How Could New Related-Party Disclosures Affect Higher Ed?

Higher education institutions depend on donations to boost their operating budgets, but a new regulation change could make it more difficult to accept anonymous donations. In a move to increase transparency, the Department of Education (ED) is proposing organizations must provide additional details about related-party transactions when submitting financial statements.

In May 2023, ED proposed an amendment to Section 668.23(d) of the Code of Federal Regulations. The amendment would require not only that the financial statements submitted to ED match the fiscal year-end of the entity’s annual return(s) filed with the IRS — but must also include additional detail regarding related parties.

The change would require higher education institutions to provide more details in their financial statement disclosures — and could make it nearly impossible for donors to give gifts anonymously.

What related-party information is changing?

Currently, an institution’s audited financial statements must disclose all related parties and enough detail to make them readily identifiable. Such information may include:

• The name
• Location
• A description of the related entity
• The nature and amount of any transactions between the related party and the institution, financial or otherwise, regardless of when they occurred.

ED wants to change the requirement language to make this information required. The new requirement does not have a materiality limit, which means there is no minimum amount of money for a transaction to be considered important, and all related-party transactions must be disclosed.

What is considered a “related party”?

Higher education institutions would need to provide additional details about related parties. This includes information about affiliates, trusts, owners, management, and more — and it can be a challenge to determine who is considered a related party. The definition can extend to those who simply have a significant influence on the organization.

The Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) glossary defines “related parties” as:

• Affiliates of the entity
• Entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity
• Trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management
• Principal owners of the entity and members of their immediate families
• Management of the entity and members of their immediate families
• Other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests
• Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

The FASB ASC glossary also defines the terms affiliate, control, immediate family, management, and principal owners. FASB ASC 850-10-05-3 provides examples of related party transactions.

How will it affect your institution?

In a nonprofit institution, the most common related-party transactions include donations from board members and members of management along with transactions with companies owned by board members.

In addition, these changes could negatively affect the number of donations a nonprofit higher education institution receives due to a donor’s wishes to protect their privacy. The financial statements, including the related footnotes, must be uploaded to the Federal Audit Clearinghouse, which is a public website.

This could also subject the donor to unwanted solicitation from other nonprofit entities seeking donations or they could become targets of bad actors.

How we can help

Staying on top of changing regulations can be a challenge. Our higher education team digs deep into the latest requirements to understand how it could affect your organization. Our professionals share clear insight to help you understand what steps you may need to take to comply with financial reporting and regulatory requirements.