Summary of Significant Accounting Policies

12 Months Ended

Jun. 30, 2020

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

For each accounting topic that is addressed in its own note, the description of the accounting policy may be found in the related note. Other significant accounting policies are described below.

Principles of Consolidation

The Consolidated Financial Statements include the accounts of Adtalem and its wholly-owned and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Where our ownership interest is less than 100%, but greater than 50%, the noncontrolling ownership interest is reported on our Consolidated Balance Sheets. The noncontrolling ownership interest earnings portion is classified as “net (loss) income attributable to redeemable noncontrolling interest” in our Consolidated Statements of Income (Loss). Unless indicated, or the context requires otherwise, references to years refer to Adtalem’s fiscal years. Certain prior periods amounts have been reclassified to conform to current period presentation.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Although our current estimates contemplate current conditions, including the impact of the novel coronavirus (“COVID-19”) pandemic, and how we expect them to change in the future, as appropriate, it is reasonably possible that actual conditions could differ from what was anticipated in those estimates, which could materially affect our results of operations and financial condition. On March 11, 2020, the COVID-19 outbreak was declared a pandemic by the World Health Organization, which recommended containment and mitigation measures worldwide. The outbreak and the response of governmental and public health organizations in dealing with the pandemic included restricting general activity levels within communities, the economy, and operations of our customers. While we have experienced an impact to our business, operations, and financial results as a result of the COVID-19 pandemic, it may have even more far-reaching impacts on many aspects of our operations including the impact on customer behaviors, business operations, our employees, and the

market in general. The extent to which the COVID-19 pandemic ultimately impacts our business, financial condition, results of operations, cash flows, and liquidity may differ from management’s current estimates due to inherent uncertainties regarding the duration and further spread of the outbreak, actions taken to contain the virus, as well as, how quickly and to what extent normal economic and operating conditions can resume.

Equity Investments

The equity method of accounting is used for an investment in the equity of another entity where we have the ability to influence the operating and financial decisions of the investee but do not possess ownership controlling interest. Generally, this occurs when the ownership interest is between 20% and 50%. The investment is initially recorded at cost and classified as other assets, net on the Consolidated Balance Sheets. The carrying amount of the investment is adjusted in subsequent periods for Adtalem’s share of the earnings or losses of the investee, which is recorded in the Consolidated Statements of Income (Loss) as equity method investment loss.

For an investment in the equity of a private entity where we do not have the ability to influence the operating and financial decisions of the investee, we have elected to measure our investment at cost, less indicated impairment, with adjustments to fair value in the event an observable transaction occurs that demonstrates the fair value of the equity securities. Such investments are classified as other assets, net on the Consolidated Balance Sheets. During fiscal year 2018, Adtalem invested $5.0 million for a 3.68% equity interest (on a fully-diluted basis) in Singularity University (“SU”).

Cash and Cash Equivalents

Cash and cash equivalents consists of highly liquid investments with original maturities of three months or less. The carrying value of cash and cash equivalents approximate fair value. We maintain cash and cash equivalent balances that exceed federally-insured limits. We have not experienced any losses on our cash and cash equivalents.

Marketable Securities

Investments classified as trading securities are carried at fair value with any unrealized gains or losses recorded as investment gain (loss) in the Consolidated Statements of Income (Loss). Investments classified as available-for-sale are carried at fair value with unrealized gains or losses, net of tax, included as a component of other comprehensive income (loss) on the Consolidated Statements of Comprehensive Income (Loss).

The following is a summary of our available-for-sale marketable securities, which consists of bond mutual funds (in thousands):

	June 30,
	2020		2019
Amortized cost	$	2,154	$	2,099
Unrealized gains		243		130
Fair value	$	2,397	$	2,229

Marketable securities consists of the following (in thousands):

	June 30,
	2020		2019
Stock mutual funds	$	6,571	$	6,451
Bond mutual funds		2,397		2,229
Total marketable securities	$	8,968	$	8,680

All mutual fund investments are recorded at fair market value based upon quoted market prices. All of the stock and bond mutual fund investments are held in a rabbi trust for the purpose of paying benefits under Adtalem’s non-qualified deferred compensation plan. See Note 19 “Fair Value Measurements” for additional information.

Restricted Cash

Restricted cash represents amounts received from federal and state governments under various student aid grant and loan programs and such restricted funds are held in separate bank accounts. Once the financial aid authorization and disbursement process for the student has been completed, the funds are transferred to unrestricted accounts, and these funds then become available for use in Adtalem’s operations. This authorization and disbursement process that precedes the transfer of funds generally occurs within the period of the academic term for which such funds were authorized.

Internal-Use Software Development Costs

Adtalem capitalizes certain internal-use software development costs that are amortized using the straight-line method over the estimated lives of the software, not to exceed seven years. Capitalized costs include external direct costs of equipment, materials, and services consumed in developing or obtaining internal-use software and payroll-related costs for employees directly associated with the internal-use software development project. Capitalization of such costs ceases at the point at which the project is substantially complete and ready for its intended purpose. Capitalized internal-use software development costs for projects not yet complete are included as construction in progress within the property and equipment, net section of the Consolidated Balance Sheets. As of June 30, 2020 and 2019, the net balance of capitalized internal-use software development costs was $12.3 million and $10.6 million, respectively.

Property and Equipment

Property and equipment, net, including both purchased and internal-use software development costs, is recorded at cost. Cost also includes additions and those improvements that enhance performance, increase the capacity, or lengthen the useful lives of the assets. Repairs and maintenance costs are expensed as incurred. Upon sale or retirement of an asset, the accounts are relieved of the cost and the related accumulated depreciation, with any resulting gain or loss included in income. Assets under construction are reflected in construction in progress until they are placed into service for their intended use.

Leasehold improvements are amortized using the straight-line method over the term of the lease or the estimated useful life of the asset, whichever is shorter.

Depreciation is computed using the straight-line method over estimated service lives. These lives range from 5 to 40 years for buildings and leasehold improvements, and from 3 to 8 years for computers, furniture, and equipment.

See Note 10 “Property and Equipment, Net” for additional information.

Goodwill and Intangible Assets

Goodwill and indefinite-lived intangibles are not amortized, but are tested for impairment annually and when an event occurs or circumstances change such that it is more likely than not that an impairment may exist. Our annual testing date is May 31.

Adtalem first assesses goodwill for impairment qualitatively (Step 0) for each reporting units that contained goodwill. Management analyzes factors that include results of operations and business conditions, significant changes in cash flows at the reporting unit level, as well as how much previously calculated fair values exceed carrying values to determine if it is more likely than not that the reporting units have been impaired. If there is reason to believe the carrying value of a reporting unit exceeds its fair value, then management performs a quantitative (Step1) impairment review. Adtalem uses a discounted cash flow model to compute fair value. The estimated fair values of the reporting units are based on management’s projection of revenue, gross margin, operating costs, and cash flows considering planned business and operational strategies over a long-term planning horizon of five years. These reporting units constitute components for which discrete financial information is available and regularly reviewed by segment management and the Board. If the carrying amount of a reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized to the extent the fair value of the reporting unit goodwill is less than the carrying amount of the goodwill, up to the amount of goodwill recorded.

For indefinite-lived intangible assets, management first analyzes qualitative factors, including results of operations and business conditions of each reporting unit that contain indefinite-lived intangible assets, significant changes in cash flows at the individual indefinite-lived intangible asset level, if applicable, as well as how much previously calculated fair values exceed carrying values to determine if it is more likely than not that the intangible assets associated with these reporting units have been impaired. If there is reason to believe the carrying value of an intangible asset exceeds its fair value, then management performs a quantitative impairment review. In calculating fair value, Adtalem uses various valuation techniques including a royalty rate model for trade names and intellectual property and a discounted cash flow model for Title IV eligibility and accreditation. The estimated fair values of these indefinite-lived intangible assets are based on management’s projection of revenue, gross margin, operating costs, and cash flows considering planned business and operational strategies over a long-term planning horizon of five years. The assumed royalty rates and the growth rates used to project cash flows and operating results are based upon historical results and analysis of the economic environment in which the reporting units that record indefinite-lived intangible assets operate. The valuations employ present value techniques to measure fair value and consider market factors. Management believes the assumptions used for the impairment testing are consistent with those that would be utilized by a market participant in performing similar valuations of its indefinite-lived intangible assets. If the carrying amount exceeds the fair value, an impairment loss is recognized in an amount equal to that excess.

For intangible assets with finite lives, we evaluate for potential impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying value is no longer recoverable based upon the undiscounted future cash flows of the asset, the amount of the impairment is the difference between the carrying amount and the fair value of the asset. Intangible assets with finite lives are amortized over their expected economic lives, ranging from 5 to 10 years.

Amortization of all intangible assets and certain goodwill is being deducted for tax reporting purposes over statutory lives.

Determining the fair value of a reporting unit or an intangible asset involves the use of significant estimates and assumptions. Management bases its fair value estimates on assumptions it believes to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Actual results may differ from those estimates, which could lead to future impairments of goodwill or intangible assets. See Note 12 “Goodwill and Intangible Assets” for additional information on our goodwill and intangible assets impairment analysis.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying value is no longer recoverable based upon the undiscounted future cash flows of the asset, the amount of the impairment is the difference between the carrying amount and the fair value of the asset. Events that may trigger an impairment analysis could include a decision by management to exit a market or a line of business or to consolidate operating locations. For a discussion of long-lived asset impairments, see Note 10 “Property and Equipment, Net.”

Treasury Stock

Shares that are repurchased by Adtalem under its share repurchase programs are recorded as treasury stock at cost and result in a reduction in shareholders’ equity. See Note 15 “Share Repurchases” for additional information.

From time to time, shares of our common stock are delivered back to Adtalem under a swap arrangement resulting from employees’ exercise of incentive stock options pursuant to the terms of the Adtalem Stock Incentive Plans (see Note 17 “Stock-Based Compensation”). In addition, shares of our common stock are delivered back to Adtalem for payment of withholding taxes from employees for vesting restricted stock units (“RSUs”). These shares are recorded as treasury stock at cost and result in a reduction in shareholders’ equity.

Treasury shares are reissued at market value, less a 10% discount, to the Adtalem Colleague Stock Purchase Plan in exchange for employee payroll deductions. The 10% discount is considered compensatory and recorded as an expense in the income statement. When treasury shares are reissued, Adtalem uses an average cost method to reduce the treasury

stock balance. Gains on the difference between the average cost and the reissuance price, less the amount recorded as expense, are credited to additional paid-in capital. Losses on the difference are charged to additional paid-in capital to the extent that previous net gains from reissuance are included therein, otherwise such losses are charged to retained earnings.

Earnings per Common Share

Basic earnings per share (“EPS”) is computed by dividing net income or loss attributable to Adtalem by the weighted-average number of common shares outstanding during the period plus unvested participating RSUs. Diluted EPS is computed by dividing net income or loss attributable to Adtalem by diluted weighted-average number of shares outstanding during the period. Diluted shares are computed using the Treasury Stock Method and reflect the additional shares that would be outstanding if dilutive stock-based grants were exercised during the period. Diluted EPS considers the impact of potentially dilutive securities, except in periods in which there is a loss from continuing operations, because the inclusion of the potential common shares would have an anti-dilutive effect.

Income Taxes

Adtalem accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Adtalem also recognizes future tax benefits associated with tax loss and credit carryforwards as deferred tax assets. Adtalem’s deferred tax assets are reduced by a valuation allowance, when in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Adtalem measures deferred tax assets and liabilities using enacted tax rates in effect for the year in which Adtalem expects to recover or settle the temporary differences. The effect of a change in tax rates on deferred taxes is recognized in the period that the change is enacted. Adtalem reduces its net tax assets for the estimated additional tax and interest that may result from tax authorities disputing uncertain tax positions Adtalem has taken.

Restructuring Charges

Adtalem’s financial statements include charges related to severance and related benefits for workforce reductions. These charges also include impairments on operating lease assets and losses on disposals of property and equipment related to campus and administrative office consolidations (see Note 6 “Restructuring Charges”). When estimating the costs of exiting lease space, estimates are made which could differ materially from actual results and result in additional restructuring charges or reversals in future periods.

Advertising Costs

Advertising costs are expensed when incurred and totaled $82.6 million, $72.0 million, and $64.9 million for the years ended June 30, 2020, 2019, and 2018, respectively. Advertising costs are included in student services and administrative expense in the Consolidated Statements of Income (Loss).

Hurricane Expense

In September 2017, Hurricanes Irma and Maria caused damage and disrupted operations at AUC and RUSM. Adtalem recorded expense of $12.5 million in the year ended June 30, 2019 associated with incremental costs of teaching at alternative sites and $63.3 million in fiscal year 2018 associated with the evacuation process, temporary housing and transportation of students, faculty and staff, and incremental additional costs of teaching in alternate locations. Insurance proceeds of $12.5 million were recorded in the year ended June 30, 2019, and insurance proceeds and receivables of $59.0 million were recorded in the year ended June 30, 2018 to offset these expenses. Based upon damage assessments of the AUC and RUSM facilities, impairment write-downs of buildings, building improvements, furniture, and equipment of $31.0 million were recorded in the year ended June 30, 2018. Insurance receivables of $21.9 million were recorded to offset these expenses in the year ended June 30, 2018. No further asset impairments were recorded in the year ended June 30, 2019 or 2020. In total, no net expense related to the hurricanes was recorded in the year ended June 30, 2019 or 2020. In total, $13.4 million of net expense was recorded in cost of educational services in the Consolidated Statement of Income for the year ended June 30, 2018. The expense primarily represented the deductibles under insurance policies. During the second quarter of fiscal year 2019, Adtalem received the final insurance proceeds for damages from Hurricanes Irma and Maria and recorded a pre-tax gain of $15.6 million in the year ended June 30, 2019.

Settlement Gains

Adtalem recorded a $10.6 million gain in the fourth quarter of fiscal year 2019 related to a lawsuit settlement against the Adtalem Board of Directors. Settlement gains in the Consolidated Statement of Income were $26.2 million for the year ended June 30, 2019, which includes the hurricane insurance settlement of $15.6 million discussed above.

Foreign Currency Translation

The financial position and results of operations of the AUC, RUSM, and RUSVM Caribbean operations are measured using the U.S. dollar as the functional currency. As such, there is no translation gain or loss associated with these operations. Adtalem Brazil’s and EduPristine’s operations and Becker’s and ACAMS’s international operations are measured using the local currency as the functional currency. Assets and liabilities of these entities are translated to U.S. dollars using exchange rates in effect at the balance sheet dates. Income and expense items are translated at monthly average exchange rates. The resulting translation adjustments are recorded as foreign currency translation adjustments in the Consolidated Statements of Comprehensive Income (Loss). Transaction gains or losses during each of the fiscal years presented were not material.

Recent Accounting Standards

Recently adopted accounting standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02: “Leases (Topic 842).” This guidance was issued to increase transparency and comparability among organizations by recognizing right-of-use assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We adopted this guidance, along with the related clarifications and improvements, effective July 1, 2019 using the modified retrospective approach without adjusting prior comparative periods. The adoption of this standard significantly impacts our Consolidated Balance Sheets, but did not impact our Consolidated Statements of Income (Loss). We elected the practical expedients package which allows us to forego reassessing (i) whether any expired or existing contracts are or contain leases; (ii) the lease classification for any expired or expiring leases; and (iii) initial direct costs for any existing leases. We did not elect the hindsight practical expedient, which permits the use of hindsight when determining the lease term and impairment of operating lease assets. See Note 11 “Leases” for the disclosures related to this new accounting standard.

The impact on the Consolidated Balance Sheet upon adoption of Accounting Standards Codification (“ASC”) 842 is as follows (in thousands, except par value):

	June 30,		Adjustments due to		July 1,
	2019		adoption of ASC 842		2019
Assets:
Current assets:
Cash and cash equivalents	$	299,445	$	—	$	299,445
Investments in marketable securities		8,680		—		8,680
Restricted cash		1,022		—		1,022
Accounts receivable, net		157,829		—		157,829
Prepaid expenses and other current assets		37,724		(3,483)		34,241
Total current assets		504,700		(3,483)		501,217
Noncurrent assets:
Property and equipment, net		364,683		—		364,683
Operating lease assets		—		282,978		282,978
Deferred income taxes		18,314		—		18,314
Intangible assets, net		418,097		—		418,097
Goodwill		874,451		—		874,451
Other assets, net		62,451		—		62,451
Total noncurrent assets		1,737,996		282,978		2,020,974
Total assets	$	2,242,696	$	279,495	$	2,522,191
Liabilities and shareholders' equity:
Current liabilities:
Accounts payable	$	57,627	$	—	$	57,627
Accrued payroll and benefits		64,492		—		64,492
Accrued liabilities		86,722		(16,946)		69,776
Deferred revenue		99,790		—		99,790
Current operating lease liabilities		—		66,707		66,707
Current portion of long-term debt		3,000		—		3,000
Total current liabilities		311,631		49,761		361,392
Noncurrent liabilities:
Long-term debt		398,094		—		398,094
Long-term operating lease liabilities		—		269,387		269,387
Deferred income taxes		29,426		—		29,426
Other liabilities		102,472		(39,653)		62,819
Total noncurrent liabilities		529,992		229,734		759,726
Total liabilities		841,623		279,495		1,121,118
Redeemable noncontrolling interest		9,543		—		9,543
Shareholders' equity:
Common stock, $0.01 par value		801		—		801
Additional paid-in capital		486,061		—		486,061
Retained earnings		2,012,902		—		2,012,902
Accumulated other comprehensive loss		(137,290)		—		(137,290)
Treasury stock, at cost		(970,944)		—		(970,944)
Total shareholders' equity		1,391,530		—		1,391,530
Total liabilities and shareholders' equity	$	2,242,696	$	279,495	$	2,522,191

Upon the adoption of ASC 842, the following balances were removed from the Consolidated Balance Sheet as of July 1, 2019: (i) $3.5 million of prepaid rent balances within prepaid expenses and other current assets; (ii) $6.8 million of current deferred rent liability balances within accrued liabilities; (iii) $10.1 million of current restructure liability balances within accrued liabilities; (iv) $24.8 million of noncurrent deferred rent liability balances within other liabilities; and (v) $14.9 million of noncurrent restructure liability balances within other liabilities.

In March 2020, FASB issued ASU No. 2020-04: “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The guidance was issued to provide for temporary optional expedients and exceptions to the current guidance on certain contract modifications and hedge relationships to ease the burdens related to the expected market transition from the London Inter-bank Offered Rate (“LIBOR”) or other reference rates to alternative reference rates. The guidance is effective as of March 12, 2020 through December 31, 2022. We adopted this guidance in the third quarter of fiscal year 2020 and it is not expected to have a significant effect on Adtalem’s Consolidated Financial Statements.

Recently issued accounting standards not yet adopted

In June 2016, FASB issued ASU No. 2016-13: “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The guidance was issued to provide financial statement users with more decision-

useful information about the expected losses on financial instruments by replacing the incurred loss impairment methodology with a methodology that reflects expected credit losses by requiring a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. We will implement this guidance effective July 1, 2020. Management has evaluated the impact the guidance will have on Adtalem’s Consolidated Financial Statements and believes the guidance applied to our allowance for bad debts on trade receivables and financing agreements upon adoption will not have a significant impact on Adtalem’s Consolidated Financial Statements.

Reclassifications

Beginning in the first quarter of fiscal year 2020, Adtalem Brazil operations were classified as discontinued operations. See Note 4 “Discontinued Operations and Assets Held for Sale” for additional information. Prior periods have been revised to conform to the current classification. Certain expenses in prior periods previously allocated to Adtalem Brazil within our former Business and Law segment have been reclassified to the Home Office and Other segment based on discontinued operation reporting guidance regarding allocation of corporate overhead. For fiscal year 2020, home office costs to support the remaining businesses are being allocated to the Medical and Healthcare and Financial Services segments. See Note 21 “Segment Information” for additional information.