§ 668.172 Financial ratios. ( a ) *Appendices A and B, ratio methodology.* As provided under appendices A and B to this subpart, the Secretary determines an institution's composite score by— ( 1 ) Calculating the result of its Primary Reserve, Equity, and Net Income ratios, as described under paragraph (b) of this section;
( 2 ) Calculating the strength factor score for each of those ratios by using the corresponding algorithm;
( 3 ) Calculating the weighted score for each ratio by multiplying the strength factor score by its corresponding weighting percentage;
( 4 ) Summing the resulting weighted scores to arrive at the composite score; and
( 5 ) Rounding the composite score to one digit after the decimal point.
( b ) *Ratios.* The Primary Reserve, Equity, and Net Income ratios are defined under appendix A to this subpart for proprietary institutions, and under appendix B to this subpart for private non-profit institutions.
( c ) *Excluded items.* In calculating an institution's ratios, the Secretary— ( 1 ) Generally excludes income or losses from discontinued operations under Accounting Standards Codification 205, prior period adjustments, the cumulative effect of changes in accounting principles, and the effect of changes in accounting estimates;
( 2 ) May include or exclude the effects of questionable accounting treatments, such as excessive capitalization of marketing costs;
( 3 ) Excludes all unsecured or uncollateralized related-party receivables;
( 4 ) Excludes all intangible assets defined as intangible in accordance with generally accepted accounting principles; and
( 5 ) Excludes from the ratio calculations Federal funds provided to an institution by the Secretary under program authorized by the HEA only if— ( i ) In the notes to the institution's audited financial statement, or as a separate attestation, the auditor discloses by name and CFDA number, the amount of HEA program funds reported as expenses in the Statement of Activities for the fiscal year covered by that audit or attestation; and
( ii ) The institution's composite score, as determined by the Secretary, is less than 1.5 before the reported expenses arising from those HEA funds are excluded from the ratio calculations.
( d ) *Accounting for operating leases.* The Secretary accounts for operating leases by— ( 1 ) Applying FASB Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) to all leases the institution has entered into on or after December 15, 2018 (post-implementation operating/financing leases), as specified in the Supplemental Schedule (see Section 2 of Appendix A to this subpart and Section 2 of Appendix B to this subpart);
( 2 ) Treating leases the institution entered into prior to December 15, 2018 (pre-implementation operating/financing leases), as they would have been treated prior to the requirements of ASU 2016-02, as long as the institution provides information about those leases on the Supplemental Schedule and a note in, or on the face of, its audited financial statements; and
( 3 ) Accounting for any adjustments, such as any options exercised by the institution to extend the life of a pre-implementation operating/finance lease, as post-implementation operating/finance leases.
( e ) *Incorporation by reference.* The material listed in this paragraph (e) is incorporated by reference into this section with the approval of the Director of the Federal Register under 5 U.S.C. 552(a) and 1 CFR part 51. This incorporation by reference (IBR) material is available for inspection at U.S. Department of Education and at the National Archives and Records Administration (NARA). Contact U.S. Department of Education at: Office of the General Counsel, 400 Maryland Avenue SW, Room 2C-136, Washington DC 20202; phone: (202) 401-6000*; https://www2.ed.gov/about/offices/list/ogc/index.html?src=oc .* For information on the availability of this material at NARA, contact the Office of the Federal Register—email: *fr.inspection@nara.gov ;* website: *www.archives.gov/federal-register/cfr/ibr-locations.html .* The material may be obtained from the Financial Accounting Standards Board (FASB), 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856-5116; (203) 847-0700; *www.fasb.org .* ( 1 ) Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), (February 2016).
( 2 ) Accounting Standards Codification (ASC) 205, Presentation of Financial Statements, Updated through August 9, 2021 (with taxonomy revisions as of January 26, 2022).
(Approved by the Office of Management and Budget under control number 1845-0022) [62 FR 62877, Nov. 25, 1997, as amended at 63 FR 40348, July 28, 1998; 65 FR 65637, Nov. 1, 2000; 84 FR 49913, Sept. 23, 2019; 87 FR 63693, Oct. 20, 2022]