Hampden-Sydney College and Affiliates. Consolidated Financial and Compliance Report Year Ended June 30, 2016

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1 Hampden-Sydney College and Affiliates Consolidated Financial and Compliance Report Year Ended June 30, 2016

2 Contents Financial section Independent auditor s report 1-2 Consolidated financial statements Consolidated statements of financial position 3-4 Consolidated statements of activities 5-6 Consolidated statements of cash flows 7-8 Notes to consolidated financial statements 9-30 Compliance section Internal control and compliance matters Reports and schedules required by Government Auditing Standards and the Uniform Guidance: 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 Audit Standards Independent auditor s report on compliance for each major federal program and on internal control over compliance required by the Uniform Guidance Schedule of expenditures of federal awards 35 Notes to schedule of expenditures of federal awards 36 Schedule of findings and questioned costs Summary schedule of prior audit findings 39

3 Independent Auditor s Report To the Board of Trustees Hampden-Sydney College Report on the Financial Statements We have audited the accompanying consolidated financial statements of Hampden-Sydney College and Affiliates, which comprise the consolidated statements of financial position as of June 30, 2016 and 2015, the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the 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. 1

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hampden-Sydney College and Affiliates as of June 30, 2016 and 2015, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Supplementary Information Our audits were 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 information 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 reports dated October 21, 2016, on our consideration of Hampden-Sydney College and Affiliates internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements and other matters. The purpose of these reports 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. These reports are an integral part of an audit performed in accordance with Government Auditing Standards in considering Hampden- Sydney College and Affiliates internal control over financial reporting and compliance. Richmond, Virginia October 21,

5 Consolidated Statements of Financial Position June 30, 2016 and 2015 Assets Cash and cash equivalents $ 10,319,630 $ 12,751,392 Accounts, notes and grants receivable, less allowance for doubtful collections (2016 $495,227; 2015 $455,192) 1,140,631 1,168,673 Contributions receivable, less allowance for doubtful collections (2016 $417,346; 2015 $635,308) (Note 2) 4,801,027 7,305,474 Loans to students, less allowance for doubtful collections (2016 $360,266; 2015 $332,252) (Note 3) 4,741,419 5,297,307 Beneficial interest in perpetual trusts (Note 5) 6,465,747 6,986,967 Investments, at fair value (Notes 4 and 5) 143,646, ,052,966 Investments, at cost 6,126,217 6,340,807 Inventories and deferred expenses 2,157,792 2,055,553 Property and equipment: Land and improvements 14,201,008 13,986,690 Buildings & major renovations 120,564, ,047,471 Equipment 19,374,768 20,264, ,140, ,298,604 Less accumulated depreciation 72,105,569 72,225,971 82,035,125 84,072,633 Construction in progress 4,896,281 1,429,476 86,931,406 85,502,109 Total assets $ 266,330,230 $ 281,461,248 See notes to consolidated financial statements. 3

6 Consolidated Statements of Financial Position June 30, 2016 and 2015 Liabilities and Net Assets Liabilities Accounts payable and accrued expenses $ 2,523,973 $ 2,311,198 Tuition from students received in advance 332, ,500 Investments and deposits held in custody for others - 281,009 Accrued interest payable 82,191 95,349 Refundable grants 1,328,814 1,327,803 Annuities payable 4,728,810 4,728,023 Bonds payable and other debt (Note 6) 15,464,849 17,228,276 Total liabilities 24,461,333 26,292,158 Commitments (Notes 7 and 8) Net assets Unrestricted 69,120,932 70,268,368 Temporarily restricted (Note 9) 84,094,060 96,989,761 Permanently restricted (Note 9) 88,653,905 87,910,961 Total net assets 241,868, ,169,090 Total liabilities and net assets $ 266,330,230 $ 281,461,248 See notes to consolidated financial statements. 4

7 Consolidated Statement of Activities Year Ended June 30, 2016 Temporarily Permanently Unrestricted Restricted Restricted Total Public support, revenue and gains/losses Tuition and fees $ 44,236,416 $ - $ - $ 44,236,416 Less scholarship allowances: Institutional 22,494, ,494,097 Federal and state grants 3,300, ,300,836 Net tuition and fees 18,441, ,441,483 Federal grants and contracts 1,159, ,159,758 State grants and contracts 2,364, ,364,427 Private gifts, grants and contracts 1,934,423 1,929,872 1,763,816 5,628,111 Investment income (loss), net 158,739 (5,654) (13,833) 139,252 Net realized gains (losses) on investments (19,286) 851,382 94, ,692 Net unrealized losses on investments (120,078) (7,607,506) (908,189) (8,635,773) Sales and services of auxiliary enterprises 15,436, ,436,988 Actuarial losses on annuity obligations (27,719) (115,107) (193,601) (336,427) Other sources 349, , ,923 Total public support, revenue, and gains/losses 39,677,918 (4,740,428) 742,944 35,680,434 Net assets released from restrictions, satisfaction of purpose or time restrictions (Note 9) 8,195,267 (8,195,267) - - Net public support, revenue, and gains/losses 47,873,185 (12,935,695) 742,944 35,680,434 Expenses Educational and general expenses: Instruction 14,873, ,873,613 Research 193, ,120 Academic support 4,692, ,692,929 Student services 11,437, ,437,239 Institutional support 7,954, ,954,796 Educational and general expenses 39,151, ,151,697 Auxiliary enterprises 9,828, ,828,930 Total expenses 48,980, ,980,627 Change in net assets before transfers (1,107,442) (12,935,695) 742,944 (13,300,193) Transfers, net (39,994) 39, Change in net assets (1,147,436) (12,895,701) 742,944 (13,300,193) Net assets Beginning 70,268,368 96,989,761 87,910, ,169,090 Ending $ 69,120,932 $ 84,094,060 $ 88,653,905 $ 241,868,897 See notes to consolidated financial statements. 5

8 Consolidated Statement of Activities Year Ended June 30, 2015 Temporarily Permanently Unrestricted Restricted Restricted Total Public support, revenue and gains/losses Tuition and fees $ 42,658,480 $ - $ - $ 42,658,480 Less scholarship allowances: Institutional 20,784, ,784,599 Federal and state grants 3,353, ,353,025 Net tuition and fees 18,520, ,520,856 Federal grants and contracts 1,173, ,173,406 State grants and contracts 2,356, ,356,165 Private gifts, grants and contracts 2,707,545 5,438,912 4,752,741 12,899,198 Investment income (loss), net 177,188 (21,038) (53,271) 102,879 Net realized gains on investments 7,610 1,317, ,225 1,885,814 Net unrealized gains (losses) on investments (24,026) 5,938,809 (534,056) 5,380,727 Sales and services of auxiliary enterprises 15,252, ,252,881 Actuarial losses on annuity obligations (42,108) (83,400) (137,425) (262,933) Other sources 512, ,934 3, ,222 Total public support, revenue, and gains/losses 40,641,692 12,860,196 4,591,327 58,093,215 Net assets released from restrictions, satisfaction of purpose or time restrictions (Note 9) 8,209,375 (8,209,375) - - Net public support, revenue, and gains/losses 48,851,067 4,650,821 4,591,327 58,093,215 Expenses Educational and general expenses: Instruction 14,552, ,552,456 Research 94, ,654 Academic support 5,065, ,065,482 Student services 10,916, ,916,319 Institutional support 7,275, ,275,528 Educational and general expenses 37,904, ,904,439 Auxiliary enterprises 9,862, ,862,742 Total expenses 47,767, ,767,181 Change in net assets before transfers and reclassifications 1,083,886 4,650,821 4,591,327 10,326,034 Transfers, net (30,000) - 30,000 - Change in net assets 1,053,886 4,650,821 4,621,327 10,326,034 Net assets Beginning 69,214,482 92,338,940 83,289, ,843,056 Ending $ 70,268,368 $ 96,989,761 $ 87,910,961 $ 255,169,090 See notes to consolidated financial statements. 6

9 Consolidated Statements of Cash Flows Years Ended June 30, 2016 and Cash flows from operating activities Change in net assets $ (13,300,193) $ 10,326,034 Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation 3,589,168 3,662,147 Amortization of bond issuance costs 23,054 23,054 Provision for doubtful accounts (149,913) 315,944 Discount on contributions receivable (26,152) (201,439) Net realized and unrealized (gains) losses on investments 7,709,081 (7,266,541) Loss on disposal of property and equipment 238,846 - Actuarial losses on annuity obligations 336, ,933 Contributions restricted for long-term investment (4,611,912) (6,119,988) Interest and dividends restricted for long-term investment 13,833 53,271 Changes in assets and liabilities: Receivables 3,264,442 (3,069,816) Inventories and deferred expenses (125,293) (81,818) Accounts payable and other liabilities (181,060) 102,910 Tuition from students received in advance 12,196 7,333 Refundable grants 1,011 1,006 Net cash used in operating activities (3,206,465) (1,984,970) Cash flows from investing activities Purchases of property and equipment (5,160,255) (1,481,995) Purchases of investments (975,012) (2,370,148) Proceeds from disposal of property and equipment 2,612 - Proceeds from sale of investments 4,441,877 5,267,105 Net cash (used in) provided by investing activities (1,690,778) 1,414,962 (Continued) 7

10 Consolidated Statements of Cash Flows (Continued) Years Ended June 30, 2016 and Cash flows from financing activities Proceeds from contributions restricted for: Investment in endowment $ 1,763,817 $ 4,752,741 Investment in property and equipment 2,848,095 1,367,247 Other financing activities: Interest and dividends restricted for reinvestment (13,833) (53,271) Decrease in annuities payable 88,393 94,292 Payment of annuity obligations (457,564) (433,126) Proceeds from debt - 10,000 Payments on bonds payable and other debt (1,763,427) (1,741,561) Net cash provided by financing activities 2,465,481 3,996,322 Net (decrease) increase in cash (2,431,762) 3,426,314 Cash Beginning 12,751,392 9,325,078 Ending $ 10,319,630 $ 12,751,392 Supplemental disclosure of cash flow information: Cash payments for interest $ 426,398 $ 473,524 Supplemental schedule of noncash operating and investing: Property and equipment financed by accounts payable $ 655,770 $ 556,102 See notes to consolidated financial statements. 8

11 Note 1. Nature of Activities and Significant Accounting Policies Nature of business: Hampden-Sydney College and Affiliates (the College) is a private, all-male institution offering four-year degree programs in liberal arts studies. The College was founded in 1776 and is located in Hampden-Sydney, Virginia. Nature of activities: These consolidated financial statements present the financial position, activities and cash flows of the College and its consolidated affiliates, H-SC Poplar Hill and H-SC Fine Arts Project (the LLC s). Principles of consolidation: The consolidated financial statements include the accounts of Hampden- Sydney College and its consolidated affiliates, the LLC s, which were organized in August 1999 and April 2016, respectively. All significant intercompany accounts and transactions have been eliminated. The significant accounting policies followed by the College are described below: Basis of accounting: The accompanying consolidated financial statements are presented in accordance with the accrual basis of accounting, whereby, revenue is recognized when earned and expenses are recognized when incurred. Financial statement presentation: The financial statement presentation follows the requirements of Accounting Standards Codification (ASC) ASC 958, Not-for-Profit Entities. Under ASC 958, the College is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted, temporarily restricted and permanently restricted. Unrestricted net assets: Unrestricted net assets are the net assets that are neither permanently restricted nor temporarily restricted by donor-imposed stipulations. Temporarily restricted net assets: Temporarily restricted net assets result from contributions whose use is limited by donor-imposed stipulations that either expire by passage of time or can be fulfilled and removed by actions of the College pursuant to those stipulations. Net assets may be temporarily restricted for various purposes, such as use in future periods or for specified purposes. Permanently restricted net assets: Permanently restricted net assets result from contributions whose use is limited by donor-imposed stipulations that neither expire by passage of time or otherwise are removed by the College s actions. Use of estimates: The preparation of consolidated financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of public support and revenue, and expenses during the reporting period. Actual results could differ from those estimates. Contributions receivable: Unconditional promises to give that are expected to be collected within one year are recorded at their net realizable value. Unconditional promises to give that are expected to be collected in future years are recorded at the present value of estimated future cash flows after an allowance for estimated uncollectible contributions is provided. The discounts on those amounts are computed using a risk-free interest rate applicable to the year in which the promise is received. Amortization of the discount is included in contribution revenue. Management determines the allowance by regularly evaluating individual donor receivables and considering a donor s payment history and current economic conditions. Contributions receivable are written off when deemed uncollectible. Conditional promises to give are not included as support until such time as the conditions are substantially met. 9

12 Note 1. Nature of Activities and Significant Accounting Policies (Continued) Accounts receivable: Accounts receivable are carried at original amounts less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and using historical experience applied to an aging of accounts receivable. The current provision for doubtful accounts is computed to maintain an allowance equal to a percentage of the outstanding balance plus an additional provision for accounts deemed fully or partially uncollectible. Accounts receivable are written off when deemed uncollectible. Recovery of accounts receivable previously written off are recorded when received. Loans to students: The College makes uncollateralized loans to students based on financial need. Loans to students are stated at the principal amount loaned to students plus accrued interest. Student loans are funded through the Federal Perkins revolving loan program or institutional resources. Interest is charged at a fixed rate (3% for loans funded through institutional resources and 5% for loans funded through the Federal Perkins revolving loan program at June 30, 2016 and 2015). Loans are carried at original amounts less an estimate made for doubtful receivables. An allowance for doubtful collections on loans to students is provided based on a review of the loans along with an analysis of historical loss and recoveries. Loans are written off when deemed uncollectible. Recoveries of loans previously written off are recognized when received. The availability of funds under the Federal Perkins student loan program is dependent on reimbursements to the pool of repayments on outstanding loans. Funds advanced by the Federal government are ultimately refundable to the government and are classified as liabilities in the statement of financial position. Outstanding loans cancelled under the program result in a reduction of funds available for loans and a decrease in the liability to the government. Beneficial interest in perpetual trust: The College has been named as a beneficiary in several perpetual trusts in which the College is not the trustee. When the College is notified of the existence of the trust, assets are recorded based on the College s percentage ownership per the trust agreement of the fair value of the assets. It is the College s policy not to record contributions receivable from remainder trusts if the trust is revocable or if the donor retains the unilateral right to change beneficiaries. Investments: Equity securities with readily determinable fair values and all investments in debt securities are reported at fair value. In the case of certain less marketable investments, as described in Note 4, fair value is established by using the net asset value of each investment fund as provided by the investment fund manager. Unrealized gains and losses are included in the consolidated statements of activities. Realized gains and losses on investments are determined using the specific-identification method. The College receives contributions in which it is the trustee of the irrevocable donor trusts. For such contributions, the assets are recorded at fair value on the date of gift and a liability is recorded equal to the time value of the expected future distributions. The difference between the assets received and the liability recorded is the amount of contribution revenue recognized. These values are reevaluated annually using appropriate actuarial assumptions. Investments received by gift are initially recorded at fair value at the date of gift, and thereafter like other investments as described above. Other investments held by the College are recorded at cost. Other investments as of June 30, 2016 and 2015, include real estate held for investment and a certificate of deposit. Periodic evaluations are made by management, as deemed necessary based upon an event or change in circumstances that has occurred during the period, to whether investments have been impaired. 10

13 Note 1. Nature of Activities and Significant Accounting Policies (Continued) Market risk: Market risk arises primarily from changes in the market value of financial instruments. Theoretically, the College s exposure is equal to the value of investments purchased. Exposure to market risk is influenced by a number of factors, including the relationships between financial instruments, and the volatility and liquidity in the markets in which the financial instruments are traded. The College attempts to control its exposure to market risk through various analytical monitoring techniques. Management of the College seeks investment opportunities that offer the possibility of attaining substantial capital appreciation. Certain events particular to each industry in which the College s investments conduct their operations, as well as general economic and political conditions, may have a significant negative impact on the investee s operations and profitability. Such events are beyond the College s control, and the likelihood that they may occur cannot be predicted. The College invests in a professionally managed portfolio that contains common shares and bonds of publicly traded companies, U.S. obligations, mutual funds and money market funds. Such investments are exposed to various risks such as interest rate, market and credit. Due to the level of risk associated with such investments and the uncertainty related to changes in the value of such investments, it is at least reasonably possible that changes in risks in the near term would materially affect investment balances and the amounts reported in the consolidated financial statements. Because alternative investments are not readily marketable, the fair value represents the amount the College would expect to receive if it were to liquidate its investment excluding any redemption charges that may apply (see Note 4). The fund managers of alternative investment funds in which the College invests, may utilize derivative instruments with off balance-sheet risk. The College s exposure is limited to the amount of its investment. Concentrations of credit risk: The College maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The College has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash. Credit risk arises primarily from the potential inability of counterparties to perform in accordance with the terms of a contract. The College s exposure to credit risk associated with counterparty nonperformance is limited to the current cost to replace all contracts in which the College has a gain. Exchange-traded financial instruments generally do not give rise to significant counterparty exposure due to the cash settlement procedures for daily market movements and the margin requirements of individual exchanges. Loans to students and accounts, notes and grants receivables are also financial instruments that are exposed to concentrations of credit risk. Realization of these items is dependent on various individual economic conditions. The College performs ongoing credit evaluations of the financial condition of these loans and receivables. Loans to students and accounts, notes and grants receivables are carried at estimated net realizable values. Inventories: Inventories consist of maintenance supplies, spare parts and Campus Store items held for resale, which are stated at the lower of cost or market. Cost is determined on the first-in, first-out method. Bond issuance costs: Bond issuance costs have been capitalized and are included in deferred expenses on the consolidated statements of financial position. These deferred expenses are amortized over the life of the bonds using the straight-line method. Bond amortization expense was $23,054 for the years ended June 30, 2016 and

14 Note 1. Nature of Activities and Significant Accounting Policies (Continued) Property and equipment: Plant assets, consisting of land, buildings and equipment, were recorded at appraisal values in 1915, and subsequent additions have been recorded at cost. Donated real property received is recorded at approximate fair value as of the date of receipt. Depreciation is computed by the straight-line method over the following estimated useful lives: Years Land improvements 20 Major renovations and buildings Equipment 5-30 Valuation of long-lived assets: Long-lived assets, such as buildings and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the accompanying consolidated statements of financial position and reported at the lower of the carrying amount or fair value less costs to sell. Revenue recognition: Tuition and fees revenue are recognized during the period to which they relate. Amounts received in advance are reported as tuition from students received in advance. Auxiliary services revenue includes room, board and other student services, and is recognized when earned. Interest income is recognized when earned. Dividend income is recognized when dividends are declared. Governmental grants and contracts revenue are recognized when all requirements relating to the grants and contracts have been met. Contributions: Gifts of cash and other assets are presented as restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statement of activities as net assets released from restrictions. When restrictions are met in year of contribution receipt, donations are shown as temporarily restricted contributions and as net assets released from restrictions. Gifts of land, buildings and equipment are presented as unrestricted support unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, the College reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service (as the assets are used in the College s activities). Functional expenses: Expenses are primarily reported in the statements of activities in categories recommended by the National Association of College and University Business Officers. The College s primary program service is instruction. Expenses reported as academic support, student services, institutional support and auxiliary enterprises are incurred in support of this primary program service. 12

15 Note 1. Nature of Activities and Significant Accounting Policies (Continued) Functional expenses are determined through allocating total expenses incurred to the programs and supporting services benefited. Depreciation of property and equipment, interest expense and maintenance and certain other expenses, as discussed in Note 10, are allocated to program and supporting activities based on periodic inventories of facilities. Income taxes: The College has a tax determination letter from the Internal Revenue Service that states it qualifies under Section 501(c)(3) of the Internal Revenue Code and is exempt from federal income taxes. Accordingly, no provision for income taxes has been made in the accompanying consolidated financial statements. Management evaluated the College s tax positions and has concluded that the College has taken no uncertain tax positions that require adjustment to the consolidated financial statements. Reclassifications: Certain prior year amounts have been reclassified to conform to current year presentation. Such reclassifications had no effect on net assets or change in net assets as previously reported. Recently issued accounting pronouncements: In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) , Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU , which defers the effective date of ASU one year making it effective for annual reporting periods beginning after December 15, The College has not yet selected a transition method and is currently evaluating the effect that the standard will have on the consolidated financial statements. In August 2014, the FASB issued ASU , Presentation of Financial Statements Going Concern (Subtopic ): Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern. ASU explicitly requires management to evaluate, at each annual or interim reporting period, whether there are conditions or events that exist which raise substantial doubt about an entity s ability to continue as a going concern and to provide related disclosures. ASU is effective for annual periods ending after December 15, 2016, and annual and interim periods thereafter, with early adoption permitted. The adoption of ASU is not expected to have a material effect on the College s financial statements or disclosures. In May 2015, the FASB issued ASU , Disclosures for Investments in Certain Entities That Calculate New Asset Value Per Share or Its Equivalent (Topic 820), which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share (or its equivalent) using the practical expedient. A reporting entity should continue to disclose information on investments for which fair value is measured at net asset value (or its equivalent) as a practical expedient to provide information surrounding the nature and risks of investments and whether investments, if sold, are probable of being sold at amounts different from net asset value. The ASU is effective for annual periods beginning after December 15, Early adoption is permitted. The College is currently evaluating the effect that the provisions of ASU will have on the College s consolidated financial statements. 13

16 Note 1. Nature of Activities and Significant Accounting Policies (Continued) In February 2016, the FASB issued ASU , Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The College is currently evaluating the impact of the pending adoption of the new standard on the consolidated financial statements. In August 2016, the FASB issued ASU , Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, reducing net asset classifications from three to two categories: with donor restriction and without donor restrictions. Expanded disclosures about the nature and amount of any donor restrictions will be required. The updated standard becomes effective for annual reporting periods beginning after December 15, 2017, with early adoption allowed. The College is currently evaluating the effect that the provisions of ASU will have on the College s financial statements. Subsequent events: The College evaluated subsequent events for potential recognition and/or disclosure through October 21, 2016, the date the consolidated financial statements were available to be issued. The College has determined that there are no such events to report. In August 2016, the College entered into an agreement with a contractor for the renovation of Brinkley Hall. The College anticipates construction to be completed by March 2017, with total future payments of approximately $3,500,000. Note 2. Contributions Receivable Unconditional promises to give are included in the consolidated financial statements as contributions receivable and revenue of the appropriate net asset category, net of allowances. Contributions expected to be received in periods greater than one year are recorded at the discounted present value of the future cash flows. Anticipated collections of contributions receivable at June 30 are as follows: Contributions receivable to be collected: Less than one year $ 1,622,619 $ 2,050,848 One to five years 3,478,401 5,772,444 More than five years 212, ,494 5,313,225 8,061,786 Less Allowance for doubtful collections 417, ,308 Discount for time-value of money at 0.5 5% 94, ,004 $ 4,801,027 $ 7,305,474 14

17 Note 3. Loans to Students At June 30, loans to students consisted of the following: Federal Perkins revolving loan program $ 1,600,893 $ 1,576,911 Institutional programs 3,500,792 4,052,648 Gross loans to students 5,101,685 5,629,559 Less allowance for doubtful collections (360,266) (332,252) Net loans to students $ 4,741,419 $ 5,297,307 At June 30, 2016 and 2015, the following amounts were past due under student loan programs: 1-8 Months 8-24 Months Months 60+ Months Total June 30, Past Due Past Due Past Due Past Due Past Due 2016 $ 132,154 $ 140,240 $ 218,910 $ 242,705 $ 734, , , , , ,887 Note 4. Investments, at Fair Value The cost and the fair value of investments at June 30 are as follows: Fair Fair Investment Type Cost Value Cost Value Cash and cash equivalents held in broker accounts $ 137,462 $ 137,462 $ 158,352 $ 158,352 Equities 3,084,581 3,266,788 3,395,909 3,758,859 Fund of funds investments 82,795, ,332,244 83,986, ,475,287 Government obligations , ,556 Corporate bonds 590, , , ,467 Insurance policies 303, , , ,445 $ 86,911,774 $ 143,646,361 $ 89,203,826 $ 154,052,966 Investment income includes interest and dividend income and is recorded net of investment advisory and custodial fees. These investment advisory and custodial fees totaled $96,612 and $163,540 for the years ended June 30, 2016 and 2015, respectively. 15

18 Note 4. Investments, at Fair Value (Continued) Investments include pooled assets and specifically invested assets. Pooled assets are recorded in their respective funds on a fair value basis, with each individual fund subscribing to or disposing of units on the basis of value per unit at market value at the beginning of the calendar quarter within which the transactions, including realized gains or losses, take place. The following tabulation summarizes changes in relationships between cost and market values of the pooled assets: Net Market Pooled Assets Unrealized Value Fair Value Cost Gain/(Loss) Per Unit Balance at June 30, 2016 $ 144,852,132 $ 88,315,116 $ 56,537,016 $ 6.96 June 30, ,446,317 91,965,152 64,481, Unrealized net loss for the year (7,944,149) - Realized net gain for the year 893,103 - Total net loss for the year ended June 30, 2016 $ (7,051,046) $ (0.32) The average annual earnings per unit, representing dividends and interest, less fees, exclusive of net gains/(losses), amounted to $0.001 for the years ended June 30, 2016 and Alternative investments are less liquid than the College s other investments. The following table summarizes these investments by strategy type at June 30: Number of Number of Alternative Investment Strategy Funds Fair Value Funds Fair Value Fund of funds: Multi-strategy 1 $ 139,144,863 1 $ 148,122,078 Hedge 1 20, ,535 Private equity 1 167, ,674 Total fund of funds 3 $ 139,332,244 3 $ 148,475,287 Alternative investments include fund of funds that hold investments in limited partnerships, limited liability corporations, and off-shore investment funds. Included in investments of the limited partnerships are certain types of financial instruments, including, among others, futures and forward contracts, options and securities sold but not yet purchased, intended to hedge against changes in the market value of investments. The financial instruments, which involve varying degrees of off-balance-sheet risk, may result in loss due to changes in market value (market risk). The College s multi-strategy fund of funds investment consists of an investment in the Richmond Fund (the Fund), which represents approximately 9% of partners capital of the Fund as of June 30, 2016 and As shown above, the College has invested $139,144,863, which includes all endowed funds, or 95% of all College investments in a multi-strategy fund of fund. Such investment is considered to be a concentration of credit risk. 16

19 Note 5. Fair Value Measurements Guidance provided by the FASB defines fair value 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. The College utilizes valuation techniques to maximize the use of observable inputs and minimize the use of unobservable inputs. Inputs are broadly defined as assumptions market participants would use in pricing an asset or liability. Assets and liabilities recorded at fair value are categorized within the fair value hierarchy based upon the level of judgment associated with the inputs used to measure their value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below: Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the College has the ability to access at the measurement date. The types of investments included in Level 1 include listed equities and listed derivatives. As required by the guidance provided by the FASB, the College does not adjust the quoted price for these investments, even in situations where the College holds a large position and a sale could reasonably impact the quoted price. Level 2: Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly, and the fair value is determined through the use of models or other valuation methodologies. Investments that are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities, certain over-the-counter derivatives, and certain general and limited partnership and membership interests in funds that calculate net asset value per share, or its equivalent. A significant adjustment to a Level 2 input could result in the Level 2 measurement becoming a Level 3 measurement. Level 3: Inputs that are unobservable for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. The inputs into the determination of fair value are based upon the best information in the circumstances and may require significant management judgment or estimation. Investments that are included in this category generally include equity and debt positions in private companies and certain general and limited partnership interests in corporate private equity and real estate funds, debt funds, hedge funds, funds of hedge funds and distressed debt. All transfers between fair value hierarchy levels are recognized by the College at the end of each reporting period. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The College s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. The inputs or methodology used for valuing financial instruments are not necessarily an indication of the risks associated with investing in those instruments. A description of the valuation techniques applied to the College s major classes of assets and liabilities measured at fair value on a recurring basis follows. Equities: Securities traded on a national securities exchange (or reported on the NASDAQ national market) are stated at the last reported sales price on the day of valuation. To the extent these securities are actively traded and valuation adjustments are not applied, they are categorized in Level 1 of the fair value hierarchy. 17

20 Note 5. Fair Value Measurements (Continued) Fund of funds investments: Depending on the redemption options available, as a practical expedient it may be possible that for investments in other funds, the reported net asset value (NAV) represents fair value based on observable data such as ongoing redemption and/or subscription activity. In these cases, the NAV is considered as a Level 2 input. However, certain funds may provide the manager with the ability to suspend or postpone redemption (a gate), or a lock-in period upon initial subscription, within which the College may not redeem without incurring a penalty. In the case of the imposition of a gate, if a lock-in period of in excess of three months is remaining at the statement of financial position date, or if the College may not redeem its holding in the fund within three months or less, the College s ability to validate or verify the NAV and fair value through redeeming is impaired, and the investment is generally classified as Level 3. Investments in funds are valued at fair value based on the applicable percentage ownership of the net assets of each of the underlying funds as of the measurement date, with consideration given to the effects of various terms and features of each investment and the significance of any transactions in the ownership interests of the investments. In determining fair value, the College utilizes the NAV provided by the underlying fund investment managers. The underlying fund investments value securities and other financial instruments at fair value. The estimated fair values of certain investments of the underlying fund investments, which may include private placements and other securities for which prices are not readily available, are determined by the general partner or sponsor of the respective fund investment and may not reflect amounts that could be realized upon immediate sale, nor amounts that ultimately may be realized. Accordingly, the estimated fair values may differ significantly from the values that would have been used had a ready market existed for these investments. Government obligations: U.S. Government securities are normally valued using a model that incorporates market observable data such as reported sales of similar securities, broker quotes, yields, bids, offers and reference data. Certain securities are valued principally using dealer quotations. Corporate bonds: The fair value of corporate bonds is estimated using various techniques, which may consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads, fundamental data relating to the issuer and credit default swap spreads adjusted for any basis difference between cash and derivative instruments. Although most corporate bonds are categorized in Level 2 of the fair value hierarchy, in instances where lower relative weight is placed on transaction prices, quotations or similar observable inputs, they are categorized in Level 3. Insurance policies: The policies are valued based on the cash surrender value for each policy, which represents fair value based on actuarial data supplied to the insurer. Beneficial interest in perpetual trusts: The College has been named as a beneficiary in several perpetual trusts in which the College is not the trustee. Amounts reported approximate fair value. Under the guidelines set forth in FASB ASC 820 fair value hierarchy, beneficial interests are classified as Level 3 inputs due to the use of unobservable inputs such as the extent of the beneficial interest in each perpetual trust. 18

21 Note 5. Fair Value Measurements (Continued) The following tables represent the College s fair value hierarchy for those assets measured at fair value on a recurring basis as of June 30: Quoted Prices in Significant Significant Active Markets for Other Observable Unobservable Identical Assets Inputs Inputs Description Total (Level 1) (Level 2) (Level 3) 2016 Assets Cash and cash equivalents held in broker accounts $ 137,462 $ 137,462 $ - $ - Equities: Fair Value Measurements Using Basic materials 16,987 16, Consumer discretionary 590, , Consumer staples 373, , Energy 184, , Financials 686, , Health care 248, , Industrials 407, , Information technology 204, , Materials 129, , Utilities 20,736 20, Real estate 258, , Telecommunications services 82,956 82, Other 62,842 62, Total equities 3,266,788 3,266, Fund of funds investments Multi-strategy 139,144, ,144,863 Hedge 20, ,171 Private equity 167, ,210 Total fund of funds investments 139,332, ,332,244 Government obligations(¹) Corporate bonds(¹) 606, ,308 - Insurance policies(¹) 303, ,559 - Total investments, at fair value $ 143,646,361 $ 3,404,250 $ 909,867 $ 139,332,244 Beneficial interest in perpetual trusts $ 6,465,747 $ - $ - $ 6,465,747 19

22 Note 5. Fair Value Measurements (Continued) Fair Value Measurements Using Quoted Prices in Significant Significant Active Markets for Other Observable Unobservable Identical Assets Inputs Inputs Description Total (Level 1) (Level 2) (Level 3) 2015 Assets Cash and cash equivalents held in broker accounts $ 158,352 $ 158,352 $ - $ - Equities Basic materials 33,300 33, Consumer discretionary 676, , Consumer staples 381, , Energy 180, , Financials 874, , Health care 390, , Industrials 398, , Information technology 260, , Materials 157, , Utilities 36,227 36, Real estate 226, , Telecommunications services 38,042 38, Other 104, , Total equities 3,758,859 3,758, Fund of funds investments Multi-strategy 148,122, ,122,078 Hedge 43, ,535 Private equity 309, ,674 Total fund of funds investments 148,475, ,475,287 Government obligations(¹) 701, ,556 - Corporate bonds(¹) 632, ,467 - Insurance policies(¹) 326, ,445 - Total investments, at fair value $ 154,052,966 $ 3,917,211 $ 1,660,468 $ 148,475,287 Beneficial interest in perpetual trusts $ 6,986,967 $ - $ - $ 6,986,967 (1) Based on its analysis of the nature and risks of these investments, the reporting entity has determined that presenting them as a single class is appropriate. 20

23 Note 5. Fair Value Measurements (Continued) Financial instruments classified as Level 3 in the fair value hierarchy represent the College s investments in financial instruments in which the College has used at least one significant unobservable input in the valuation model. The following table presents a reconciliation of activity for the Level 3 financial instruments: Beneficial interest Private in perpetual Total Multi-strategy Hedge equity trusts Balance, June 30, 2014 $ 151,513,891 $ 143,687,321 $ 73,174 $ 411,997 $ 7,341,399 Realized and unrealized change in investments: Net realized gain on investments 1,310,448 1,200,555 4, ,750 - Net change in unrealized appreciation (depreciation) on investments 5,755,499 6,234,202 (21,948) (102,323) (354,432) Sales of investments (3,117,584) (3,000,000) (11,834) (105,750) - Balance, June 30, ,462, ,122,078 43, ,674 6,986,967 Realized and unrealized change in investments: Net realized gain on investments 883, ,916 1,965 57,000 - Net change in unrealized depreciation on investments (8,530,401) (7,802,131) (7,586) (199,464) (521,220) Sales of investments (2,017,743) (2,000,000) (17,743) - - Balance, June 30, 2016 $ 145,797,991 $ 139,144,863 $ 20,171 $ 167,210 $ 6,465,747 The total change in appreciation (depreciation) included in the consolidated statements of activities attributable to Level 3 investments still held at June 30, 2016 and 2015, includes: Fund of funds investments: Multi-strategy $ (6,977,215) $ 7,434,757 Hedge (5,621) (17,805) Private equity (142,464) (102,323) Beneficial interest in perpetual trusts (521,220) (354,432) $ (7,646,520) $ 6,960,197 21

24 Note 5. Fair Value Measurements (Continued) The following tables provide additional information that describes the nature and risk of investments, whose fair value is based on net assets value, by major class. Redemption Frequency Redemption Strategy Category Fair Value (if currently eligible) Notice Period 2016 Fund of funds Multi-strategy (a) $ 139,144,863 Quarterly 60 days Hedge (b) 20,171 Not applicable Not applicable Private equity (c) 167,210 Not applicable Not applicable Total $ 139,332,244 (a) This category includes an investment in a fund that invests 79% in other hedge and private equity funds and the remaining 21% is directly invested in securities, which includes fixed maturities, equity securities, rights and warrants and exchange traded funds. Investments in hedge funds represent 68% of the total fund of funds investments and consists of domestic equity, international equity, global equity, multi-strategy and credit-oriented hedge funds. Investments in private equity funds represent 20% of the fund of funds investments and consist of international private equity, buyout, venture capital and subordinated debt-oriented private equity funds. The remaining fund of funds investments is invested in real estate and real assets. The fair value of the investment in this category has been provided by the underlying fund manager. The investment in this category was not available to be fully redeemed as of June 30, 2016; the College has the right to withdraw an amount not to exceed 10% of its capital account as of the last business day of each quarter. (b) This category represents a hedge fund of fund that primarily invests in global or North America long/short equity, absolute return, distressed debt, distressed mortgage, long/short credit and diversified income primarily domiciled in North America or Cayman Islands. The fair values of the investments in this category have been provided by the underlying hedge fund managers. The entire value of the investments in this category was not available to be redeemed at June 30, 2016, because the investment is in liquidation. (c) This category includes an investment in a private equity fund of funds launched in 2003 specializing in mid-and large-capitalization distressed debt and special situations investing. Through its investments in portfolio funds, this category has exposure to debt obligations, securities and assets of distressed issuers; including without limitation, publicly-traded or privately-placed debt securities, loans, participation in loans, trade and other claims against issuers, other indebtedness and debtor in possession financing. The fair value of the investment in this category has been provided by the underlying fund manager. This investment in this category is a closed-end fund which was extended on December 31, The fund may be extended, not more than two times, for a period each not to exceed two years. There are no unfunded commitments related to this category. 22

25 Note 5. Fair Value Measurements (Continued) Redemption Frequency Redemption Strategy Category Fair Value (if currently eligible) Notice Period 2015 Fund of funds Multi-strategy (a) $ 148,122,078 Quarterly 60 days Hedge (b) 43,535 Not applicable Not applicable Private equity (c) 309,674 Not applicable Not applicable Total $ 148,475,287 (a) This category includes an investment in a fund that invests 77% in other hedge and private equity funds and the remaining 23% is directly invested in securities, which includes fixed maturities, equity securities, rights and warrants and exchange traded funds. Investments in hedge funds represent 67% of the total fund of funds investments and consists of domestic equity, international equity, global equity, multi-strategy and credit-oriented hedge funds. Investments in private equity funds represent 21% of the fund of funds investments and consist of international private equity, buyout, venture capital and subordinated debt-oriented private equity funds. The remaining fund of funds investments is invested in real estate and real assets. The fair value of the investment in this category has been provided by the underlying fund manager. The investment in this category was not available to be fully redeemed as of June 30, 2015; the College has the right to withdraw an amount not to exceed 10% of its capital account as of the last business day of each quarter. (b) This category represents a hedge fund of fund that primarily invests in global or North America long/short equity, absolute return, distressed debt, distressed mortgage, long/short credit and diversified income primarily domiciled in North America or Cayman Islands. The fair values of the investments in this category have been provided by the underlying hedge fund managers. The entire value of the investments in this category was not available to be redeemed at June 30, 2015 because the investment is in liquidation. (c) This category includes an investment in a private equity fund of funds launched in 2003 specializing in mid-and large-capitalization distressed debt and special situations investing. Through its investments in portfolio funds, this category has exposure to debt obligations, securities and assets of distressed issuers; including without limitation, publicly-traded or privately-placed debt securities, loans, participation in loans, trade and other claims against issuers, other indebtedness and debtor in possession financing. The fair value of the investment in this category has been provided by the underlying fund manager. This investment in this category is a closed-end fund which was extended on December 31, The fund may be extended, not more than two times, for a period each not to exceed two years. There are no unfunded commitments related to this category. 23

26 Note 6. Bonds Payable and Other Debt Bonds payable and other debt at June 30 consist of the following: Industrial Development Authority (IDA) Educational Facilities Revenue Bonds, Series of 2003, $6,000,000 serial bonds due in annual principal installments ranging from $290,000 in March, 2018 to $475,000 in March, 2033; interest rate of 2.20% payable semiannually, unsecured $ 6,000,000 $ 6,000,000 Industrial Development Authority (IDA) Educational Facilities Revenue Note, Series of 2004, $1,210,000 note due in annual principal installments ranging from $61,106 in July, 2006 to $103,698 in July, 2020; interest rate of 3.85% payable semiannually, unsecured 481, ,296 Industrial Development Authority (IDA) Revenue Bond, Series of 2005, $10,000,000 bond due in annual principal installments ranging from $336,515 in June, 2008 to $706,401 in June, 2027; interest rate of 2.87% payable semiannually, unsecured 6,441,644 6,901,480 Virginia College Building Authority (VCBA), Educational Facilities Refunding Revenue Bonds, Series 2010, including Bond Premium, $7,190,000 serial bonds due through September 1, 2018, interest coupon varying from 1.50% to 4.00% payable semiannually; annual principal payments ranging from $135,000 to $1,070,000, unsecured 1,504,832 2,560,950 14,427,922 16,029,726 Two notes with an individual, principal and interest of $16,335, due quarterly until October, 2015; interest rate of 5.5%, secured by assets purchased - 32,008 Other 1,036,927 1,166,542 1,036,927 1,198,550 $ 15,464,849 $ 17,228,276 In connection with the bonds and other debt, the College has agreed, among other things, to: (a) maintain insurance as required; (b) maintain corporate existence and tax-exempt status; and (c) provide annual audited financial statements timely. The College also has to maintain a debt coverage ratio of at least

27 Note 6. Bonds Payable and Other Debt (Continued) Future maturities at June 30, 2016, are as follows: 2003 IDA 2004 IDA 2005 IDA 2010 VCBA Revenue Revenue Revenue Revenue Other Bonds Note Bond Bonds Debt Total 2017 $ - $ 89,155 $ 478,138 $ 1,091,118 $ 129,615 $ 1,788, ,000 92, , , ,615 1,270, ,000 96, , , ,615 1,195, ,000 99, , ,615 1,076, , , , ,615 1,112,236 Thereafter 4,780,000-3,852, ,852 9,021,782 $ 6,000,000 $ 481,446 $ 6,441,644 $ 1,504,832 $ 1,036,927 $ 15,464,849 Note 7. Retirement Plans The College has certain defined contribution retirement plans for academic and nonacademic employees. Contributions are based on a percentage of the employee s salary. The College contributed $1,441,184 and $1,305,550 to the plans for the years ended June 30, 2016 and 2015, respectively. Note 8. Commitments During the year ended June 30, 2004, the College entered into a 15-year operations and maintenance agreement. Total future payments over the life of this agreement are as follows: Years ending June 30: 2017 $ 152, , $ 160, ,408 During the year ended June 30, 2012, the College entered into a five-year food service contract. The agreement may be renewed, upon mutual agreement for an additional five-year term and can be terminated by either party upon 90 day written notice. The College will reimburse the food service provider for the direct cost of services performed, which include costs associated with catering and selling of food products to students, employees and guests on the College s campus. During the year ended June 30, 2016, the College entered into an agreement with a contractor for the construction of the new student center. The College anticipates construction to be completed by March 2017, with total future payments of approximately $6,500,

28 Note 9. Restricted Net Assets Temporarily restricted net assets at June 30, are available as follows: For funding of operations $ 6,319,301 $ 6,329,658 For funding of scholarships and student aid 5,083,412 6,961,494 For annuity and life income contracts 495, ,725 For purchase of property and equipment and improvements to buildings and facilities 10,495,103 8,114,716 For endowment 61,700,966 74,993,168 $ 84,094,060 $ 96,989,761 Temporarily restricted net assets were released from donor restrictions by incurring expenses satisfying the restricted purposes or by occurrence of other events specified by donors during 2016 and 2015, as follows: Purpose restrictions accomplished Funding of operations $ 1,166,604 $ 1,518,411 Funding of scholarships and student aid 2, ,642 Purchase of property and equipment and improvements to buildings and facilities, placed into service 420, ,210 Appropriation of endowment assets 6,606,328 6,289,112 Total restrictions released $ 8,195,267 $ 8,209,375 Interpretation of relevant law: The College endowment funds consist of approximately 479 individual funds established for general and educational purposes. Net assets associated with endowment funds are classified and reported based on existence or absence of donor imposed restrictions. 26

29 Note 9. Restricted Net Assets (Continued) The Board of Trustees of the College has interpreted the Virginia enacted version of Uniform Prudent Management of Institutional Funds Act (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. As a result of this interpretation, 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 to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not appropriated for expenditure 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: a. The duration and preservation of the fund b. The purposes of the organization and the donor-restricted endowment fund c. General economic conditions d. The possible effects of inflation and deflation e. The expected total return from income and the appreciation of investments f. Other resources of the organization g. The investment policies of the organization Return objective and risk parameters: The primary investment objectives are to preserve and protect assets by earning a total return for each category of assets, and long-term growth which reflects returns that exceed blended benchmarks established for the portfolio. A secondary objective is to experience market appreciation sufficient to enable maximum annual distributions to help fund the College s ongoing operations and programs. The College s philosophy regarding assets combines both the preservation of principal and moderate risk-taking. A moderate level of risk is warranted and encouraged to enable the opportunity to achieve satisfactory results consistent with the objectives and the fiduciary character of the funds over a full market cycle. Strategies employed for achieving objectives: The College adheres to capital market theory which maintains that, over the very long term, the risk of owning equities should be rewarded with a somewhat greater return than available from fixed-income investments. Market timing is not an objective; however, sensitivity to market fluctuations is considered when making investment decisions. Spending policy and how the investment objectives relate to spending policy: The College s spending policy was developed with the objective of meeting current operating needs, providing year-toyear budget stability and protecting the future purchasing power of the endowment assets against the effect of inflation. On an annual basis, the Board of Trustees approves the spending rate as a percentage of a three-year moving average of the market value of the endowment assets. The spending rate for the years ended June 30, 2016 and 2015, was 4.9% and 5.0% respectively. 27

30 Note 9. Restricted Net Assets (Continued) The endowment activity for the years ended June 30, 2016 and 2015, is shown in the following table: Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, June 30, 2014 $ 1,361,339 $ 74,077,817 $ 77,255,156 $ 152,694,312 Investment return Investment income, net 311,168-89, ,533 Realized and unrealized gains (losses) 19,901 7,204,463 (362,290) 6,862,074 Total investment return 331,069 7,204,463 (272,925) 7,262,607 Contributions - - 4,476,130 4,476,130 Board designated 5, ,000 Transfers , ,672 Appropriation of endowment assets for expenditure (358,734) (6,289,112) - (6,647,846) Endowment net assets, June 30, ,338,674 74,993,168 81,960, ,291,875 Investment return Investment income, net , ,092 Realized and unrealized losses (97,248) (6,685,874) (522,043) (7,305,165) Total investment return (97,248) (6,685,874) (419,951) (7,203,073) Contributions - - 1,692,315 1,692,315 Transfers , ,381 Appropriation of endowment assets for expenditure (50,903) (6,606,328) - (6,657,231) Endowment net assets, June 30, 2016 $ 1,190,523 $ 61,700,966 $ 83,513,778 $ 146,405,267 Endowment net assets consist of the following at June 30: 2016 Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ - $ 61,700,966 $ 83,513,778 $ 145,214,744 Board-designated endowment funds 1,190, ,190, $ 1,190,523 $ 61,700,966 $ 83,513,778 $ 146,405,267 Donor-restricted endowment funds $ - $ 74,993,168 $ 81,960,033 $ 156,953,201 Board-designated endowment funds 1,338, ,338,674 $ 1,338,674 $ 74,993,168 $ 81,960,033 $ 158,291,875 28

31 Note 9. Restricted Net Assets (Continued) Permanently restricted net assets at June 30 are restricted to investment in perpetuity, the income earned is expendable to support the purposes as follows: Financial aid $ 46,955,750 $ 45,259,035 General operations 20,783,261 20,553,189 Professorships 9,343,853 9,195,675 Beneficial interests held in trust 6,465,747 6,986,967 Annuity and life income contracts 5,105,294 5,916,095 $ 88,653,905 $ 87,910,961 Permanently restricted net assets at June 30 are as follows: Endowment $ 83,513,778 $ 81,960,033 Annuity and life income contracts 5,105,294 5,916,095 Student loan funds 34,833 34,833 $ 88,653,905 $ 87,910,961 Note 10. Expense Allocation Costs related to the operation and maintenance of the 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 external debt. These expenses for the years ended June 30 are as follows: Operation and maintenance of plant $ 5,162,186 $ 5,275,227 Depreciation 3,589,168 3,662,147 Interest 392, ,360 $ 9,143,476 $ 9,376,734 Allocation of this amount to functional expense categories for the years ended June 30, 2016 and 2015, approximated 22% and 21% instruction, 21% and 25% academic support, 34% and 31% student services, 5% and 4% institutional support and 18% and 19% auxiliary services, respectively. Fund-raising costs which include publicizing and conducting fund-raising campaigns; maintaining donor mailing lists; conducting special fund-raising events; preparing and distributing fund-raising manuals, instructions and other materials; and conducting other activities involved with soliciting contributions totaled $2,410,178 and $2,308,033 for the years ended June 30, 2016 and 2015, respectively. Fundraising costs are in the consolidated statements of activities as institutional support for the years ended June 30, 2016 and

32 Note 10. Expense Allocation (Continued) Financial aid is awarded to students based upon need and merit and is applied to billed tuition and fees, and room and board. Financial aid does not include payments made to students for services rendered to the College. The College, however, does participate in work-study programs. Expenses for work-study programs totaled $341,921 and $321,529 for the years ended June 30, 2016 and 2015, respectively, are included in the appropriate functional expense categories in the consolidated statements of activities. Of these amounts, the federal government contributed $68,756 and $65,881, respectively. 30

33 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 Hampden-Sydney College and Affiliates Hampden-Sydney, 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 the Hampden-Sydney College and Affiliates (the College), which comprise the consolidated statement of financial position as of June 30, 2016, and the related consolidated statements of activities and cash flows for the year then ended, and the related notes to the consolidated financial statements, and have issued our report thereon dated October 21, Internal Control over Financial Reporting In planning and performing our audit of the 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 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 entity s 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. 31

34 Compliance and Other Matters As part of obtaining reasonable assurance about whether the College's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Richmond, Virginia October 21,

35 Independent Auditor s Report on Compliance for Each Major Federal Program and on Internal Control Over Compliance Required by the Uniform Guidance To the Board of Trustees Hampden-Sydney College Hampden-Sydney, Virginia Report on Compliance for Each Major Federal Program We have audited Hampden-Sydney College and Affiliates (the College) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on the College s major federal program for the year ended June 30, The College s major federal program is identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts and grants applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for the College s major federal program based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirement for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the College s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for the College s federal program. However, our audit does not provide a legal determination of Hampden-Sydney College and Affiliates compliance. Opinion on the Major Federal Program In our opinion, the College complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on its major federal program for the year ended June 30,