| 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 and Cash Equivalents
A significant portion of the University’s revenue is received
from students who participate in government financial aid
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 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, municipal securities and certificates of deposit
as available-for-sale Available-for-sale
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
2.8% in 2017, 2.2% in 2016, and 1.9% in 2015. Interest cost
capitalized and incurred in the years ended December 31, 2017,
2016, and 2015 are as follows:
Year Ended
December 31,
2017 2016 2015
Interest incurred $ 2,656 $ 2,538 $ 1,962
Interest capitalized 487 1,210 714
Interest expense $ 2,169 $ 1,328 $ 1,248
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
Other Assets
The University developed our online delivery platform with an
affiliated entity and put this platform into full production in
2011. The University has prepaid perpetual license fees and source
code rights for the software developed, and has prepaid maintenance
and service fees. 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
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
Share-Based Compensation
The University measures and recognizes compensation expense for
share-based payment awards made to employees and directors. 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.
Stock-based compensation expense related to restricted stock grants
is expensed over the vesting period using the straight-line method
for University employees and the University’s board of
directors. Starting January 1, 2017 with the adoption of the
share-based compensation accounting standard, the University made
an accounting policy election to account for forfeitures as they
occur, prior to 2017 these forfeitures were estimated and reported
net of the expense. See Note 2, Accounting Pronouncements Adopted
in 2017.
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 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 notes
payable 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 8, Derivative Instruments.
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.
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
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 275 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, 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 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.
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.
Lease termination costs
In July 2016, the University notified a current landlord of its
intent to vacate leased space by the end of the fourth quarter of
2016. As part of that notification, the University was required to
pay a termination fee to its landlord of $3,363 which was recorded
as an expense in the third quarter of 2016. As of December 31,
2016, the University had vacated the space, and expensed an
additional $160 in the fourth quarter of 2016 related to the
remaining amounts due under the lease net of remaining deferred
rent.
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. The University regularly analyzes its reserves for incurred
but not reported claims, and for reported but not paid claims
related to self-funded insurance programs. While the University
believes reserves are adequate, significant judgment is involved in
assessing these reserves such as assessing historical paid claims,
average lags between the claims’ incurred date, reported
dates and paid dates, and the frequency and severity of claims.
There may be differences between actual settlement amounts and
recorded reserves and any resulting adjustments are included in
expense once a probable amount is known.
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 BBB 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, 2017 and 2016
consist of investments rated BBB 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.
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 $9,928 and
$3,636 of excess tax benefits which had been included as a
financing activity to an operating activity for the years ended
December 31, 2016 and 2015, respectively, 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 $16,511 for the year ended
December 31, 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 years ended December 31, 2017,
2016 and 2015, 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
years ended December 31, 2017, 2016 and 2015. 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 years ended
December 31, 2016 and 2015:
Consolidated Statement of Cash Flows Data:
December 31, 2016 December 31, 2015
As As As As
Net cash provided by operating activities $ 218,286 $ 237,761 $ 173,900 $ 185,080
Net cash provided by (used in) financing activities $ 20,655 $ 10,727 $ (15,221 ) $ (18,857 )
Net increase (decrease) in cash and cash equivalents and restricted
cash $ 22,940 $ 32,487 $ (42,202 ) $ (34,658 )
Cash and cash equivalents and restricted cash, beginning of
period $ 23,036 $ 98,420 $ 65,238 $ 133,078
Cash and cash equivalents and restricted cash, end of period $ 45,976 $ 130,907 $ 23,036 $ 98,420
Recent Accounting Pronouncements
In May 2014, the FASB issued “ Revenue from Contracts with
Customers one-year 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. |
