Pennsylvania Department of Education

1. Pennsylvania Department of Education Department of Private Licensed Schools Financial Reporting Overview

2. Who is the Department of Private Licensed Schools? • State Board of Private Licensed Schools • The Board of Private Licensed Schools, which regulates the Commonwealth's career and trade schools, is appointed by the Secretary of Education.  The Board is composed of 15 representatives from various types of schools and from the general public.  Three representatives are appointed from trade schools.  Three members represent correspondence schools.  Three board members represent business schools and five represent the general public.  One member from the Board is a representative of the Attorney General's office. • Division of Private Licensed Schools • Administrative Support to implement the Board’s regulations

3. Purpose of Board • Protect students, facilitate the investigation of complaints, provide for regulatory compliance visits, and to facilitate the collection of statistical data on private licensed schools. • Develop regulations to: (1) establish minimum standards and procedures for licensing and registration of schools; (2) determine levels and forms of financial responsibility; (3) establish procedures for denial, suspension, or revocation of licenses or registrations; (4) establish qualifications for instructors and administrators; and (5) establish procedures for the imposition of penalties. 

4. Financial Review Committee (FRC) • Composed of Board members • Responsible for reviewing and approving the financial information submitted • Proposing and recommending changes to the full Board for: • Reporting Requirements Referrals to RRP for disciplinary • Fines Action • Surety Bond Requirements

5. Requirements to File a Financial Report(from the Private Licensed School Act, Act 174 of 1986) • Application for School License or Registration - § 73.52 • (12)  A financial report under §  73.53 (relating to financial resources).   • (13)  Evidence of surety under §  73.54 (relating to surety). • Reportable events - § 73.201 • (1) The financial condition of the school has changed materially as the term ‘‘material change’’ is understood in accordance with standard accounting practice. • (2)  The school’s form of surety has or is about to lapse or the level of surety has become insufficient to protect the contractual rights of students. • (3)  The school is the named voluntary debtor in a petition in bankruptcy filed under 11 U.S.C.A. § §  101—1330, known as the Federal Bankruptcy Act, or has made an assignment for the benefit of creditors or has become insolvent. If a licensee is named as an involuntary debtor, the licensee shall notify the Board when a court of appropriate jurisdiction declares the licensee bankrupt. • (6)  The school is to be subject to a Title IV—section 487(c) of the Higher Education Act of 1965 (20 U.S.C.A. §  1094)—audit initiated by the United States General Accounting Office. • (7)  Another event in a section of this chapter which imposes on a school an obligation to notify the Board, subject to the specific reporting requirements of the section.

6. Who Needs to Submit Financial Statements? • Apply for a License • Renewal of License (initially 1 year / then bi-annually) • Application for Scholarship • Application for Change of Ownership • Quarterly Reporting • Notification from Regulatory Bodies • Recommendation from Board Staff • This Overview does not cover Statistical Survey requirements

7. Types of Financial Reports • Pro-forma • PDE-2006 • PDE-2006 (Annual) • PDE-2006 (Qtrly) • New Schools* • License Renewal / Scholarship / Change of Ownership * • Quarterly Reporting * New Schools and Change of Ownership are automatically placed on Quarterly Reporting for the 1st four quarters

8. It all Starts with the Application to become a New School • All schools are required to submit financial documentation as a component of the license application (24 P.S. § 6507).  • The financial documentation is required in order to demonstrate that the school has the financial solvency that will be required to successfully launch the operation and prevent negative consequences for students (22 Pa. Code § 73.53). • Each application must include documentation that demonstrates that the school is appropriately capitalized, that accurate assessments have been made regarding operating costs, and that the individual, partnership, or corporation that owns the school is solvent and has the financial capacity to support the operation.

9. New School - continued • The Financial Review Committee reviews the financial statements and supporting documentation before each Board meeting.  A license cannot be issued until the Financial Review Committee approves the financial condition of the applicant school. • Submit actual financial statements specific to the school on the PDE-2006 form.  This statement should be only for the school site that is applying for licensure (i.e. stand alone statement). The financial statements should not include other schools and reflect actual results. • All financial documentation must be less than six months old on the Board meeting date at which the application will be reviewed

10. New School - continued • Provide a pro-forma financial statement that accurately and realistically reflects the revenue and expenditures anticipated prior to opening and the first 12 months of operation (post opening.)  This pro-forma statement should include all costs associated with the operation of the school, including facilities, utilities, advertising, printing costs, staffing, staff benefits, insurance, and all other expenses.  Failure to accurately anticipate reasonable expenses or unrealistic revenue projections can result in deferral or denial by the Financial Review Committee. 

11. New School - continued • All applicant schools must demonstrate the financial solvency of the owners.  If the school is a proprietorship (single owner) or partnership, the application should include personal financial statements.  If the school is owned by a corporation, corporate financial statements must be provided.  Audited or reviewed statements are appreciated, but not required, unless the committee specifically requests an audited or reviewed statement.

12. New School - continued • Financial statements provided for new school applications are expected to meet the following criteria: • A current ratio of 1:1 (current assets to current liabilities) • A positive net worth, accompanied by a reasonable debt to equity ratio • Net profit in one of the last two fiscal years • Sufficient cash reserves to support 4 months of operation without depending on tuition revenue. • Accurate and realistic reflection of the revenue and expenditures anticipated prior to opening and the first 12 months of operation post opening.

13. New School - Disclaimer • Information is provided to guide schools and applicants in financial planning and financial reporting.  However, the Board and the Financial Review Committee may look at any other indicator to determine stability and are not limited to or bound by the criteria outlined in this presentation.

14. PDE-2006 • Forms and instructions located at: ftp://ftp.state.pa.us/pub/PDE_PUBLIC/PLS%20Financial/ • A guide for the FRC to assess the financial strength and solvency of a school / institute • Measures the current condition and ability to operate in the future through: • Income Statement (page 1)- Revenue and Expenses • Balance Sheet (page 2) – Assets, Liabilities and Stockholder’s Equity • Disclosure Information (page 3) – Methodologies, Terms of Significant Notes, Parent Company Information, Pending regulatory/legal Issues and Explanations • Key Indicators (page 4) – Individual program information

15. PDE-2006 – General Guidelines • All financial information must conform with Generally Accepted Accounting Principles (GAAP) • The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information. • Imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes. GAAP cover such things as revenue recognition, balance sheet item classification and outstanding share measurements. • Still Room for interpretation and different methodologies within GAAP

16. PDE-2006 – General Guidelines • Key concept of GAAP is Accrual Accounting • An accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received). This method allows the current cash inflows / outflows to be combined with future expected cash inflows / outflows to give a more accurate picture of a company's current financial condition. 

17. PDE-2006 – Accrual Accounting Revenue A student starts a six month program on July 1. He/she pays his/her full tuition on October 1st. Expense A school pays their property insurance every year on April 1st. Insurance covers from May 1 – April 30 of the following year. Accrual Recognized when earned / used Revenue – recognize 1/6th of the tuition each month for 6 months Expense – recognize 1/12th of the costs of the insurance each month from May through April Cash Recognized when paid / collected Revenue – recognize the full tuition when paid in October Expense – recognize the full cost of the insurance when paid in April

18. PDE-2006 – Balance Sheet • Three Sections – • Assets – what a company owns • Liabilities – what a company owes • Stockholder’s Equity – the amount invested by shareholder(s) • Measurement of a company at a particular point in time (e.g. June 30) • Called a Balance Sheet because the 2 sides must balance out (Assets = Liabilities + Stockholder’s Equity) • Balances are “permanent”

19. PDE-2006 – Assets Assets • Split into Current and Long-Term • Current Assets – can be converted to cash or consumed < 1 year • Cash (on hand* and restricted) • Accounts Receivable (student* and other) • Inventory • Non-Current Assets - > 1 year • Property and Equipment (Gross and Accumulated Dep) • Prepaid Expenses • Goodwill

20. PDE-2006 – Liabilities Liabilities • Split into Current and Long-Term • Current Liabilities – need to be settled / paid < 1 year • Accounts Payable / Notes Payable • Tuition Refunds Payable • Current Potion of Long-Term Debt • Unearned Tuition* • Long-Term Liabilities - > 1 year • Notes or Bonds Payable • Due To / From Parent

21. PDE-2006 – Stockholder’s Equity Stockholder’s Equity (also called net worth or owner’s equity) • Stockholder’s Equity represents the capitalization and the retained earnings of the organization • Capitalization – capital contributed to an organization (either through stock or direct paid-in contributions) less any re-purchases • Retained Earning – the amount of net income that an entity retains/re-invests back into its operations less any dividends paid

22. PDE-2006 – Capitalization • Ways to Capitalize • Cash investment – either through the purchase of stocks or direct capital contribution (Other Equity) • Contribution of equipment, building, or other asset • Note – Cash or Contribution of an Asset represents a capital investment made in the organization to purchase assets, pay expenses or use in day to day operations of the business. Capital is not expected to be paid back. • Issuance of a Note Payable • Note – Notes payable are recorded as a liability and are paid back over time and place an additional burden on the organization

23. PDE-2006 – Capitalization • Accounting for Capitalization • Cash Contribution Cash Debit $25,000 Common Stock/Other Equity Credit $25,000 • Contribution of equipment, building, or other asset Fixed Asset Debit $50,000 Common Stock/Other Equity Credit $50,000 • Note Payable* Cash Debit $30,000 Note Payable Credit $30,000 * Terms of the note payable must be disclosed on page 3 of the PDE-2006 (example 5 year, 8% note payable to Bob Smith, proprietor. Note due on demand)

24. PDE-2006 - Retained Earnings • Retained Earnings: Earnings (Loss) for Year - reflects the net income / (loss) from the Income Statement • Dividends – the payout of any earnings to shareholders • Retained Earnings: Ending Balance is closed out to the Beginning Balance each year

25. PDE-2006 – Balance Sheet • Key Aspects • Balance Sheet must Balance • Current Ratio > 1:1 • Retained Earnings – Current Year = Net Income for Current Year • Cash, Total Assets, Unearned Tuition, Retained Earnings and Total Stockholder’s Equity must be > $0 or provide explanation • Capitalization – How well and for how long can an entity sustain operations

26. PDE-2006 – Income Statement • Represents the financial performance resulting from the operations of the entity • Two Components • Revenue • Expense • Measurement of a company’s performance over a period of time • Quarter Ending – a three month period • Year to Date – range from 3 months to 12 months depending upon year end date • Balances are closed out every year

27. PDE-2006 – Income Statement • PDE-2006 Income Statement is split into 2 sections: • Educational Income – tuition revenue less expenses incurred in operating (or running) the school • Other Income and Expense – revenue and expenses recognized from non-school / operating activities

28. PDE-2006 – Revenue • It all starts with the Revenue – Tuition • In order to be compliant with GAAP regs, Revenue must recognized when earned, not collected or billed (revenue recognition) • Deduct any tuition refunds recognized in current period (regardless of who it is owed to or when it will be paid) • Deduct cost of books and/or supplies given to students as part of the program

29. PDE-2006 – Income StatementGross Tuition Example Example – School A starts 10 students on January 1st. They charge $2,000 tuition for the 52 week program. There were no other starts in the year and half the students paid their full tuition by the end of the 1st quarter. The School’s financial statements would reflect the following on March 31: Balance Sheet Cash A/R – Student Unearned Tuition Income Statement Gross Tuition Asset $10,000 Asset $10,000 Liability $15,000 Revenue $5,000

30. PDE-2006 – Gross Tuition Why did we Recognize $5,000 of Tuition Revenue? 10 students * $2,000 = $20,000 (total revenue) $20,000 / 12 months (for the 52 week program) = $1,666.67 (revenue earned per month) $1,666.67 * 3 months (from January 1 – March 31) = $5,000

31. PDE-2006 – Gross Tuition ExampleT-Accounts

32. PDE-2006 – Expenses • Recognize all expenses incurred in operating the school – -Salaries and Benefits -Classroom Supplies -Occupancy Expense (rent, building depreciation) -Utilities -Bad Debt -Advertising -Taxes • Include school related activity only • Do not include consolidated results • Do include school’s portion of shared costs or management fees • Expenses must be on accrual basis

33. PDE-2006 – Income StatementAccrued Expense Example Example – School B pays their utility bill each month. The utility bill, which covered the period February 15 – March 14, was $560. The School’s financial statements would reflect the following on March 31: Balance Sheet Cash A/P Income Statement Utilities* *part of Occupancy Expense Asset ($560) Liability $340 Expense $900

34. PDE-2006 – Income StatementAccrued Expense Example • Why did we accrue $340? • How it was calculated – The $560 bill was for a 28 day period (February 15-March 14). That works out to $20/day ($560/28). There are 17 days remaining in the month (March 15-March 31). 17 days * $20 = $340. • The $340 represents that amount of utilities used by the organization but not yet paid. The amount will be paid with the next bill (around April 15th). • Any expense that is likely to occur and can be estimated, must be accrued.

35. PDE-2006 – Income StatementAccrued Expense Example #2 Example – School C offers a $2,400 bonus to its school director if she achieves her targets. It is reasonable to expect that the director will earn her bonus. The bonus is paid out January of the next year (once the results for the year are final). The School’s financial statements would reflect the following at the close of each month: Balance Sheet A/P Income Statement Administrative Expense Liability $200 Expense $200

36. PDE-2006 – Income StatementAccrued Expense Example #2 Example – If at the end of the year it is determined that the Director will not earn her bonus, the School’s financial statements would reflect the reversal of 11 months of bonus accruals (11 * $200 = $2,200) at December 31: Balance Sheet A/P Income Statement Administrative Expense Liability ($2,200) Expense ($2,200)

37. Closing Entries • Temporary accounts (Income and Expense accounts) are closed out each period • Revenue and Expense Accounts are closed out to the Income Summary • Income Summary is closed out to the Retained Earnings: Earnings (Loss) for Year • Retained Earnings: Ending Balance closed out to the Retained Earnings: Beginning Balance at the end of the year

38. Closing Entries - Example $900 (1) __________ $900

39. Disclosure Information • Valuation Methodologies • Inventory, Depreciation, Revenue • Default Rate • % of school borrowers (i.e. students) that enter repayment • Terms of Notes Payable / Receivable • Parent Company Information • Adverse Findings / Legal Action • Explanations for Negative / $0 Balances

40. Key Indicators • Measures the performance of each program • Accreditation – Yes or No • Ending Student Population • Students on Temporary Leave • Attrition Rate • Graduation Rate • Placement Rate • Instructions on Key Indicator measurements are meant to assist the schools. Use your accrediting / regulatory body calculations where possible

41. Key Indicators • Attrition Rate – measures the % of students who permanently withdraw from a program 40 students withdraw during the year (120 students beginning+80 starts+10 re-entries) = 19%

42. Key Indicators • Graduation Rate – measures the % of students who receive a certificate or diploma compared to the full enrollment 80 students graduating (120 students beginning+80 starts+10 re-entries) = 38%

43. Key Indicators • Placement Rate – measures the proportion of students who receive full time employment in their intended field compared to the number of graduates 70 students employed 90 Students eligible for employment = 78%

44. Examples of PDE-2006 Submissions