Related party disclosure requirement changes impacting all colleges and universities
Article | Higher Education

Related party disclosure requirement changes impacting all colleges and universities

The U.S. Department of Education (ED) published a final regulation on Oct. 31, 2023 that will go into effect on July 1, 2024. The final regulation includes changes to the financial responsibility provisions, including enhanced related party disclosure requirements, that go beyond what an institution would be required to report under Generally Accepted Accounting Principles (GAAP).

All higher education institutions, for-profit and not-for-profit, should be aware of these changes to the disclosure requirements for the audited financial statements that will be submitted to ED on or after July 1, 2024.

Why the change?

ED noted in the preamble to the final regulations that these changes are relevant to determine “whether audited financial statements should be submitted on a consolidated or combined basis” and “may also require adjustments to the calculation of an institution’s composite score.” ED also noted that for not-for-profit institutions, the disclosures help them to “identify financial impediments to nonprofit status for Title IV, Higher Education Act (HEA) purposes.”

What is changing?

Below is a summary of the GAAP requirements and ED regulations. This does not include the full text of the Accounting Standards Codification (ASC) 850 or 34 CFR §668.23 and institutions are encouraged to visit the full text for additional context.

  ASC 850 Title 34 CFR §668.23(d)(1)
When is disclosure required? 850-10-50-1: Financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. Disclosure requirements extend beyond ASC 850 to include all related parties. If there are no related parties, this must be disclosed.
What must be disclosed? 850-10-50-1: The disclosures shall include:
  1. the nature of the relationship(s) involved
  2. a description of the transactions and other such information to understand the effects of the transactions on the financial statements
  3. dollar amount of transactions for each of the periods presented
  4. Amounts due from or to related parties
Such information must include, but is not limited to, the name, location and a description of the related entity, including the nature and amount of any transactions between the related party and the institution, financial or otherwise, regardless of when they occurred.
Can I aggregate transactions? 850-10-50-2 states that notes or accounts receivable from officers, employees or affiliated entities must be shown separately and not included under a general heading such as notes receivable or accounts receivable.

850-10-50-3 indicates that in certain cases, aggregation of similar transactions may be appropriate. Sometimes, the effect of the relationship between the parties may be so pervasive that disclosure of the relationship alone will be sufficient. 
All related party transactions must be disclosed in a level of detail that would enable the Department to readily identify the related party. There is no provision that would permit aggregation of transactions or an exception to the disclosure requirements above.
Do I have to make disclosure if there are no related party transactions? No explicit requirement to disclose. 850-10-50-1 indicates that disclosure is only required for material related party transactions. If there are no related party transactions during the audited fiscal year or related party outstanding balances reported in the financial statements, then management must add a note to the financial statements to disclose this fact.
Do I have to disclose the names of the individual or entity? 850-10-50-3: If necessary to the understanding of the relationship, the name of the related party shall be disclosed. Name, location and a description of each related party.

De minimis transactions such as “routine items such as meals provided to all board members during a working lunch would not be a related party transaction since the meals would be incidental to supporting a board meeting” are not intended to be reported.

What you can do to prepare

Compiling this information for all related party transactions may be challenging for institutions, specifically related to ensuring that all transactions are captured and accounted for across campus without regard to established materiality thresholds. Additionally, this may result in lengthy disclosures and will require additional procedures by your auditor to ascertain completeness and accuracy of the information to be included in the audited financial statements.  

We recommend that institutions consider the following to be audit-ready:

  • Review existing procedures to ensure the institution has a process to identify, track and report on related party transactions, including establishing or refining internal controls to ensure completeness and accuracy of the data
  • Enhance existing procedures to ensure a clear definition of "related party" is conveyed across campus. For identified related parties, ensure the institution is gathering the additional information required by §668.23, including the name, location and description of the transaction
  • Consider the need to establish a centralized reporting mechanism
  • Report to stakeholders that such additional information will be required to be reported to ED in your annual financial statement audit
  • Engage with your auditor early to understand the additional effort required for enhanced disclosure and reporting

Colleges and universities should expect additional information on example disclosures and auditor reporting considerations as the July 1, 2024 deadline approaches.

For more information, or to learn how Baker Tilly’s higher education specialists can help your institution, contact our team.

Blaine Jasper
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