To Separate or Not: Recognizing Revenue from Tuition and Housing Contracts
FASB’s new revenue recognition standard puts tuition and housing contracts in the limelight. Because your higher education institution has to apply an onerous set of criteria to determine when and how you recognize revenue from customer contracts, you are obliged to consider if your tuition and housing arrangements should be combined or treated as two separate contracts with distinct commercial objectives.
The determination is important because, if combined, institutional aid must be allocated between tuition and housing in deciding the transaction price to be allocated to the performance obligations. The presentation on the statement of activities is also impacted, as tuition and housing is then considered one revenue steam; it is no longer appropriate to present housing and auxiliary activities separately, as many institutions have done in prior years.
FASB says new rules are not fundamentally different from old rules
Under Topic 606, for contracts to be combined they must meet one of the following conditions:
- Be negotiated as a package with a single commercial objective
- Have payment considerations in one contract that depend on the price or performance of the other contract
- Together promise goods or services that amount to a single performance obligation
The National Association of College and University Business Officers (NACUBO) recently took up the subject in a position paper for FASB’s review and comment. It argued that, in a many cases, the facts and circumstances indicate that there are two distinct contracts because the contracts are not negotiated and priced as a package with a single commercial objective.
FASB held a meeting to publicly comment on NACUBO’s positon, agreed that it isn’t inconsistent with the guidance in Topic 606, and consented that it would be a “reasonable approach” to not combine tuition and housing contracts. One member also indicated that the accounting in this space is not intended to be “fundamentally different” between Topic 605 (old rules) and Topic 606 (new rules). Therefore, an institution should consider what facts and circumstances led it to conclude that its tuition and housing contracts had different commercial objectives under the old rules. These facts are probably treated the same under the new rules.
Consider Topic 606 criteria in light of facts and circumstances
There are two viewpoints on making the determination whether tuition and housing contracts with customers should be combined:
- Housing lacks economic substance because it can only be utilized by students who are enrolled at an institution. As a result, tuition and housing contracts need to be combined for the application of Topic 606.
- In many institutions, management does not consider tuition and housing to have the same commercial objective and, therefore, price these services separately. The price of one service does not depend on a customer choosing to utilize both services. The use of housing facilities is not a requirement for obtaining a degree. As a result, Topic 606’s criteria are not met, and tuition and housing contracts are not required to be combined; they should be assessed under the guidance of Topic 606 as separate contracts with customers.
Facts and circumstances are important, and there is not a one-size-fits-all conclusion. However, based on Topic 606’s criteria, each contract should be reviewed to determine whether it has a single commercial objective. This means your college or university must understand and document how tuition and housing rates are determined, the requirements to utilize residential services, and whether residential services are necessary in the attainment of a degree.
Essentially, educational and residential services should not be combined when:
- Housing is not a requirement for all students for the entire time of study
- Students can obtain a degree while commuting to campus
- Exemptions from the requirement to live on campus are given, such as when living with family members or being married
- Tuition and housing are priced independently by the business office
- The price of educational services and residential services are not dependent on one another
And, typically, educational and residential services meet Topic 606’s criteria and must be combined when:
- Housing is a part of the education experience and a requirement to obtain a degree
- International educational experiences depend upon housing to complete the program
- Educational and housing prices are dependent on one another
Allocate institutional aid accordingly on financial statements
If, based on facts and circumstances, you determine that your tuition and housing contracts should not be combined, institutional aid does not need to be allocated between tuition and housing and can be presented separately on the statement of activities. Some colleges and universities offer institutional aid for housing separately from tuition. In these cases, institutional aid earmarked for housing should be accounted for as reducing the transaction price of residential services.
If your contracts are combined, educational and residential services may represent two performance obligations. Institutional aid should therefore be allocated between tuition and housing when determining the transaction price to be allocated to the two performance obligations.
How we can help
CLA’s higher education professionals live and breathe the revenue recognition rules. We can help you evaluate your contracts, consider your facts and circumstances, apply the rules, and appropriately recognize revenue from your tuition and housing contracts.
- Michael Johns