Queens University of Charlotte

Transcription

1 Consolidated Financial Statements and Reports and Schedules Required by Government Auditing Standards and the Uniform Guidance Year Ended June 30, 2017 (with comparative financial information for the year ended June 30, 2016) The report accompanying these financial statements was issued by BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of BDO International Limited, a UK company limited by guarantee.

2 Consolidated Financial Statements Year Ended June 30, 2017 (with comparative financial information for the year ended June 30, 2016)

3 Contents Independent Auditor s Report 3-5 Consolidated Financial Statements Consolidated Statements of Financial Position 7 Consolidated Statements of Activities 8 Consolidated Statements of Cash Flows 9 Notes to Consolidated Financial Statements 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 Consolidated Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditor s Report on Compliance for Each Major Federal and State Program and Report on Internal Control Over Compliance Required by the Uniform Guidance Schedule of Expenditures of Federal and State Awards 36 Notes to the Schedule of Expenditures of Federal and State Awards 37 Schedule of Findings and Questioned Costs Summary Schedule of Prior Year Audit Findings 42 Management s Corrective Action Plan 43

4 Tel: Fax: Fayetteville Street Suite 300 Raleigh, NC Independent Auditor s Report The Board of Trustees Queens University of Charlotte Charlotte, North Carolina Report on Financial Statements We have audited the accompanying consolidated financial statements of Queens University of Charlotte and its subsidiary (the University ), which comprise the consolidated statement of financial position as of June 30, 2017 and 2016, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of 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. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 3

5 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Queens University of Charlotte and its subsidiary as of June 30, 2017 and 2016, and the changes in their 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 and state awards, as required by Title 2 US Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards and the requirements described in the North Carolina Need Based Scholarship Program Audit Compliance Supplement Guide 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 report dated October 18, 2017 on our consideration of the University s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the University s internal control over financial reporting and compliance 4

6 Report on Summarized Comparative Information We have previously audited the University s 2016 consolidated financial statements, and we expressed an unmodified audit opinion on those audited consolidated financial statements in our report dated October 27, In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2016, is consistent in all material respects with the audited consolidated financial statements from which it has been derived. October 18, 2017, except for our report on the Schedule of Expenditures of Federal and State Awards, for which the date is March 28,

7 Consolidated Financial Statements

8 Consolidated Statements of Financial Position June 30, Assets Cash and cash equivalents $ 3,656,986 $ 2,020,375 Accounts receivable, net of allowance for uncollectible accounts of $322,494 and $383,090 at June 30, 2017 and 2016, respectively 1,839,251 1,557,328 Contributions receivable, net 4,610,375 3,956,557 Loans receivable 150, ,874 Prepaid expenses and other assets 797,012 1,785,027 Investments, at fair value 110,987, ,567,549 Beneficial interest in perpetual trusts 5,557,996 5,055,931 Beneficial interest in non-perpetual trust 34,782,299 - Land, buildings and equipment, net 120,509, ,236,181 Total Assets $ 282,891,909 $ 233,336,822 Liabilities and Net Assets Liabilities Accounts payable and accrued liabilities $ 8,474,109 $ 4,865,487 Annuities payable 1,745,254 2,055,830 Deposits and deferred revenue 3,451,788 3,951,367 Lines of credit 9,482,768 9,976,918 Capital lease obligations 218, ,202 Term loan 1,850,000 - Bonds payable, net 55,801,043 55,725,072 Interest rate swaps, at fair value 2,495,873 5,295,830 U.S. government grants refundable 173, ,900 Total Liabilities $ 83,692,294 $ 82,648,606 Net Assets Unrestricted 125,595, ,818,999 Temporarily restricted 15,846,347 14,686,921 Permanently restricted 57,757,664 21,182,296 Total Net Assets 199,199, ,688,216 Total Liabilities and Net Assets $ 282,891,909 $ 233,336,822 See accompanying notes to consolidated financial statements. 7

9 Consolidated Statements of Activities Years ended June 30, Temporarily Permanently Unrestricted Restricted Restricted Total Total Revenues Tuition and fees $ 48,420,347 $ - $ - $ 48,420,347 $ 49,883,794 Student aid (21,091,388) - - (21,091,388) (20,245,422) Total tuition and fees, net of student aid 27,328, ,328,959 29,638,372 Other Support Private gifts and grants 3,058,578 6,715,194 35,644,733 45,418,505 14,099,341 Governmental grants and contracts 1,787, ,858 74,245 2,311,555 2,496,464 Sales and services of auxiliary enterprises 10,384, ,384,103 10,400,239 Other income 1,452, ,452,730 1,181,078 Total Other Support 16,682,863 7,165,052 35,718,978 59,566,893 28,177,122 Net assets released from restrictions 8,219,929 (8,219,929) Total revenues and other support 52,231,751 (1,054,877) 35,718,978 86,895,852 57,815,494 Expenses Instruction 19,081, ,081,291 19,075,007 Student services 12,298, ,298,023 12,098,408 Institutional support 16,541, ,541,524 16,170,864 Auxiliary enterprises 3,763, ,763,598 3,480,122 Total expenses 51,684, ,684,436 50,824,401 Changes in net assets before gains, losses and other activities 547,315 (1,054,877) 35,718,978 35,211,416 6,991,093 Gains, Losses and Other Activities Net realized gains on investments and investment income 2,690, ,358-3,183,563 1,095,062 Net unrealized gains (losses) on investments 8,278,444 1,721, ,370 10,804,555 (1,992,850) Gain on disposal of land, buildings and equipment, net 3,416, ,416,912 - Changes in fair value of financial instruments 2,799, ,799,957 (2,286,940) Depreciation expense (5,021,626) - - (5,021,626) (4,877,283) Interest expense (1,883,378) - - (1,883,378) (2,103,934) Change in donor intent (51,224) (796) 52, Change in Net Assets 10,776,605 1,159,426 36,575,368 48,511,399 (3,174,852) Net assets, beginning of year 114,818,999 14,686,921 21,182, ,688, ,863,068 Net assets, end of year $ 125,595,604 $ 15,846,347 $ 57,757,664 $ 199,199,615 $ 150,688,216 8 See accompanying notes to consolidated financial statements.

10 Consolidated Statements of Cash Flows Years ended June 30, Operating Activities Change in net assets $ 48,511,399 $ (3,174,852) Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation expense 5,021,626 4,877,283 Change in the provision for uncollectable accounts 18, ,363 Gain on disposal of assets (3,416,912) - Net unrealized (gains) losses on investments (9,990,463) 1,817,186 Net unrealized (gains) losses on beneficial interest in perpetual trusts (434,171) 175,664 Net unrealized gains on beneficial interest in non-perpetual trusts (379,921) - Change in fair market value of financial instruments (2,799,957) 2,286,940 Private gifts and grants permanently restricted (35,718,978) (976,050) Increase in accounts receivable (342,518) (181,699) (Increase) decrease in contributions receivable (612,011) 2,344,166 Decrease (increase) in prepaid expenses and other assets 1,101,382 (771,269) Increase in accounts payable, annuities payable, and accrued liabilities 3,298,046 1,697,480 Decrease in deposits and deferred revenue (499,579) (167,493) Net Cash and Cash Equivalents Provided by Operating Activities 3,756,731 8,132,719 Investing Activities Purchases of land, buildings and equipment (9,077,951) (5,878,897) Proceeds from sale of property 4,200,000 - Decrease in loans receivable 7,165 5,624 Receipt of agency funds Federal Pell grants 1,656,580 1,771,270 Disbursement of agency funds Federal Pell grants (1,709,469) (1,820,507) Sales of investments 2,634,418 3,813,540 Purchase of investments (2,132,163) (9,410,743) Investments due to receipt of non-perpetual trust (34,402,377) - Net Cash and Cash Equivalents Used by Investing Activities (38,823,797) (11,519,713) Financing Activities Payments on capital lease obligations (371,151) (251,511) Proceeds on lines of credit, net 1,170,030 1,066,955 Proceeds on term loan 185,820 - Private gifts and grants permanently restricted 35,718, ,050 Net Cash and Cash Equivalents Provided by Financing Activities 36,703,677 1,791,494 Net Increase (Decrease) in Cash and Cash Equivalents 1,636,611 (1,595,500) Cash and Cash Equivalents, beginning of year 2,020,375 3,615,875 Cash and Cash Equivalents, end of year $ 3,656,986 $ 2,020,375 Supplemental Disclosures of Cash Flow Information Debt related interest expense $ 1,833,378 $ 2,103,934 Interest paid $ 1,788,055 $ 1,991,619 Conversion of line of credit to term loan $ 1,664,180 $ - See accompanying notes to consolidated financial statements. 9

11 Notes to Consolidated Financial Statements 1. Significant Accounting Policies Description of the University Queens University of Charlotte (the University ) is a nonprofit corporation operating as a private, co-educational, Presbyterian-affiliated comprehensive university with a commitment to both liberal arts and professional studies. Located in Charlotte, North Carolina, the University serves over 2,400 undergraduate and graduate students through the College of Arts and Sciences, the McColl School of Business, the Wayland H. Cato, Jr. School of Education, the James L. Knight School of Communication, the Hayworth School for Graduate and Continuing Education and the Andrew Blair College of Health which features the Presbyterian School of Nursing. The University is accredited by the Commission of Colleges of the Southern Association of Colleges and Schools. The University s revenue consists principally of student tuition, room and board, federal and state grants, and private gifts. The Queens University of Charlotte Endowment ( Endowment ) was organized in November 2014 as a nonprofit corporation for the purposes of investing and managing the assets of the University s pooled endowment as described in Note 2 below. The Endowment board of trustees is controlled by the University. The Endowment is managed by a third-party services firm Foundation for the Carolinas ( Foundation ), also a nonprofit corporation, which invests and manages funds for various institutions. In January of 2015, the University sold the liquid assets from its endowment, transferred the proceeds to the Endowment and directed that the proceeds be used to invest in certain investment pools provided by the Foundation. Additionally, the University transferred and assigned its illiquid assets from its endowment to the Foundation for the purposes of investing in certain investment pools on behalf of the Endowment. The Endowment owns a fractional share of the Foundation s investment pools as more fully described in the notes below. The University is the sole beneficiary of the Endowment. Principles of Consolidation The consolidated financial statements and related notes herein include the consolidation of Queens University of Charlotte and the Queens University of Charlotte Endowment. All intercompany transactions and balances are eliminated in consolidation. Basis of Accounting The consolidated financial statements of the University have been prepared on the accrual basis of accounting. The consolidated statements of activities include prior-year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with generally accepted accounting principles in the United States ( U.S. GAAP ). Accordingly, such information should be read in conjunction with the Company s consolidated financial statements for the year ended June 30, Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. 10

12 Notes to Consolidated Financial Statements Basis of Presentation The University s net assets and revenues, expenses, gains, and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of the University and changes therein are classified and reported as follows: Unrestricted net assets Net assets that are not subject to donor-imposed stipulations and are fully available at the discretion of management and the Board of Trustees; Temporarily restricted net assets Net assets subject to donor-imposed stipulations that may or will be met either by actions of the University and/or the passage of time. At such time, these assets will be reclassified as unrestricted net assets; and Permanently restricted net assets Net assets subject to donor-imposed stipulations that the assets be maintained permanently by the University. Generally the donors of these assets permit the University to use all of, or part of, the income earned on related investments for general or specific purposes. Revenues are reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments and other assets are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by law. Contributions, including unconditional promises to give, are recognized as revenues in the period received. 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 discounts is recorded as additional contributed revenue in accordance with donorimposed restriction, if any, on the contributions. Income and realized and unrealized net gains on investments of endowment and similar funds 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; and As increases in temporarily restricted net assets if the terms of the gift impose restrictions on the use of the income or until income is appropriated by the Board of Trustees. Reclassifications Certain 2016 amounts have been reclassified to conform to the 2017 presentation with the accompanying consolidated financial statement. There was no modification to changes in net assets or any net assets balance as a result of any reclassifications. 11

13 Notes to Consolidated Financial Statements Cash and Cash Equivalents Cash and cash equivalents include highly liquid instruments with original maturities of three months or less from the date of purchase. At various times throughout the year, the University may have cash balances in financial institutions which exceed the amounts that are federally insured. As of June 30, 2017 there is $1,758,000 of temporarily donor restricted cash expected to be released within the next 12 to 18 months. Accounts Receivable Accounts receivable, a significant portion of which is due from current and former students and are unsecured, are recorded at the invoiced amount and do not bear interest. The allowance for uncollectible accounts is the University s best estimate of the amount of probable credit losses in the University s existing accounts receivable. The University determines the allowance based on historical write-off experience, current collection efforts and analysis of the accounts status. Account balances are charged-off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Contributions Receivable Contributions receivable are recorded at their present value, net of an allowance for uncollectible contributions receivable. An allowance for uncollectible contributions receivable is provided based upon the University s judgment including such factors as prior collection history, the type of contributions and the nature of fund-raising activity. The University records contributions receivable with donor restrictions as temporarily restricted or permanently restricted based on donor stipulations. For gifts that are temporarily restricted due to purpose requirements by the donor, the University releases the total amount of the gift from restriction upon satisfaction of the purpose restriction, including amounts that are outstanding contributions receivable deemed to be collectible. Prepaid Expenses and Other Assets Prepaid expenses and other assets represent amounts expended for goods and services that will benefit future periods. These balances will fluctuate from year to year depending on timing and business activities in a given period. Investments The University s investments include the Endowment s fractional share of the Foundation s investment pools (as described more fully below) as well as various types of investment securities and investment vehicles held by the University. The University and the Endowment record all marketable equity securities and all debt securities at fair value, with realized and unrealized gains and losses being reported in the statement of activities. The estimated fair value of investments is based on quoted market prices, except for investments for which quoted market prices are not available. The estimated value for investments for which quoted market prices are not readily available is subject to uncertainty which therefore may differ from the value that would have been used had a ready market for such investments existed. 12

14 Notes to Consolidated Financial Statements Investment earnings, including dividends, interest, rents and royalties, are recognized as income when earned. Investment securities are exposed to several risks, such as interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the University s consolidated statement of financial position and statement of activities. Beneficial Interest in Perpetual Trusts The University is the beneficiary of various trusts created by donors, the assets of which are not in the possession of the University. The University has legally enforceable rights or claims to such assets, including the right to receive income in future periods. The fair value of these interests and the net realized and unrealized gains (losses) of beneficial interest in perpetual trusts is recorded in the permanently restricted net asset class. Beneficial Interest in Non-Perpetual Trust The University is the beneficiary of a 25.5% interest in a non-perpetual Charitable Trust. The Charitable Trust holds certain assets and is the residuary beneficiary of the receivable trust of a donor that passed away on March 27, It is anticipated that approximately one half of the value of the University s interest in the Charitable Trust will be distributed to the University within one year of the donor s passing and the remainder will be distributed within three years. The donor s will specifies the Charitable Trust distributions are to be used for funding endowed scholarships at the University. When the Trust assets are distributed to the beneficiaries, the amount of the distribution will go into the University s permanently restricted endowment. The fair value of this beneficial interest was recorded as private gifts and grants in permanently restricted net assets. Land, Buildings and Equipment Land, buildings and equipment are stated at cost, net of depreciation (if applicable), and donated plant and equipment are recorded at estimated fair value at the time of contribution. All expenditures for land, buildings, and equipment in excess of $5,000 are capitalized in accordance with the University s capitalization policy. Equipment under capital lease is stated at the present value of future minimum lease payments. Depreciation on land improvements, buildings and equipment is calculated on the straight-line method over estimated useful lives as noted below: Description of Property and Equipment Buildings Building and land improvements Furniture and vehicles Equipment Useful Lives years 20 years 10 years 5 years 13

15 Notes to Consolidated Financial Statements Property and equipment under capital lease arrangements are depreciated over the lesser of the useful life of the asset or term of the lease. The carrying value of property and equipment is evaluated on an on-going basis; based on estimated future undiscounted cash flows. In the event such cash flows are not expected to be sufficient to recover the carrying value of the assets, the useful lives of the assets are revised or the assets are written down to the estimated fair values. Split-Interest Agreements The University has certain trust agreements and other arrangements with donors under which both parties derive benefits (split-interest agreements). Split-interest agreements entered into by the University consist primarily of charitable gift annuities. Assets received under irrevocable splitinterest agreements are recorded at their fair value when received. The University records a liability in connection with such agreements equal to the present value of future payments to be made to donors or beneficiaries. The University is the beneficiary of several charitable gift annuities. Under charitable gift annuities, the University receives cash or other assets from donors and in return agrees to pay a fixed dollar amount annually for a specified period of time to the donor or other designated beneficiary. The University records a gift annuity liability, which represents the present value of the future cash flows expected to be paid to the donors. The present values are calculated using the donors actuarially determined life expectancies and interest rates at the date of the gift, which range from 5.0% to 6.3%. Liabilities associated with the gift annuities totaled $1,745,254 and $2,055,830 as of June 30, 2017 and 2016, respectively. Income Taxes The University is a not-for-profit corporation which is exempt from Federal income tax on related income under Internal Revenue Code Section 501(c)(3). With respect to any unrelated business income generated by the University, it records income taxes using the liability method under which deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax basis of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the currently enacted tax rate expected to apply to taxable income in the period that the deferred tax asset or liability is expected to be realized or to be settled. As of June 30, 2017 and 2016, the University had no deferred tax assets or liabilities, net of valuation allowance. The University analyzed its tax positions for the year ended June 30, 2017 and determined that there were no uncertain tax positions that would have a material impact on the University s consolidated financial statements. The University recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the statement of activities. During the year, the University did not accrue any interest or penalties. Recent Accounting Pronouncements In May 2014, the Financial Accounting and Standards Board ( FASB ) issued Accounting Standards Update ( ASU ) , Revenue from Contracts with Customers (Topic 606) ( ASU ). The amendments in ASU affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. This ASU will supersede the 14

16 Notes to Consolidated Financial Statements revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU , Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date ( ASU ), which defers the effective date of ASU for all entities by one year. ASU is now effective for financial statements issued for annual reporting periods beginning after December 15, The University is currently evaluating the impact this ASU will have on its consolidated financial statements. In April 2015, the FASB ) issued ASU , Interest - Imputation of Interest (Subtopic ): Simplifying the Presentation of Debt Issuance Costs ( ASU ). ASU revises Subtopic to require that debt issuance costs be reported in the statement of financial position as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts. Prior to the amendments, debt issuance costs were presented as a deferred charge (i.e., an asset) on the statement of financial position. The ASU provides examples illustrating the balance sheet presentation of notes net of their related discounts and debt issuance costs. Further, the amendments require the amortization of debt issuance costs to be reported as interest expense. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate on the debt. The amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The amendments are effective for all other entities for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, The University adopted this ASU in 2016, which resulted in a reclassification of $113,957 from deferred financing fees, net to related party notes payable, net of discount on the accompanying consolidated statement of financial position as of June 30, In February 2016, the FASB issued ASU , Leases (Topic 842) ( ASU ), which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee s right to use, or control the use of, a specified asset for the lease term. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. ASU is effective for annual periods beginning after December 15, Early application is permitted for all public business entities and all nonpublic business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The University is currently evaluating the impact of adopting this ASU on the consolidated financial statements. 15

17 Notes to Consolidated Financial Statements In August 2016, the FASB issued ASU No , Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities ( ASU ). The new guidance simplifies and improves how not-for-profit entities classify net assets as well as the information presented in financial statements and notes about liquidity, financial performance, and cash flows. ASU is effective for annual periods beginning after December 15, 2017; however, early adoption is permitted. The University is currently evaluating the impact of adopting this ASU on the consolidated financial statements. Other Financial Instruments The University s financial instruments that are recorded at fair value include investments and beneficial interest in trusts. Other financial instruments which include cash and cash equivalents, accounts receivable, contributions receivable, accounts payable, annuities payable, and bonds payable are stated at cost which approximates fair value. 2. Fair Value Measurements Accounting Standards Codification 820 ( ASC 820 ), Fair Value Measurement, defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. Effective June 1, 2008, the University adopted these standards for the assets and liabilities included in the table below, which define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. These standards established a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: Level 1: Level 2: Quoted market prices for identical assets or liabilities to which an entity has access at the measurement date. Inputs and information other than quoted market indices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: Quoted prices for similar assets or liabilities in active markets; Quoted prices for identical or similar assets in markets that are not active; Observable inputs other than quoted prices for the asset or liability; and Inputs derived principally from, or corroborated by, observable market data by correlation or by other means. Level 3: Unobservable inputs for the asset or liability. Unobservable inputs should be used to measure the fair value to the extent that observable inputs are not available. 16

18 Notes to Consolidated Financial Statements Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed from sources independent of the reporting entity; and unobservable inputs reflect the reporting entity s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. Because the Endowment owns a share of the Foundation s investment pools and the investment pools are not themselves marketable assets, nor do the Foundation s pools have quoted prices for similar assets, the Endowment s pooled assets are classified below as Level 3. However, within the Foundation s investment pools, there are assets that meet the criteria for Level 1 as well as Level 3 assets. A description of the Foundation s pooled assets in those categories are shown in the second table below. Assets include alternative investments (including private equity, hedge funds, real assets and limited partnership investments) and certain beneficial interests in perpetual trusts, for which valuation is based on information supplied by external investment managers. The University believes this information is a reasonable estimate of fair value. However, because these investments are not readily marketable, their fair value is subject to uncertainty and therefore, may differ from the value that would have been used had an active market for such investment existed. The following tables summarize the levels in the fair value hierarchy of the University s invested assets and interest rate swap liabilities at June 30, 2017 and 2016, respectively: June 30, 2017 Level 1 Level 2 Level 3 Total Assets Investments $ 123,231 $ - $ - $ 123,231 Pooled investments Endowment ,418, ,418,221 Non-endowment - - 6,080,169 6,080,169 Alternative investments - - 1,366,242 1,366,242 Subtotal investments 123, ,864, ,987,863 Beneficial interest in perpetual trusts - - 5,557,996 5,557,996 Beneficial interest in non-perpetual trusts - 34,782,299-34,782,299 Total Invested Assets $ 123,231 $ 34,782,299 $ 116,422,628 $ 151,328,158 Liabilities Interest rate swaps $ - $ 2,495,873 $ - $ 2,495,873 17

19 Notes to Consolidated Financial Statements June 30, 2016 Level 1 Level 2 Level 3 Total Assets Investments $ 273,771 $ - $ - $ 273,771 Pooled investments Endowment ,412,200 94,412,200 Non-endowment - - 5,514,336 5,514,336 Alternative investments - - 1,367,242 1,367,242 Subtotal investments 273, ,293, ,567,549 Beneficial interest in perpetual trusts - - 5,055,931 5,055,931 Total Invested Assets $ 273,771 $ - $ 106,349,709 $ 106,623,480 Liabilities Interest rate swaps $ - $ 5,295,830 $ - $ 5,295,830 The following tables summarize the levels in the fair value hierarchy of the University s and the Endowment s share of the Foundation s pooled investments and includes both endowment and non-endowment assets: June 30, 2017 Level 1 Level 2 Level 3 Total Pooled Investments Cash and cash equivalents $ 212,298 $ - $ - $ 212,298 Redemption receivable - - 1,805,205 1,805,205 Long-term growth 68,209,732-2,353,824 70,563,556 Moderate growth 4,536, ,536,550 Short-term fixed income 1,543, ,543,618 Alternatives ,837,163 30,837,163 Total $ 74,502,198 $ - $ 34,996,192 $ 109,498,390 June 30, 2016 Level 1 Level 2 Level 3 Total Pooled Investments Cash and cash equivalents $ 94,064 $ - $ - $ 94,064 Redemption receivable 3,634, ,634,541 Long-term growth 56,496,267-2,082,648 58,578,915 Moderate growth 3,993, ,993,717 Short-term fixed income 1,520, ,520,619 Alternatives ,104,680 32,104,680 Total $ 65,739,208 $ - $ 34,187,328 $ 99,926,536 18

20 Notes to Consolidated Financial Statements The Endowment contributed its 100% ownership interest of several alternative investments that include private limited partnership interests into the pooled investment at the Foundation. The Foundation expects to liquidate these assets when deemed appropriate over the terms of these investments. Other Fair Value Considerations A reasonable estimate of the fair value of the loans receivable from students under government loan programs and advances from Federal government for student loans included in U.S. government grants refundable on the statement of financial position could not be made because the loans receivable are not salable and can only be assigned to the U.S. government or its designees. The carrying amount of the debt approximates fair value since these financial instruments bear interest at variable rates which approximate current market rates for bonds with similar maturities and credit quality and based on limited open market trades at par value. The carrying amounts of contributions receivable approximate fair value based on maturity since these instruments are recorded at net present value. The fair value of the beneficial interest in non-perpetual trust was determined using quoted market prices for the specific investments held by the Charitable Trust in which the University has a 25.5% interest. Approximately one half of the University s interest in the Charitable Trust is expected to be distributed to the University within the next six months and as such, the market value as of June 30, 2017 was used as the estimate of fair value. The remaining portion of the Charitable Trust is expected to be distributed within three years and as such the fair value was estimated using a present value technique in accordance with Accounting Standards Codification Not-for-Profit Entities. Interest rate swap valuations are provided by experienced financial institutions on a mark-tomarket basis. Whenever possible, the University utilizes observable market data including yields and spreads, but may be based in part on assumptions concerning interest rates, credit rates, discount rates and other factors. As of June 30, 2017 and 2016, the fair value of $116,422,628 and $106,349,709, respectively, of other investments which are not actively traded on a public market are based upon level 3 input values. These inputs include information provided by external investment managers. The University uses the practical expedient provision in ASC 820 which permits the measurement of fair value based on the net asset value of the investment, without further adjustment, unless it is probable that the investment will be sold at a value significantly less than the net asset value. However, because these investments are not readily marketable, their fair value is subject to uncertainty and therefore, may differ from the value that would have been used had an active market for such investment existed. 19

21 Notes to Consolidated Financial Statements The following table provides a rollforward for fair value measurements using significant unobservable inputs (level 3) including the University s beneficial interest in perpetual trusts: Year ended June 30, 2017 Investments Beneficial interests in perpetual trusts Fair value roll-forward for level 3 measurements: Beginning balance $ 101,293,778 $ 5,055,931 Total realized and unrealized losses, net 10,000, ,171 Purchases and receipts from donors 2,064,270 67,894 Sales (2,493,601) - Ending balance $ 110,864,632 $ 5,557,996 Year ended June 30, 2016 Investments Beneficial interests in perpetual trusts Fair value roll-forward for level 3 measurements: Beginning balance $ 98,245,604 $ 4,469,796 Total realized and unrealized losses, net (1,828,129) (175,664) Purchases and receipts from donors 8,687, ,799 Sales (3,810,951) - Ending balance $ 101,293,778 $ 5,055,931 There was $10,434,356 and ($2,003,793) included in unrealized gains (losses) related to level 3 assets held by the University at June 30, 2017 and 2016, respectively. Investment expense for the years ended June 30, 2017 and 2016 was $221,430 and $277,232, respectively, which is included in institutional support in the accompanying consolidated statements of activities. 20

22 Notes to Consolidated Financial Statements 3. Contributions Receivable Contributions receivable, net, are summarized as follows: June 30, Unconditional promises expected to be collected in: Less than one year $ 732,027 $ 444,748 One to five years 4,631,808 4,007,944 Over five years 33, ,439 5,397,819 4,561,131 Less allowance for uncollectible contributions (269,442) (227,635) Less unamortized discount (discount rates of 3.25% to 8.50%) (518,002) (376,939) Contributions receivable, net $ 4,610,375 $ 3,956,557 Contributions to be received after one year are discounted at an appropriate discount rate commensurate with the risks involved. Amortization of discounts is recorded as additional contributed revenue in accordance with donor-imposed restriction, if any, on the contributions. Significant Donors As of June 30, 2017 and 2016, the University had two significant donors which accounted for $1,800,000 (33.4%) and $1,525,548 (33.5%), respectively of total contributions receivable, respectively. For the period ending June 30, 2017, the University had one significant donor which accounted for $35,402,377 (80.0%) of the total private gifts and grants. This gift was recorded as a beneficial interest held in non-perpetual trust as described in Note 1. For the period ending June 30, 2016, the University had two significant donors which accounted for $7,847,023 (45%) of the total private gifts and grants. 4. Loans Receivable At June 30, 2017 and 2016, loans receivable consisted of: (1) loans made to eligible students under the Federal Perkins Loan program administered by the U.S. Department of Education, (2) the University student loans and (3) other loans receivable. Perkins loans bear interest at the rate of 5% per annum and are to be repaid over a ten-year period beginning six to nine months after the student ceases to be enrolled at least half-time. The University loans bear interest at rates of 10% and 12% per annum. The loans are to be repaid over a six or seven-year period beginning three months after the student ceases to be enrolled at the University. 21

23 Notes to Consolidated Financial Statements 5. Land, Buildings and Equipment Land, buildings and equipment owned by the University consisted of the following at: June 30, Land $ 260,000 $ 260,000 Land improvements 10,370,110 10,370,110 Buildings 130,030, ,001,008 Building improvements 8,066,426 4,880,340 Equipment and furniture 31,611,108 29,211,905 Vehicles 570, ,016 Construction in-progress 4,377, ,635 Land, buildings and equipment 185,286, ,238,014 Less accumulated depreciation (64,776,809) (60,001,833) Land, buildings and equipment, net $ 120,509,418 $ 117,236,181 Depreciation expense for the year ended June 30, 2017 and 2016 was $5,021,626 and $4,877,283, respectively. During the year ended June 30, 2017, the University disposed $783,088 of property, buildings and equipment, resulting in a $3,416,912 gain, which has been recorded on the accompanying statement of activities. 22

24 Notes to Consolidated Financial Statements 6. Debt Bonds Payable In December 2013, the University entered into a Bond Purchase and Loan Agreement among the Wisconsin Public Finance Authority as the issuer of a bond and Bank of American Public Capital Corp, as the purchaser of the bond in the amount of $55,915,000 to refinance the outstanding bond issuances from 1999, 2001, and In association with these bonds, the University has made a collateral assignment of $534,999 in pledges associated with the construction of a specific facility financed by the bonds. Additionally, the bonds are secured by a negative pledge which states the University shall not sell, assign, lease, transfer or otherwise dispose of, or mortgage, pledge, encumber, grant a security interest in or permit any lien, charge or encumbrance to exist or be placed upon, certain real estate owned by the University located at its main campus in Charlotte, North Carolina. The University had the following bonds outstanding as of the dates indicated: June 30, Series 2013 Bonds, payments due in various installments through March 2043 beginning on September 2017, bearing interest at a variable monthly rate (1.6% at June 30, 2017) $ 55,915,000 $ 55,915,000 Debt issuance costs (113,957) (189,928) Total bonds payable $ 55,801,043 $ 55,725,072 Principal repayments of bonds payable outstanding as of June 30, 2017 are as follows: Year ending June 30, Amount 2018 $ 1,310, ,360, ,405, ,455, ,520,000 Thereafter 48,865,000 Total bonds payable $ 55,915,000 The debt agreements under which all bonds payable are outstanding contain various financial and other covenants. The primary financial covenants are the debt service coverage ratio and the minimum unrestricted liquidity ratios. At June 30, 2017 and 2016, the University was compliant with all covenants. 23

25 Notes to Consolidated Financial Statements Interest Rate Swaps On June 26, 2001, effective July 2, 2001, to hedge its exposure to changes in variable interest rates on the bonds, the University entered into an eighteen year and eight month interest rate swap to pay a fixed rate of 3.99% on a varying notional amount ($3,170,000 as of June 30, 2017 and $4,367,500 as of June 30, 2016) and receive a variable rate equal to 65% of one month LIBOR, payable on a monthly basis with the first payment due August 1, The interest rate swap matures on March 1, On October 26, 2005, effective November 1, 2005, to hedge its exposure to changes in variable interest rates on the bonds, the University entered into a fourteen year and five month interest rate swap to pay a fixed rate of 3.35% on a varying notional amount ($3,170,000 as of June 30, 2017 and $4,367,500 as of June 30, 2016) and receive a variable rate equal to 65% of one month LIBOR, payable on a monthly basis with the first payment due December 1, The interest rate swap matures on March 1, On November 7, 2016, the University exercised its option to terminate an existing interest rate swap that had a fixed rate payment of 2.695% and in order to continue to hedge its exposure to changes in the variable interest rate on the bonds, the University entered into a fourteen year and three month interest rate swap with Wells Fargo Bank, N.A. to pay a fixed rate of 1.433% with a varying notional amount ($10,134,250 as of June 30, 2017) and receive a variable rate equal to 70% of one month LIBOR, payable on a monthly basis with the first payment due January 1, The interest rate swap matures on March 1, On September 23, 2014 effective March 1, 2015, to hedge its exposure to changes in the variable interest rate on the 2013 Bonds, the University entered into a twenty six year and six month interest rate swap with Deutsche Bank AG New York to pay a fixed rate of 2.438% on a varying notional amount ($10,835,000 as of June 30, 2017 and $7,330,000 as of June 30, 2016) and receive a variable rate equal to 67% of one month LIBOR, payable on a monthly basis with the first payment due April 1, The interest rate swap matures on March 1, On November 7, 2016, to hedge its exposure to changes in the variable interest rate on the bonds, the University entered into a fourteen year and three month interest rate swap with Bank of America, N.A. to pay a fixed rate of 1.433% with a varying notional amount ($10,134,250 as of June 30, 2017) and receive a variable rate equal to 70% of one month LIBOR, payable on a monthly basis with the first payment due January 1, The interest rate swap matures on March 1, At June 30, 2017 and 2016, the fair value of these interest rates swaps was $2,495,873 and $5,295,830, respectively. The bond obligations and interest rate swaps have the same critical terms, except that the interest rate swaps reprice monthly and mature one year later than the 1999 bond obligation, one year before the 2001 bond obligation, and three years before the 2011 bond obligation. Because the expiration dates of the interest rate swaps are different than the maturity date of the debt obligation, the University may not assume the changes in fair value of the interest rate swaps are and will be highly effective at offsetting the variability of cash flows associated with the variable rate bond obligations. 24