| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
University and its wholly-owned subsidiaries. Intercompany
transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The accompanying unaudited interim consolidated financial
statements of the University have been prepared in accordance with
U.S. generally accepted accounting principles and pursuant to the
rules and regulations of the United States Securities and Exchange
Commission and the instructions to Form 10-Q and Article 10,
consistent in all material respects with those applied in its
financial statements included in its Annual Report on Form 10-K for
the fiscal year ended December 31, 2015. They do not include
all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements.
Such interim financial information is unaudited but reflects all
adjustments that in the opinion of management are necessary for the
fair presentation of the interim periods presented. Interim results
are not necessarily indicative of results for a full year. These
consolidated financial statements should be read in conjunction
with the University’s audited financial statements and
footnotes included in its Annual Report on Form 10-K for the fiscal
year ended December 31, 2015 from which the December 31,
2015 balance sheet information was derived.
Restricted Cash, Cash Equivalents and Investments
A significant portion of the University’s revenue is received
from students who participate in government financial aid and
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 remains 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.
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 periods 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 strong credit ratings, and they
are expected to perform fully under the terms of the
agreements.
On February 27, 2013, the University entered into an interest
rate corridor to manage its 30 Day LIBOR interest exposure related
to its variable rate debt. The fair value of the interest rate
corridor instrument as of March 31, 2016 and December 31,
2015 was $346 and $728, respectively, which is included in other
assets. The fair value of the derivative instrument was determined
using a hypothetical derivative transaction and Level 2 of the
hierarchy of valuation inputs. This derivative instrument was
originally designated as a cash flow hedge of variable rate debt
obligations. The adjustment of ($386) and ($392) for the three
months ended March 31, 2016 and 2015, respectively, for the
effective portion of the gain/(loss) on the derivatives is included
as a component of other comprehensive income, net of taxes.
The interest rate corridor instrument reduces variable interest
rate risk starting March 1, 2013 through December 20,
2019 with a notional amount of $78,333 as of March 31, 2016.
The corridor instrument’s terms permits the University to
hedge its interest rate risk at several thresholds; the University
pays variable interest monthly based on the 30 Day LIBOR rates
until that index reaches 1.5%. If 30 Day LIBOR is equal to 1.5%
through 3.0%, the University pays 1.5%. If 30 Day LIBOR exceeds
3.0%, the University pays actual 30 Day LIBOR less 1.5%.
As of March 31, 2016, no derivative ineffectiveness was
identified. Any ineffectiveness in the University’s
derivative instrument designated as a hedge is reported in interest
expense in the income statement. For the three months ended
March 31, 2016, ($4) of credit risk was recorded in interest
expense for the interest rate corridor. At March 31, 2016, the
University does not expect to reclassify gains or losses on
derivative instruments from accumulated other comprehensive income
(loss) into earnings during the next 12 months.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, investments,
accounts receivable, accounts payable and accrued compensation and
benefits and accrued liabilities expenses approximate their fair
value based on the liquidity or the short-term maturities of these
instruments. The carrying value of notes payable approximates fair
value as it is based on variable rate index. The carrying value of
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, with the use of inputs other than quoted prices that are
observable for the asset or liability.
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.
Revenue Recognition
Net revenues
consist primarily of tuition and fees derived from courses taught
by the University online, on ground at its approximately 250-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 three months ended March 31, 2016 and 2015, the
University’s revenue was reduced by approximately $53,591 and
$46,432, 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 of such money to the
Department of Education 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 the
consolidated balance sheets. 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 sheet. 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.
The University determines the adequacy of its allowance for
doubtful accounts based on an analysis of its historical bad debt
experience, current economic trends, 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 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 reflects 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.
Long-Lived Assets (other than goodwill)
The University evaluates the recoverability of our long-lived
assets for impairment 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.
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, 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.
Commitments and Contingencies
The University accrues for contingent obligations 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.
Use of Estimates
The preparation of consolidated 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.
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.
Accounting Pronouncements Recently Adopted
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
Recent Accounting Pronouncements
In May 2014, the FASB issued “ Revenue from Contracts with
Customers
In January 2016, the FASB issued “ Financial Instruments
– Overall: Recognition and Measurement of Financial Assets
and Financial Liabilities
In February 2016, the FASB issued “ Leases
In March 2016, the FASB issued “ Compensation – Stock
Compensation: Improvements to Employee Share-Based Payment
Accounting
The University has determined that no other recent accounting
pronouncements apply to its operations or could likewise have a
material impact on its financial statements. |
