What is lost revenue according to the Department of Education?

On March 19, 2021, the Department of Education (DOE) issued long-awaited guidance clarifying its definition of lost revenue.  In conjunction with their clarification, the DOE also noted that institutions are now able to use a longer window to determine the full impact of lost revenue that an institution experienced.  As noted by the DOE, you do not need to allocate expenses to lost revenue since the expenses are lost revenue.  This may be advantageous to institutions that are looking to maximize other items such as Paycheck Protection Program forgiveness or Employee Retention Tax Credits since you cannot double-dip on expenses.

Similar to HEERF I, the DOE has attempted to provide as much flexibility as possible. This means that institutions have the options to use various methods including; a year over year comparison, semester to semester comparison, multi-year budget projections (i.e. 3 to 5-year budgets) to develop a baseline revenue, previously budgeted revenue to actual or comparison a baseline from the date of the national emergency declaration to a prior year.

The DOE permits institutions to select a method on how they will determine lost revenue, which permits institutions the most amount of flexibility in making this determination.  Within the frequently asked questions (FAQs) published by the DOE, they outline/provide three examples.

  • For the first example, the institution should establish the impact using the three years prior to the declaration of the national emergency to establish a baseline of what revenue has been.  Under this method, a simple average is performed using the prior three years actual data and comparing it to the actual revenue recorded during the fiscal 2021 year.  This may the simplest method.
  • For the second example, the institution would compare a fiscal year (i.e., fiscal 2020) to fiscal 2019 and then prorate the decline in revenue during fiscal 2020 from the declaration of the national emergency to the end of that fiscal year (i.e., May 31 or June 30).  This requires some additional work to determine the pro-ration of revenue.
  • The last example uses budgeted information. The DOE does note that the budget should be a budget that was made prior to the declaration of the national emergency.  In this case, the institution would compare the budgeted revenue to the actual revenue received, and the difference is lost revenue.  If the budget information did not exist, it may be necessary to use one of the first two methods for this determination.

Sounds simple right? Check out this article from Brittany Becker, CPA of Schneider Downs, which describes further the types of revenue that are and aren’t permitted. Also, make sure to exclude from the calculation the impact of any previously used HEERF funds to offset tuition refunds to students.

For any of the strategies elected, it is important to have clear documentation of how the lost revenue is determined since this will be part of the Schedule of Expenditures of Federal Awards (SEFA).  For most institutions, this will be a major program subject to audit.  Ensure the documentation clearly demonstrates the method selected, all calculations, how the expected estimated revenue was determined, and other items, such as board minutes and documents evidencing budgets and other items that were established prior to March 13, 2020.

Schneider Downs also has other articles in this series:


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