BELMONT UNIVERSITY Nashville, Tennessee. CONSOLIDATED FINANCIAL STATEMENTS AND SINGLE AUDIT REPORTS UNDER UNIFORM GUIDANCE May 31, 2016 and 2015

Transcription

1 Nashville, Tennessee CONSOLIDATED FINANCIAL STATEMENTS AND SINGLE AUDIT REPORTS UNDER UNIFORM GUIDANCE

2 Nashville, Tennessee CONSOLIDATED FINANCIAL STATEMENTS AND SINGLE AUDIT REPORTS UNDER UNIFORM GUIDANCE Table of Contents INDEPENDENT AUDITOR S REPORT... 1 FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL POSITION CONSOLIDATED STATEMENTS OF ACTIVITIES... 4 CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF THE FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS INDEPENDENT AUDITOR S REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY UNIFORM GUIDANCE SCHEDULE OF FINDINGS AND QUESTIONED COSTS... 34

3 Crowe Horwath LLP Independent Member Crowe Horwath International INDEPENDENT AUDITOR S REPORT The Board of Trustees Belmont University Nashville, Tennessee Report on the Financial Statements We have audited the accompanying consolidated financial statements of Belmont University (the University ), which comprise the consolidated statements of financial position as of May 31, 2016 and 2015, and the related consolidated statements of activities, and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the University s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1.

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Belmont University as of, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The schedule of expenditures of federal awards for the year ended May 31, 2016, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain other procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. Report on Other Legal and Regulatory Requirements In accordance with Government Auditing Standards, we have also issued our report dated October 3, 2016, on our consideration of the University s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the University s internal control over financial reporting and compliance. Franklin, Tennessee October 3, 2016 Crowe Horwath LLP 2.

5 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ASSETS Cash and cash equivalents (Note S) $ 43,262,034 $ 41,118,289 Accounts receivable, net (Note B) 1,230,520 1,223,953 Contributions receivable, net (Note D) 33,261,625 16,720,413 Inventories 970,446 1,010,239 Prepaid expenses and other assets 386, ,199 Investments (Notes E and S) 115,501, ,633,845 Notes receivable - students, net (Note C) 1,645,416 1,707,560 Deposits held by bond trustee (Note I) 9,273,224 4,688,180 Bond issuance costs, net (Note H) 673, ,465 Beneficial interests in trusts (Note G) 393, ,807 Property, buildings, and equipment, net (Note F) 564,146, ,454,776 Total assets $ 770,745,163 $ 743,948,726 LIABILITIES Accounts payable and accrued liabilities $ 11,701,668 $ 20,776,970 Deferred revenue 8,807,179 8,454,736 Annuities payable (Note M) 1,640,696 1,750,902 Advances from Federal government 1,292,151 1,320,755 Notes payable and long-term obligations (Note I) 104,096, ,302,715 Interest rate swap agreements (Note J) 2,546,209 2,880,858 Deposits held for others 246, ,004 Total liabilities $ 130,330,479 $ 193,660,940 NET ASSETS Unrestricted 510,034, ,846,369 Temporarily restricted (Note P) 32,022,105 38,065,772 Permanently restricted (Note P) 98,357,966 67,375,645 Total net assets 640,414, ,287,786 Total liabilities and net assets $ 770,745,163 $ 743,948,726 See accompanying notes to consolidated financial statements. 3.

6 CONSOLIDATED STATEMENT OF ACTIVITIES Year ended May 31, 2016 (With comparative 2015 totals) Temporarily Permanently Unrestricted Restricted Restricted Total Total Revenue and other support: Tuition and fees $ 220,596,074 $ - $ - $ 220,596,074 $ 205,339,283 Less scholarships and fellowships (Note N) (44,677,577) - - (44,677,577) (38,827,842) Net tuition and fees 175,918, ,918, ,511,441 Governmental grants and contracts 1,500 1,265,315-1,266,815 1,240,682 Private gifts, grants and contracts - operating 1,171,846 2,537,961-3,709,807 2,624,269 Endowment spending payout 2,654, ,654,224 2,182,542 Sales and services of auxiliary enterprises 35,357, ,256-35,991,205 32,783,239 Other sources 6,070, ,362-6,655,335 5,785,965 Net assets released from restrictions (Note Q) 6,839,149 (6,839,149) Total revenue and other support 228,014,138 (1,818,255) - 226,195, ,128,138 Expenses: Instruction 72,360, ,360,299 66,568,942 Academic support 16,779, ,779,485 15,583,680 Student services 25,856, ,856,760 24,704,183 Institutional support 24,072, ,072,843 21,665,486 Auxiliary enterprises 21,350, ,350,739 20,016,559 Total expenses 160,420, ,420, ,538,850 Net increase (decrease) in net assets from operating activities 67,594,012 (1,818,255) - 65,775,757 62,589,288 Non-operating activities: Private gifts and grants - non-operating - 120,847 30,991,021 31,111,868 9,046,278 Net loss on endowment and other investments, net of amount appropriated for endowment spending payout (2,453,924) (4,338,913) - (6,792,837) 4,550,061 Change in value of interest rate swaps (Note J) 334, , ,108 Change in value of annuity agreements (286,493) (7,346) (8,700) (302,539) (276,903) Change in net assets 65,188,244 (6,043,667) 30,982,321 90,126,898 76,298,832 Net assets at beginning of year (Notes A, P) 444,846,369 38,065,772 67,375, ,287, ,988,954 Net assets at end of year $ 510,034,613 $ 32,022,105 $ 98,357,966 $ 640,414,684 $ 550,287,786 4.

7 CONSOLIDATED STATEMENT OF ACTIVITIES Year ended May 31, 2015 Temporarily Permanently Unrestricted Restricted Restricted Total Revenue and other support: Tuition and fees $ 205,339,283 $ - $ - $ 205,339,283 Less scholarships and fellowships (Note N) (38,827,842) - - (38,827,842) Net tuition and fees 166,511, ,511,441 Governmental grants and contracts 10,391 1,230,291-1,240,682 Private gifts, grants and contracts - operating 586,032 2,038,237-2,624,269 Endowment spending payout 2,182, ,182,542 Sales and services of auxiliary enterprises 32,598, ,928-32,783,239 Other sources 5,268, ,873-5,785,965 Net assets released from restrictions (Note Q) 7,251,426 (7,251,426) - - Total revenue and other support 214,408,235 (3,280,097) - 211,128,138 Expenses: Instruction 66,568, ,568,942 Academic support 15,583, ,583,680 Student services 24,704, ,704,183 Institutional support 21,665, ,665,486 Auxiliary enterprises 20,016, ,016,559 Total expenses 148,538, ,538,850 Net increase (decrease) in net assets from operating activities 65,869,385 (3,280,097) - 62,589,288 Non-operating activities: Private gifts and grants - non-operating - 7,269,804 1,776,474 9,046,278 Net gain on endowment and other investments, net of amount appropriated for endowment spending payout 1,965,624 2,584,437-4,550,061 Change in value of interest rate swaps (Note J) 390, ,108 Change in value of annuity agreements (285,324) (19,080) 27,501 (276,903) Change in net assets 67,939,793 6,555,064 1,803,975 76,298,832 Net assets at beginning of year 376,906,576 31,510,708 65,571, ,988,954 Net assets at end of year $ 444,846,369 $ 38,065,772 $ 67,375,645 $ 550,287,786 See accompanying notes to consolidated financial statements. 5.

8 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended Year Ended May 31, Cash flows from operating activities: Change in net assets $ 90,126,898 $ 76,298,832 Adjustments to reconcile increase in net assets to net cash provided by operating activities: Depreciation and amortization 11,746,862 9,177,442 Loss (gain) on investments and beneficial interests 5,191,507 (821,299) Gain on fair value of interest rate swaps (334,649) (390,109) Bad debt expense 615, ,630 Private gifts and grants restricted for long-term investment (18,597,660) (1,776,474) Changes in assets and liabilities Change in accounts receivable (621,759) 1,027,251 Change in contributions receivable (16,541,212) (3,381,146) Change in inventories 39,793 (112,980) Change in prepaids and other assets (191,995) 664,609 Change in accounts payable, deposits, and accrued liabilities (9,003,180) (4,228,897) Change in deferred revenue 352, ,326 Change in annuities payable 302, ,903 Net cash provided by operating activities 63,084,779 77,968,088 Cash flows from investing activities: Purchases of property and equipment (26,424,696) (74,448,649) Proceeds from sales and maturities of investments 20,223,169 28,271,301 Purchases of investments (11,266,653) (34,291,288) Change in notes receivable - students 62,144 (21,881) Net cash used in investing activities (17,406,036) (80,490,517) Cash flows from financing activities: Payments on long-term debt (57,106,265) (7,986,736) Change in advances from Federal government (28,604) (10,141) Proceeds from private gifts and grants restricted for long-term investment 18,597,660 1,776,474 Payments of annuity obligations (412,745) (423,618) Change in deposits held by bond trustee (4,585,044) 64,982 Net cash used in financing activities (43,534,998) (6,579,039) Net increase (decrease) in cash and cash equivalents 2,143,745 (9,101,468) Cash and cash equivalents at beginning of year 41,118,289 50,219,757 Cash and cash equivalents at end of year $ 43,262,034 $ 41,118,289 Supplemental disclosure Cash paid for interest, net of interest capitalized for construction in progress of $2,988,097 and $3,568,198 in 2016 and 2015, respectively $ 1,394,512 $ 1,176,962 Construction in progress in accounts payable - 5,049,077 Non-cash transactions Notes payable to seller in connection with property acquisition $ 2,900,000 $ - See accompanying notes to consolidated financial statements. 6.

9 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Belmont University (the "University") is a private, not-for-profit institution of higher education. The University is a student-centered Christian community providing an academically challenging education that empowers men and women of diverse backgrounds to engage and transform the world with disciplined intelligence, compassion, courage and faith. Midtown Capital Investments, LLC, a wholly owned subsidiary of the University, was formed in April 2004 for the purpose of future development of campus facilities. The Athlete s House International, Ltd., a wholly owned subsidiary of the University, was purchased by the University in March The financial statements and footnotes are presented on a consolidated basis with all significant intercompany balances and transactions eliminated in the consolidation. The significant accounting policies followed by the University are described below. Accrual Basis and Financial Statement Presentation: These financial statements are prepared on the accrual basis of accounting. The University classifies its revenue, expenses, gains, and losses into three classes of net assets based on the existence or absence of donor-imposed restrictions. Net assets of the University and changes therein are classified as follows: Unrestricted net assets - Net assets that are not subject to donor-imposed stipulations. Certain unrestricted net assets are designated by the Board of Trustees and management for internal purposes. Temporarily restricted net assets - Net assets subject to donor-imposed stipulations that may or will be met either by actions of the University and/or the passage of time. Permanently restricted net assets - Net assets subject to donor-imposed stipulations that they be maintained permanently by the University. Generally, the donors of these assets permit the University to use all or part of the income earned on related investments for general or specific purposes. The amount for each of these classes of net assets is presented in the consolidated statement of financial position and the amount of change in each class of net assets is displayed in the consolidated statement of activities. Non-operating activities reflect transactions of a capital nature, e.g,, contributions for long-term investments or contributions to be used for facilities and equipment, and investment returns in excess of amounts designated for current operations Accounting Estimates: The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 7.

10 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition: Tuition revenue is recognized as earned by providing instruction. Revenue from auxiliary enterprises is recognized when goods or services are provided. Revenue is reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets, except for specific write-downs of pledges receivable which were previously recorded as temporarily restricted. Gains and losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by law. Per the Uniform Prudent Management of Institutional Funds Act ( UPMIFA ), gains and losses on investments related to permanent endowment funds are reported as increases or decreases in temporarily restricted net assets. Expirations of temporary restrictions on net assets (i.e., the donor-stipulated purpose has been fulfilled and/or the stipulated time period has elapsed) are reported in the statement of activities as net assets released from restrictions. Contributions, including unconditional promises to give, are recognized as revenue in the period received. A conditional contribution is one which depends on the occurrence of some specified uncertain future event to become binding on the donor. Conditional promises to give are not recognized until they become unconditional; that is, when the conditions on which they depend are substantially met. Contributions of assets other than cash are recorded at their estimated fair value at the date recognized. Contributions to be received after one year are recorded at their estimated fair value using an appropriate discount rate commensurate with the rate on U.S. Government Bonds whose maturities correspond to the maturities of the contributions and management s estimate of credit risk for each contribution. Amortization of the discount is recorded as additional contribution revenue in accordance with donor-imposed restrictions, if any, on the contributions. An allowance for uncollectible pledges receivable is provided based upon management s judgment including such factors as prior collection history, type of pledge and nature of fundraising activity. Concentration of Credit Risk: The University receives significant student financial aid from the U.S. Department of Education. The disbursement of funds received under such programs generally requires compliance with terms and conditions specified in federal regulations and is subject to audit by the U.S. Department of Education and possible disallowance of certain expenditures. The University has not had any significant disallowance of student financial aid in the past and expects such amounts, if any, to be immaterial. Contributions: The University reports gifts of cash and other assets as restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or the purpose of the restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statement of activities as net assets released from restrictions. The University reports gifts of land, buildings, and equipment as unrestricted support unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations regarding how long the long-lived assets must be maintained, the University reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service. Contributions of services are recognized if the services received (a) create or enhance nonfinancial assets or (b) require specialized skills, are provided by individuals possessing those skills and would typically need to be purchased if not provided by donation. 8.

11 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES In the event a donor makes changes to the nature of a restricted gift which affects its classification among the net asset categories, such amounts are reflected as reclassifications in the consolidated statement of activities. Cash and Cash Equivalents: The University considers all cash and all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents except for amounts held as part of the University s long-term investment policy. The University maintains cash balances in excess of the federal depository insurance limits at financial institutions that it considers to be high quality financial institutions, and believes credit risk related to these deposits is minimal. Student Accounts Receivable: Student accounts receivable are reported net of an allowance for doubtful accounts. The allowance is estimated by management based on historical collection and allowance practices as well as an analysis of delinquent accounts. Student accounts are written off when deemed uncollectible. The provision for bad debt was approximately $200,000 and $100,000 for the years ended, respectively. There is no interest charged on past due accounts. Student Loans Receivable: Student loans receivable represent advances from the Federal Perkins Loan Program and are stated at their unpaid principal balances. Based on an analysis of specific receivables and historical collections, management has determined that an allowance for uncollectible loans is not considered necessary. Student loans receivable are written off when deemed uncollectible and may be assigned to the Department of Education. Recoveries of student loans receivable previously written off are recorded when received after a student is no longer enrolled in an institution of higher education and after a grace period, interest is charged on student loans receivable and is recognized as it is charged. Interest income on loans is recorded as restricted income and used to fund the student loan program. Late charges are assessed if payments are not paid by the payment due date and are recognized as they are charged. Student loans receivable are considered to be past due if a payment is not made within 90 days of the payment due date. Students may be granted a deferment, forbearance, or cancellation of their student loan receivable based on eligibility requirements defined by the Department of Education. Inventories: Inventories, consisting of textbooks and supplies at the University bookstore and pharmaceutical supplies and drugs at the University pharmacy, are stated at the lower of cost (firstin, first-out) or market (net realizable value). Investments: The University s investments, consisting primarily of publicly traded fixed income and equity mutual funds, are stated at fair value as of May 31. The investments of the University are exposed to interest rate, market and credit risks. During a volatile market environment when there is a higher than normal level of uncertainty, the level of risk associated with such investments increases. If the level of risk increases in the near term, it is possible that the investment balances and the amounts reported in the financial statements would be materially affected. Property, Buildings, and Equipment: Property, buildings, and equipment are stated in the accompanying consolidated statement of financial position at cost, or if contributed, at fair value at date of receipt. It is the University s policy to capitalize expenditures for these items in excess of $5,000. Expenses for repairs and maintenance which do not extend the lives of the related assets are charged to expense as incurred. Interest cost on borrowed funds during the period of construction is capitalized as a component of the cost of acquiring those assets. Library holdings have been recorded at actual cost by the University. Long lived assets, such as buildings and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management believes that currently there is no impairment of long-lived assets. 9.

12 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Depreciable assets are being depreciated using the straight-line method over the estimated useful lives of the assets as follows: Buildings Improvements Library holdings Equipment 60 years years 15 years 5-10 years Bond Issuance Costs: Bond issuance costs are amortized over the term of the bond issues using the effective interest method. Beneficial Interests in Trusts: Beneficial interests in trusts represent arrangements in which a donor establishes and funds a trust administered by an individual or organization other than the University. Beneficial interests are recorded at fair value based upon amounts reported by the trust administrators. Deferred Revenue: The University's policy is to pre-register students for the summer and fall terms during the preceding spring semester. The University's policy is to record student fees collected prior to year-end as deferred revenue. Advances from Federal Government: The Perkins Loan Program is a campus-based program providing financial assistance to eligible postsecondary school students based on financial need. The Department of Education provides funds, which along with University funds are used to make loans to eligible students at low interest rates. Advances from the federal government under the Perkins loan program are distributable to the federal government upon liquidation of the funds and thus are reflected as a liability on the statements of financial position. Scholarships and Fellowships: Scholarships and fellowships are offered by the University to attract and retain students. The University offers merit-based and need-based grants at the University s discretion. Functional Expenses: Operating expenses directly identified with a functional area are charged to that area and, where those expenses affect more than one area, they are allocated on the basis of predetermined ratios. Derivative Instruments: The University accounts for its derivative instruments under Accounting Standards Codification (ASC) 815, Derivatives and Hedging, which establishes accounting and reporting standards requiring that derivative instruments be recorded in the consolidated statement of financial position at estimated fair value. Changes in a derivative s fair value are included in the statement of activities as a component of the change in the net assets in the period of change. As described in Note J, the University has interest rate swap agreements which are considered to be derivatives. The University s interest rate management strategy is to stabilize cash flow requirements by maintaining interest rate swap contracts to convert certain variable-rate debt to a fixed rate. 10.

13 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fair Value of Financial Instruments: Cash and cash equivalents, notes receivable from students and others, and accounts payable approximate fair value because of the short maturity of these instruments. Accounts and notes receivable consist primarily of student loans through a government loan program, a mortgage note receivable and short-term receivables. The notes receivable are not readily marketable. The University has estimated their fair value to be the carrying value. Contributions receivable approximate fair value because of the present value discount included in the carrying amount. Beneficial interests in trusts approximate fair value because the receivables are based upon the fair value of the assets carried in the applicable trusts. Investments are carried at fair value based upon quoted market prices. The carrying amount of the annuities payable approximates fair value based on life expectancies and the present value discount. The carrying value of accounts payable, accrued liabilities and deferred revenue approximates fair value due to the short-term nature of the obligations. Bonds payable and notes payable have a carrying value which approximates the fair value of the outstanding balance of the bonds and notes, respectively. The fair values of financial instruments other than investments, which include the items listed in the preceding paragraph, are based on a variety of factors. In some cases, fair values represent quoted market prices for identical or comparable instruments (Level 1 inputs - market approach). In other cases, fair values have been estimated based on assumptions about the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of risk (Level 2 inputs - income approach). Accordingly, the fair values may not represent actual values that could have been realized at year-end or that will be realized in the future. All other financial instruments' carrying values approximate fair value as of. Income Taxes: The University is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code; accordingly, no provision for income taxes has been made in the accompanying consolidated financial statements. The University is not classified as a private foundation. The University files a Form 990 (Return of Organization Exempt from Income Tax) annually. When these returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the tax position taken or the amount of the position that would ultimately be sustained. Examples of tax positions common to universities include such matters as the following: the tax exempt status of each entity and various positions relative to potential sources of unrelated business income tax ( UBIT ). UBIT is reported on Form 990-T, as appropriate. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes that it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions are not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely to be realized on settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above would be reflected as a liability for uncertain tax benefits in the accompanying statements of financial position along with any associated interest and penalties that would be payable to the taxing authorities upon examination. As of, there were no uncertain tax positions identified. The University does not expect the total amount of unrecognized tax benefits to significantly change in the next 12 months. 11.

14 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Forms 990 and 990-T filed by the University are subject to examination by the Internal Revenue Service (IRS) up to three years from the extended due date of each return. Management believes the Forms 990 and 990-T have been filed appropriately. Forms 990 and 990-T filed by the University are no longer subject to examination for the fiscal years ended May 31, 2012 and prior. The University would recognize interest and penalties related to unrecognized tax positions in interest and income tax expense, respectively. The University did not recognize or accrue any interest or penalties as of, and for the years then ended. Subsequent Events: Management has performed an analysis of the activities and transaction subsequent to May 31, 2016, to determine the need for any adjustments to and/or disclosures within the audited financial statements for the year ended May 31, Management has performed their analysis through October 3, 2016, which was the date the financial statements were issued and has determined that there are no subsequent events to disclose. Reclassifications: Certain amounts in the prior year financial statements have been reclassified, with no effect on net assets or changes in net assets, to conform to current year presentations. B. ACCOUNTS RECEIVABLE Accounts receivable at, consisted of the following: Accounts receivable students $ 332,937 $ 310,306 Less allowance for doubtful accounts (200,000) (100,000) 132, ,306 Other accounts receivable 1,097,583 1,013,647 $ 1,230,520 $ 1,223,

15 C. NOTES RECEIVABLE - STUDENTS The University makes uncollateralized loans to students based on financial need. Student loans are funded through Federal government loan programs and are stated at their unpaid principal balances. At, student loans represented 0.21% and 0.23% of total assets, respectively. At May 31, student loans consisted of the following: Federal government programs $ 1,710,171 $ 1,764,473 Institutional programs 675, ,087 2,385,416 2,447,560 Less allowance for doubtful accounts: Beginning of year 740, ,000 Increases - - Write-offs - - End of year 740, ,000 Student loans receivable, net $ 1,645,416 $ 1,707,560 The University participates in the (USDE) Perkins federal revolving loan program. The availability of funds for loans under this program is dependent on reimbursements to the pool from repayments on outstanding loans. Funds advanced by the Federal government (USDE) of $1.7 million at May 31, 2016 and 2015, are ultimately refundable to the government and are classified as liabilities in the statement of financial position. Outstanding loans cancelled under the program result in a reduction of the funds available for loan and a decrease in the liability to the government. At, the following amounts were past due under student loan programs: 1-60 Days Days 90+ Days Total Past Due Past Due Past Due Past Due 2016 $ 398,466 $ 18,655 $ 858,036 $ 1,275, $ 136,952 $ 61,686 $ 834,602 $ 1,033,240 Amounts due under the Perkins loan program are guaranteed by the government and, therefore, no reserves are placed on any past due balances under those programs. The University has no loans due from faculty or staff. D. CONTRIBUTIONS RECEIVABLE Contributions receivable at consisted of the following: Contributions receivable (present value) $ 33,673,725 $ 17,024,613 Less: allowance for doubtful contributions (412,100) (304,200) $ 33,261,625 $ 16,720,

16 D. CONTRIBUTIONS RECEIVABLE Expected maturities of contributions receivable at May 31, 2016 were as follows: Years ended May 31, Amount 2017 $ 7,164, ,977, ,645, ,859, ,836,686 Thereafter 15,881,308 Total expected contributions 38,365,690 Less: allowance for net present value (4,691,965) Present value of contributions receivable $ 33,673,725 The University has received pledges for current operations, endowed scholarships, and capital projects. As of May 31, 2016, and 2015, the University has net related party pledges receivable, primarily from board members, of $7,869,592 and $8,117,785, respectively. E. INVESTMENTS Investments of the University consisted of the following at : Fair Value Measurements Investments: Common stock securities $ 2,601,792 $ 2,790,658 Corporate bond securities 1,142,810 43,853 U.S. Treasury and agency bonds 734,691 1,829,830 Preferred stock 61,916 61,456 Mutual funds 110,960, ,908,048 Total investments $ 115,501,946 $ 129,633,845 Interest and dividends, net of fees, earned on investments owned by the University amounted to $5,368,671 and $4,971,931 for the years ended, respectively. Investment management fees totaled $137,773 and $144,333 for the years ended, respectively. Deposits held by the bond trustee as further discussed in Note I consist solely of short term money market securities as of. 14.

17 F. PROPERTY, BUILDINGS AND EQUIPMENT Property, buildings and equipment at, consisted of the following: Land $ 32,704,777 $ 29,964,482 Buildings 590,680, ,647,625 Furnishings and equipment 33,887,196 32,169,020 Improvements other than buildings 4,757,903 4,757,903 Library holdings 10,651,384 10,651,384 Construction in progress 4,890,716 78,642,063 Total plant facilities 677,572, ,832,477 Less accumulated depreciation (113,425,446) (103,377,701) $ 564,146,667 $ 546,454,776 Net interest of $2,988,097 and $3,568,198 was capitalized during fiscal 2016 and 2015, respectively. As of, capitalized interest of $15,012 and $1,150,248 was included in construction in progress, respectively. The estimated cost to complete construction in progress at May 31, 2016 was approximately $6,540,000, which relates primarily to the Gabhart building renovation, scheduled for completion in January 2017, and the renovation of the newly purchased book store building, also scheduled for completion in January G. BENEFICIAL INTERESTS IN TRUSTS At, the fair value of these trusts totaled $393,683 and $409,807, respectively. Various financial institutions hold these funds for the benefit of the University and all have been recorded in the University s consolidated financial statements as beneficial interests in trusts. H. BOND ISSUANCE COSTS The amortization expense of the bond issuance costs was $114,057 and $26,720 for the years ended, respectively. The estimated future amortization expense for bond issuance costs for the next five years totals $183,112 annually. 15.

18 I. NOTES PAYABLE AND LONG-TERM OBLIGATION Notes payable and long-term obligations at, consisted of the following: Years Interest Outstanding Principal Description Remaining Rate Notes payable and obligations: Series Variable (1) $ - $ 38,981,928 Series % 53,680,477 55,658,407 Series 2012A 9 Variable (2) 36,200,000 40,000,000 Series Variable (3) 6,250,000 18,400,000 Belmont Heights % 1,669,879 1,818,750 TN Baptist Foundation % (4) 3,410,234 3,443,630 Athlete s House % 2,885,860 - Total notes payable $ 104,096,450 $ 158,302,715 (1) 1.57% and 1.39% at (2) 1.73% and 1.54% at (3) 1.63% and 1.46% at (4) Imputed rate In June 2013, Series 2013 Educational Facilities variable rate revenue bonds in the amount of $40,100,000 were issued by The Health and Educational Facilities Board of Metropolitan Government of Nashville and Davidson County, Tennessee (the Board ). The bonds are secured under an Indenture of Trust between the University and the Trustee. The interest rate is equal to 67% of LIBOR plus 127 basis points. The proceeds of the bonds are to provide funding for the construction of certain campus facilities. The Series 2013 bonds were paid off in their entirety in March, In May 2012, Series 2012 variable rate revenue refunding bonds were issued by The Health and Educational Facilities Board of Metropolitan Government of Nashville and Davidson County, Tennessee (the Board ). The University issued a note payable to the Board collateralized by a negative pledge on certain University property. The proceeds of the note payable were to provide for the refinancing of the indebtedness previously incurred from the Series 2009 bond issuance (reissued as Series 2012A), along with funding for the construction of certain campus facilities. The Series 2012 bonds are payable in annual installments commencing November 1, 2013, ranging from $100,000 to $4,200,000, with the final installment due November 1, Interest is due semi-annually on May 1 and November 1 of each year. The bonds were originally issued at a premium of $3,197,830, which is being amortized by the effective interest method over the term of the bonds. The remaining unamortized premium was $2,580,478 and $2,758,407 as of May 31, 2016 and 2015, respectively. The Series 2012A bonds are payable on December 1 of each year in installments ranging from $3,500,000 to $1,200,000, with the final installment due December 1, Interest is payable monthly. 16.

19 I. NOTES PAYABLE AND LONG-TERM OBLIGATION In January 2010, Series 2010 variable rate revenue refunding bonds were issued by the Health and Educational Facilities Board of the Metropolitan Government of Nashville and Davidson County, Tennessee (the Board ). The University issued a note payable to the Board collateralized by a negative pledge on certain University property. The proceeds of the note payable provided funding for the construction of the Patton/Bear residence halls. The note is payable in installments of $575,000 on June 30 and December 31 of each year, commencing June 30, 2011 and continuing through June 30, At, the University had a note payable totaling $1,669,879 and $1,818,750 respectively, related to the purchase of Belmont Heights Baptist Church. The note bears interest at 8% and is due in quarterly principal and interest payments of $74,238 through maturity in November The note is collateralized by a deed of trust on the related property. At, the University had an obligation totaling $8,000,000 and $8,250,000, respectively, related to a 2008 settlement between the University and the Tennessee Baptist Convention (TBC). The agreement is non-interest bearing (imputed interest of 6.29%) and is presented net of a present value discount of $4,589,766 and $4,806,370 for the years ended, respectively. Annual payments of $250,000 began January 20, 2009 and extend through January The University s loan agreements contain various covenants related to debt service coverage and levels of liquidity and leverage. The University was in compliance with the covenants and ratios at May 31, At May 31, 2016, the University had a note payable totaling $2,885,860 related to the stock purchase of The Athlete s House International, Ltd. (the Company ). The shares purchased represent all of the Company s issued and outstanding equity interests. Two unconditional irrevocable letters of credit were issued, totaling $4,593,291, which are held in trust. Notes payable maturities at their repayment value at May 31, 2016 were as follows: Year Ending May 31, Amount 2017 $ 7,334, ,962, ,384, ,707, ,993,413 Thereafter 60,194,158 $ 101,515,972 The following funds are being held in trust as of May 31: Bond debt service reserve fund $ 4,679,933 $ 4,688,180 Letter of credit reserve fund 4,593,291 - Total $ 9,273,224 $ 4,688,

20 J. INTEREST RATE SWAPS The University uses interest rate swap agreements as part of its interest rate risk management strategy to fix its cost of variable rate debt as cash flow hedges, not for speculation. Although the University believes the derivatives would qualify as a hedge, it has elected for simplicity purposes to report the instruments as freestanding derivatives. As a result, gains and losses are recognized in current earnings, outside of operations. The University entered into the current interest rate swap agreements with a bank during a previous year on portions of the Series 1997, 2002, 2002A and two 2005 bonds payable outstanding. The University redeemed the related bond issues in fiscal year 2010; however, the interest rate swaps were not unwound as a result of this transaction. The notional principal amounts are being amortized over the life of the agreements. The following table presents a summary of the notional amounts and fair values of the University's derivative contracts at May 31, 2016: Maturity Notional Fair Date Amounts Value Rate 12/1/2019 $ 1,900,000 $ (107,654) 3.26% 12/1/ ,400,000 (1,484,266) 3.64% 12/1/2022 4,400,000 (514,399) 3.99% 12/1/ ,000 (18,394) 4.35% 12/1/2023 3,800,000 (421,496) 3.48% $ 21,300,000 $ (2,546,209) The following table presents a summary of the notional amounts and fair values of the University's derivative contracts at May 31, 2015: Maturity Notional Fair Date Amounts Value Rate 12/1/2019 $ 2,300,000 $ (156,599) 3.26% 12/1/ ,300,000 (1,568,847) 3.64% 12/1/2022 4,900,000 (611,940) 3.99% 12/1/2016 1,600,000 (70,050) 4.35% 12/1/2023 4,200,000 (473,422) 3.48% $ 24,300,000 $ (2,880,858) Summary information about the interest rate swaps not designated as hedges as of May 31 is as follows: Notional amounts $ 21,300,000 $ 24,300,000 Settlements on swap 743, ,037 Weighted average pay rates (fixed) 3.677% 3.694% Weighted average receive rates (68% of 1 month LIBOR) 0.299% 0.113% Weighted average maturity 7.65 years 9.39 years 18.

21 K. LEASES The University leases certain buildings and equipment under non-cancelable operating leases, which expire at various dates through May Rent expense under these lease arrangements amounted to $302,519 and $239,951 for the years ended, respectively. Future minimum rental payments required under operating leases that have initial or remaining lease terms in excess of one year as of May 31, 2016, are as follows: Year Ending May 31, Amount 2017 $ 254, , , , ,557 Thereafter 892,126 Total $ 1,827,971 L. EMPLOYEE BENEFIT PLANS The University participates in the retirement program Guidestone and TIAA-CREF. These programs are defined contribution annuity plans that cover substantially all full-time employees. The University contributes an amount equal to the participants' contributions, not to exceed 5% of the participants' compensation. The University's total pension expense was $2,558,112 and $2,418,572 for fiscal 2016 and 2015, respectively. Pension cost is funded as accrued. The University provides medical benefits for substantially all employees through the use of selffunding, employee contributions, and stop-loss insurance coverage. The University pays a monthly premium and is responsible for the first $125,000 of costs per individual after reaching a minimum annual deductible of approximately $5,500,000. The University s expense for the medical benefits, and the related administrative costs and insurance costs totaled $7,001,974 and $6,535,514 for 2016 and 2015, respectively. As of, $711,446 and $634,261, respectively, was accrued for self-insurance of expected claims incurred as of the balance sheet date. The University has entered into deferred compensation agreements with certain employees. Amounts are accrued, including interest, on an annual basis under the terms of each agreement. The University has recorded a liability of $1,746,246 and $1,570,775 for fiscal 2016 and 2015, respectively. M. ANNUITY TRUST AGREEMENTS The University has entered into certain annuity trust agreements with donors whereby the University has received contributions. Upon termination of the trusts, the remaining assets will be remitted to the University or other beneficiaries named by the donors. The assets related to the annuity agreements are recorded at fair value and are included in investments. As of May 31, 2016 and 2015, annuity trust assets, at fair value, totaled $7,507,905 and $7,544,457, respectively. The liabilities to the annuitants are recorded at the net present value of estimated future cash flows. The change in values of annuities payable for fiscal 2016 and 2015 was $(302,539) and $(276,903), respectively. 19.

22 N. TUITION AND FEES, NET Tuition allowances, including scholarships of $44,677,574 and $38,827,842 and bad debt expense on student accounts of $715,192 and $696,630 for fiscal 2016 and 2015, respectively, have been netted against tuition and fees. Bad debt recoveries on student accounts written off amounted to $352,999 and $809,346 for fiscal 2016 and 2015, respectively. These amounts have also been included as a component of net tuition revenue in the consolidated statement of activities. O. ENDOWMENT FUNDS The Board s endowment consists of individual donor-restricted funds established for a variety of purposes and includes both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. As required by GAAP, net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. Interpretation of Relevant Law: The Board of Directors of Belmont University has interpreted the applicable state laws as requiring the preservation of the original gift as of the gift date of the donorrestricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Board classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the University in a manner consistent with the standard of prudence prescribed by applicable state laws. In accordance with applicable state laws, the University considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: The duration and preservation of the fund The purposes of the University and the donor-restricted endowment fund General economic conditions The possible effect of inflation and deflation The expected total return from income and the appreciation of investments Other resources of the University The investment policies of the University 20.