CONSOLIDATED FINANCIAL REPORT (In Accordance With the Requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative

Transcription

1 CONSOLIDATED FINANCIAL REPORT (In Accordance With the Requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards) JUNE 30, 2016

2 CONSOLIDATED FINANCIAL REPORT (In Accordance with the Requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards) EIN#

3 CONTENTS Page INDEPENDENT AUDITOR S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS ISSUED IN A SINGLE AUDIT...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 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS...35 INDEPENDENT AUDITOR S REPORT ON: Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards...37 Compliance for Each Major Program and on Internal Control over Compliance Required by the Uniform Guidance...39 SUMMARY SCHEDULE OF FINDINGS AND QUESTIONED COSTS...41 SUMMARY SCHEDULE OF PRIOR YEAR FINDINGS AND QUESTIONED COSTS...43

4 INDEPENDENT AUDITOR S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS AND ON THE SUPPLEMENTAL SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS ISSUED IN A SINGLE AUDIT To the Board of Trustees Randolph College Lynchburg, Virginia Report on the Financial Statements We have audited the accompanying consolidated financial statements of Randolph College and its subsidiary (hereafter referred to as the College ), which comprise the consolidated statements of financial position as of and 2015, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to 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 the consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free 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. 3 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 College and its subsidiary as of and 2015, and the changes in net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated in all material respects, in relation to the consolidated financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated December 20, 2016, on our consideration of the College s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the College s internal control over financial reporting compliance. Roanoke, Virginia December 20, 2016 CERTIFIED PUBLIC ACCOUNTANTS 4

6 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION and ASSETS Cash and cash equivalents $ 14,407,651 $ 5,951,769 Student accounts receivable, net of allowance for uncollectible accounts 2016 $210,000; 2015 $223, , ,213 Other receivables 132,635 77,457 Other assets 664, ,864 Notes receivable, less allowance for uncollectible accounts 2016 $312,900; 2015 $317,200 1,234,153 1,402,487 Contributions receivable (Note 2) 4,966,751 4,459,671 Investments (Note 3) 147,861, ,045,059 Funds held in trust by others (Note 6) 2,932,537 3,067,865 Deferred loan costs, net of accumulated amortization 245, ,307 Funds restricted to investment in buildings and equipment 4,083,328 3,359,165 Land, buildings, and equipment, less accumulated depreciation (Notes 7 and 10) 53,763,924 52,079,363 Total assets $ 230,508,865 $ 233,685,220 LIABILITIES AND NET ASSETS Accounts payable and other accrued expenses $ 1,442,994 $ 2,467,828 Accrued interest payable 35,378 34,799 Student deposits and other deferred revenue 606, ,619 Postretirement healthcare benefit obligation (Note 8) 579, ,925 Trust and annuity obligations (Note 9) 1,982,941 2,038,064 Asset retirement obligation (asbestos abatement) 2,025,960 1,929,486 U.S. Government grants refundable 629, ,190 Debt (Note 10) 21,324,341 20,361,984 Total liabilities 28,627,543 28,771,895 Net assets (Note 11) Unrestricted 78,023,253 84,333,848 Temporarily restricted 40,178,099 37,232,599 Permanently restricted 83,679,970 83,346,878 Total net assets 201,881, ,913,325 Total liabilities and net assets $ 230,508,865 $ 233,685,220 The Notes to Consolidated Financial Statements are an integral part of these statements. 5

7 CONSOLIDATED STATEMENT OF ACTIVITIES Year Ended 2016 Temporarily Permanently Unrestricted Restricted Restricted Total OPERATING REVENUES Tuition and fees $ 22,968,769 $ - $ - $ 22,968,769 Less financial aid (14,022,167) - - (14,022,167) Net tuition and fees (Note 12) 8,946, ,946,602 Contributions 2,035,707 9,660,364-11,696,071 Investment income, endowment draw (Note 4) 4,424,111 6,701,171-11,125,282 Other investment income 16, , ,125 Government grants - 771, ,597 Auxiliary services 6,793, ,793,515 Other 793,514 1, ,559 Net assets released from restrictions and reclassifications (Note 13) 8,485,641 (8,485,641) - - Total operating revenues 31,495,172 8,810,579-40,305,751 OPERATING EXPENSES Educational and general: Instruction 10,824, ,824,242 Academic support 2,990, ,990,967 Student services 5,668, ,668,638 Institutional support 6,640, ,640,936 Auxiliary services 4,343, ,343,094 Total operating expenses 30,467, ,467,877 Change in net assets, operating 1,027,295 8,810,579-9,837,874 NON-OPERATING INCOME (EXPENSES) Contributions 357,500 2,555, ,510 3,444,504 Change in value of split interest agreements and contributions receivable (56,785) 361,673 (80,387) 224,501 Investment return (Note 3) (1,788,283) (3,338,556) 2,126 (5,124,713) Investment return, appropriated to operations as sustainable endowment draw (Note 4) (4,424,111) (6,701,171) (11,125,282) Change in funds held in trust by others - - (135,328) (135,328) Other (154,242) (153,559) Gain on sale of art (Note 4) Net assets released from restrictions and reclassifications (Note 13) (1,271,969) 1,256,798 15,171 - Change in net assets, non-operating (7,337,890) (5,865,079) 333,092 (12,869,877) Change in net assets (6,310,595) 2,945, ,092 (3,032,003) NET ASSETS Beginning 84,333,848 37,232,599 83,346, ,913,325 Ending $ 78,023,253 $ 40,178,099 $ 83,679,970 $ 201,881,322 The Notes to Consolidated 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 OPERATING REVENUES Tuition and fees $ 22,167,345 $ - $ - $ 22,167,345 Less financial aid (13,420,666) - - (13,420,666) Net tuition and fees (Note 12) 8,746, ,746,679 Contributions 2,169,691 1,131,268-3,300,959 Investment income, endowment draw (Note 4) 3,729,364 7,245,574-10,974,938 Other investment income 12, , ,647 Government grants - 327, ,357 Auxiliary services 6,588, ,588,741 Other 876,445 1, ,445 Net assets released from restrictions and reclassifications (Note 13) 8,557,297 (8,557,297) - - Total operating revenues 30,680, ,476-31,020,766 OPERATING EXPENSES Educational and general: Instruction 9,975, ,975,570 Academic support 2,913, ,913,898 Student services 5,713, ,713,745 Institutional support 6,260, ,260,348 Auxiliary services 4,271, ,271,895 Total operating expenses 29,135, ,135,456 Change in net assets, operating 1,544, ,476-1,885,310 NON-OPERATING INCOME (EXPENSES) Contributions 707,779 4,241,531 1,606,683 6,555,993 Change in value of split interest agreements and contributions receivable (56,682) (1,809,245) 104,418 (1,761,509) Investment return (Note 3) (1,258,368) (2,383,166) (26,992) (3,668,526) Investment return, appropriated to operations as sustainable endowment draw (Note 4) (3,729,364) (7,245,574) - (10,974,938) Change in funds held in trust by others - - (100,784) (100,784) Other (179,077) (81,381) - (260,458) Gain on sale of art (Note 4) 4,201, ,201,943 Net assets released from restrictions and reclassifications (Note 13) 1,265, ,762 (1,581,175) - Change in net assets, non-operating 951,644 (6,962,073) 2,150 (6,008,279) Change in net assets 2,496,478 (6,621,597) 2,150 (4,122,969) NET ASSETS Beginning 81,837,370 43,854,196 83,344, ,036,294 Ending $ 84,333,848 $ 37,232,599 $ 83,346,878 $ 204,913,325 The Notes to Consolidated Financial Statements are an integral part of these statements. 7

9 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended and CASH FLOWS FROM OPERATING ACTIVITIES Tuition and auxiliary service receipts $ 15,756,229 $ 15,349,400 Government grants 703, ,105 Interest and dividends received 1,231,798 1,113,390 Contributions received 14,783,075 9,763,086 Proceeds from contributions restricted for long-term investment (3,005,370) (7,407,977) Other receipts 596, ,767 Salaries and wages paid to faculty and staff (14,637,688) (14,124,316) Faculty and staff benefits (3,624,040) (3,801,297) Payments to vendors for goods and services (9,420,147) (9,103,239) Interest paid (435,909) (436,803) Net cash provided by (used in) operating activities 1,947,861 (7,399,884) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of land, buildings, and equipment, net of accounts payable and debt incurred (2,394,477) (4,278,527) Proceeds from sale of land, buildings, and equipment 133,783 4,500 Proceeds from sale of art - 4,201,943 Payments on asset retirement obligation - (5,466) Receipt of funds restricted to investment in buildings and equipment, net of debt proceeds (724,163) (1,830,371) Collection (issuances) of notes receivable, net 168, ,361 Distribution of funds held in trust by others - 139,908 Additions to long-term investments (608,138) (6,626,476) Investment income retained in long-term investments (1,172,505) (908,743) Distributions from long-term investments 9,773,141 11,098,450 Net cash provided by investing activities 5,175,975 2,079,579 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from contributions restricted for long-term investment 3,005,370 7,407,977 Payments on trust and annuity obligations (265,525) (280,194) Proceeds from issuance of new debt 2,370,156 1,398,271 Less new debt incurred to finance land, buildings, and equipment additions (2,370,156) (1,398,271) Principal payments on debt (1,407,799) (1,407,091) Net cash provided by financing activities 1,332,046 5,720,692 Increase in cash and cash equivalents 8,455, ,387 CASH AND CASH EQUIVALENTS Beginning 5,951,769 5,551,382 Ending $ 14,407,651 $ 5,951,769 (Continued) The Notes to Consolidated Financial Statements are an integral part of these statements. 8

10 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended and SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Noncash assets received as contributions $ 357,500 $ 93,866 Assets acquired through assumption of directly related liabilities $ 2,526,145 $ 2,746,417 Reconciliation of change in net assets to net cash provided by (used in) operating activities: Change in net assets $ (3,032,003) $ (4,122,969) Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation of buildings and equipment 2,083,415 1,859,974 Amortization of deferred loan costs and bond discount 25,454 25,455 Noncash assets received as contributions (357,500) (93,866) Net realized and unrealized losses on investments 6,191,067 4,504,548 Contributions received for long-term investment (3,005,370) (7,407,977) Change in funds held in trust by others 135, ,784 Loss on disposal of land, buildings, and equipment 28,217 80,633 Earnings on funds restricted for investment in land, buildings, and equipment - (96) Gain of sale of art - (4,201,943) Accretion of interest on asset retirement obligations 96,474 92,140 Change in certain assets and liabilities: (Increase) decrease in: Student and other receivables (57,735) (15,178) Contributions receivable (507,080) 1,848,211 Other assets 93,095 (175,309) Increase (decrease) in: Accounts payable and other accrued expenses 167,902 (86,272) Student deposits and other deferred revenue (123,805) 76,480 Postretirement and healthcare benefit obligation - 24,893 Trust and annuity obligations 210,402 90,608 Net cash provided by (used in) operating activities $ 1,947,861 $ (7,399,884) The Notes to Consolidated Financial Statements are an integral part of these statements. 9

11 Note 1. Nature of Operations and Significant Accounting Policies The consolidated financial statements include the accounts of Randolph College and its wholly-owned subsidiary, Investment Properties of Lynchburg, L.L.C., collectively referred to as the College. The subsidiary owns commercial real estate located adjacent to the campus. All significant intercompany transactions have been eliminated in consolidation. The College is a private, nonprofit institution of higher education, located in Lynchburg, Virginia, offering undergraduate, graduate, exchange, and overseas programs. Significant sources of revenue include tuition and fees, auxiliary services, contributions, and investment returns. The College is accredited by the Southern Association of Colleges and Schools. The affairs of the College are governed by a Board of Trustees. The significant accounting policies followed by the College are presented below. Basis of financial statement presentation and accounting: The financial statements of the College 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 College 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 College 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 and funds held in trust by others. (Continued) 10

12 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Cash and cash equivalents: The College considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Certificates of deposit, regardless of maturity, are included in cash. Cash restricted to future plant investment is classified as funds restricted to investment in buildings and equipment. Cash and cash equivalents restricted for endowment purposes, future operations, and loan programs may be included in cash and cash equivalents on the statement of financial position. Cash equivalents are stated at cost, which approximates market value. The College follows the common cash management practice of consolidating certain operating cash and cash equivalent accounts, which include 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 College has sufficient unrestricted funds to cover the receivables and payables, as applicable, of the designated or restricted net assets. Student receivables: Student receivables are stated at the amount the College expects to collect from outstanding balances. The College 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. The College considers student receivable balances in excess of 90 days past due accounts. The College charges late fees on past due balances. At and 2015, the College had balances in excess of 90 days of approximately $391,000 and $403,000, respectively. Investments: Investments in marketable securities with readily determinable fair values and all investments in debt securities are reported at their fair values. The fair values of investments in equities, fixed income, and cash and cash equivalents are determined by reference to quoted market prices and other relevant information generated by market transactions. Certain real estate held for investment, which is not readily marketable, is carried at cost or donated value. Non-marketable securities are presented at estimated fair value. Net realized and unrealized gains or losses are reflected in the statements of activities. (Continued) 11

13 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Investments: (Continued) The fair value of investments in hedge funds or other alternative investments are determined by reference to the net asset value allocated to the College at the measurement date. The College believes the carrying amount of these financial instruments is a reasonable estimate of fair value. Because alternative investments are not readily marketable, their estimated value is subject to uncertainty and, therefore, may differ from the value that would have been used had a ready market for such investments existed. Such difference could be material. 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. Income and realized and unrealized net gains or losses on endowment and similar investment assets 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 or decreases in temporarily restricted net assets for all permanent donor-restricted endowment funds which do not require such reinvestment to principal; As increases or decreases in unrestricted net assets in all other cases. Deferred loan costs: Costs incurred in connection with the issuance of loans are being amortized on a straight-line basis over the lives of the applicable loans. 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, if contributed, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. At the time of disposal, an asset is removed from the records and any gain or loss is recognized. Expenditures for equipment exceeding $1,000 are capitalized. Facility expenditures, including land improvements, exceeding $5,000 for new construction, major renewal, or replacement are capitalized. Facility repairs and maintenance are recorded as expenses. The College has an extensive art collection which is maintained in a separate building under curatorial care. Contributed collection items are recognized as non-operating revenues or gains and capitalized. The College s art collection is stated at cost at the date of acquisition or at fair value at the date of gift, if contributed. Student deposits: Deposits and student fees applicable to academic sessions subsequent to the current year are deferred and recognized as revenues in subsequent periods. (Continued) 12

14 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Postretirement benefits: The College provides health insurance for retired employees under the age of 65 that meet eligibility requirements and their dependents. The College s share of the estimated costs of benefits that will be paid after retirement is being accrued by charges to expense over the employees active service periods to the dates they are fully eligible for benefits. Asset retirement obligations (AROs) (asbestos abatement): An asset retirement obligation is a legal liability to the College for the cost of retiring a tangible long-lived asset (e.g., a 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 College. To reasonably estimate these liabilities, the College 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 College follows the policy of recording the fair value of such liabilities when they can be reasonably estimated. Split-interest agreements: The College participates in various split-interest agreements that are unconditional and irrevocable. These arrangements are established when a donor makes a gift to the College or a trust in which the College shares benefits with other beneficiaries. Generally, the College 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. The difference between the asset and the liability is recognized as contribution revenue as of the date the underlying agreement is established. If the College holds the assets or is the trustee, the assets are included in investments and the liabilities are included in trust and annuity obligations. If a third party is the trustee until the termination of the trust and the remaining assets are transferred to the beneficiaries, the assets less related liabilities are included in contributions receivable. If the donor establishes a perpetual trust with a third party as trustee (the College will never receive the principal of the trust), the assets less related liabilities are included in funds held in trust by others. Notes receivable and U.S. government grants refundable: The College participates in the Federal Perkins Loan Program sponsored by the U.S. government. Under this program, funds are loaned to qualified students and may be reloaned after collection. Student loan receivables related to this program are recorded as notes receivable. Such funds are ultimately refundable to the U.S. government and, accordingly, are recorded as a liability, U.S. government grants refundable. (Continued) 13

15 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Notes receivable and U.S. government grants refundable: (Continued) The College accounts for its notes receivable at cost and recognizes interest income as it is earned. An allowance for doubtful accounts is based on prior collection history and individual circumstances of the borrower. Notes are considered past due after days and accrue interest until written off when considered uncollectible. Net asset classifications of institutional funds: The College holds institutional funds, principally endowment funds, subject to the Uniform Prudent Management of Institutional Funds Act (UPMIFA). As titled, UPMIFA provides guidance and applicable regulations relative to the management of applicable funds. Endowment is a commonly used term to refer to the resources that have been restricted by the donor or designated by the Board that will be invested to provide future revenue to support the College s activities. The College s endowment consists of approximately 550 individual funds established for a variety of purposes including both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. In response to UPMIFA, the College adopted the provisions of accounting guidance for the net asset classification of donor restricted endowment funds and related required financial statement disclosures. Interpretation of UPMIFA The College 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 College 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 College in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the College 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 College 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 College, and (7) the investment policies of the College. (Continued) 14

16 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Net asset classifications of institutional funds: (Continued) Return Objectives and Risk Parameters The College has adopted investment and spending policies for endowment assets that attempt to provide a reliable stream of funding over the longer term 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 custom, blended benchmark composed of three investable indexes of varying weightings. The College expects its endowment funds to provide an average annual real rate of return of approximately 5.0% over the long-term. Actual returns in any given year may vary from this amount. It is also recognized that this real return objective is a long-term average expectation, and that there will be periods of time in which the portfolio falls above or below this target, sometimes by a large amount. Strategies Employed for Achieving Objectives To satisfy its long-term rate of return objective, the College 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 College targets a diversified asset allocation that places emphasis on investments in global equities, fixed income (bonds and cash), and diversifying investments funds to achieve its long-term return objectives within prudent risk constraints. Effective May 2015 and through, the College had adopted the following strategic asset allocation: Asset Class (Continued) 15 Target Percentage Minimum Maximum Global Equity Fund: Developed Market Stocks 45% 35% 55% Emerging Markets Stocks 5-15 Total Global Equity Fund 50% 40% 60% Fixed Income Fund: Bonds and Cash 22% 16% 28% Total Fixed Income Fund 22% 16% 28% Diversifying Investments Fund: Hedge Funds 18% 10% 25% Real Assets Total Diversifying Investments Fund 28% 18% 38% 100%

17 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Net asset classifications of institutional funds: (Continued) Strategies Employed for Achieving Objectives (Continued) During 2017, the College will be transitioning all of its pooled endowment assets into a single limited partnership investment in The Richmond Fund, L.P. The pooled investments of this limited partnership consist of a multi-strategy fund of funds, which is governed by a new, single investment policy for all limited partners. Spending Policy and How the Investment Objectives Relate to Spending Policy The College employs a total return endowment spending policy that establishes the amount of endowment investment return that is available to support current operational and capital needs. This policy is designed to insulate program spending from capital market fluctuations and increase the amount of return that is reinvested in the corpus of the fund in order to preserve the purchasing power of the endowment. For the years ending and 2015, the Board-approved sustainable spending formula for the endowment provided for an annual spending rate of not more than 7% of the average of the prior twelve quarters of the endowment fair market value as of the preceding December 31. If current yield (interest and dividends) is less than the spending rate, accumulated realized gains can be used to make up the difference. Any income in excess of the actual endowment spending is reinvested in the endowment. Funds with Deficiencies 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 College to retain as a fund of perpetual duration. Deficiencies of this nature decrease the College s unrestricted net assets and were $4,079,352 and $844,378 as of and 2015, respectively. These deficiencies resulted primarily from unfavorable market fluctuations. Subsequent gains that restore the fair value of the assets of the endowment fund to the required level will be classified as an increase in unrestricted net assets. 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 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. (Continued) 16

18 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Contributions: (Continued) 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 at the time of acquisition of such long-lived assets. Operating results: Operating activities in the statements of activities illustrate a measure of how the College is maintaining the resources available for its current operations. Operations generally reflect transactions increasing or decreasing unrestricted net assets except those of a capital nature that is, capitalized for long-term investment or as land, buildings, and equipment. Temporarily restricted net assets released from restrictions which satisfy an operating purpose are treated as an operating reclassification. The College accounts for all operating contributions on a cash basis. Accordingly, all contributions receivable and related adjustments are accounted for as non-operating activity in the statement of activities. The College accounts for unrestricted contributions designated by the Board for long-term purposes as non-operating contributions. In late June 2016, the College received an extraordinary temporarily restricted bequest for scholarships, increasing total operating revenues and the total operating change in net assets by $7,820,199. In accordance with the College s total return spending policy, only the sustainable portion of total investment return (no more than 7% for the years ended and 2015, as approved by the Board) available under this policy to meet operating needs is included in operating revenues. Additionally, the portion of total investment return available to support current operations under the College 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. The College allocates certain expenses, including operation and maintenance of physical plant, depreciation of plant assets, and interest expense, on a functional basis among its various programs and supporting services. Expenses that can be identified with a specific program or supporting service are allocated directly. Employee benefits and other expenses that are common to several functions are allocated by various statistical bases. Fundraising costs totaled approximately $1,218,000 and $1,104,000 for the years ended and 2015, respectively. Interest expense was approximately $436,000 and $435,000 for the years ended and 2015, respectively. (Continued) 17

19 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Derivative instruments: The College utilizes derivative financial instruments to reduce its exposure to market risks from changes in interest rates. By entering into pay-fixed, receive-variable interest rate swaps, the College limits its exposure to changes in variable interest rates. The College is exposed to credit related losses in the event of nonperformance by the counterparty to the interest rate swaps; however, the counterparty is a major financial institution, and the risk of loss due to nonperformance is considered remote. Interest rate differentials paid or received on the swaps are recognized as adjustments to interest expense in the period earned or incurred. The fair value of interest rate swap agreements is the estimated amount the College would receive or pay to terminate the agreements based on reference to market rate inputs and the net present value of future cash flows as determined by the lender. Adjustments to the fair value of such agreements are accounted for as non-operating activity in the statement of activities. Concentrations: Financial instruments which potentially subject the College to concentrations of credit risk consist principally of cash and cash equivalents, investments, and student accounts receivable and notes receivable. The College places its cash and cash equivalents with high-credit quality financial institutions. A portion of the College s bank deposits may, at times, be in excess of federally insured limits. Concentration of credit risk for investments is limited by the College s policy of diversification of investments. Concentration of credit risk for student accounts receivable and notes receivable are limited due to a large base and geographic dispersion. The College s contributions are concentrated among relatively few donors. In 2016, approximately 68% of contributions were from five donors and approximately 63% of contributions receivable were from three donors. In 2015, approximately 45% of contributions were from six donors and approximately 65% of contributions receivable were from two donors. Fair value measurements: The College 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 College has adopted accounting guidance for financial assets and liabilities that are measured and reported on a fair value basis. (Continued) 18

20 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Fair value measurements: (Continued) Fair value is defined as the prices 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 accounting guidance, the College 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). Regardless of where an asset falls in the fair value hierarchy, it is chosen as part of an overall investment strategy having risk and return objectives reasonably suited to the College s investment policies and objectives. 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. 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 designee. These installment notes are due over terms of ten years, with interest at 5% per annum, and are carried at face value. Income taxes: The Internal Revenue Service has ruled that the College qualifies under Section 501(c)(3) of the Internal Revenue Code and, therefore, is not generally subject to income taxes under present tax laws. Management believes that any income tax liability resulting from unrelated business income for the years ended and 2015 would not have a significant impact on the College s financial statements. (Continued) 19

21 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Subsequent events: Subsequent events were considered through October 7, 2016, the date the financial statements were available to be issued. Reclassifications: Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. Note 2. Contributions Receivable Contributions receivable consists of the following as of June 30: Unconditional promises to give $ 1,493,813 $ 529,225 Various charitable trusts held by others 3,472,938 3,930,446 $ 4,966,751 $ 4,459,671 Expected to be collected in: Less than one year 1,530,190 $ 697,892 One to five years 3,278,771 3,550,889 Over five years 972,865 1,010,638 5,781,826 5,259,419 Less: Actuarial present value of future payments from trusts (707,855) (762,015) Allowance for uncollectible contributions (69,199) (24,647) Discount on unconditional promises to give to net present value at % (38,021) (13,086) (815,075) (799,748) $ 4,966,751 $ 4,459,671 (Continued) 20

22 Note 2. Contributions Receivable (Continued) The net asset classification of contributions receivable as of June 30 is as follows: Temporarily restricted $ 4,357,565 $ 3,849,189 Permanently restricted 609, ,482 $ 4,966,751 $ 4,459,671 At and 2015, the College had also received bequests and other contribution intentions of approximately $23.0 million. These intentions to give are not recognized as assets until they are received. Note 3. Investments Investments are comprised of the following as of June 30: Pooled Non-Pooled Total Percent Pooled Non-Pooled Total Percent Global equities $ 98,466 $ 3,285,490 $ 3,383, % $ 65,592,340 $ 3,238,058 $ 68,830, % Alternative investments 23,922,172-23,922, ,510,405-55,510, Fixed income - 1,262,494 1,262, ,271,445 1,599,060 27,870, Cash and cash equivalents 119,048, , ,245, ,545, ,976 9,786, Real estate - 47,563 47, ,563 47, $ 143,069,426 $ 4,792,068 $ 147,861, % $ 156,919,402 $ 5,125,657 $ 162,045, % The College began liquidating its pooled investments near the end of 2016 to maximize its initial investment in a new limited partnership, The Richmond Fund, L.P. (the Fund ), effective July 1, Therefore, as of, approximately 83% of its total pooled endowment was in cash and cash equivalents awaiting investment in the Fund on July 1, In addition, approximately $17.8 million of the alternative investments within the College s pooled endowment as of were transferred either in cash upon a redemption or in kind to the Fund with a July 1, 2016 investment date. The College expects to complete the full transition of its pooled endowment portfolio to the Fund during As of June 30, 2015, the College s endowment was underweight in global equities and corresponding with an overweight in alternative assets primarily due to the timing of its portfolio transition. The College had provided various hedge funds with its full or partial redemption notices as of fiscal year end, but the proceeds had not yet been received. As these hedge fund proceeds were received, the College primarily invested them in global equities to achieve the new asset allocation targets adopted in its Investment Policy as revised in May (Continued) 21

23 Note 3. Investments (Continued) The market value of investment asset classifications is as follows as of June 30: Endowment (Note 4): Pooled investments $ 143,069,426 $ 156,919,402 Other investments: Trusts, annuities, and pooled income funds 3,401,652 3,773,336 All other non-pooled investments 1,390,416 1,352,321 $ 147,861,494 $ 162,045,059 Certain assets of endowment and similar funds are pooled on a fair-value basis. Each individual fund subscribed to or disposed of units on the basis of the unit fair value at the beginning of the quarter within which the transaction occurred. The following schedule summarizes total investment return and its classification in the statements of activities for the years ended June 30: Investment income $ 1,137,257 $ 910,062 Change in trust and annuity obligations (70,903) (74,040) Net realized and unrealized losses on investments (6,191,067) (4,504,548) Total investment return $ (5,124,713) $ (3,668,526) Investment returns for the years ended and 2015 are net of related investment expenses of approximately $1.7 million and $1.9 million, respectively. The College 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. The College is exposed to potential risks through its investments in alternative investments. Certain alternative investment funds hold various types of securities that are not readily marketable. Such securities are valued using various methodologies including estimates of fair value as determined by the management of the alternative investment funds. Such estimates are subject to change with the passage of time and the occurrence of events and such changes could be material. (Continued) 22

24 Note 4. Endowment The College s endowment (excluding funds held in trust by others, annuities, and contributions receivable) consisted of the following net assets as of June 30: Temporarily Permanently Temporarily Permanently Unrestricted Restricted Restricted Total Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ - $ 18,131,634 $ 79,368,279 $ 97,499,913 $ - $ 24,557,762 $ 78,760,141 $ 103,317,903 Reclassification to cover underwater endowment funds (4,079,352) - - (4,079,352) (844,378) - - (844,378) Board-designated endowment funds 49,648, ,648,865 54,445, ,445,877 Total endowment net assets $ 45,569,513 $ 18,131,634 $ 79,368,279 $ 143,069,426 $ 53,601,499 $ 24,557,762 $ 78,760,141 $ 156,919,402 Changes in the College s endowment are as follows: Temporarily Permanently Temporarily Permanently Unrestricted Restricted Restricted Total Unrestricted Restricted Restricted Total Endowment net assets, July 1, 2015 $ 53,601,499 $ 24,557,762 $ 78,760,141 $ 156,919,402 $ 54,647,033 $ 33,421,113 $ 76,335,609 $ 164,403,755 Investment return: Investment income 373, ,133-1,076, , , ,398 Net unrealized and realized losses (2,146,984) (4,035,431) - (6,182,415) (1,528,758) (2,863,533) - (4,392,291) (1,773,752) (3,332,298) - (5,106,050) (1,254,243) (2,327,650) - (3,581,893) Contributions and other additions , , ,424,532 2,424,532 Board-approved endowment draw (4,424,111) (6,701,171) - (11,125,282) (3,729,364) (7,245,574) - (10,974,938) Surplus not drawn from endowment and miscellaneous adjustments 1,400, ,367-1,773, ,476 (19,473) - 446,003 Gain on sale of art ,201, ,201,943 Net assets reclassified to cover underwater funds (3,234,974) 3,234, (729,346) 729, Endowment net assets, $ 45,569,513 $ 18,131,634 $ 79,368,279 $ 143,069,426 $ 53,601,499 $ 24,557,762 $ 78,760,141 $ 156,919,402 (Continued) 23

25 Note 5. Fair Value Measurements The following is a summary of the inputs used to determine the fair values of financial assets and liabilities measured on a recurring basis as of June 30 (See Note 1): Fair Value Level 1 Level 2 Level 3 Fair Value Level 1 Level 2 Level 3 Financial assets: Investments: Global equities $ 3,383,956 $ 3,264,738 $ 20,752 $ 98,466 $ 68,830,398 $ 28,283,706 $ 40,454,632 $ 92,060 Alternative investments 23,922,172-18,760,836 5,161,336 55,510,405 7,213,262 35,072,208 13,224,935 Fixed income/bonds 1,262, , ,440-27,870,505 1,221,530 26,648,975 - Cash and cash Equivalents 119,245, ,245, ,786,188 9,786, ,813, ,388,101 19,166,028 5,259, ,997,496 46,504, ,175,815 13,316,995 Contributions receivable (trusts only) 3,472, ,472,938 3,930, ,930,446 Funds held in trust 2,932, ,932,537 3,067, ,067,865 Financial liabilities: Interest rate swap liability (367,136) - (367,136) - (291,979) - (291,979) - $ 153,852,270 $ 123,388,101 $ 18,798,892 $ 11,665,277 $ 168,703,828 $ 46,504,686 $ 101,883,836 $ 20,315,306 A reconciliation of the financial assets and liabilities valued using Level 3 inputs for the years ended as follows: Funds Held Funds Held Contributions in Trust Contributions in Trust Investments Receivable by Others Total Investments Receivable by Others Total Balance, beginning $ 13,316,995 $ 3,930,446 $ 3,067,865 $ 20,315,306 $ 17,519,044 $ 4,985,364 $ 3,308,557 $ 25,812,965 Realized and unrealized (losses) gains (630,127) (457,508) (135,328) (1,222,963) 188,327 (1,054,918) (240,692) (1,107,283) Purchases , ,000 Transfers in and/or out (7,427,066) - - (7,427,066) (5,290,376) - - (5,290,376) Balance, ending $ 5,259,802 $ 3,472,938 $ 2,932,537 $ 11,665,277 $ 13,316,995 $ 3,930,446 $ 3,067,865 $ 20,315,306 Amounts included in transfers out of alternative investments valued using Level 3 inputs substantially resulted from investments which were either redeemed from the portfolio during 2016 or have now been valued using Level 2 inputs at. The investments which have now been valued using Level 2 inputs at versus Level 3 inputs at June 30, 2015 primarily resulted from a decrease in the percentage of fund assets classified as a Level 3 investment and liquidity. As of, management has determined that the percentage classified as a Level 2 investment and the nature of the liquidity require the net asset value be reported as a Level 2 input. (Continued) 24

26 Note 5. Fair Value Measurements (Continued) Realized and unrealized gains (losses), as disclosed above, are included in investment return in the statements of activities. The fair values of investments in cash and cash equivalents and publicly traded investments in equities and bonds are determined based upon quoted market prices. Alternative investments, including investments in common trusts, commingled funds, and proprietary funds, do not have quoted market prices. The fair value of such investments is based upon the net asset value of the respective funds, which are based upon the estimated fair values of the underlying investments. The fair values of underlying investments are based upon quoted market prices, where applicable, or upon estimated fair values determined by the respective fund managers and are subject to review by the College and independent annual financial statement audits. The fair values of contributions receivable (trusts only) are determined using the income approach based on calculating the net present value of the future distributions expected to be received, using published life expectancy tables and appropriate discount rates. The fair value of the interest rate swap liability is estimated based on current settlements prices. The following table summarizes by major category the alternative investments valued at net asset value per share: Fair Value Redemption Redemption Major Category Frequency Notice Period a) Hedge Funds $ 23,922,172 $ 40,993,370 Quarterly or annually at the purchase anniversary date 45 to 90 days b) Real Assets - 7,303,773 Monthly 10 days $ 23,922,172 $ 48,297,143 As of, one of the College s absolute return hedge funds had a remaining hard lock-up of eighteen months. Effective July 1, 2016, this hedge fund was transferred in-kind to the Richmond Fund, L.P. as part of the College s initial investment in that limited partnership, along with two other hedge funds in the College s portfolio as of. Two of the College s other hedge funds are in liquidation as of with full liquidation to investors expected to be completed in 2017 or The remaining market value of these hedge funds in liquidation was approximately $258,000 and $444,000 as of and 2015, respectively. (Continued) 25

27 Note 5. Fair Value Measurements (Continued) All of the soft or hard lock-ups associated with the College s remaining hedge funds have expired as of fiscal year end. In preparation for the College s full pooled endowment portfolio transition to the Richmond Fund, L.P. during fiscal year 2017, the College has utilized the standard redemption notice periods included above for these funds to affect redemptions without incurring additional fees so that redemption proceeds become available in fiscal year 2017 for investment in the limited partnership. a) Hedge Funds: This category includes four long/short equity hedge fund partnerships and five absolute return hedge fund partnerships. The long/short funds principally hold long and short positions in publicly-traded common stock. The absolute return funds hold long and short positions in publicly-traded common stock, fixed income securities, commodities, derivative securities, and cash. b) Real Assets: The single investment in this category was fully redeemed as of. (Continued) 26

28 Note 6. Funds Held in Trust by Others The College is the beneficiary of various trusts created by donors, the assets of which are not in the possession of the College. The College has legally enforceable rights and claims to income from these trusts. Net realized and unrealized gains/(losses) related to these interests are reported as changes in permanently restricted net assets. The fair values of funds held in trust by others are determined by the present value of estimated future cash flows. The market value of those interests as of June 30 is as follows: Randolph College Share Trust, Trustee, and Purpose Percent West Virginia Emulation Endowment Trust BB&T Restricted for scholarships , ,474 Margaret F. Williams Scholarship Fund Wells Fargo Bank Restricted for scholarships , ,357 Lucy Clair Harris Griffin Wells Fargo Bank Unrestricted , ,769 Ruth Hines Temple PNC Bank Restricted for Chair in English and scholarships ,174,055 1,235,639 John and Frances Kirby Wells Fargo Bank Restricted for scholarships , ,690 Charles H. Stone Bank of America Restricted for scholarships , ,453 Henrietta and Paul Munro Fund Greater Lynchburg Community Trust Unrestricted ,693 24,895 Dorothy M. Brooks Scholarship Fund Greater Lynchburg Community Trust Restricted for scholarships ,830 11,588 $ 2,932,537 $ 3,067,865 (Continued) 27

29 Note 7. Land, Buildings, and Equipment, Net Land, buildings, and equipment consist of the following at June 30: Estimated Useful Life Buildings 60 years $ 69,969,616 $ 64,285,127 Building improvements 20 years 1,014,785 - Land improvements 20 years 207, ,602 Furniture and equipment 5-10 years 22,692,005 21,508,708 Library books 10 years 3,549,175 3,506,734 Horses 5 years 1,224,500 1,088,000 98,657,741 90,516,171 Less accumulated depreciation (49,614,934) (47,586,519) 49,042,807 42,929,652 Land 695, ,554 Art and historic collection 3,133,923 3,110,473 Construction in progress (primarily infrastructure upgrade at June 30,2016) 891,640 5,343,684 4,721,117 9,149,711 $ 53,763,924 $ 52,079,363 Note 8. Postretirement Healthcare Benefit Obligation The College provides health insurance to certain retired employees under the age of 65 and their dependents. The costs of postretirement benefits are accrued during the service lives of employees. The College funds these benefits on a pay-as-you-go basis. Assumptions used in determination of the costs of postretirement benefits consisted of the following: Discount rate used in determining the accumulated postretirement benefit obligation (APBO) 4.25% Assumed healthcare cost trend used in measuring the accumulated postretirement benefit obligation (declining to 5.0% in 2025) 8.00% The healthcare cost trend rate assumption can have a significant effect on the amounts reported. For example, if the healthcare cost trend rate assumptions were increased by 1.0%, the APBO would be increased by approximately $100,000. The effect of this change on the sum of the service cost and interest cost components of net periodic postretirement benefits costs would be an increase of approximately $15,000. (Continued) 28

30 Note 8. Postretirement Healthcare Benefit Obligation (Continued) Items not yet recognized as a component of net periodic cost include a net gain of $698,280 and prior service cost of $845,720 to be periodically amortized as a reduction to the cost. Retiree contributions expected to be paid to the plan for the year ended June 30, 2017 approximate $31,000. Benefits paid were $57,181 and $210,331, and participant contributions were $20,468 and $23,562 in 2016 and 2015, respectively. Benefits expected to be paid in the future are as follows: Year ending June 30, 2017 $ 59, $ 68, $ 73, $ 86, $ 110, $ 853,973 Note 9. Trust and Annuity Obligations Trust and annuity obligations, for which the College is trustee, are as follows as of June 30: Charitable remainder trust obligations $ 442,029 $ 520,938 Annuity obligations under various charitable gift annuities 680, ,010 Deferred revenue or discount for future interest under pooled income arrangements 859, ,116 $ 1,982,941 $ 2,038,064 Note 10. Debt Debt payable consists of the following as of June 30: (Continued) Note to the Industrial Development Authority of the City of Lynchburg, Virginia for Educational Facilities Revenue Bonds assigned to Branch Banking and Trust Company (Series 2010), amended and restated in December 2013, payable in principal installments ranging from $10,000 to $545,000 monthly with balance due September 1, Interest rate is payable monthly at 68% of the one-month LIBOR rate plus 0.99% (1.31% and 1.12% at and 2015, respectively). The note is unsecured. $ 6,705,690 $ 6,864,691

31 Note 10. Debt (Continued) Debt payable consists of the following as of June 30: (Continued) (Continued) Note to the Economic Development Authority of Amherst County, Virginia assigned to Branch Banking and Trust Company (Series 2010), amended and restated in November 2013, payable in principal installments ranging from $15,020 to $31,459 monthly with balance due January 1, Interest rate is payable monthly at 68% of the one-month LIBOR rate plus 0.99% (1.31% and 1.12% at and 2015, respectively). The note is unsecured. 4,582,024 4,728,022 Note to the Industrial Development Authority of the County of Campbell, Virginia for Educational Facilities Revenue Refunding Bonds (Series 2013), payable in principal installments ranging from $16,600 to $116,200 monthly with balance due September 1, Interest is payable monthly at 68% of the one-month LIBOR rate plus 1.01% (1.33% and 1.14% at and 2015, respectively). The note is unsecured. 6,268,200 7,371,000 Line of Credit to Branch Banking and Trust Company for the renovation of Wright Hall, Cheatham Dining Hall, and other capital projects. The maximum outstanding balance is $7,000,000, with draws permitted until December 15, All outstanding principal and accrued interest is due December 15, Interest is payable monthly at the one-month LIBOR rate plus 1.25% (1.72% and 1.44% at and 2015, respectively). The line is unsecured. 3,768,427 1,398,271 Total outstanding debt matures as follows: June 30, 2017 $ 1,538, ,673, ,725, ,545, ,803, and thereafter 9,037,859 $ 21,324,341 $ 20,361,984 $ 21,324,341

32 Note 10. Debt (Continued) The proceeds from the Series 2013 bonds were used to refinance the Series 2003 bonds and associated costs of issuance, as well as to finance new capital projects of approximately $720,000. The proceeds from the Series 2010 and 2003 bonds were used to finance capital projects and the associated costs of issuance. Commencing September 15, 2018, Branch Banking and Trust Company has the right, upon written notice to the respective Authority and the College, to require repayment in full of either or both of the Series 2010 notes payable at such date specified in the notice. This date can be no earlier than January 15, 2019 and must be 120 days following the date of the notice. The College utilizes a swap transaction with a termination date of January 15, 2019 with the purpose of locking the interest rate on a fixed $7.6 million of the Series 2010 issuances. Under the terms of the agreement, the College pays a fixed rate of 2.60% on a monthly basis and, in return, is paid 68% of the one-month LIBOR rate plus 0.99%. The notional amount at and 2015 was $7,600,000. The College also utilizes a swap transaction with a termination date of September 1, 2023 for the purpose of locking the interest rate on the Series 2013 bonds. Under the terms of the agreement, the College pays a fixed rate of 2.325% on a monthly basis and, in return, is paid 68% of the one-month LIBOR rate plus 1.01%. The notional amount of the swap at and 2015 was $6,268,000 and $7,371,000, respectively. These swap contracts had a fair value of $367,136 and $291,979 at and 2015, respectively, which is included in accounts payable and other accrued expenses. The College s credit agreements require a number of financial covenants, which include complying with: (i) a maximum ratio of total debt to unrestricted net assets, (ii) a minimum debt service coverage ratio (defined as the ratio of the change in net assets (operating) plus depreciation, interest expense, contributions (non-operating) and other income (non-operating) to total principal and interest payments) and (iii) a minimum level of available assets (defined as cash plus unrestricted endowment net assets). As of, the College is in compliance with these covenants, as indicated below: Covenant Required Actual i. Debt to Unrestricted Net Assets Less than ii. Debt Service Coverage Ratio Greater than iii. Available Assets Greater than $15.0 Million $60.0 million The College is only required to meet any two of these three covenants annually at each fiscal year end. (Continued) 31

33 Note 11. Net Assets Net assets as of June 30 consist of the following: Unrestricted: Funds functioning as endowment: Quasi endowment and accumulated endowment investment return, net of amounts spent $ 49,648,865 $ 54,445,877 Cumulative losses resulting in underwater funds (4,079,352) (844,378) Investment in land, buildings, and equipment, net of debt 30,100,973 26,986,005 Other 2,352,763 3,746,344 78,023,253 84,333,848 Temporarily restricted: Instruction, academic support, financial aid, and plant renovation 34,881,919 32,299,846 Trusts and annuities 938,615 1,083,564 Contributions receivable, restricted by time or purpose 4,357,565 3,849,189 40,178,099 37,232,599 Permanently restricted: Donor-restricted for permanent investment 79,646,117 79,116,512 Trusts and annuities 492, ,019 Funds held in trust by others 2,932,537 3,067,865 Contributions receivable 609, ,482 83,679,970 83,346,878 Total net assets $ 201,881,322 $ 204,913,325 Temporarily restricted net assets are subject to both purpose and time restrictions, and are generally expendable for instruction, general operations, financial aid, academic support, and operations, maintenance and acquisition of land, buildings, and equipment. Permanently restricted net assets are restricted to investment in perpetuity, the income from which is generally expendable to support instruction, general operations, financial aid, academic support and operations, maintenance and acquisition of land, buildings, and equipment. (Continued) 32

34 Note 12. Tuition and Fees, Net of Financial Aid Revenues received for student tuition and fees, net of financial aid consist of the following for the years ended June 30: Tuition and fees $ 22,968, % $ 22,167, % Less financial aid: Institutional, non-funded (9,420,191) (41.0) (8,587,871) (38.7) Funded (4,601,976) (20.0) (4,832,795) (21.8) (14,022,167) (61.0) (13,420,666) (60.5) $ 8,946, % $ 8,746, % Note 13. Net Assets Released from Restrictions and Reclassifications Net assets were released from donor restrictions when expenses were incurred to satisfy the restricted purposes or by occurrence of other events as specified by donors. Restrictions were satisfied as follows for the years ended June 30: Operating: Financial aid $ 4,136,722 $ 4,597,589 General operations and maintenance 4,348,919 3,959,708 Total operating 8,485,641 8,557,297 Non-operating: Buildings, equipment, and construction in progress 1,854,643 1,966,526 Reclassification to cover underwater endowment funds (3,234,974) (729,346) Reclassifications due to changes in donor intent - (1,581,175) Reclassifications other 123,533 28,233 Total non-operating (1,256,798) (315,762) $ 7,228,843 $ 8,241,535 Reclassifications made to permanently restricted net assets, as reflected in the statements of activities, occur when a donor applies or changes restrictions on contributions previously recorded. Reclassifications other for the years ended and June 30, 2015 primarily include reclassifications upon the maturity of certain split interest agreements. (Continued) 33

35 Note 14. Retirement Plan Retirement benefits are provided for all personnel through a fully funded, immediately vested, defined contribution retirement plan with Teacher s Insurance and Annuity Association College Retirement Equities Fund. The College contributed an amount equal to 8% of regular salary for faculty and staff for the years ended and 2015, respectively. The total expense under this plan was approximately $996,000 and $960,000 for the years ended and 2015, respectively. Note 15. Commitments and Contingencies The College has an agreement with an outside company to provide food service for the students, faculty, staff, and guests from July 1, 2016 through June 30, Thereafter, the agreement can be renewed for five additional one year terms upon the mutual agreement of the College and food service provider. The College expects to pay approximately $1.6 million for this service in fiscal year In conjunction with this contract, the food service company will pay the College a sum of money, some of which is for general capital use and some of which is to be invested in food service facility renovations, the purchase and installation of food service equipment, and signage or graphic upgrades. Such funds will be recorded as deferred revenue when received and will be amortized on a straight-line basis over the life of the contract or from the applicable renovation project completion date to the contract end date. The contract can be terminated with 120 days notice without cause and 30 days notice with cause. If the contract is terminated prior to June 30, 2021, the College will owe the food service provider the unamortized deferred revenue at the termination date. Final expenditure reports of grants and contracts submitted to certain granting agencies in current and prior years are subject to audit by such agencies. As a result, the reimbursed expenditures are subject to adjustment. The effect of such adjustments, if any, is not determinable at this time. Management is of the opinion that the liability, if any, would not have a material effect on the College s financial position. The College s students receive a substantial amount of support from state and federal student financial assistance programs. A significant reduction in the level of this support, if this were to occur, could have an adverse effect on the College s programs and activities. From time to time, the College is named as a party in litigation arising in the normal course of business. Management believes that the outcome of any such litigation will not result in a material impact on the financial position or the change in net assets of the College. 34

36 (Founded as Randolph-Macon Woman s College in 1891) SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year ended U.S. Department of Education: Student Financial Aid Programs: Federal Grantor/ Program Title Federal CFDA Number Total Federal Financial Assistance/ Student Loans Advanced Federal Supplemental Educational Opportunity Grant Program $ 59,936 Federal Direct Loan Program ,801,456 Federal Work-Study Program ,606 Federal Perkins Loan Program ,580 Federal Pell Grant Program ,271 Federal TEACH Grant Program ,620 Total student financial aid programs 5,932,469 Federal SCHEV NCLB Grant B 111,257 NSF S-STEM Grant ,352 NIH Aging Research Grant ,867 CMS Health Care Innovation Awards ,961 Total Federal Awards $ 6,553,906 (Continued) 35

37 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year Ended Note 1. Basis of Presentation The accompanying schedule of expenditures of federal awards includes the federal grant activity of the College and is presented using the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the consolidated financial statements. The College s major program is as follows: Student Financial Aid Student Financial Aid includes certain awards to provide financial aid to students, primarily under the Federal Work-Study (FWS), Federal Pell Grant (Pell), and Federal Supplemental Educational Opportunity Grant (FSEOG), and Teacher Education Assistance for College and Higher Education Grants (TEACH) programs of the U.S. Department of Education. The College also receives awards to make loans to eligible students under a federal student loan program (Federal Perkins Loan) and the Federal Direct Loan program. Note 2. Summary of Significant Accounting Policies for Expenditures of Federal Awards Expenditures for federal student financial aid programs are recognized as incurred and include the federal share of students FSEOG program grants and FWS program earnings, certain other federal financial aid for students, and administrative cost allowances, where applicable. The College did not elect to use the 10% de minimus indirect coast rate. Pell, SCHEV, ACG, and TEACH awards are recognized as agency transactions and are not recorded as expenditures in the consolidated financial statements. Note 3. Federal Direct Loan Program The College is responsible only for the performance of certain administrative duties with respect to its Federal Direct Loan program and, accordingly, these loans are not included in its consolidated financial statements. It is not practicable to determine the balance of loans outstanding to students and former students of the College under these programs as of. Note 4. Federal Perkins Loan Program Cumulative loans outstanding (net of principal repayments, assignments, and cancellations), including the $53,580 of student loans advanced under the Federal Perkins Loan Program in 2016, total $865,

38 INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Board of Trustees Randolph College Lynchburg, Virginia We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the consolidated financial statements of Randolph College, which comprise the consolidated statement of financial position as of, and the related consolidated statements of activities and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated December 20, Internal Control over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered the College s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of the College s internal control. Accordingly, we do not express an opinion on the effectiveness of the College s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the College s consolidated financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. 37 Your Success is Our Focus 319 McClanahan Street, S.W. Roanoke, Virginia Fax: