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Summary of Significant Accounting Policies

9 Months Ended

Mar. 31, 2023

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Basis of Presentation

A full listing of our significant accounting policies is described in Note 2 “Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (“2022 Form 10-K”). We have prepared the accompanying unaudited consolidated financial statements in accordance with GAAP for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (which are normal and recurring in nature) considered necessary for a fair presentation have been included. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. These consolidated financial statements and accompanying notes should be read in conjunction with our annual consolidated financial statements and the notes thereto included in our 2022 Form 10-K.

We use the same accounting policies in preparing quarterly and annual financial statements. Unless otherwise noted, amounts presented within the Notes to Consolidated Financial Statements refer to our continuing operations.

Certain prior period amounts have been reclassified for consistency with the current period presentation. Other income (expense), net in the Consolidated Statements of Income for the three months ended March 31, 2023 consists of interest income of $3.2 million and investment gain of $0.8 million, and for the nine months ended March 31, 2023 consists of interest income of $7.4 million, investment gain of $0.9 million, and investment impairment of $5.0 million. Other income (expense), net for the three months ended March 31, 2022 consists of interest income of $1.1 million and investment loss of $1.4 million, and for the nine months ended March 31, 2022 consists of interest income of $3.2 million and investment loss of $0.8 million.

Business acquisition and integration expense was $11.3 million and $35.7 million in the three and nine months ended March 31, 2023, respectively, and $5.9 million and $41.5 million in the three and nine months ended March 31, 2022, respectively. These are transaction costs associated with acquiring Walden and costs associated with integrating Walden into Adtalem. In addition, during the first quarter of fiscal year 2023, we initiated transformation initiatives to accelerate growth and organizational agility. Certain costs relating to this transformation are included in business acquisition and integration costs in the Consolidated Statements of Income.

Use of Estimates

The preparation of financial statements in conformity with 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, but not limited to, the impact of (i) the novel coronavirus (“COVID-19”) pandemic, (ii) rising interest rates, and (iii) labor and material cost increases and shortages, and how we anticipate 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. COVID-19 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 COVID-19, actions taken to contain the virus, the efficacy and distribution of the vaccines, as well as, how quickly and to what extent normal economic and operating conditions can resume.

Recent Accounting Standards

Recently adopted accounting standards

In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08: “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” The amendments require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The amendments should be applied prospectively to business combinations occurring on or after the effective date of the amendments. Early adoption of the amendments is permitted, including adoption in an interim period. An entity that early adopts in an interim period should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application. We adopted this guidance on July 1, 2022 and will apply the guidance to any future business combinations.

Recently issued accounting standards not yet adopted

In March 2022, the FASB issued ASU No. 2022-02: “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” The guidance was issued as improvements to ASU No. 2016-13. The vintage disclosure changes are relevant to Adtalem and require an entity to disclose current-period gross write-offs by year of origination for financing receivables. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The amendments should be applied prospectively. Early adoption of the amendments is permitted, including adoption in an interim period. Management expects to implement this guidance effective July 1, 2023. The amendments will impact our disclosures but will not otherwise impact Adtalem’s Consolidated Financial Statements.

We reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on our Consolidated Financial Statements.

Revision to Previously Issued Financial Statements

During the third quarter of fiscal year 2023, Adtalem identified an error in its revenue recognition related to certain scholarship programs within its Medical and Veterinary segment. Certain scholarships and discounts offered within that segment provide students a discount on future tuition that constitute a material right under Accounting Standards Codification (“ASC”) 606 “Revenue from Contracts with Customers” that should be accounted for as a separate performance obligation within a contract. Adtalem assessed the materiality of this error individually and in the aggregate with other previously identified errors to prior periods’ Consolidated Financial Statements in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 99 “Materiality” and SAB 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” codified in ASC 250 “Accounting Changes and Error Corrections.” Adtalem concluded that the errors were not material to prior periods and therefore, amendments of previously filed reports are not required. However, Adtalem determined it was appropriate to revise its previously issued financial statements. In accordance with ASC 250, Adtalem corrected prior periods presented herein by revising the financial statement line item amounts previously disclosed in SEC filings in order to achieve comparability in the Consolidated Financial Statements. The impact of this revision of Adtalem’s previously reported Consolidated Financial Statements are detailed below. In connection with this revision, Adtalem also corrected other immaterial errors in the prior periods, including certain errors that had previously been adjusted for as out of period corrections in the period identified.

The following table summarizes the effect of the revisions on the affected line items within the Consolidated Balance Sheets (in thousands):


	June 30, 2022						March 31, 2022
	As reported		Adjustment		As revised		As reported		Adjustment		As revised
Assets:
Current assets:
Prepaid expenses and other current assets	$	126,467	$	1,065	$	127,532	$	123,505	$	1,463	$	124,968
Total current assets		556,039		1,065		557,104		1,010,996		1,463		1,012,459
Total assets		3,029,175		1,065		3,030,240		3,518,460		1,463		3,519,923
Liabilities and shareholders' equity:
Current liabilities:
Accrued payroll and benefits		66,642		1,150		67,792		56,705		805		57,510
Deferred revenue		144,840		4,970		149,810		167,576		4,361		171,937
Total current liabilities		417,527		6,120		423,647		521,206		5,166		526,372
Noncurrent liabilities:
Other liabilities		65,074		8,626		73,700		65,729		8,651		74,380
Total noncurrent liabilities		1,106,581		8,626		1,115,207		1,505,947		8,651		1,514,598
Total liabilities		1,524,108		14,746		1,538,854		2,027,153		13,817		2,040,970
Shareholders' equity:
Retained earnings		2,322,810		(12,414)		2,310,396		2,314,796		(11,146)		2,303,650
Accumulated other comprehensive loss		(960)		(1,267)		(2,227)		(2,209)		(1,208)		(3,417)
Total shareholders' equity		1,505,067		(13,681)		1,491,386		1,491,307		(12,354)		1,478,953
Total liabilities and shareholders' equity		3,029,175		1,065		3,030,240		3,518,460		1,463		3,519,923

The following table summarizes the effect of the revisions on the affected line items within the Consolidated Statements of Income (in thousands, except per share data):


	Three Months Ended March 31, 2022						Nine Months Ended March 31, 2022
	As reported		Adjustment		As revised		As reported		Adjustment		As revised
Revenue	$	365,623	$	(1,342)	$	364,281	$	1,025,891	$	(4,696)	$	1,021,195
Operating cost and expense:
Student services and administrative expense		149,890		(1,027)		148,863		432,923		456		433,379
Total operating cost and expense		332,359		(1,027)		331,332		989,956		456		990,412
Operating income		33,264		(315)		32,949		35,935		(5,152)		30,783
Other income (expense), net		1,045		(1,372)		(327)		2,784		(349)		2,435
Loss from continuing operations before income taxes		(2,276)		(1,687)		(3,963)		(71,188)		(5,501)		(76,689)
Benefit from income taxes		8,133		230		8,363		38,897		700		39,597
Income (loss) from continuing operations		5,857		(1,457)		4,400		(32,291)		(4,801)		(37,092)
Discontinued operations:
Income from discontinued operations before income taxes		4,071		(645)		3,426		2,180		(645)		1,535
Income from discontinued operations		343,985		(645)		343,340		341,982		(645)		341,337
Net income		349,842		(2,102)		347,740		309,691		(5,446)		304,245

Earnings (loss) per share:
Basic:
Continuing operations	$	0.12	$	(0.03)	$	0.09	$	(0.65)	$	(0.10)	$	(0.75)
Discontinued operations	$	7.03	$	(0.01)	$	7.02	$	6.91	$	(0.01)	$	6.90
Total basic earnings per share	$	7.15	$	(0.04)	$	7.11	$	6.26	$	(0.11)	$	6.15
Diluted:
Continuing operations	$	0.12	$	(0.03)	$	0.09	$	(0.65)	$	(0.10)	$	(0.75)
Discontinued operations	$	6.97	$	(0.02)	$	6.95	$	6.91	$	(0.01)	$	6.90
Total diluted earnings per share	$	7.09	$	(0.05)	$	7.04	$	6.26	$	(0.11)	$	6.15

To conform to current period presentation, the previously reported interest and dividend income and investment gain lines have been condensed to other income (expense), net.

The following table summarizes the effect of the revisions on the affected line items within the Consolidated Statements of Comprehensive Income (in thousands):


	Three Months Ended March 31, 2022						Nine Months Ended March 31, 2022
	As reported		Adjustment		As revised		As reported		Adjustment		As revised
Net income	$	349,842	$	(2,102)	$	347,740	$	309,691	$	(5,446)	$	304,245
Comprehensive income before reclassification		349,818		(2,102)		347,716		309,703		(5,446)		304,257
Reclassification adjustment for realized gain on foreign currency translation adjustments		(1,551)		645		(906)		(1,551)		645		(906)
Comprehensive income		348,267		(1,457)		346,810		314,847		(4,801)		310,046

The following table summarizes the effect of the revisions on the affected line items within the Consolidated Statements of Cash Flows (in thousands):


	Nine Months Ended March 31, 2022
	As reported		Adjustment		As revised
Operating activities:
Net income	$	309,691	$	(5,446)	$	304,245
Income from discontinued operations		(341,982)		645		(341,337)
Loss from continuing operations		(32,291)		(4,801)		(37,092)
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on investments		—		807		807
Changes in assets and liabilities:
Prepaid expenses and other current assets		3,531		(1,133)		2,398
Accrued payroll and benefits		(23,221)		805		(22,416)
Deferred revenue		87,811		4,696		92,507
Net cash provided by operating activities-continuing operations		58,397		374		58,771
Net cash provided by operating activities		51,482		374		51,856
Investing activities:
Proceeds from sales of marketable securities		—		941		941
Purchases of marketable securities		—		(1,315)		(1,315)
Net cash used in investing activities-continuing operations		(1,500,303)		(374)		(1,500,677)
Net cash used in investing activities		(540,938)		(374)		(541,312)

The following table summarizes the effect of the revisions on the affected line items within the Consolidated Statements of Shareholders’ Equity (in thousands):


	As reported		Adjustment		As revised
June 30, 2021
Retained earnings	$	2,005,105	$	(5,700)	$	1,999,405
Accumulated other comprehensive loss		(7,365)		(1,853)		(9,218)
Total shareholders' equity		1,301,070		(7,553)		1,293,517
December 31, 2021
Retained earnings		1,964,954		(9,044)		1,955,910
Accumulated other comprehensive loss		(634)		(1,853)		(2,487)
Total shareholders' equity		1,287,890		(10,897)		1,276,993
March 31, 2022
Retained earnings		2,314,796		(11,146)		2,303,650
Accumulated other comprehensive loss		(2,209)		(1,208)		(3,417)
Total shareholders' equity		1,491,307		(12,354)		1,478,953
June 30, 2022
Retained earnings		2,322,810		(12,414)		2,310,396
Accumulated other comprehensive loss		(960)		(1,267)		(2,227)
Total shareholders' equity		1,505,067		(13,681)		1,491,386
December 31, 2022
Retained earnings		2,349,146		(13,505)		2,335,641
Total shareholders' equity		1,522,722		(13,505)		1,509,217
Three Months Ended March 31, 2022
Net income		349,842		(2,102)		347,740
Reclassification adjustment for realized gain on foreign currency translation adjustments		(1,551)		645		(906)
Nine Months Ended March 31, 2022
Net income		309,691		(5,446)		304,245
Reclassification adjustment for realized gain on foreign currency translation adjustments		(1,551)		645		(906)