| 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 10-K
Restricted Cash and Cash Equivalents
A significant portion of the University’s revenue is received
from students who participate in government financial aid and
assistance programs. Restricted cash and cash equivalents 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 and cash equivalents.
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 securities as
available-for-sale Available-for-sale
Derivatives and Hedging
Derivative financial instruments are recorded on the balance sheet
as assets or liabilities and re-measured
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 June 30, 2017 and December 31,
2016 was $372 and $490, 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 $119 and $526 for the six months
ended June 30, 2017 and 2016, respectively, for the effective
portion of the losses 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 $70,000 as of June 30, 2017.
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 June 30, 2017, 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. At June 30, 2017, 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, 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, were
determined using Level 2 of the hierarchy of valuation inputs,
with the use of 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.
Revenue Recognition
Net revenues consist primarily of tuition and fees derived from
courses taught by the University online, on ground at its over 270
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 pro-rata
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 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 Adopted in 2017
In March 2016, the FASB issued “Compensation – Stock
Compensation: Improvement to Employee Share-Based Payment
Accounting,” to simplify certain aspects of the accounting
for share-based payment transactions to employees. The new standard
requires excess tax benefits and tax deficiencies to be recorded in
the consolidated statements of income as a component of the
provision for income taxes when stock awards vest or options are
exercised. In addition, it eliminates the requirement to reclassify
cash flows related to excess tax benefits from operating activities
to financing activities on the consolidated statements of cash
flows. The standard also provides an accounting policy election to
account for forfeitures as they occur, allows us to withhold more
of an employee’s vesting shares for tax withholding purposes
without triggering liability accounting, and clarifies that all
cash payments made to tax authorities on an employee’s behalf
for withheld shares should be presented as a financing activity on
our consolidated cash flows statement.
The University adopted the new guidance in the first quarter of
2017 which required us to reflect any adjustments as of
January 1, 2017. Upon adoption, excess tax benefits or
deficiencies from share-based awards or options are now reflected
in the consolidated statement of income as a component of the
provision for income taxes, whereas previously they were recognized
in equity. The University elected to account for forfeitures as
they occur, rather than estimate expected forfeitures. The net
cumulative effect of this change increased additional paid-in
The University adopted the provisions of the standard impacting the
cash flow presentation retrospectively, and accordingly, to conform
to the current period presentation, we reclassified $5,484 of
excess tax benefits which had been included as a financing activity
to an operating activity for the six months ended June 30,
2016 in our consolidated statement of cash flows. The presentation
requirement for cash flows related to employee taxes paid for
withheld shares had no impact on our consolidated statement of cash
flows since such cash flows have historically been presented as a
financing activity.
Adoption of the provision of the new standard related to income
taxes was adopted prospectively and resulted in a reduction to our
provision for income taxes of $13,752 for the six months ended
June 30, 2017, due to the recognition of excess tax benefits
from restricted stock awards that vested or stock options that were
exercised in 2017. Our restricted stock awards vest in March each
year so the excess tax benefits and deficiencies is greatest in the
first quarter each year. The inclusion of excess tax benefits and
deficiencies as a component of our income tax expense will increase
volatility within our provision for income taxes as the amount of
excess tax benefits or deficiencies from share-based compensation
awards are dependent on our stock price at the date the restricted
awards vest, our stock price on the date an option is exercised,
and the quantity of options exercised.
In August 2016, the FASB issued a new standard that clarifies how
certain cash receipts and cash payments are presented and
classified in the consolidated statement of cash flows. The
University elected to early adopt this guidance in the first
quarter of 2017 on a retrospective basis. There was no
reclassification impact of the adoption on our consolidated
statement of cash flows for the six months ended June 30, 2017
and 2016, as our historical statements have been presented in
accordance with this new guidance.
In November 2016, the FASB issued a new standard that requires
restricted cash and cash equivalents to be included with the amount
of cash and cash equivalents that are reconciled on the
consolidated statement of cash flows. The University elected to
early adopt this guidance in the first quarter of 2017 on a
retrospective basis, and accordingly, to conform to the current
period presentation, we reclassified our restricted cash and cash
equivalents to be included in the total of cash and cash
equivalents presented at the bottom of our consolidated statement
of cash flows for both the beginning and ending periods for our six
months ended June 30, 2017 and 2016. As a result, the amount
of the change in our net cash provided by operating activities no
longer includes the impact of the change in restricted cash and
cash equivalents for either period.
The following table summarizes the effects related to the adoption
of both accounting standards (share-based compensation and
restricted cash and cash equivalents) for the six months ended
June 30, 2016:
Consolidated Statement of Cash Flows Data:
June 30, 2016
As reported As adjusted
Net cash provided by operating activities $ 114,024 $ 112,464
Net cash used in investing activities $ (106,710 ) $ (104,210 )
Net cash provided by financing activities $ 14,204 $ 8,720
Net increase in cash and cash equivalents and restricted cash $ 21,518 $ 16,974
Cash and cash equivalents and restricted cash, beginning of
period $ 23,036 $ 98,420
Cash and cash equivalents and restricted cash, end of period $ 44,544 $ 115,394
Recent Accounting Pronouncements
In May 2014, the FASB issued “ Revenue from Contracts with
Customers one-year Revenue from Contracts with
Customers pro-rata
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 right-of-use
In June 2016, the FASB issued “ Financial Instruments
– Credit Losses: Measurement of Credit Losses on Financial
Instruments
The University has determined that no other recent accounting
pronouncements apply to its operations or could otherwise have a
material impact on its consolidated financial statements. |
