Before evaluating the specific guidance on lost revenues provided by ED, it is important to note that ED also released guidance on March 19, 2021 that specifies that HEERF II funds can be spent on costs that were incurred from March 13, 2020 (the date of the declaration of the COVID-19 national emergency) through one year from the date of the supplemental award for HEERF II. This is a significant change, as initially, ED had communicated that costs could only be incurred from December 27, 2020 (the date the CRRSAA was passed) through one year from the date of the supplemental award for HEERF II.
The guidance provided by ED in the March 19, 2021 FAQs on lost revenues includes the following key takeaways:
- Lost revenues refers to those revenues an institution of higher education otherwise expected but were reduced or eliminated as a result of the novel coronavirus 2019 (COVID-19) pandemic. As such, lost revenues can only be estimated.
- Potential sources of lost revenue associated with the COVID-19 pandemic may include, but are not limited to, the following:
- Academic sources – Tuition, fees, room and board, supported research, summer terms and camps
- Auxiliary services sources – Food services, dormitory services, cancelled events, facility rental revenues, childcare services, bookstore revenue, parking revenues, lease revenue, royalties, other operating revenues
- Potential sources of lost revenue that are not allowable to be reimbursed under HEERF II guidance are the following:
- Athletic fee revenues associated with capital outlays for athletic fees, such as student fees used to fund capital outlays for athletic fees or to pay down debt associated with athletic facilities capital outlays.
- Revenues associated with acquisition of real property (including bond revenues)
- Contributions or donations to the institution
- Revenues associated with marketing or recruitment activities
- Revenues associated with sectarian instruction or religious worship
- Alcohol sales
- Investment income (including endowment and quasi-endowment revenue)
- Lost revenues must be associated with the COVID-19 pandemic, therefore if there was already a planned reduction in revenue as a result of a decision by the institution before the COVID-19 pandemic, this reduction in revenue would not be allowable.
- Examples would be the planned closure of a dormitory or ending a degree program that was already planned before the COVID-19 pandemic that causes revenue to decline.
- Lost revenues can be evaluated from March 13, 2020 through the end of the HEERF grant performance period.
- The institution can charge lost revenues to its grant at the end of the period that it is using to estimate lost revenue.
- Lost revenues that are claimed for the period March 13, 2020 through June 30, 2020 and within the period July 1, 2020 through June 30, 2021 are expected to be reported on the FY 2021 SEFA as federal expenditures.
- Institutions can use any reasonable methodology to calculate their estimated lost revenue. Some examples of how to calculate lost revenue are as follows:
- A comparison with a baseline year of a fiscal year prior to the March 13, 2020 national emergency declaration
- For example, an institution could use their FY19 year to compare for both FY20 and FY21 declines in revenue.
- A year-over-year comparison using the prior year
- This could be particularly advantageous for institutions that had an increase in revenues in FY20, but saw a decline between FY20 and FY21.
- A semester-over-semester comparison using the prior year semester
- A comparison using a 3- or 5-year combined average revenue as a baseline revenue
- A comparison to previously budgeted revenue or projected revenue for the period
- Lost revenues for which reimbursement is requested through HEERF funds cannot include any refunds previously provided to students that were already covered by HEERF I funds.
- Lost revenues for the HEERF program cannot include the estimated amount of lost revenues for which reimbursement was received under another federal program.
- Institutions should adequately document its estimate of lost revenue, including its rationale, calculations, methodology, underlying data, and budgets or projections used to determine the amount of lost revenue.
- Specific costs or expenses that the lost revenue covered do not need to be assigned to the HEERF program.
The Institutional Portion of the HEERF III funding that was passed within the ARPA is generally expected to follow the same guidance for HEERF II with some specific exceptions in relation to the administration of the program and certain allowable costs. However, lost revenues are included as an allowable cost for HEERF III. It can be anticipated that HEERF III may follow the same lost revenue guidance, although ED may require applications or certification and agreement forms to be completed for HEERF III that could contain additional guidance.
Given that guidance on GAAP revenue recognition for HEERF funding related to lost revenues may evolve or be clarified over the next few months, institutions should discuss with their financial consultants or auditors the impact of this to the financial statements and SEFA. Institutions should also consider any other federal programs such as the Employee Retention Credit when evaluating the timing of expenditure for the HEERF funding.
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A significant change for HEERF II funds compared to the HEERF I funds is that lost revenues are now specifically considered to be allowable costs. Although lost revenues are a significant potential source for allowable costs for many institutions, there was very little guidance released by The Department of Education (ED) until March 19, 2021, when ED released an update to the existing FAQs and a specific FAQ document on lost revenues.