FINANCIAL REPORT JUNE

Transcription

1 FINANCIAL REPORT JUNE 30, 2015

2 CONSOLIDATED FINANCIAL REPORT

3 CONTENTS Page INDEPENDENT AUDITOR S REPORT... 3 FINANCIAL STATEMENTS Consolidated Statements of Financial Position... 5 Consolidated Statements of Activities... 6 Consolidated Statements of Cash Flows... 8 Notes to Consolidated Financial Statements...10

4 INDEPENDENT AUDITOR S REPORT To the Board of Trustees of Marymount University Arlington, Virginia We have audited the accompanying consolidated financial statements of Marymount University, which comprise the consolidated statements of financial position as of and 2014, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the consolidated 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 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of 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. Your Success is Our Focus 319 McClanahan Street, S.W. Roanoke, Virginia Fax:

5 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the University as of and 2014, 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. Roanoke, Virginia September 14, 2015 CERTIFIED PUBLIC ACCOUNTANTS

6 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION and 2014 ASSETS Cash and cash equivalents Cash and cash equivalents, other $ 7,196,295 $ 7,590,357 Comprehensive campaign, restricted 2,525,048 2,456,445 Restricted by debt agreement (Note 7) 4,286,764 1,864,978 Total cash and cash equivalents 14,008,107 11,911,780 Receivables and other assets (Note 2) 7,536,139 6,592,700 Notes receivable, University and government student loans, net of allowance for doubtful accounts 2015 $6,358; 2014 $6,314 1,108,027 1,160,134 Contributions receivable (Note 3) 916,070 1,891,134 Funds held in reserve by debt agreement (Note 7) 9,418,000 - Funds held for investment in land, buildings, and equipment 17,652,900 - Investments and funds held in trust by others (Note 4) 37,554,979 39,844,994 Deferred loan costs, net of accumulated amortization 1,621, ,912 Land, buildings, and equipment, net of accumulated depreciation (Notes 5 and 7) 116,340, ,830,949 Total assets $ 206,155,613 $ 179,503,603 LIABILITIES AND NET ASSETS Accounts payable, accruals, and other liabilities (Note 6) $ 2,109,430 $ 1,491,802 Accrued interest payable 800, ,512 Accrued salaries and payroll taxes 4,669,324 3,640,921 Deposits and deferred revenue 5,590,585 4,427,375 U.S. government grants refundable 1,128,555 1,128,555 Interest rate swap agreement liability (Note 7) - 2,590,370 Debt (Note 7) 89,921,906 60,243,771 Total liabilities 104,220,564 74,023,306 Net assets (Note 8) Unrestricted 65,319,105 68,351,233 Temporarily restricted 26,903,000 27,457,348 Permanently restricted 9,712,944 9,671,716 Total net assets 101,935, ,480,297 Total liabilities and net assets $ 206,155,613 $ 179,503,603 The Notes to Financial Statements are an integral part of these statements. 5

7 CONSOLIDATED STATEMENT OF ACTIVITIES Year Ended 2015 Temporarily Permanently Unrestricted Restricted Restricted Total REVENUES Tuition and fees $ 81,305,019 $ - $ - $ 81,305,019 Less financial aid (18,190,805) - - (18,190,805) Net tuition and fees (Note 9) 63,114, ,114,214 Contributions and grants 1,446,737 1,836, ,283,479 Endowment income, available to support current operations (Note 4) 9, , ,083 Investment income, other 219, ,738 Auxiliary services 12,143, ,143,429 Other and miscellaneous fees 2,465, ,465,040 Net assets released from restrictions and reclassifications (Note 10) 2,448,486 (2,448,486) - - Total revenues 81,847,302 (51,828) ,795,983 EXPENSES Educational and general: Instruction 30,690, ,690,637 Academic support 13,385, ,385,446 Student services 10,478, ,478,472 Institutional support 14,487, ,487,724 Auxiliary services 11,483, ,483,011 Total expenses (Note 11) 80,525, ,525,290 Change in net assets, operating 1,322,012 (51,828) 509 1,270,693 NON-OPERATING Investment return, net of amount available to support current operations (Note 4) (198,635) (502,520) 40,719 (660,436) Change in value of interest rate swap 110, ,370 Loss on write-off of Ballston building (4,265,875) - - (4,265,875) Change in net assets (3,032,128) (554,348) 41,228 (3,545,248) NET ASSETS Beginning 68,351,233 27,457,348 9,671, ,480,297 Ending $ 65,319,105 $ 26,903,000 $ 9,712,944 $ 101,935,049 The Notes to Financial Statements are an integral part of these statements. 6

8 CONSOLIDATED STATEMENT OF ACTIVITIES Year Ended June 30, Temporarily Permanently Unrestricted Restricted Restricted Total REVENUES Tuition and fees $ 79,633,317 $ - $ - $ 79,633,317 Less financial aid (17,165,344) - - (17,165,344) Net tuition and fees (Note 9) 62,467, ,467,973 Contributions and grants 1,137,128 3,389,281 7,300 4,533,709 Endowment income, available to support current operations (Note 4) - 630, ,512 Investment income, other 166, ,484 Auxiliary services 12,838, ,838,307 Other and miscellaneous fees 2,047, ,047,907 Net assets released from restrictions and reclassifications (Note 10) 2,023,563 (2,023,563) - - Total revenues 80,681,362 1,996,230 7,300 82,684,892 EXPENSES Educational and general: Instruction 28,627, ,627,005 Academic support 12,969, ,969,849 Student services 9,887, ,887,131 Institutional support 13,619, ,619,748 Auxiliary services 11,466, ,466,727 Total expenses (Note 11) 76,570, ,570,460 Change in net assets, operating 4,110,902 1,996,230 7,300 6,114,432 NON-OPERATING Investment return, net of amount available to support current operations (Note 4) 1,848,632 1,356, ,804 3,825,945 Change in value of interest rate swap 339, ,484 Loss on write-off of Ballston building Change in net assets 6,299,018 3,352, ,104 10,279,861 NET ASSETS Beginning 62,052,215 24,104,609 9,043,612 95,200,436 Ending $ 68,351,233 $ 27,457,348 $ 9,671,716 $ 105,480,297 The Notes to Financial Statements are an integral part of these statemens. 7

9 CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ (3,545,248) $ 10,279,861 Adjustments to reconcile change in net assets to net cash provided by operating activities: Non-operating and noncash items: Contributions and investment income restricted for plant expansion and endowment (408,722) (1,509,058) Net realized and unrealized (gains) losses on investments (Note 4) 957,433 (3,723,452) Increase in cash surrender value of life insurance (96,111) (10,814) Write-off of borrowing costs 502,285 - Loss on disposal of fixed assets 4,265,875 - Depreciation and amortization 4,813,777 4,817,051 Change in certain operating assets and liabilities (Increase) decrease in: Receivables and other assets (847,328) (602,389) Contributions receivable 975,064 (220,597) (Decrease) increase in: Accounts payable, accruals, and other liabilities 1,988, ,607 Deposits and deferred revenue 1,163,210 (502,739) Interest rate swap agreement liability (2,590,370) (339,484) Net cash provided by operating activities 7,178,219 8,469,986 CASH FLOWS FROM INVESTING ACTIVITIES Change in notes receivable, net 52,107 92,223 Purchases of land, buildings, and equipment, net of debt and accounts payable incurred (7,287,481) (6,531,497) Change in investments, net of proceeds from sales 1,332,582 (1,284,791) Net cash used in investing activities (5,902,792) (7,724,065) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from contributions restricted for plant expansion and endowment 408,722 1,509,058 Additions to deferred loan costs (1,621,176) - Payments of debt and capital leases (3,374,093) (3,708,285) Proceeds from issuance of new debt - 2,175,803 VCBA 2015A debt 65,010,000 - Bond premium 4,337,511 - Bank loan incurred by LLC 18,200,000 - Capital leases 301,326 - Less refinancing of old debt (55,069,164) - Less funds held in reserves and funds held for investment in land, buildings, and equipment (27,070,900) - Less debt incurred to finance house - (2,000,000) Less debt incurred to finance equipment (301,326) (175,803) Net cash provided by (used) in financing activities 820,900 (2,199,227) Increase (decrease) in cash and cash equivalents 2,096,327 (1,453,306) CASH AND CASH EQUIVALENTS, including cash restricted by debt agreement Beginning 11,911,780 13,365,086 Ending $ 14,008,107 $ 11,911,780 (Continued) MARYMOUNT UNIVERSITY CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended and 2014 The Notes to Financial Statements are an integral part of these statements. 8

10 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended and 2014 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for interest, net of amounts capitalized 2015 $55,824; 2014 $-0- $ 2,642,396 $ 2,253,219 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Purchases of land, buildings, and equipment included in accounts payable $ 459,929 $ 502,000 Capital lease obligation incurred for use of equipment $ 301,326 $ 175,803 Debt incurred for purchase of house $ - $ 2,000,000 Debt incurred to refinance existing debt $ 55,069,164 $ - Debt incurred to establish funds held in reserve and funds held for investment in land, buildings, and equipment $ 27,070,900 $ - The Notes to Financial Statements are an integral part of these statements. 9

11 Note 1. Reporting Entity and Significant Accounting Policies Reporting entity: Marymount University (the University ), an independent, comprehensive Catholic university, combines the liberal arts tradition with career preparation. The University was founded in 1950 and is associated with the Religious of the Sacred Heart of Mary. The University is located in Arlington, Virginia, minutes from Washington, D.C., and serves approximately 3,600 students through its main campus, its Ballston campus, the Reston Center, and through outreach activities in Northern Virginia. The University s charter allows up to a 35-member Board of Trustees, who are appointed for three-year terms. The University offers a wide range of graduate and undergraduate degree programs. In 2015, the University formed Marymount NBG Ground Lessor LLC (the LLC ), a limited liability company. The LLC was formed for the purpose of holding the residential parcel of the Ballston property that is subject to a ground lease and all the activities related to the ground lease. The University owns a 100% membership interest in the LLC. As a result of this ownership interest, financial accounting standards require the LLC to be consolidated by the University for financial reporting purposes. All transactions between the University and the LLC were eliminated upon consolidation. The significant accounting policies followed by the University are described below: Basis of financial statement presentation and accounting: The financial statements of the University have been prepared in accordance with accounting principles generally accepted in the United States of America. 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, the 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. The accompanying financial statements present information regarding the University 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 action of the Board of Trustees or may otherwise be limited by contractual 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 expire either by the passage of time or that can be fulfilled by action of the University pursuant to those stipulations. Permanently restricted net assets are amounts required by donors to be held in perpetuity; however, generally the income on these assets is available to meet various restricted and other operating needs. These net assets primarily include permanent endowment funds. (Continued) 10

12 Note 1. Reporting Entity and Significant Accounting Policies (Continued) Cash and cash equivalents: The University considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates market value. Cash held for long-term investment is included with endowment assets or classified as funds held for to investment in land, buildings, and equipment or funds held in reserves. The University follows the common cash management practice of consolidating certain operating cash and cash equivalent accounts, which includes various designated and restricted current operating and plant accounts. As a result of this practice, cash and cash equivalents specifically associated with the original gift of certain designated and restricted monies can be spent from the consolidated account. When this occurs, the activity is accounted for by maintaining receivables and payables between the net asset classes. The University has sufficient unrestricted funds to cover the receivables and payables, as applicable, of the designated or restricted net assets. Student, grant, and other receivables: Student receivables are stated at the amount the University expects to collect from outstanding balances. The University provides for probable uncollectible amounts through a provision for bad debt expense and an adjustment to a valuation allowance based on its experience and other circumstances, which may affect the ability of students to meet their obligations. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Changes in the valuation allowance have not been material to the financial statements. The University considers student receivable balances in excess of 90 days past due accounts. The University does not charge interest on past due balances. At and 2014, the University had balances in excess of 90 days of approximately $2,900,000 and $2,523,000, respectively. Investments: Investments in marketable equity securities with readily determinable fair values and all investments in debt securities are reported at their fair values. The fair value of investments in equities, bonds, U.S. government securities, exchange traded mutual funds, and short-term assets is determined by reference to quoted market prices and other relevant information generated by market transactions. Net unrealized and realized gains or losses are reflected in the statements of activities. Certain land and other investments which are not readily marketable are carried at cost. Gifts of investments are recorded at their fair value (based upon quotations or appraisals) at the date of gift. Purchases and sales of investments are recorded on the trade date. (Continued) 11

13 Note 1. Reporting Entity and Significant Accounting Policies (Continued) Investments: (Continued) Income, and realized and unrealized net gains, on investments of endowment and similar net asset classes are reported as follows: As increases in permanently restricted net assets if the terms of the gift require that they be added to the principal of a permanent endowment fund; As increases in temporarily restricted net assets if the terms of the gift impose restrictions on the use of the income, including income earned on donor restricted endowment funds; As increases in unrestricted net assets in all other cases. Land, buildings, and equipment: Land, buildings, and equipment are stated at cost at the date of acquisition or at fair value at the date of gift, less accumulated depreciation and amortization. Depreciation and amortization are recorded using the straight-line method over the estimated useful lives of the assets. Equipment is removed from the records and any gain or loss is recognized at the time of disposal. Expenditures for new construction, major renewals, replacements, and equipment exceeding $2,500 are capitalized. Collections are recorded at cost if purchased and at fair value at date of accession if donated. Gains and losses from deaccessions are reported as changes in net assets based on the absence or existence and nature of donor-imposed restrictions. Collection items are protected, kept unencumbered, cared for, and preserved. The University recognizes costs related to planned major maintenance activities as costs are incurred. Deferred loan costs: Deferred loan costs are being amortized on the straight-line basis over the term of the related financing agreement. Asset retirement obligations (AROs): An asset retirement obligation is a legal liability to the University for the cost of retiring a tangible long-lived asset (e.g., building containing asbestos) that results from the acquisition, construction, or development and/or the normal operation of the long-lived asset. A conditional ARO is a legal obligation in which the timing and/or method of retirement are conditional on a future event that may or may not be within the control of the University. To reasonably estimate these liabilities, the University must be able to determine (1) the settlement date the estimated date or range of dates that disposal is anticipated or legally required, and (2) the settlement method how the disposal will take place. The University follows the policy of recording the fair value of such liabilities when they can be reasonably estimated. Accrued compensation: The University accrues for salaries and all other compensation earned but not paid. (Continued) 12

14 Note 1. Reporting Entity and Significant Accounting Policies (Continued) Student and other deposits: Deposits and student fees applicable to academic sessions subsequent to the current year are deferred and recognized as revenues in subsequent periods. Notes receivable, government student loans, and U.S. government grants refundable: The University participates in the Federal Perkins Loan and the Nursing Student Loan Programs sponsored by the United States Government. Under these programs, funds are loaned to qualified students and may be reloaned after collection. Student loan receivables related to these programs are recorded as notes receivable. The portion of those funds contributed by the U.S. government (that is, exclusive of the University s match funds) is ultimately refundable to the government. Derivatives interest swap agreement: Prior to April 2015, the University utilized a derivative financial instrument to reduce its exposure to market risks from changes in interest rates in connection with the financing of its 26 th Street Project. By entering into a pay-fixed, receive-variable interest rate swap, the University limited its exposure to changes in variable interest rates. The University was exposed to credit related losses in the event of nonperformance by the counterparty to the interest rate swap; however, the counterparty was a major financial institution and the risk of loss due to nonperformance was considered remote. Interest rate differentials paid or received on the swap were recognized as adjustments to interest expense in the period earned or incurred. The fair value of interest rate swap agreements was the estimated amount the University would receive or pay to terminate the agreement based on reference to market rate inputs and the net present value of future cash flows as determined by the lender. The University recognizes derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. Changes in the fair value are reported as a change in net assets. The interest swap agreement was terminated by the University as of March See Note 7 for additional details. Split-interest agreements: The University participates in various split-interest agreements that are unconditional and irrevocable. These arrangements are established when a donor makes a gift to the University or a trust in which the University shares benefits with other beneficiaries. Generally, the University accounts for these agreements by recording its share of the related assets at fair-market value (which approximates the present value of the estimated future cash receipts). Liabilities are recorded for any portion of the assets held for donors or other beneficiaries equal to the present value of the expected future payments to be made. The liabilities are adjusted annually for changes in the value of the assets, accretion of the discount, and other changes in the estimates of future benefits. Contribution revenues are recognized at the dates the agreements are established for the difference between the assets and the liabilities. The related assets are included in the statement of financial position as investments and the related liabilities are included in accounts payable, accruals, and other liabilities. The fair value of funds held in trust by others is determined by the present value of estimated future cash flows. (Continued) 13

15 Note 1. Reporting Entity and Significant Accounting Policies (Continued) Net asset classifications of institutional funds: The University holds institutional funds, principally endowment funds, subject to the Uniform Prudent Management of Institutional Funds Act (UPMIFA). Endowment is a commonly used term to refer to the resources, including trusts and annuities, that have been restricted by the donor or designated by the Board that will be invested to provide future revenue to support the University s activities. The University s endowment consists of approximately individual funds established for a variety of purposes. As titled, UPMIFA provides guidance and applicable regulations relative to the management of applicable funds. In response to UPMIFA, the University adopted the provisions of accounting guidance for the net asset classification of donor-restricted endowment funds for an organization that is subject to UPMIFA and also required related financial statement disclosures. Interpretation of UPMIFA The Board of Trustees of the University 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 stipulations to the contrary. Accordingly, the University 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 of investment returns to the permanent endowment made in accordance with the direction of the applicable donor gift instrument, when applicable, at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified as 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 UPMIFA. In accordance with UPMIFA, the University 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 University 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) other resources of the University, and (7) the investment policies of the University. (Continued) 14

16 Note 1. Reporting Entity and Significant Accounting Policies (Continued) Net asset classifications of institutional funds: (Continued) Return Objectives and Risk Parameters The University has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those of donor-restricted funds that organizations must hold in perpetuity or for a donor-specified period as well as board-designated funds. Under this policy, as approved by the Board of Trustees, the endowment assets are invested in a manner that is intended to produce results that exceed the price and yield results of a benchmark in excess of the CPI plus 4.0% while assuming a moderate level of investment risk. The University expects its endowment funds to provide an average annual rate of return of approximately 4.0% plus inflation (measured as the consumer price index). Actual returns in any given year may vary from this amount. Strategies Employed for Achieving Objectives To satisfy its long-term rate-of-return objectives, the University relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The University targets a diversified asset allocation on its endowment investments that places emphasis on global equities, global fixed income securities, real assets, and diversifying assets in the following ranges to achieve its long-term return objectives within prudent risk constraints. Minimum Target Maximum Global equity 50% 60% 70% Global fixed income 5% 20% 40% Real assets - % 10% 20% Diversifying strategies - % 10% 20% Cash and cash equivalents - % - % 10% Spending Policy and How the Investment Objectives Relate to Spending Policy On University-held investments, the University employs a total return endowment spending policy that establishes the amount of endowment investment return that is available to support current needs and restricted purposes. This policy is designed to insulate program spending from capital market fluctuations and to increase the amount of return that is reinvested in the corpus of the fund in order to enhance its long-term value. For the years ended and 2014, the Board-approved spending formula for the endowment provided for an annual spending rate of not more than 4.0% of the average of the prior three years June 30 endowment market values, except on those funds that were underwater. If cash yield (interest and dividends) is less than the spending rate, realized gains can be used to make up the deficiency. Any income in excess of the spending rate is to be reinvested in the endowment. The spending rate on funds held in trust by others is determined by the respective trust document or trust administrator. (Continued) 15

17 Note 1. Reporting Entity and Significant Accounting Policies (Continued) Net asset classifications of institutional funds: (Continued) Funds with Deficiencies ( Underwater Funds) From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or UPMIFA requires the University to retain as a fund of perpetual duration. Deficiencies of this nature are reported in unrestricted net assets. Subsequent gains that restore the fair value of the assets of the endowment fund to the required level are classified as an increase in unrestricted net assets. There were no such deficiencies as of and Contributions: Contributions, including unconditional promises to give or contributions receivable, are recognized as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence and/or nature of any donor restrictions in the period the donor s commitment is received. Unrestricted, unconditional promises to give are recognized as temporarily restricted operating revenues unless the donor explicitly stipulates its use to support current period activities. 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. Contributions to be received after one year are discounted at an appropriate discount rate commensurate with the risks involved. 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 contributions receivable is provided based upon management s judgment, including such factors as prior collection history, type of contribution, and nature of the fundraising activity. Contributions received with donor-imposed restrictions that are met in the same year as received are reported as revenues of the temporarily restricted net asset class, and a reclassification to unrestricted net assets is made to reflect the expiration of such restrictions. Contributions of land, buildings, and equipment, without donor stipulations concerning the use of such long-lived assets, are reported as revenues of the unrestricted net asset class. Contributions of cash or other assets to be used to acquire land, buildings, and equipment with such donor stipulations are reported as revenues of the temporarily restricted net asset class; the restrictions are considered to be released over the estimated useful lives of the long-lived assets using the University s depreciation policies. Operations: Operating activities in the statements of activities illustrate a measure of how the University is maintaining the resources available for its current operations. Operations reflect all transactions increasing or decreasing unrestricted net assets. Temporarily restricted net assets released from restrictions which satisfy an operating purpose are also classified as operating. (Continued) 16

18 Note 1. Reporting Entity and Significant Accounting Policies (Continued) Operations: (Continued) In accordance with the University s total return policy, only the portion of total investment return available under this policy to meet operating needs is included in operating revenues on the Statements of Activities. Additionally, the portion of total investment return available to support current operations under the University s total return policy is excluded from cash flows from operating activities; only the actual cash yield is included in cash flows from operating activities. Costs 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 proceeds of the external debt. Advertising costs: The University follows the policy of charging advertising costs to expense as incurred. Fair value measurements: The University carries various assets and liabilities at fair value. Historically, the methods used to measure fair value were derived from a variety of accounting standards. In order to provide a consistent framework for measuring and disclosing fair value, the University has adopted accounting guidance for financial assets and liabilities that are measured and reported on a fair value basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, a market-based approach is used which establishes that fair value is based on the highest and best use. Additionally, in accordance with the accounting guidance, the University categorizes its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as reflected below. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 1 Fair values are based on unadjusted quoted prices in active markets for identical assets or liabilities that management has the ability to access at the measurement date. Level 2 Fair values are based on inputs other than quoted prices in Level 1 that are either for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that were observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 Fair values are based on unobservable inputs for the asset or liability where there is little, if any, market activity for the asset or liability at the measurement date. (Continued) 17

19 Note 1. Reporting Entity and Significant Accounting Policies (Continued) Fair value measurements: (Continued) The estimated fair value for specific groups of financial instruments is presented within the notes applicable to such items. If not specifically presented, fair value is estimated to approximate the related carrying value. It was not considered practical to determine fair value of notes receivable, from students under the 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 5% per month per annum, and are carried at face value. Based upon current borrowing rates available to the University for similar borrowings, the carrying value of long-term debt approximates fair value. Credit risk concentrations: Financial instruments, which potentially subject the University to concentrations of credit risk, consist principally of cash, short-term investments, marketable securities, student accounts receivable, and loans receivable. The University places its short-term investments with high-credit, quality financial institutions. A portion of the University s bank deposits are in excess of federally insured limits. Concentration of credit risk for marketable securities is limited by the University s policy of diversification of investments. Concentration of credit risk for student accounts receivable and loans receivable are limited due to a large base and geographic dispersion. Income taxes: The University is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code. The federal Forms 990 of the University are subject to examination by the Internal Revenue Service, generally for three years after they are filed. Reclassifications: Certain reclassifications have been made to the prior year amounts in order to conform to the current year presentation. Subsequent events: Subsequent events were considered through September 14, 2015, the date the financial statements were available to be issued. (Continued) 18

20 Note 2. Receivables and Other Assets Receivables and other assets consist of the following as of June 30: Student receivables $ 4,937,285 $ 4,476,169 Less allowance for doubtful accounts (249,715) (265,817) 4,687,570 4,210,352 Prepaid expenses 1,005,357 1,283,846 Amounts due from various government agencies 1,170, ,211 Conference center receivable 71, ,562 Miscellaneous receivables 280, ,310 Cash value of life insurance 309, ,419 Timeshare 11,000 11,000 $ 7,536,139 $ 6,592,700 Note 3. Contributions Receivable Contributions receivable consist of the following as of June 30: (Continued) 19 Expected to be collected in: Less than one year $ 895,233 $ 1,571,753 One to five years 160, ,617 1,055,900 2,024,370 Less: Discount to net present value at 0.8% 2.4% (39,830) (33,236) Allowance for uncollectible contributions (100,000) (100,000) All contributions are classified in the temporarily restricted net asset class. $ 916,070 $ 1,891,134 Contributions received from two donors comprised 41% of total contributions for the year ended as reported on the statement of activities. Additionally, gross contributions receivable from three donors accounted for 39% and 48% of total gross contributions receivable as of and 2014, respectively. The University received a conditional contribution receivable of $675,000 from their food service provider to be paid in various installments through October 2018 as long as the agreement between the University and the food service provider remains in effect. The accumulated installments received and recorded as contribution revenue through were $375,000 with a remaining outstanding conditional balance of $300,000.

21 Note 4. Investments and Funds Held in Trust by Others Investments and funds held in trust by others are comprised of the following as of June 30: Equity securities: Mutual funds: U.S. mid to large cap $ 4,285, % $ 1,165, % U.S. small cap , International 4,613, ,601, Emerging markets 2,818, ,396, Other investments in common stock 6,570, ,956, Total equity securities 18,288, ,614, Fixed income securities: U.S. treasuries/government agencies securities 2,748, ,311, Corporate obligations 2,793, ,001, Mutual funds 3,552, ,091, Total fixed income securities 9,094, ,404, Other: Mutual funds, various asset allocation classes 739, ,783, Alternatives real estate REIT 1,319, , Cash and cash equivalents 683, , Total other 2,742, ,436, ,125, % 32,455, % Clare Boothe Luce funds held in trust by others 7,429,418 7,389,000 $ 37,554,979 $ 39,844,994 (Continued) 20

22 Note 4. Investments and Funds Held in Trust by Others (Continued) The ownership of investments and funds held in trust by others for each class of net assets as of June 30 is as follows: Unrestricted $ 13,797,614 $ 16,124,623 Temporarily restricted 14,044,421 14,048,655 Permanently restricted 9,712,944 9,671,716 $ 37,554,979 $ 39,844,994 The market values of investment asset classifications are as follows as of June 30: Endowment $ 37,475,166 $ 37,734,431 Operating and plant 79,813 2,110,563 $ 37,554,979 $ 39,844,994 Included in operating investments are investments restricted by debt agreement which represent funds reserved in accordance with debt covenants to pay for principal and interest on notes payable (see Note 7). These investments totaled $-0- and $1,995,240 at and 2014, respectively. The University has various investment vehicles that have carrying values that fluctuate with the financial markets. As a result, the value of such investments may have declined from year end values and that decline could be material. (Continued) 21

23 Note 4. Investments and Funds Held in Trust by Others (Continued) Investments and funds held in trust by others activity for the years ended June 30 are reflected in the table below: Investments and funds held in trust by others, beginning $ 39,844,994 $ 34,836,751 Gifts available for investment and investment income reinvestment 438,762 1,269,463 40,283,756 36,106,214 Investment returns Dividends and interest 954, ,881 Investment return, net of amount available to support current operations per statements of activities (660,436) 3,825,945 Add spending in excess of cash yield (296,997) (102,493) Net realized and unrealized gains (losses) (957,433) 3,723,452 Total return on investments (2,652) 4,584,333 Close out of bond reserve fund due to refund of bonds (2,082,897) - Amounts appropriated for operations, net transfers to operational accounts and other activity (643,228) (845,553) Investments and funds held in trust by others, ending $ 37,554,979 $ 39,844,994 Investment returns for the years ended and 2014 are net of related management and custodial expenses of $92,387 and $80,664, respectively. (Continued) 22

24 Note 4. Investments and Funds Held in Trust by Others (Continued) The following summarizes long-term investment return and its classification in the statement of activities for the years ended June 30: Endowment investment income, net of expenses $ 950,861 $ 832,313 Net realized and unrealized gains on investments (1,041,214) 3,624,144 Endowment total return (90,353) 4,456,457 Other investment income, net of expenses 3,920 28,568 Other net realized and unrealized gains on investments 83,781 99,308 Total return on investments $ (2,652) $ 4,584,333 Included in the statements of activities as follows: Amount available to support current operations in accordance with the University s and the Henry Luce Foundation, Inc. s spending policies $ 570,083 $ 630,512 Other amounts available to support current operations included in investment income, other 87, ,876 Investment return, net of amount available to support current operations (660,436) 3,825,945 Clare Boothe Luce Fund: (Continued) 23 $ (2,652) $ 4,584,333 The University is the beneficiary of an original endowment bequest of a $3 million share of the Clare Boothe Luce Fund. The share remains in a trust, administered by the Henry Luce Foundation, Inc. (the Foundation ), subject to normal prudent investment standards. Accordingly, the original share of the bequest and unrealized gains are included in permanently restricted net assets, and income thereon is included in temporarily restricted net assets. Under the endowment terms, the income distribution is to be used to encourage women to enter, study, graduate, and teach in certain scientific and technological fields in which they have been historically underrepresented. According to the will, each designated participating institution (14 in total), including the University, is to receive the income due to it in each calendar year. The income distribution received is placed in an interest-bearing escrow account by the University. Transactions in the escrow account included in investments as cash and cash equivalents during the years ended June 30 are summarized below: Opening balance, beginning $ 257,468 $ 342,890 Investment earnings on escrow account Cash received 330, ,000 Approved expenditures (316,572) (385,439) Closing balance, ending $ 270,910 $ 257,468

25 Note 5. Land, Buildings, and Equipment Land, buildings, and equipment consist of the following at June 30: Estimated Useful Life Land improvements years $ 3,583,957 $ 3,619,793 Buildings and improvements years 121,612, ,831,908 Furniture and equipment 4-10 years 26,856,779 26,039,194 Library collection 10 years 16,184,474 15,774,466 Donated assets 4-10 years 61,396 61,396 Collections 50 years 219, ,140 Leased equipment 1-3 years 1,096, , ,615, ,341,436 Accumulated depreciation and amortization (67,047,340) (64,983,154) 102,567, ,358,282 Land 7,408,448 7,408,448 Construction in progress 6,363,837 1,064,219 $ 116,340,215 $ 117,830,949 As of and 2014, construction in progress was primarily for the Ballston project. This project is estimated to have total cost of approximately $75.0 million. The project is expected to be paid with debt totaling approximately $69.6 million and contributions and accumulated funds from prior surpluses. Construction in process, as of, includes amounts incurred under an original contract totaling $39.9 million. As of, the University has remaining a commitment of approximately $ 39.2 million under the original contract. Note 6. Obligation to Arlington County The University has entered into an agreement with Arlington County that allows the University the use of an athletic field for the purpose of conducting games and practices for its intercollegiate teams in exchange for capital and operating contributions. This agreement will remain in effect for 15 years. Total capital contributions due to Arlington County, included in accounts payable, accruals, and other liabilities on the statement of financial position as of and 2014, totaled $336,000 and $502,000, respectively. The payments on this obligation are due as follows: 2016 $ 166, ,000 (Continued) 24 $ 336,000 Also, beginning July 2010, annual operating contributions of $14,000, adjusted annually for the Consumer Price Index, are required for the duration of the agreement.

26 Note 7. Debt The University s debt consists of the following as of June 30: The University borrowed funds by issuing tax-exempt bonds through the Virginia College Building Authority Educational Facilities Revenue and Refunding Bonds (the Authority ) (Series 2015A), interest is payable semi-annually with rates ranging from 4.0% to 5.0% over the term of the bond (4.0% at ). Principal maturities range from $1,100,000 to $3,865,000 through July The University has a promissory note with the Authority in the principal amount of the bonds. Secured by a deed of trust on certain real property. $ 65,010,000 $ - The University borrowed funds by issuing tax-exempt bonds through the Authority (Series 1998) payable with varying principal payments up to $1,625,000 through July The University had a promissory note with the Authority in the principal amount of the bonds. Interest was payable semi-annually at varying rates up to 5.125%. Secured by a deed of trust on certain real property. In 2015, this bond was refunded through issuance of the Authority, Series 2015A bonds. - 15,070,000 The University borrowed funds by issuing tax-exempt bonds (Series 2009) through the Authority, interest was payable monthly at a rate of 78% of 30-day LIBOR plus 0.81% (0.93% at June 30, 2014). Varying principal payments of up to $1,700,000 were payable. The note is due March 2019 but was being amortized based on a thirty year payback period. The University had a promissory note with the Authority in the principal amount of the bonds. As described below, this debt was subject to an interest rate swap agreement. Unsecured. In 2015, this bond was refunded through issuance of the Authority, Series 2015A bonds. - 37,300,000 (Continued) 25

27 Note 7. Debt (Continued) The University s debt consists of the following as of June 30: (Continued) (Continued) 26 Note payable with a bank in the amount of up to $8,000,000 for renovations to Rowley Hall and the Main House with monthly payments of $111,111, including interest at a rate of 30-day LIBOR plus 1.25% (1.40% at June 30, 2014). Any remaining unpaid balance was payable in full on August 31, Unsecured. In 2015, this note was refinanced through issuance of the Virginia College Building Authority, Educational Facilities Revenue and Refunding Bonds, Series 2015A. - 5,687,337 Note payable with a bank payable with monthly payments of interest-only at 3.75% through June Beginning July 2020, monthly payments will be $70,995 including interest of 4.15% through June The note is secured by a Deed of Trust on property located at 1008 N. Glebe Road and was obtained by the LLC. 18,200,000 - Note payable with a bank payable with monthly payments of interest-only at 4.75% through June Beginning June 2018, monthly payments will be $11,112 including interest of 4.75% through June The note is secured by a Deed of Trust on the house. 2,000,000 2,000,000 Other bonds payable, secured by certain facilities and pledges on certain revenues, as follows: Series C, 3.0%, annual payments ranging up to $45,000 through ,000 Series D, 3.0%, annual payments ranging up to $45,000 through ,000 Capital lease obligation with quarterly payments of $8,693, including imputed interest at 3.0% through August 31, Secured by certain computer equipment. The net book value of the leased equipment was $49,705 at. 42,504 75,379