Sweet Briar Institute

Transcription

1 Consolidated Financial Statements Year Ended June 30, 2016 (with comparative financial information for the year ended June 30, 2015) The report accompanying these financial statements was issued by BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of BDO International Limited, a UK company limited by guarantee.

2 Consolidated Financial Statements Year Ended June 30, 2016 (with comparative financial information for the year ended June 30, 2015)

3 Contents Independent Auditor s Report 3-4 Consolidated Financial Statements Consolidated Statements of Financial Position 6 Consolidated Statements of Activities and Other Changes in Net Assets 7 Consolidated Statements of Cash Flows 8 Notes to Consolidated Financial Statements 9-30 Supplementary Information Independent Auditor s Report on Supplementary Information 32 Consolidating Statement of Financial Position 33 Consolidating Statement of Activities 34

4 Tel: Fax: Wade Park Boulevard Suite 208 Raleigh, NC Independent Auditor s Report The Board of Directors Sweet Briar Institute Sweet Briar, Virginia We have audited the accompanying consolidated financial statements of Sweet Briar Institute and its subsidiaries (the Institute ), which comprise the consolidated statement of financial position as of June 30, 2016 and the related consolidated statements of activities and other changes in net assets and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated 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 error or fraud. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 entity 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 entity 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. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 3

5 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sweet Briar Institute and its subsidiaries as of June 30, 2016 and the changes in their net assets and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of a Matter As described in Note 1, the Institute has restated its 2015 consolidated financial statements to correct misstatements related to the classification of net assets in accordance with applicable accounting standards and donor requirements. Our opinion is not modified with respect to this matter. November 18,

6 Consolidated Financial Statements

7 Consolidated Statements of Financial Position June 30, (As Restated) Assets Cash and cash equivalents $ 5,715,890 $ 8,685,084 Accounts receivable, net 341, ,343 Loans to students, net of allowance for bad debts of $165,000 and $125,000 in 2016 and 2015, respectively 1,844,803 2,080,675 Grants receivable - 80,864 Contributions receivable 1,235,882 1,356,707 Redemptions receivable - 13,741,508 Pledges receivable, net 2,978,523 7,291,238 Prepaid expenses and deferred charges 30, ,374 Inventories 77,320 13,293 Investments 69,373,968 57,355,548 Beneficial interests in perpetual trust 7,086,750 7,649,841 Bond costs, net 239, ,763 Land, buildings and equipment, net 55,605,556 56,595,658 Total Assets $ 144,529,723 $ 156,109,896 Liabilities and Net Assets Liabilities Accounts payable $ 872,909 $ 1,126,688 Accrued interest payable 252, ,549 Student deposits and credit balances 263,126 10,728 Asset retirement obligations 61,632 61,632 Post employment benefits payable 53,843 3,715,273 Annuity and life income obligations 494, ,775 Capital lease obligations 148,484 - Refundable government advances for Perkins loan program 1,135,580 1,116,189 Bonds payable, net 23,909,765 24,903,000 Total Liabilities 27,192,457 31,708,834 Net Assets Unrestricted 39,288,655 39,813,324 Temporarily restricted 29,728,617 36,522,928 Permanently restricted 48,319,994 48,064,810 Total Net Assets 117,337, ,401,062 Total Liabilities and Net Assets $ 144,529,723 $ 156,109,896 6

8 Consolidated Statements of Activities and Other Changes in Net Assets Temporarily Permanently Unrestricted Restricted Restricted Total Years ended June 30, Net Assets Net Assets Net Assets Revenues Tuition and fees 10,656, ,656,663 22,675,087 Financial aid (6,323,471) - - (6,323,471) (12,052,374) Tuition and fees, net 4,333, ,333,192 10,622,713 Federal/State grants and contracts 205, , ,104 Gifts and grants 10,304,772 2,984, ,978 14,155,478 14,285,494 Endowment spending allocation 291, ,902 71, ,193 16,550,000 Sales and services of educational departments 395, ,159 47,466 Auxiliary enterprises 4,187, ,187,525 8,201,642 Other sources 421,138-7, , ,582 Total revenues 20,138,409 3,109, ,924 24,192,963 50,554,001 Net assets released from restriction 8,270,086 (8,270,086) Total revenues and other support 28,408,495 (5,160,456) 944,924 24,192,963 50,554,001 Expenses Program services: Instruction and research 10,183, ,183,661 15,787,425 Academic support 2,277, ,277,881 3,205,400 Student services 3,587, ,587,886 4,436,452 Auxiliary enterprises 5,109, ,109,626 7,016,343 Supporting activities: Development and related activities 1,622, ,622,716 1,681,669 Management and general 5,476, ,476,519 13,008,735 Total expenses 28,258, ,258,289 45,136,024 Excess (deficiency) of revenues and other support over expenses 150,206 (5,160,456) 944,924 (4,065,326) 5,417,977 Other Gains and Losses Total endowment investment return less endowment spending allocation (3,559,970) 1,214,115 (11,953) (2,357,808) (15,360,126) Loss on foreign currency transactions (12,662) - - (12,662) (197,737) Change in value of split-interest gifts - (36,273) (114,696) (150,969) (104,821) Contributions to SBC Restoration Lesse, LLC ,509 Net gain on plant and other disposals 86, ,060 (3,085) Change in beneficial interest of perpetual trust - - (563,091) (563,091) (361,088) Net assets released from restrictions - non-operating 2,811,697 (2,811,697) (Decrease) increase in net assets (524,669) (6,794,311) 255,184 (7,063,796) (9,972,371) Net assets, beginning of year (as restated) 39,813,324 36,522,928 48,064, ,401, ,373,433 Net assets, end of year 39,288,655 29,728,617 48,319, ,337, ,401,062 See accompanying notes to consolidated financial statements. 7

9 Consolidated Statements of Cash Flows Years ended June 30, Cash Flows from Operating Activities Change in net assets $ (7,063,796) $ (10,608,880) Adjustments to reconcile change in net assets to net cash used by operating activities: Depreciation and amortization 2,363,374 2,410,521 Change in the provision for uncollectable accounts (116,954) - Amounts restricted for permanent endowment (255,184) (216,357) Investment losses not used for operations 3,141, ,151 (Gain) Loss on plant and other disposals (86,060) 3,085 Adjustments for (increases) decreases in assets and increases (decreases) in liabilities: Accounts and grants receivable 553,434 79,031 Contributions receivable 120,825 79,533 Redemptions receivable - (13,741,508) Pledges receivable 4,173,265 (3,672,042) Dividend and interest receivable - 1,024 Inventories (64,027) 115,078 Prepaid expenses 375,795 (212,492) Accounts payable (253,779) (56,217) Accrued liabilities (9,640) - Deposits and deferred revenues 252,398 (555,065) Annuity and life income obligations (18,566) (21,835) Post employment benefits (3,661,430) 3,715,273 Net cash used in operating activities (548,841) (22,217,700) Cash Flows from Investing Activities Purchase of investment securities (1,788,238) (3,528,483) Sale of investment securities, net of gains not distributed 932,913 34,221,421 Buildings and equipment additions (1,049,286) (1,905,876) Loan repayments from students 347,298 - Loan advances to students (151,426) (3,228) Net cash (used in) provided by investing activities (1,708,739) 28,783,834 Cash Flows from Financing Activities Principal payments on bonds payable (986,189) (939,647) Contribution to SBC Restoration Lessee LLC - 636,509 Government advance for Perkins loan program 19,391 - Amounts restricted for permanent endowment 255, ,357 Net cash used in financing activities (711,614) (86,781) Net change in cash and cash equivalents (2,969,194) 6,479,353 Cash and cash equivalents, beginning of year 8,685,084 2,205,731 Cash and cash equivalents, end of year $ 5,715,890 $ 8,685,084 See accompanying notes to consolidated financial statements. Supplemental Information: Interest paid $ 1,009,274 $ 1,045,227 Equipment financed through capital leases $ 148,484 $ - 8

10 Notes to Consolidated Financial Statements 1. Nature of Operations and Significant Accounting Policies Nature of Operations The accompanying consolidated financial statements include the accounts of Sweet Briar College Virginia Programs (the College ), Sweet Briar College Junior Year in France, Sweet Briar College Junior Year in Spain, Sweet Briar Alumnae Association, and SBC Restoration Lessee LLC (the LLC ), collectively referred to as Sweet Briar Institute (the Institute ). In March, 2014, the LLC, a Virginia limited liability company and controlled affiliate of the Institute, was formed so that the renovation expenditures incurred in connection to the rehabilitation of the Institute s library will support Virginia Historic Tax Credits certified to the LLC for allocation to its members. The Institute is the managing member of the LLC and holds a majority membership interest. The non-controlling interest in the LLC constitutes 1%. Accordingly, the accounts of the LLC have been consolidated with the accounts of the Institute. All significant interfund and intercompany accounts and transactions have been eliminated. The institute is a private, nonprofit institution of higher education offering undergraduate, graduate, and abroad programs. The Institute is accredited by the Southern Association of Colleges and Schools. The significant accounting policies followed by the Institute are presented below. Basis of Financial Statement Presentation The consolidated financial statements of the Institute have been prepared in accordance with accounting principles generally accepted in the United States of America ( U.S. GAAP ). The Institute s consolidated financial statements follow the provisions of Financial Accounting Standards Board ( FASB ) Accounting Standards Codification ( ASC ) Topic 958, Not-for-Profit Entities. Classification of Net Assets The accompanying consolidated financial statements present information regarding the Institute s financial position and activities according to three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. The three classes are differentiated based on the existence or absence of donor-imposed restrictions, as described below: Unrestricted net assets are free of donor-imposed restrictions. Unrestricted net assets may be designated for specific purposes by actions of the Board of Directors or may otherwise be limited by agreements with outside parties. Revenues, gains, and losses that are not temporarily or permanently restricted by donors are included in this classification. Expenses are reported as decreases in this classification. Temporarily restricted net assets are limited in use by donor-imposed stipulations that either expired by the passage of time or that can be fulfilled by appropriate action of the Institute pursuant to those stipulations. Permanently restricted net assets are required by donor-imposed stipulations to be held permanently by the Institute. These net assets include primarily permanent endowments funds. Generally, the income from these assets either becomes temporarily restricted for such use as scholarships or is currently available for the Institute s unrestricted use. 9

11 Notes to Consolidated Financial Statements Restatement of Prior Year Net Asset Balances The 2015 net asset balances as presented on the accompanying consolidated statement of activities and other changes in net assets have been restated to correct misstatements related to the reclassification of net assets in accordance with applicable accounting standards and donor stipulations. This restatement constitutes the following reclassification: Temporarily Permanently Unrestricted Restricted Restricted June 30, 2015 Net Assets Net Assets Net Assets Total Net assets, as previously reported $ 47,710,702 $ 29,653,007 $ 47,037,353 $ 124,401,062 Restatement adjustment (7,897,378) 6,869,921 1,027,457 - Net assets, as restated $ 39,813,324 $ 36,522,928 $ 48,064,810 $ 124,401,062 Cash and Cash Equivalents Cash and cash equivalents consist of cash, money market funds, and treasury bills with a maturity of ninety days or less when acquired. Cash held for long-term investment is classified as investments or as assets restricted to investment in land, buildings, and equipment. The Institute places its cash and cash equivalents on deposits with financial institutions in the United States. The Federal Deposit Insurance Corporation ( FDIC ) covers $250,000 for substantially all depository accounts. During the year, the Institute from time to time may have had amounts on deposit in excess of the insured limits. As of June 30, 2016, the Institute had $5,443,359 which exceeded these insured amounts. The Institute has not experienced significant losses in such accounts and does not believe it is exposed to any significant risk. Accounts Receivable Accounts receivable consist of student accounts receivable and are stated at the billed amount less an allowance for doubtful accounts. Management s determination of the allowance for doubtful accounts is based on an evaluation of the accounts receivable, past experience, current economic conditions, and other risks inherent in the accounts receivable portfolio. Concentrations of credit risk with respect to student receivables are limited due to the number of students and their dispersion across geographic areas. Contributions Receivable Contributions receivable include irrevocable gifts in which the Institute has a remainder interest, but that are held in trust and administered by outside trustees Pledges Receivable Unconditional pledges to contribute to the Institute are recorded upon receipt at their estimated fair values. The fair value of pledges to be received after one year is presented at an appropriate discount rate. In addition, an allowance for doubtful amounts as determined by management has been recorded. 10

12 Notes to Consolidated Financial Statements Investments Investments are reported in the accompanying consolidated statements of financial position at fair value. Unrealized and realized gains and losses on investments are reflected in the accompanying consolidated statements of activities and other changes in net assets. Investment earnings, including dividend and interest income, are recognized when earned. The Institute has a spending policy based on the total return concept that governs the rate at which funds are transferred from the Endowment Fund to the operating budget. The spending rate is determined annually by the Board as part of the budgeting process. Purchases and sales of investments are recorded on the trade date. Investment securities are exposed to several risks, such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the accompanying consolidated statements of financial position and consolidated statements of activities and other changes in net assets. Redemptions Receivable Redemption receivables consist of redemptions requested from two investment funds that were not received as of June 30, These amounts were collected during the year ended June 30, Beneficial Interest in Perpetual Trust The beneficial interest in perpetual trust represents resources neither in the possession of nor under the control of the Institute, but held and administered by outside fiscal agents, with the Institute deriving income from such funds. The fair value of the Institute s share of the assets is based on the underlying investments held by the trust and is derived from quoted market prices. The fair value balance is reflected in the accompanying consolidated statements of financial position, and income (including unrealized gains/losses) is recorded in the accompanying consolidated statements of activities and other changes in net assets. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market value and consist primarily of book store merchandise. Such cost is determined using the retail inventory method. 11

13 Notes to Consolidated Financial Statements Land, Buildings, and Equipment Land, buildings, and equipment are stated at cost at the date of purchase or, if acquired by gift, at fair value at the date of the gift. Depreciation of buildings and equipment is computed by the straight-line method, based on the estimated useful lives of assets, as follows: Classification Land improvements Buildings Equipment Building improvements Income producing property Vehicles Estimated Useful Life 10 to 15 years 10 to 60 years 7 to 20 years 5 to 60 years 10 to 60 years 7 to 20 years Vehicles that are leased are depreciated over the lesser of the lease term or useful life of the vehicle. Interest costs incurred for construction are capitalized. Betterments and major renewals which extend the lives of properties are capitalized; maintenance, repairs, and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is then recognized. Bond Issuance Costs Bond issuance costs are amortized using the straight-line method, which approximates the effective interest rate method, over the term of the related financing agreement. Deposits and Advance Fees Deposits and student fees applicable to academic sessions subsequent to the current year are deferred and recognized as revenues in subsequent periods. Split-Interest Agreements and Annuity Obligations The Institute has been named the beneficiary in several charitable gift annuity contracts and charitable remainder trusts for which the Institute serves as trustee. Assets held in these trusts are included in investments at fair value and are recognized at the date the trusts are established. Annuity obligations arising from these gifts are recognized as liabilities and measured at the present value of the actuarially determined obligation based upon the life expectancy of the donors and their beneficiaries, the contractual payment obligation under the agreement, and using a discount rate of 7% for the years ended June 30, 2016 and Periodic revaluations of these liabilities result in changes in the value of the contracts. 12

14 Notes to Consolidated Financial Statements Post Employment Benefits Payable As part of the conditions of the settlement of the litigation, the Institute accrued severance costs related to all individuals who separated from the Institute subsequent to the decision to close. Amounts were accrued based on each terminated employee s salary, termination date, and date of rehire, if applicable. Amounts are expected to be paid within 6 months of year end. Tuition and Fees Student tuition and fees are recorded as revenue in the fiscal year that the related academic services are rendered. Student tuition and fees received in advance of services to be rendered are recorded as deferred revenue. Financial aid provided by the institute is reflected as a reduction of tuition and fees. Grants Grant revenue is recognized when qualified grant expenditures are incurred as they have been determined to be exchange transactions. Auxiliary Enterprises Auxiliary enterprises, including dormitories, food service, and the bookstore furnish services to students, faculty, and staff. Art Objects The Institute owns a collection of various objects of art. These items are held for public exhibition rather than for financial gain and are kept protected and preserved. It is the Institute s policy to use any proceeds from the sale of collection items to acquire other items for the collection. Accordingly, the Institute does not recognize contributions of works of art, nor are works of art capitalized and recorded on the accompanying consolidated statements of financial position. Allocation of Expenses Expenses related to the operation and maintenance of physical plant, including depreciation of plant assets are allocated to operating programs and supporting activities based upon periodic inventories of facilities. Interest expense on external debt is allocated to the activities that have most directly benefited from the debt proceeds. Expenses, including depreciation, are allocated on a functional basis and are not presented by natural categories. 13

15 Notes to Consolidated Financial Statements Income Taxes The Institute is exempt from federal and state income taxed under Section 501(c)(3) of the U.S. Internal Revenue Code. However, certain income unrelated to its exempt function is subject to income taxation. The Internal Revenue Service ( IRS ) has held that a Virginia limited liability company, treated as a partnership for state income tax purposes, would also be treated as a partnership for federal income tax purposes. Therefore, income taxes are not provided with respect to the operations of SBC Restoration Lessee LLC since each member is responsible for the income tax consequences associated with its proportionate share of such operations. Management has evaluated the effect of the guidance provided for uncertainty in income taxes that became effective for the Institute on July 1, Management believes that the Institute continues to satisfy the requirements of a tax-exempt organization at June 30, Management has evaluated all tax positions that could have a significant effect on the consolidated financial statements and determined the Institute had no uncertain income tax positions at June 30, The Institute is no longer subject to U.S. federal, state, or local tax examinations by tax authorities for tax years prior to the year ending June 30, Use of Estimates The preparation of consolidated 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 consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. The fair value of investments held by the Institute which are not traded on an organized exchange is necessarily based upon estimates by management and these estimates are critical to the Institute s reported net assets and its changes in net assets. Fair Value Measurements The carrying amounts of contributions receivables and annuities payable approximate fair value upon application of the discount rate used on future cash flows. The carrying amounts reflected on the accompanying consolidated statements of financial position for mortgage loans receivables approximate fair value due to the effect of the variable rate of interest associated with the mortgage loans. The carrying value of investments, beneficial interests in perpetual trusts, and amounts payable to third-party beneficiaries are reported at fair value as amounts were derived from quoted market prices, net asset value of investments held, a mid-market quotation from a broker, a bid quotation, or if unavailable or unrepresentative, at their probable realization value as of year-end, estimated in good faith by the investment administrator. 14

16 Notes to Consolidated Financial Statements FASB ASC Topic 820, Fair Value Measurement, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction value hierarchy which requires an entity to maximize the use of observable inputs when measuring fir value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 Inputs to the valuation methodology are quoted prices available in active markets for identical investments as of the reporting date; Level 2 Inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value can be determined through the use of models or other valuation methodologies; and Level 3 Inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the asset or liability including assumptions regarding risk. A financial instrument s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Fair Value of Other Financial Instruments Except for notes receivable from students and long-term debt, the fair value of all financial instruments approximates fair value. It was not considered practical to determine fair value of notes receivable from students under U.S. Government loan programs and related government advances because the notes receivable are non-marketable and can only be assigned to the U.S. Government or its designees. These installment notes are due over terms of ten years, with interest at five percent per annum, and are carried at face value. Based upon current borrowing rates available to the Institute for similar borrowings, management of the Institute believes that the carrying value of its long-term debt approximates its fair value. Asset Retirement Obligations Asset retirement obligations ( ARO ) are legal obligations associated with the retirement of longlived assets. These liabilities are initially recorded at fair value and the related asset retirement costs are capitalized by increasing the carrying amount of the related assets by the same amount as the liability. Asset retirement costs are subsequently depreciated over the useful lives of the related assets. Subsequent to initial recognition, the Institute records period-to-period changes in the ARO liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows. The Institute derecognizes ARO liabilities when the related obligations are settled. 15

17 Notes to Consolidated Financial Statements New Accounting Pronouncements In August 2014, the FASB issued Accounting Standards Update ( ASU ) , Presentation of Financial Statements-Going Concern (Subtopic ): Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern ( ASU ). The amendments in ASU are intended to define management s responsibility to evaluate whether there is substantial doubt about an organization s ability to continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, U.S. GAAP lacks guidance about management s responsibility to evaluate whether there is substantial doubt about the organization s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization s management; with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. This standard is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Institute is currently evaluating the impact of adopting the ASU. In April 2015, the FASB issued ASU , Interest Imputation of Interest: Simplifying the presentation of Debt Issuance Costs ( ASU ), which is intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in ASU are effective for an entity s financial statements issued for fiscal years beginning after December 15, Early adoption is permitted for financial statements that have not been previously issued. The Institute does not anticipate that the ASU will have a material impact to the financial statements. In May 2015, the FASB issued ASU , Fair Value Measurement (Topic 820); Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent) ( ASU ), which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The amendments in ASU are effective for an entity s interim and annual reporting periods in fiscal years that begin after December 15, Early adoption is permitted. The Institute does not anticipate that the ASU will have a material impact to the financial statements. 16

18 Notes to Consolidated Financial Statements In June 2015, FASB issued ASU , Technical Corrections and Improvements ( ASU ), which clarified guidance related to expiration of donor-imposed restriction. The amendment to the accounting guidance focuses on the accounting for situations involving two temporary restrictionsa purpose and time restriction that were specified by the donor. The new guidance indicates that when a purpose restriction has been satisfied, the time restriction may be released. The new guidance is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. The Institute does not anticipate that the ASU will have a material impact to the financial statements. 2. Accounts Receivables Accounts receivable consisted of the following at: Carrying Value June 30, Student accounts $ 99,336 $ 585,359 Auxiliary services 91,972 4,079 Other 172, ,425 Total accounts receivable 364, ,863 Less allowance for doubtful accounts (22,942) (237,520) Accounts receivable, net $ 341,351 $ 599, Loans to Students Loans to students are funded primarily by advances from the U.S. Government and totaled $1,013,594 and $1,156,607 as of June 30, 2016 and 2015, respectively. Advances from the U. S. Government for student loans, all part of the Perkins loan program, are repayable upon liquidation of the program. As of June 30, 2016 and 2015, loans to students represented 1.28% and 1.33% of total assets, respectively. The availability of funds for loans under the Perkins federal revolving loan program is dependent on reimbursements to the pool from repayments on outstanding loans. Funds advanced by the government of $1,135,580 and $1,116,189 at June 30, 2016 and 2015, respectively, are ultimately refundable to the government and are classified as U.S. government grants refundable on the consolidated statements 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. 17

19 Notes to Consolidated Financial Statements 4. Donated Life Insurance The Institute is the owner and beneficiary of donated life policies with a total face value of approximately $235,270 and $236,270 at June 30, 2016 and 2015, respectively. Premiums are funded by the donors through periodic gifts to the Institute. The cash value of the policies are funded by the donors through periodic gifts to the Institute. The cash value of the policies was $145,709 and $143,350 at June 30, 2016 and 2015, respectively, and is included in investments in the accompanying consolidated statements of financial position. 5. Pledges Receivables, Net Pledges receivable consisted of the following at: June 30, Expected to be collected Within one year $ 1,925,780 $ 7,417,085 After one year and before five years 1,565, ,668 After five years - 47,365 Total 3,490,852 7,664,118 Less unamortized discount (discount rates of 3.75% to 8.25%) (101,949) (20,123) Less allowance for doubtful amounts (410,380) (352,747) Pledges receivable, net $ 2,978,523 $ 7,291,248 Pledges receivable in future periods have been discounts using a credit risk adjusted rate based upon the expected collection date of the pledge. Three donors made up 64% and 1 donor made up 96% of total pledges receivable at June 30, 2016 and 2015, respectively. Use of the funds from pledges receivable have been restricted by donors for future use as follows at: June 30, Temporarily restricted by time $ 2,323,979 $ 7,005,000 Temporarily restricted by purpose 594, ,643 Permanently restricted 470,623 82,352 Total pledges receivable, net of unamortized discount 3,388,903 7,643,995 Less allowance for doubtful amounts (410,380) (352,757) Pledges receivable, net $ 2,978,523 $ 7,291,238 18

20 Notes to Consolidated Financial Statements 6. Investments Long-term investments, stated at fair value, are summarized as follows at: June 30, Cash equivalents $ 14,850,462 $ 624,107 Fixed income mutual funds 9,422,394 8,939,359 Real estate and mortgages 990, ,213 Domestic equities 15,536,353 15,300,020 International equities 20,807,839 23,682,303 Inflation hedging 5,397,574 5,451,714 Flexible capital 2,368,685 2,413,832 Total long-term investments $ 69,373,968 $ 57,355,548 The institute s cash and investment are placed in major domestic and international financial institutions which limit the amount of credit exposure. The Institute s investment funds are managed by a number of investment managers which limits the amount of credit risk within any one investment fund. The Institute s Investment and Finance Committee establishes investment guidelines and performance standards which further reduce its exposure to credit risk. The Institute holds investments with fund managers which invest in private investment funds or limited partnerships as part of the Institute s asset allocation. The investment in the private investment funds and limited partnerships is an alternative investment strategy with the purpose of increasing the diversification of the Institute s holdings and is consistent with the Institute s overall investment objectives. The alternative investments are not traded on any organized exchange, and accordingly, investments in such funds may not be as liquid as investments in marketable equity or debt securities. The alternative investments may invest in other private investment funds, equity or debt securities, which may or may not have readily available fair values, and foreign exchange or commodity forward contracts. Investments reported on the consolidated statement of financial position at June 30, 2016 and 2015 include $940,619 and $1,041,491, respectively, of assets held under split-interest agreements, which are reported at fair value. Investment expenses for the year ended June 30, 2016 and 2015 was $459,070 and $658,471, respectively. 19

21 Notes to Consolidated Financial Statements The following table summarizes the valuation of the Institute s financial investments and beneficial interest in perpetual trust measured at fair value based on the level of input utilized to measure fair value: Total Fair June 30, 2016 (Level 1) (Level 2) (Level 3) Value Investments: Cash and cash equivalents $ 14,850,462 $ - $ - $ 14,850,462 Fixed income mutual funds 9,422, ,422,394 Real estate and mortgages 990, ,661 Domestic equities 937,992 14,598,361-15,536,353 International equities 7,600,848 13,206,991-20,807,839 Inflation hedging - 5,397,574-5,397,574 Flexible capital 2,368, ,368,685 Total long-term investments $ 36,171,042 $ 33,202,920 $ - $ 69,373,968 Beneficial interest in perpetual trust $ - $ - $ 7,086,750 $ 7,086,750 Total Fair June 30, 2015 (Level 1) (Level 2) (Level 3) Value Investments: Cash and cash equivalents $ 624,107 $ - $ - $ 624,107 Domestic equities 1,014,221 14,285,799-15,300,020 Fixed income mutual funds 8,939, ,939,359 Flexible capital 2,413, ,413,832 Inflation hedging - 5,451,714-5,451,714 International equities 8,402,164 15,280,139-23,682,303 Real estate and mortgages 944, ,213 Total investments $ 22,337,896 $ 35,017,652 $ - $ 57,355,548 Beneficial interest in perpetual trust $ - $ - $ 7,649,841 $ 7,649,841 20

22 Notes to Consolidated Financial Statements The majority of the Institute s underlying fund managers use a market approach to value an investment, although some funds may also use an income approach. In addition, the following inputs/valuation techniques are used comparable security analysis, recent transactions, earnings and cash flow forecasts, market multiple analysis, discounted cash flows, internal valuation models, and third-party appraisals. For certain investments in entities which calculate net asset value ( NAV ), or its equivalent, the Institute has estimated the fair value of the investment on the basis of the NAV of the fund, as a practical expedient, because a) the underlying investment manager s calculation of the NAV is fair value based and b) the NAV has been calculated as of the Institute s reporting date. The Institute s level 2 investments all have redemption rights. The Institute believes that the stated value of its investments in these funds is a reasonable estimate of fair value as of June 30, 2016 and There were no changes in valuation methodology during the year ended June 30, 2016 and The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Institute believes its valuation methods are appropriate and consistent with those of other market participants, because of the inherent subjectivity in any valuation methodology, the estimated fair value may differ from the fair value that would have been used had a ready market for the securities existed, and the difference could be material. The table below sets forth a summary of changes in the fair value of the Institute s Level 3 investments which consisted of investments and beneficial interests in perpetual trust: Years ended June 30, Beginning fair value $ 7,649,841 $ 16,833,085 Net realized and unrealized (loss) gain included in changes in net assets (563,091) 95,126 Withdrawals - (9,328,370) Ending fair value $ 7,086,750 $ 7,649,841 There were no transfers from level 3 to level 2 during the years ended June 30, 2016 and Transfers, when made, are deemed to be made at the end of the year. For investments in entities that calculate net asset value or its equivalent whose fair value is not readily determinable, the following tables provide information about the relative liquidity of these investments. The fair values of these investments have been estimated using net asset value per share of the investments, unless noted. Management is not aware of any factors that would impact net asset value as of June 30, 2016 and

23 Notes to Consolidated Financial Statements The following table sets forth a summary of redemption rights associated with the Institute s assets valued at net asset value per share, or its equivalent, at: Redemption Fair Unfunded Redemption Notice June 30, 2016 Value Commitments Frequency Period Inflation hedging(a) $ 5,397,574 $ - Daily - Monthly 0-15 days International equities(b) 13,206,991 - Monthly 6-30 days Domestic equities(c) 14,452,652 - Daily 2 days Redemption Redemption Fair Unfunded Frequency Notice June 30, 2015 Value Commitments (If Applicable) Period Inflation hedging(a) $ 5,451,714 $ - Daily - Monthly 0-15 days International equities(b) 15,280,139 - Monthly 6-30 days Domestic equities(c) 14,142,449 - Daily 2 days (a) Includes an investment in a limited partnership which seeks to generate net returns in excess of UBS Global Real Estate Investor Index. It achieves its objective by managing a portfolio of securities issued by REITS and other publicly held real estate companies. This class also includes an investment in a real asset strategy that seeks to deliver positive real returns with an overall portfolio risk similar to that of longer-dated U.S. Treasury Inflation-Protected Securities. The strategy is composed of three passive indices: Passive Commodity Index (Dow Jones UBS Roll Select Commodities Index), Passive Natural Resources Index (S&P Global Large Midcap Commodities Resources Index), and Passive TIPS Index (BC U.S. Tips index). Real assets complement a policy portfolio by adding diversification and are intended to provide inflation protection relative to equities and fixed income. (b) Includes investments in funds that seek to provide long-term growth by investing in a diversified portfolio of foreign equities that include small and mid-cap securities and emerging markets. The emerging markets investment utilizes a fund of funds approach with exposure to closed-end funds and over 4,000 underlying securities. The mid-cap strategy includes equities that are between $2 billion and $10 billion in market cap and have grown beyond the small cap strategy. Also includes investments in a limited partnership which invests in non-u.s. issuers and seeks to earn returns greater than the Morgan Stanley EAFE Index over a full market cycle. (c) Includes an investment in a fund that seeks to approximate as closely as practicable the returns of the Russell 3000 Index over the long term. The fund achieves its objective by investing primarily in equity securities which comprise the Russell 3000 Index. 22

24 Notes to Consolidated Financial Statements 7. Land, Buildings, and Equipment, net Land, buildings, and equipment, net, is comprised of the following at: June 30, Land and land improvement $ 2,797,490 $ 2,797,490 Buildings 25,151,425 25,156,719 Building improvements 56,545,570 56,559,235 Income producing property 7,363,241 6,376,078 Equipment 5,266,152 5,448,386 Vehicles 696, ,481 Livestock 14,500 14,500 Construction in-progress 102,271 - Total, land, buildings, and equipment 97,937,295 96,872,889 Less accumulated depreciation (42,331,739) (40,277,231) Land, buildings, and equipment, net $ 55,605,556 $ 56,595,658 Depreciation and amortization expense for the year ended June 30, 2016 and 2015 was $2,273,932 and $2,410,521, respectively. 8. Capital Lease Obligations and Operating Leases Minimum lease commitments at June 30, 2016, under agreements to lease vehicles are as follows: Operating Capital Lease Lease Years ending June 30, Payments Payments 2017 $ 98,833 $ 42, ,391 42, ,391 42, ,391 38, ,101 13, , ,781 Less executory costs (38,268) (7,563) Less interest on capital leases - (22,734) Total $ 431,839 $ 148,484 23

25 Notes to Consolidated Financial Statements 9. Bonds Payable, Net Bonds payable are summarized as follows: Final June 30, Maturity Bond payable, Series 2011, Industrial Development Authority of the Town of Amherst, Virginia, fixed interest rate of 2.97%, uncollateralized, quarterly payments 2036 $ 8,616,404 $ 8,922,593 Bond payable, Series 2006, Industrial Development Authority of the Town of Amherst, Virginia, fixed interest rate of 4% to 5%, uncollateralized, semi-annual payments ,190,000 15,870,000 Premium on bonds payable 103, ,407 Bonds payable, net $ 23,909,765 $ 24,903,000 During the year ended June 30, 2012, the Institute entered into a Series 2011 bond payable in the amount of $10,000,000. The bond series is for a twenty-five year term with a fixed rate of interest for seven years at 2.97% and a variable rate of LIBOR plus 2% thereafter. At the end of the initial seven years, there is also a put/call option to renew every give years thereafter. The Institute s bond agreement contains various restrictive covenants, all of which management if the Institute believes it complied with as of and for the year ended June 30, Schedule maturities of long-term debt as of June 30, 2016, are as follows: Years ending June 30, Amount 2017 $ 1,020, ,064, ,109, ,144, ,194,661 Thereafter 18,272,283 Total $ 23,806,404 Interest expense for the years ended June 30, 2016 and 2015 was $1,030,422 and $1,029,228, respectively. 24

26 Notes to Consolidated Financial Statements 10. Net Assets and Changes in Unrestricted Net Assets Net assets consisted of the following at: June 30, (As Restated) Unrestricted Net Assets: Operating fund $ 2,409,423 $ 7,323,423 Funds designated for a specific purpose 19,726,149 18,690,997 Funds designated as Quasi-Endowment 2,240,311 1,737,104 Matching funds required for Federal Perkins loan program Annuity and life income agreements 360, ,294 Cash surrender value of life insurance 137, ,067 Non-controlling interest 775, ,610 Investment in plant 13,639,844 10,710,829 Total unrestricted net assets $ 39,288,655 $ 39,813,324 Temporarily Restricted Net Assets: Academic departments $ 7,058,551 $ 5,822,236 Other departments 4,021,713 10,757,119 Scholarships 14,254,062 12,183,403 Annuity and life income agreements 386, ,466 Plant improvements 203, ,819 Promises to give in future years 2,590,954 7,248,885 Underwater Investments adjustment 1,214,116 - Total temporarily restricted net assets $ 29,728,617 $ 36,522,928 Permanently Restricted Net Assets: Endowment corpus $ 48,319,994 $ 48,064,810 Temporarily restricted net assets consisted of contributions and income on endowment restricted for instruction, research, and divisional support, as well as split interest agreements and time restricted contributions. Temporarily restricted net assets for the years ended June 30, 2016 and 2015 totaled $29,653,007 and $29,653,007, respectively. Permanently restricted net assets consisted of donor restricted contributions and income earned on endowment and include beneficial interest in perpetual trusts, perpetual endowment funds, split interest agreements, student loan interest, and other gifts and income. 25

27 Notes to Consolidated Financial Statements 11. Endowment The Institute s endowment consists of approximately 400 individual funds established for a variety of purposes including both donor-restricted endowment funds and funds designated by the Board of Directors to function as endowments. Net assets associated with endowment funds, including funds designated by the Board of Directors to function as endowments, are classified and reported based on the existence or absence of donor imposed restrictions. Interpretation of Relevant Law The Institute has interpreted UPMIFA as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulation to the contrary. As a result of this interpretation, the Institute 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 Institute in a manner consistent with the standard of prudence prescribed in UPMIFA. In accordance with UPMIFA, the Institute considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: 1. The duration and preservation of the fund 2. The purposes of the Institute and the donor-restricted endowment fund 3. General economic conditions 4. The possible effect of inflation and deflation 5. The expected total return from income and the appreciation of investments 6. The investment policies of the Institute 7. Other resources of the Institute Endowment net assets consist of the following: Temporarily Permanently June 30, 2016 Unrestricted Restricted Restricted Total Donor restricted endowment funds $ (6,567,065) $ 18,519,360 $ 38,964,976 $ 50,917,272 Board designated endowment funds 19,586, ,586,121 Total endowment funds $ 13,019,056 $ 18,519,360 $ 38,964,976 $ 70,503,393 26