| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company 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 Company 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 10-K
Restricted Cash and Cash Equivalents
A significant portion of the Company’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 Company 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 Company considers its investments in municipal bonds, mutual
funds, municipal securities, certificates of deposit and commercial
paper 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 Company to manage its
exposure to interest rate risk. The Company does not engage in any
derivative instrument trading activity. Credit risk associated with
the Company’s derivative 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.
On February 27, 2013, the Company 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, 2018 and December 31,
2017 was $829 and $509, 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 $335 and $119 for the six months
ended June 30, 2018 and 2017, respectively, for the effective
portion of the gains and 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 $63,333 as of June 30, 2018.
The corridor instrument’s terms permit the Company to hedge
its interest rate risk at several thresholds; the Company 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 Company pays 1.5%. If 30 Day LIBOR exceeds 3.0%, the
Company pays actual 30 Day LIBOR less 1.5%.
As of June 30, 2018, no derivative ineffectiveness was
identified. Any ineffectiveness in the Company’s derivative
instrument designated as a hedge is reported in interest expense in
the income statement. At June 30, 2018, the Company 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. 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.
The fair value of investments, primarily municipal securities, was
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
On January 1, 2018, the Company adopted “Revenue from
Contracts with Customers” using the modified retrospective
method applied to all contracts. Net revenues consist primarily of
tuition, net of scholarships, and fees derived from courses taught
by the Company online, on ground 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
Company provides to its students, such as access to online
materials. Tuition revenue is
recognized pro-rata
The following table presents our revenues disaggregated by the
nature of transfer of services for the six months ended
June 30, 2018:
Tuition revenues $ 522,430
Ancillary revenues (housing, meals, fees, golf, hotel, arena,
other) 91,245
Total revenues 613,675
Scholarships (101,176 )
Net Revenues $ 512,499
The Company’s receivables represent unconditional rights to
consideration from its contracts with students; accordingly,
students are not billed until they start attending a course and the
revenue recognition process has commenced. Once a student has been
invoiced payment is due immediately. Included in each invoice to
the student are all educational related items including tuition,
net of scholarships, housing, educational materials, fees, etc. The
Company does not have any contract assets. The Company’s
contract liabilities are reported as deferred revenue and student
deposits in the consolidated balance sheets. 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 consolidated income statement and are
reflected as current liabilities in the accompanying consolidated
balance sheets. The Company’s education 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. The majority of its
traditional ground students do not attend courses during the summer
months (May through August), which affects our results for our
second and third fiscal quarters.
The Company has identified a performance obligation associated with
the provision of its educational instruction and other educational
services, housing services, and other academic related services and
uses the output measure for recognition as the period of time over
which the services are provided to our students. The Company has
identified performance obligations related to its hotel, golf
course, restaurants, sale of branded promotional items and other
ancillary activities and recognizes revenue at the point in time
goods or services are provided to its customers. The Company
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 Company’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 Company continues to recognize the tuition
that was not refunded pro-rata
Allowance for Doubtful Accounts
The Company 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 Company 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 Company applies reserves to its
receivables based upon an estimate of the risk presented by the age
of the receivables and student status. The Company 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 Company accelerates the write off of inactive
student accounts such that the accounts are written off by day 150.
The Company 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 Company evaluates the recoverability of its 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 Company’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 Company’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 Company accrues for contingent obligations when it is probable
that a liability has been incurred and the amount is reasonably
estimable. When the Company 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 Company records a liability for the estimated loss.
If the loss is not probable or the amount of the potential loss is
not estimable, the Company 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 Company 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 Company 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 Company’s Chief Executive
Officer manages the Company’s operations as a whole and no
expense or operating income information is generated or evaluated
on any component level.
Accounting Pronouncements Adopted in 2018
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 2018, the FASB issued “ Income
Statement – Reporting Comprehensive
Income.”
Recent Accounting Pronouncements
In February 2016, the FASB issued “ Leases right-of-use
In August 2017, the FASB issued “Targeted Improvements to
Accounting for Hedging Activities.” This standard targets
improvements in the hedge relationship documentation, testing and
disclosures for derivatives. This standard is effective for fiscal
years, and interim periods within those years, beginning after
December 15, 2018. Early adoption is permitted for fiscal
years and interim period within those years, beginning in August
2017. Accordingly, the standard is effective for us on
January 1, 2019 and we are currently evaluating the impact
that the standard will have on our consolidated financial
statements.
The Company has determined that no other recent accounting
pronouncements apply to its operations or could otherwise have a
material impact on its consolidated financial statements. |
