit of account used for valuation is the
individual underlying security. The municipal securities are
comprised of city and county bonds related to schools, water and
sewer, utilities, transportation, healthcare and housing. Because
these securities are held by the University as investments,
assessment of non-performance risk is not applicable as such
considerations are only applicable in evaluating the fair value
measurements for liabilities.
The fair value of the prepaid royalty asset relating to the
settlement of future royalty payment obligations to the former
owner was determined using an income approach, based on
management’s forecasts of revenue to be generated through its
online education program using Level 3 of the hierarchy of
valuation inputs. The rate utilized to discount net cash flows to
their present values was 35%. This discount rate was determined
after consideration of the University’s weighted average cost
of capital giving effect to estimates of the University’s
risk-free rate, beta coefficient, equity risk premium, small size
risk premium, and company-specific risk premium.
Income Taxes
The University accounts for income taxes payable or refundable for
the current year and deferred tax assets and liabilities for future
tax consequences of events that have been recognized in the
University’s consolidated financial statements or tax
returns. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which the temporary
differences are expected to be realized.
The University applies a more-likely-than-not threshold for
financial statement recognition and measurement of an uncertain tax
position taken or expected to be taken in a tax return. The
University recognizes interest and penalties related to uncertain
tax positions in income tax expense. As of December 31, 2015
and 2014, the University has reserved approximately $1,706 and $0,
respectively, for uncertain tax positions, including interest and
penalties, which is classified within accrued liabilities on the
accompanying consolidated balance sheet.
The University has deferred tax assets, which are subject to
periodic recoverability assessments. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the
amount that more likely than not will be realized. Realization of
the deferred tax assets is principally dependent upon achievement
of projected future taxable income.
Commitments and Contingencies
The University accrues for a contingent obligation when it is
probable that a liability has been incurred and the amount is
reasonably estimable. When the University becomes aware of a claim
or potential claim, the likelihood of any loss exposure is
assessed. If it is probable that a loss will result and the amount
of the loss is estimable, the University records a liability for
the estimated loss. If the loss is not probable or the amount of
the potential loss is not estimable, the University will disclose
the claim if the likelihood of a potential loss is reasonably
possible and the amount of the potential loss could be material.
Estimates that are particularly sensitive to future changes include
tax, legal, and other regulatory matters, which are subject to
change as events evolve, and as additional information becomes
available during the administrative and litigation process. The
University expenses legal fees as incurred.
Revenue Recognition
Net revenues consist primarily of tuition and fees derived from
courses taught by the University online, at its over 200+ acre
campus in Phoenix, Arizona, and at facilities it leases or those of
employers, as well as from related educational resources that the
University provides to its students, such as access to online
materials. Tuition revenue and most fees from related educational
resources are recognized pro-rata over the applicable period of
instruction, net of scholarships provided by the University. For
the years ended December 31, 2015, 2014 and 2013, the
University’s revenue was reduced by approximately $163,893,
$139,962 and $111,789, respectively, as a result of scholarships
that the University offered to students. The University maintains
an institutional tuition refund policy, which provides for all or a
portion of tuition to be refunded if a student withdraws during
stated refund periods. Certain states in which students reside
impose separate, mandatory refund policies, which override the
University’s policy to the extent in conflict. If a student
withdraws at a time when only a portion, or none of the tuition is
refundable, then in accordance with its revenue recognition policy,
the University continues to recognize the tuition that was not
refunded pro-rata over the applicable period of instruction.
However, for students that have taken out financial aid to pay
their tuition and for which a return to Title IV is required as a
result of his or her withdrawal, the University recognizes revenue
after a student withdraws only at the time of cash collection.
Sales tax collected from students is excluded from net revenues.
Collected but unremitted sales tax is included as an accrued
liability in our consolidated balance sheet. The University also
charges online students an upfront learning management fee, which
is deferred and recognized over the average expected term of a
student. Costs that are direct and incremental to new online
students are also deferred and recognized ratably over the average
expected term of a student. Deferred revenue and student deposits
in any period represent the excess of tuition, fees, and other
student payments received as compared to amounts recognized as
revenue on the income statement and are reflected as current
liabilities in the accompanying consolidated balance sheets. The
University’s educational programs have starting and ending
dates that differ from its fiscal quarters. Therefore, at the end
of each fiscal quarter, a portion of revenue from these programs is
not yet earned. Other revenues may be recognized as sales occur or
services are performed.
Allowance for Doubtful Accounts
The University records an allowance for doubtful accounts for
estimated losses resulting from the inability, failure or refusal
of its students to make required payments, which includes the
recovery of financial aid funds advanced to a student for amounts
in excess of the student’s cost of tuition and related fees
that we may have to return under Title IV after a student drops.
The University determines the adequacy of its allowance for
doubtful accounts based on an analysis of its historical bad debt
experience, current economic trends, and the aging of the accounts
receivable and student status. The University applies reserves to
its receivables based upon an estimate of the risk presented by the
age of the receivables and student status. The University writes
off accounts receivable balances of active students at the earlier
of the time the balances were deemed uncollectible, or one year
after the revenue is generated. The University accelerates the
write off of inactive student accounts such that the accounts are
written off by day 150. The University continues to reflect
accounts receivable with an offsetting allowance as long as
management believes there is a reasonable possibility of
collection. Bad debt expense is recorded as an instructional costs
and services expense in the consolidated income statement.
Instructional Costs and Services
Instructional costs and services consist primarily of costs related
to the administration and delivery of the University’s
educational programs. This expense category includes salaries,
benefits and share-based compensation for full-time and adjunct
faculty and administrative personnel, information technology costs,
bad debt expense, curriculum and new program development costs
(which are expensed as incurred) and costs associated with other
support groups that provide services directly to the students. This
category also includes an allocation of depreciation, amortization,
rent, and occupancy costs attributable to the provision of
educational services, primarily at the University’s Phoenix,
Arizona campus.
Admissions Advisory and Related
Admissions advisory and related expenses include salaries and
benefits for admissions advisory personnel, and revenue share
expense as well as an allocation of depreciation, amortization,
rent and occupancy costs attributable to the admissions advisory
personnel.
Advertising
Advertising expenses include brand advertising, marketing leads and
other branding activities. Advertising costs are expensed as
incurred.
Marketing and Promotional
Marketing and promotional expenses include salaries, benefits and
share-based compensation for marketing personnel, and other
promotional expenses. This category also includes an allocation of
depreciation, amortization, rent, and occupancy costs attributable
to marketing and promotional activities. Marketing and promotional
costs are expensed as incurred.
General and Administrative
General and administrative expenses include salaries, and benefits
and share-based compensation of employees engaged in corporate
management, finance, human resources, compliance, and other
corporate functions. General and administrative expenses also
include an allocation of depreciation, amortization, rent, and
occupancy costs attributable to the departments providing general
and administrative functions.
Related party expenses
The University is a party to a revenue sharing arrangement (the
Collaboration Agreement) with Mind Streams L.L.C. (Mind Streams), a
related party, under which the University, in accordance with
applicable Department of Education guidance, pays a percentage of
net revenue that it receives from applicants recruited by Mind
Streams that matriculate at the University. The University
terminated the agreement in 2014 and the University is not
accepting any new applicants recruited by Mind Streams. The
expenses incurred in conjunction with the Collaboration Agreement
are included in admissions advisory and related expenses on our
Consolidated Income Statement.
Insurance/Self-Insurance
The University uses a combination of insurance and self-insurance
for a number of risks, including claims related to employee health
care, workers’ compensation, general liability, and business
interruption. Liabilities associated with these risks are estimated
based on, among other things, historical claims experience,
severity factors, and other actuarial assumptions. The
University’s loss exposure related to self-insurance is
limited by stop loss coverage on a per occurrence and aggregate
basis. Expected loss accruals are based on estimates, and while the
University believes the amounts accrued are adequate, the ultimate
loss may differ from the amounts provided.
Concentration of Credit Risk
The University believes the credit risk related to cash equivalents
and investments is limited due to its adherence to an investment
policy that required investments to have a minimum BB rating,
depending on the type of security, by one major rating agency at
the time of purchase. All of the University’s cash
equivalents and investments as of December 31, 2015 and 2014
consist of investments rated BB or higher by at least one rating
agency. Additionally, the University utilizes more than one
financial institution to conduct initial and ongoing credit
analysis on its investment portfolio to monitor and lower the
potential impact of market risk associated with its cash
equivalents and investment portfolio.
A majority of the University’s revenues are derived from
tuition financed under the Title IV programs of the Higher
Education Act of 1965, as amended (the “Higher Education
Act”). The financial aid and assistance programs are subject
to political and budgetary considerations and are subject to
extensive and complex regulations. The University’s
administration of these programs is periodically reviewed by
various regulatory agencies. Any regulatory violation could be the
basis for the initiation of potentially adverse actions including a
suspension, limitation, or termination proceeding, which could have
a material adverse effect on the University.
Students obtain access to federal student financial aid through a
Department of Education prescribed application and eligibility
certification process. Student financial aid funds are generally
made available to students at prescribed intervals throughout their
predetermined expected length of study. Students typically apply
the funds received from the federal financial aid programs first to
pay their tuition and fees. Any remaining funds are distributed
directly to the student.
Segment Information
The University operates as a single educational delivery operation
using a core infrastructure that serves the curriculum and
educational delivery needs of both its ground and online students
regardless of geography. The University’s Chief Executive
Officer manages the University’s operations as a whole and no
expense or operating income information is generated or evaluated
on any component level.
Recent Accounting Pronouncements
In May 2014, the FASB issued “ Revenue from Contracts with
Customers
In April 2015, the FASB issued, “ Simplifying the
Presentation of Debt Issuance Costs
In April 2015, the FASB issued, “ Intangibles-Goodwill and
Other-Internal-Use Software, Customer’s Accounting for Fees
Paid in a Cloud Computing Arrangement
In November 2015, the FASB issued, “ Income Taxes: Balance
Sheet Classification of Deferred Taxes
In January 2016, the FASB issued “ Financial Instruments
– Overall: Recognition and Measurement of Financial Assets
and Financial Liabilities
The University has determined that no other recent accounting
pronouncements apply to its operations or would otherwise have a
material impact on its consolidated financial statements. |
