Is your deferred education revenue audit-proof?
The recognition of revenue in education has undergone a shift in recent years. As a result of regulatory measures to stop bad egg providers leaving students out of pocket as well as broader accounting rule changes, educators have had to become experts in deferred revenue.
This has made things interesting for finance. Educators have needed to establish processes for determining what revenue they can recognise and when. At scale, this can be complex. Often, finance have resorted to quasi-manual calculations or ‘close enough’ estimates rather than exact results.
Fortunately, there are better ways to survive an audit. The JR Plus and VETtrak Cloud Student Management Systems, for example, use enrolment data to provide finance teams with absolute confidence in the revenue amount they can consider as ‘earned’ on any given day across their operation.
A summary of the changes to deferred revenue in education
The recognition of revenue in education has changed because of two main developments.
- Tuition Protection Service (TPS)
The TPS is an initiative of the Australian Government designed to safeguard students who are paying educators to deliver tuition. Assisting both international and eligible domestic students accessing VET Student Loans (VSL), or a FEE-HELP or HECS-HELP (HELP) loan, it provides a mechanism to protect students against providers who are unable to fully deliver a course of study.
The TPS is a result of instances where students had paid fees upfront but were then unable to gain a fee refund when their education provider went out of business or did not deliver the tuition. Now, students can receive a refund of unspent tuition fees, a re-credit of their loan for open units of study (VSL and HELP) or go on to complete studies in another course at another education provider.
- Accounting Revenue Standards
A new revenue standard, AASB 15 Revenue from Contracts with Customers, has applied to every industry and business in Australia since 1 January 2018. While designed to deal with a range of complex financial arrangements, from contracts that bundle goods and services to contingent pricing or licensing arrangements, it included rules on delivery of goods or services delivered over time.
Education businesses have been affected by this change. As elements of an educator’s service are provided over time – such as tuition – this new best practice accounting revenue standard required educators to ensure they were only utilising revenue from those services that had been delivered to a student, even if they have already taken an upfront payment for a longer course of study.
How are educators handling deferred revenue changes?
Managing deferred or unearned revenue essentially means that, for those elements of revenue that are earmarked as deferred, funds are parked in a holding account. An educator can incrementally recognise those funds (typically done on a monthly cycle) as those services are delivered to students. They are amortised over the life of service delivery in line with revenue best practices.
Enrolment fees are one example of a payment that required clarification after the release of the new accounting rules. Advice from Australian Accounting Standards Board was that these should be recognised over the life of a student’s education. Other charges that represent a point in time exchange of goods or services could be classified as non-deferred and utilised immediately.
Calculating the exact amount of deferred revenue available to an educator on a particular day can be problematic. Often, finance teams have sourced extracts from their SMS and undertaken an onerous process of calculation and averaging each month themselves. However, this was an inexact science that could leave providers vulnerable, as the resultant figures in some cases weren’t 100% accurate.
Using an SMS to gain deferred revenue certainty
ReadyTech’s Student Management Systems JR Plus and VETtrak Cloud allow finance teams to take an enrolment up (rather than finance system down) approach to deferred revenue. Using enrolment data, it shows granular data on earned revenue – for any student on any given day.
Because tuition payments are typically made upfront but are classified as deferred revenue, JR Plus will automatically amortise the cost of tuition over the length of an enrolment (accounting for non-tuition days like weekends), to generate a daily rate that providers can validate as earned revenue.
Finance teams can run a simple query each month to generate earned revenue. They can export this as a .CSV compliance artifact which they can use in an audit. JR Plus also streamlines access to this function (and enhances revenue visualisation) through its purpose-built Finance Hub.
With hundreds, if not thousands of enrolments in flight on any given day, how reassuring would it be to know the data you need is right at your fingertips?’
Learn more about what JR Plus and Finance Hub can offer your education and training provider.