Art Center College of Design and Subsidiary

Transcription

1 Report of Independent Auditors in accordance With Audit Requirements for Federal Awards (Uniform Guidance) and Financial Statements with Supplementary Information for Art Center College of Design and Subsidiary June 30, 2016 and 2015

2 CONTENTS REPORT OF INDEPENDENT AUDITORS 1 2 PAGE CONSOLIDATED FINANCIAL STATEMENTS Consolidated statements of financial position 3 Consolidated statements of activities 4 Consolidated statements of cash flows 5 Notes to consolidated financial statements 6 28 REPORT OF INDEPENDENT AUDITORS 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 REPORT OF INDEPENDENT AUDITORS ON COMPLIANCE FOR THE MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE AS REQUIRED BY THE UNIFORM GUIDANCE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 34 Notes to the schedule of expenditures of federal awards 35 SCHEDULE OF FINDINGS AND QUESTIONED COSTS MANAGEMENT S CORRECTIVE ACTION PLAN 39 SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS 40

3 To the Board of Trustees Art Center College of Design and Subsidiary REPORT OF INDEPENDENT AUDITORS Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Art Center College of Design (the College ), and Subsidiary which comprise the consolidated statements of financial position as of June 30, 2016 and 2015, 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 Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to 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 audits 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 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 Art Center College of Design and Subsidiary 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 Other Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the 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 10, 2016 on our consideration of the College s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the College s internal control over financial reporting and compliance. Los Angeles, California October 10,

5 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS OF JUNE 30, 2016 AND ASSETS Cash and cash equivalents $ 23,009 $ 19,882 Unexpended bond proceeds 5,083 Accounts and notes receivable, net 7,026 6,034 Contributions receivable, net 6,636 6,365 Investments 107, ,688 Other assets 2,888 2,544 Property, plant and equipment, net 91,972 85,002 Total assets $ 239,148 $ 232,598 LIABILITIES Accounts payable and accrued liabilities $ 19,173 $ 14,300 Unearned tuition income 12,162 10,634 Federal student loan funds Annuity obligations Bonds payable, net 63,467 64,621 Total liabilities 95,135 89,954 NET ASSETS Unrestricted 63,093 62,694 Temporarily restricted 32,032 31,638 Permanently restricted 48,888 48,312 Total net assets 144, ,644 Total liabilities and net assets $ 239,148 $ 232,598 See accompanying notes. 3

6 CONSOLIDATED STATEMENTS OF ACTIVITIES FOR THE YEARS ENDED JUNE 30, 2016 AND 2015 Temporarily Restricted Net Assets Permanently Restricted Net Assets Total Unrestricted Net Assets Temporarily Restricted Net Assets Permanently Restricted Net Assets Total Unrestricted Net Assets OPERATING REVENUES Net tuition and fees $ 79,822 $ $ $ 79,822 $ 76,264 $ $ $ 76,264 Private gifts and grants Investment and other income Sales and services of auxiliary enterprises Other sources 2,486 2,486 2,457 2,457 Amounts released from restrictions 7,738 7,738 8,146 8,146 Total revenues 92,496 92,496 89,347 89,347 OPERATING EXPENSES Education 64,778 64,778 59,668 59,668 Student services 7,427 7,427 7,076 7,076 Administration 10,253 10,253 10,760 10,760 Advancement 2,289 2,289 2,228 2,228 Auxiliary services Total expenses 85,488 85,488 80,406 80,406 Increase in net assets from operations 7,008 7,008 8,941 8,941 OTHER CHANGES IN NET ASSETS Private gifts and grants 10, ,519 5,532 1,020 6,552 Endowment income Net change in actuarial obligations (140) (140) (88) (88) Net change in fair value of investments (1,640) (4,188) (5,828) (144) Net change in fair value of interest rate swap (4,129) (4,129) (1,926) (1,926) Loss on defeasance of bonds (949) (949) Donor re designation (101) 101 Amounts released from restrictions and reclassifications (700) (7,038) (7,738) (630) (7,516) (8,146) (Decrease) increase in net assets from other changes (6,609) (5,639) (3,737) (706) 1,121 (3,322) Change in net assets ,369 5,204 (706) 1,121 5,619 NET ASSETS AT BEGINNING OF YEAR 62,694 31,638 48, ,644 57,490 32,344 47, ,025 NET ASSETS AT END OF YEAR $ 63,093 $ 32,032 $ 48,888 $ 144,013 $ 62,694 $ 31,638 $ 48,312 $ 142,644 4 See accompanying notes.

7 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2016 AND OPERATING ACTIVITIES Change in net assets $ 1,369 $ 5,619 Adjustments to reconcile increase in net assets to net cash provided by operating activities: Depreciation and amortization 3,002 2,780 Bad debt expense (student notes, tuition and contributions receivable) Unrealized and realized losses (gains) on investments 5,828 (405) Realized loss on defeasance of bonds 949 Change in actuarial obligations Change in interest rate swap 4,129 1,926 Changes in assets and liabilities: Accounts and notes receivable (1,503) 96 Contributions receivable (440) (250) Other assets (344) (17) Accounts payable and accrued liabilities 596 1,302 Unearned tuition income 1,528 9 Contributions received for long term purposes (1,955) (1,966) Net cash provided by operating activities 13,030 10,725 INVESTING ACTIVITIES Purchases of property, plant and equipment (9,961) (29,443) Proceeds from sale and maturity of investments 101,112 81,576 Purchases of investments (106,870) (78,144) Change in federal student loan funds (57) 35 Net cash used in investing activities (15,776) (25,976) FINANCING ACTIVITIES Contributions received for long term purposes 1,955 1,966 Bond issuance and issue costs, net 20,267 Payments on bonds payable (1,165) (1,285) Unexpended bond proceeds 5,083 (1,427) Net cash provided by financing activities 5,873 19,521 Net increase in cash and cash equivalents 3,127 4,270 Cash and cash equivalents, beginning of year 19,882 15,612 Cash and cash equivalents, end of year $ 23,009 $ 19,882 SUPPLEMENTAL CASH FLOW INFORMATION Interest paid during the year $ 996 $ 931 See accompanying notes. 5

8 Note 1 Nature of Operations Art Center College of Design (the "College") is a California nonprofit public benefit corporation exempt from Federal income tax under Section 501(c)(3) of the Internal Revenue Code and applicable State tax codes. The objective of the College as a nonprofit educational institution is service, and the primary obligation of accounting and reporting is for resources received and applied rather than the determination of net income. The Art Center School was founded in 1930 to provide professional instruction in visual arts and industrial design. As an independent, nonprofit institution, it has grown into an internationally acclaimed institution. In the late 1940 s it was renamed Art Center College of Design, and received accreditation by the National Association of Schools of Art and Design (NASAD) and the Western Association of Schools and Colleges (WASC). The College offers a Bachelor of Fine Arts degree (BFA) in six majors: Advertising, Film, Fine Art, Graphic Design, Illustration, and Photography & Imaging. The College offers a Bachelor of Science degree (BS) in five majors: Environmental Design, Interaction Design, Product Design, Transportation Design and Entertainment Design. Four graduate programs award the Master of Fine Arts degree (MFA) in Film, Art, Graphic Design and Media Design; and three graduate programs award the Master of Science degree (MS) in Environmental Design, Industrial Design and Transportation Design. While the College derives most of its revenues from tuition and student fees, it also receives gifts from individuals, corporations, and foundations. The Design Accelerator ( TDA ) is a for profit C Corporation whose primary function is to develop and mentor start up companies in design and technology. Principles of consolidation The consolidated financial statements include the accounts of Art Center College of Design and The Design Accelerator (collectively referred to as the College ). There were no intercompany balances or transactions for the years ended June 30, 2016 and Note 2 Summary of Significant Accounting Policies Basis of presentation The consolidated financial statements of the College have been prepared on the accrual basis of accounting, in accordance with accounting principles generally accepted in the United States of America, which requires the College to classify its net assets into three categories according to donor imposed restrictions or provisions of law: permanently restricted, temporarily restricted, and unrestricted. Permanently restricted net assets include the original value of gifts and contributions receivable to the permanent endowment in which donors have stipulated that the principal be invested in perpetuity. Donor restricted endowment income and accumulated gains are classified as temporarily restricted net assets until those amounts are appropriated for expenditure. 6

9 Note 2 Summary of Significant Accounting Policies (continued) Temporarily restricted net assets include gifts for which donor imposed restrictions have not been met (primarily for future projects), contributions receivable, and donor restricted endowment income and accumulated gains which are appropriated for expenditure. These restrictions are removed either through the passage of time or when certain actions are taken by the College to fulfill the restrictions. Temporary restrictions on net assets met due to the fulfillment of donor imposed restrictions and/or the passage of time are reported as reclassifications from temporarily restricted to unrestricted net assets in the Consolidated Statements of Activities. Donor restricted gifts that are received and either spent, or deemed spent, within the same fiscal year are reported as unrestricted revenues. Unrestricted net assets are those not subject to donor imposed restrictions. Non operating revenues and expenses include donor restricted gifts, endowment income, realized and unrealized gains and losses on investments during the year, and certain other expenses. To the extent investment income and gains are allocated for operations, as determined by the College s spending policy, those amounts are included in operating revenues. All other investment activity is classified as non operating. Expenses Expenses are reported in the unrestricted net asset category. The Consolidated Statements of Activities presents expenses by functional classification. Interest, depreciation, employee benefits and taxes, tuition remission, and operation and maintenance of plant expenses are allocated to functional categories based on building square footage dedicated to that specific function. Investments Investments are reported in the Consolidated Statements of Financial Position at fair value with any realized or unrealized gains and losses reported in the Consolidated Statements of Activities. Net change in the fair value of investments, which consists of the realized and unrealized gains or losses on those investments, is shown in the Consolidated Statements of Activities. Unrealized gains and losses reflect the changes in the fair values of investments. Investment income and gains and losses on investments, net of related expenses, are reported as increases or decreases in unrestricted net assets unless the gain or loss relates to donor restricted endowment funds which are reported in temporarily restricted net assets or their use is restricted by explicit donor stipulation. The date of record for investments is the trade date. 7

10 Note 2 Summary of Significant Accounting Policies (continued) Investment spending rule policy The Board of Trustees of the College, in setting the endowment spending policy, considered the following factors: 1) preservation of asset values, 2) preservation of purchasing power, and 3) consistency of spending over time. The College's Board of Trustees adopted a spending policy of 4.0% with a view toward balancing the need for expendable funds for the College's programs against the need to preserve the endowment against inflation. The distribution is determined by applying 4.0% to the average of the fair value of investments as of the end of the five preceding fiscal years. Property, plant and equipment Property, plant and equipment are stated at cost at date of acquisition or fair value at date of gift. Depreciation is provided over the useful lives of the respective assets on a straight line basis except for the cost of leasehold improvements and software under capital lease, which are amortized on a straight line basis over the shorter of the term of the lease or the useful lives of the assets. The estimated useful lives of depreciable assets are as follows: Useful Lives Capitalization Policy Buildings and improvements 40 years $100 and over Library books 10 years All library books Furniture and equipment 5 years $10 and over Computer hardware and software 3 years $25 and over Leasehold improvements 5 years $10,000 Computer education software 1 year $25 and over Tax exempt status The College is a California nonprofit public benefit corporation for federal and state income tax purposes, and is exempt from income tax, except with respect to any unrelated business income. Unrelated business income tax, if any, is insignificant and no tax provision has been made in the accompanying consolidated financial statements. The Design Accelerator, Inc. is a Delaware for profit corporation wholly owned by the College. The TDA had no taxable income for the year and no tax provision has been made in the accompanying consolidated financial statements. The College had no uncertain tax positions for the years ended June 30, 2016 or Revenue recognition Student tuition and fees are recorded as revenues net of all College and donorsponsored financial aid in the period in which the academic services are rendered. Student tuition and fees received in advance of services to be rendered are recorded as unearned tuition income. Revenue from auxiliary enterprises is recognized when goods or services are provided. 8 S

11 Note 2 Summary of Significant Accounting Policies (continued) Contributions, including unconditional promises to give, are recognized as revenue in the period received and are reported as increases in the appropriate category of net assets. Contributions where donor restrictions are met within the same fiscal year as the contribution are included in unrestricted net assets. 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 fair value. Contributions to be received in future periods are discounted to net present value at an appropriate discount rate. Other sources of revenue consist primarily of rental income and corporate sponsored projects and are recognized when services are earned. Concentration of credit risk The College maintains commercial accounts in three California banks. Accounts at each bank are insured by the Federal Deposit Insurance Corporation ("FDIC"). At June 30, 2016 and 2015, the College had amounts that were in excess of the FDIC insurance limit. The College performs ongoing evaluations of commercial banks to limit its concentration of credit risk exposure. The College has not sustained a loss of funds maintained in commercial banks. The College holds investments in U.S. Government securities, mutual funds and corporate debt, and equity issues which are managed by outside investment counselors. These balances are insured up to $500 by the Securities Investor Protection Corporation (SIPC). At June 30, 2016, two donors made up 80% of the College s contribution receivable balance. Concentration of credit risk with respect to student receivables is limited due to the large number of students from whom amounts are due, with no one account being significant. Cash and cash equivalents Short term investments with an original maturity of three months or less at the time of purchase are considered to be cash equivalents. Cash and cash equivalents representing permanently restricted assets are included in investments. Cash and cash equivalents are reported at cost which approximates fair value. Contributions receivable Unconditional promises to give are recorded as contributions receivable (or pledges) and revenue. Contributions are classified as temporarily restricted or permanently restricted based on time restrictions or donor imposed stipulations. Contributions are recorded at fair value using a discount rate commensurate with the risk involved. Contributions receivable are reviewed for collectability and reserves for uncollectible amounts are established when needed. Unexpended bond proceeds Indenture requirements of bond financing (see Note 9, Bonds Payable ) provide for the establishment and maintenance of various accounts with trustees. The indenture terms limit the use of these funds to the construction of plant facilities. Unexpended bond proceeds are comprised of cash equivalents and are recorded at cost, which approximates fair value. 9

12 Note 2 Summary of Significant Accounting Policies (continued) Annuity obligations The College has legal title to annuity and life income contracts and agreements subject to life interests of beneficiaries. No significant financial benefit is now being or can be realized until the contractual obligations are released. However, the cost of managing these contracts and agreements is included in unrestricted expenses. The College uses the actuarial method of recording annuity and life income contracts and agreements. Under this method, the asset is recorded at fair value when a gift is received. The present value of the aggregate annuity payable is recorded as a liability, based upon life expectancy tables, and the remainder is recorded as a contribution in the appropriate net asset category. The asset account is debited with investment income, gains and losses, and the liability account is charged with payments to beneficiaries. Periodic adjustments are made between the liability account and the net assets account for actuarial gains and losses. The actuarial liability is based on the present value of future payments discounted at 3.50% in 2016 and 4.29% in 2015 and over estimated lives according to the 2000 census mortality tables. Use of estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair value measurement of investments U.S. GAAP defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. U.S. GAAP provides a consistent definition of fair value which focuses on an exit price between market participants in an orderly transaction. The College carries most of their investments at fair value in accordance with generally accepted accounting principles. The College adopted the accounting standards update related to Topic 820 Fair Value Measurement promulgated by the Financial Accounting Standards Board (FASB). This update removes the requirement to categorize investments measured using the net asset value per share/unit practical expedient (or its equivalent) within the fair value hierarchy. This update has been applied retrospectively and prior year disclosures have been revised accordingly. 10 S

13 Note 2 Summary of Significant Accounting Policies (continued) The standard also prioritizes, within the measurement of fair value, the use of market based information for investments not measured using the net asset value per share over entity specific information and establishes a three level hierarchy for fair value measurements based on the transparency of information used in the valuation of an asset or liability as of the measurement date. The three levels of hierarchy are as follows: Level 1 Level 2 Level 3 Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the College has the ability to access at the measurement date; Inputs other than quoted prices that are observable for the asset either directly or indirectly, including inputs in markets that are not considered to be active; Inputs that are unobservable. Inputs are used in applying the valuation techniques and broadly refer to the assumptions that the College uses to make valuation decisions, including assumptions about risk. Inputs may include quoted market prices, recent transactions, manager statements, provisions within agreements with investment managers and other factors. An investment s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does not necessarily correspond to the College s perceived risk of the investment. Transfers between hierarchy levels are recognized at the end of the reporting period. There were no transfers for the years ended June 30, 2016 or The investments of the College in Level 1 include short term investment funds, commodity funds, international equity funds, domestic equity funds, complementary strategies funds, private equity, international common stock, domestic common stock, real asset funds, government bond funds, government agency funds, international corporate bond funds, and US Treasury bond funds, and are valued based on quoted market prices. The investments of the College in Level 2 include commercial mortgage backed securities, government mortgage backed securities, corporate bond funds, domestic corporate bonds, international corporate bonds, and US Treasury bonds, and are valued based on quoted market prices of comparable assets. 11

14 Note 2 Summary of Significant Accounting Policies (continued) The investments of the College in Assets Held at Net Asset Value (or equivalent) include long/short international hedge funds, corporate bond funds and private equity investments and are valued by external investment managers. The Investment Committee, in conjunction with the external investment advisors, monitors and analyzes the valuation of the investments on a quarterly basis. The Investment Committee reports to the Board of Trustees. The valuations consider variables such as financial performance of investments, recent sales prices of investments, and other pertinent information. The College has three interest rate swap agreements designed to manage the College s interest costs and risks associated with variable interest rate debt. The total notional amount of the swaps is $63,780. The College fair values the interest rate swaps using readily available market inputs. The total fair value was a liability of approximately $8,888 and $4,759 at June 30, 2016 and June respectively, and is included in accounts payable and accrued liabilities. Reclassifications Certain reclassifications have been made to the 2015 financial statements to conform to current year presentation. These reclassifications have no effect on previously reported change in net assets or total ending net assets of the College. Subsequent events Subsequent events are events or transactions that occur after the Consolidated Statement of Financial Position date but before financial statements are available to be issued. The College recognizes in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the Consolidated Statement of Financial Position, including the estimates inherent in the process of preparing the financial statements. The College s financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the Consolidated Statement of Financial Position but arose after the statement of financial position date and before financial statements are available to be issued. The College has evaluated subsequent events through October 10, 2016, which is the date the financial statements are available for issuance, and concluded that there were no events or transactions that need to be disclosed. 12 S

15 Note 2 Summary of Significant Accounting Policies (continued) Recently issued accounting pronouncements In April 2015, the FASB issued ASU , Simplifying the Presentation of Debt Issuance Costs, which amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. ASU is effective for interim and annual reporting periods beginning after December 15, 2015 and requires retrospective application. The College early adopted this standard as of the end of its current fiscal year. In May 2015, AICPA issued ASU , Fair Value Measurement: Disclosures for Investments in Certain Entities that Calculate Net Asset Value (NAV) per Share. This is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Earlier application is permitted. The amendments in this ASU remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the NAV per share practical expedient. The amendment also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV per share practical expedient. As discussed on page 9 of these financial statements, the College early adopted this standard as of the end of its current fiscal year. Note 3 Accounts and Notes Receivable Accounts and notes receivable are summarized as follows at June 30, 2016 (in thousands): 2016 Student notes, net of allowance for doubtful accounts of $481 $ 1,038 Tuition, net of allowance for doubtful accounts of $1,351 5,553 Other receivables, net of allowance for doubtful accounts of $ Total accounts and notes receivable, net $ 7,026 Accounts and notes receivable are summarized as follows at June 30, 2015 (in thousands): 2015 Student notes, net of allowance for doubtful accounts of $548 $ 1,048 Tuition, net of allowance for doubtful accounts of $1,888 4,897 Other receivables, net of allowance for doubtful accounts of $ Total accounts and notes receivable, net $ 6,034 The methodology used to estimate the allowance for doubtful accounts is based on prior experience and management s judgment. 13

16 Note 4 Contributions Receivable Unconditional promises to give are included in the consolidated financial statements as contributions receivable (or pledges) and revenue of the appropriate net asset category. Contributions are recorded after discounting at a range from 1.5% to 2.2% at their estimated fair value when recorded. Unconditional promises to give are expected to be realized in the following years, as of June 30 (in thousands): In one year or less $ 2,411 $ 1,632 Between one year and five years 4,250 4,040 More than five years 850 1,450 7,511 7,122 Less: Discount (456) (507) Allowance for doubtful pledges (419) (250) Total contributions receivable, net $ 6,636 $ 6,365 Gross contributions receivable are for the following purposes (in thousands): Restricted for specific projects $ 1,206 $ 2,050 Capital campaign 6,300 4,650 Endowment for scholarships Total contributions receivable $ 7,511 $ 7, S

17 Note 5 Investments Investments consist of the following at June 30, 2016 and 2015, stated at fair value (in thousands): Equity securities Short Term Investment Funds $ 963 $ 1,640 Commodity Funds 2,083 2,464 International Equity Funds 18,830 21,590 Domestic Equity Funds 6,713 7,271 Complementary Strategies Fund Private Equity 11,641 11,411 International Common Stock Domestic Common Stock 14,884 16,597 Real Asset Funds Debt securities Commercial Mortgage Backed Securities 7,002 4,137 Government Mortgage Backed Securities Corporate Bond Funds 7,978 8,573 Government Bond Funds 2,526 2,403 Government Agency Funds 5,574 5,532 Domestic Corporate Bonds 7,246 4,075 International Corporate Bond Funds US Treasury Bond Funds International Corporate Bonds 2,146 1,333 US Treasury Bonds 6,511 6,263 Long/Short International Hedge Funds 11,686 12,598 $ 107,617 $ 107,688 Net unrealized loss and net realized gain in the College s total investments were $7,401 and $1,572 respectively, for the year ended June 30, Net unrealized gain and net realized loss in the College s total investments were $13,164 and $12,759 respectively, for the year ended June 30,

18 Note 6 Fair Value of Assets and Liabilities The following table summarizes the valuation of the College s assets and liabilities by the fair value hierarchy levels as of June 30, 2016 (in thousands): Description Balance at June 30, 2016 Level 1 Level 2 Level 3 Assets Held at Net Asset Value (or Equivalent) Equity securities Short Term Investment Funds $ 963 $ 963 $ $ $ Commodity Funds 2,083 2,083 International Equity Funds 18,830 18,830 Domestic Equity Funds 6,713 6,713 Complementary Strategies Fund Private Equity 11, ,472 International Common Stock Domestic Common Stock 14,884 14,884 Real Estate Funds Total Equity securities 56,076 44,604 11,472 Debt securities Commercial Mortgage Backed Securities 7,002 7,002 Government Mortgage Backed Securities Corporate Bond Funds 7,978 4,846 3,132 Government Bond Funds 2,526 2,526 Government Agency Funds 5,574 5,574 Domestic Corporate Bonds 7,246 7,246 International Corporate Bond Funds US Treasury Bond Funds International Corporate Bonds 2,146 2,146 US Treasury Bonds 6,511 6,511 Total Debt securities 39,855 13,481 23,242 3,132 Total redeemable assets $ 95,931 $ 58,085 $ 23,242 $ $ 14,604 Hedge Fund Investments Long/Short International Hedge Funds $ 11,686 $ $ $ $ 11,686 Interest rate swaps liability $ (8,888) $ $ (8,888) $ $ 16 S

19 Note 6 Fair Value of Assets and Liabilities (continued) ART CENTER COLLEGE OF DESIGN AND SUBSIDIARY The following table summarizes the valuation of the College s assets and liabilities by the fair value hierarchy levels as of June 30, 2015 (in thousands): Description Balance at June 30, 2015 Level 1 Level 2 Level 3 Assets Held at Net Asset Value (or Equivalent) Equity securities Short Term Investment Funds $ 1,640 $ 1,640 $ $ $ Commodity Funds 2,464 2,464 International Equity Funds 21,590 21,590 Domestic Equity Funds 7,271 7,271 Complementary Strategies Fund Private Equity 11, ,172 International Common Stock Domestic Common Stock 16,597 16,597 Real Estate Funds Total Equity securities 61,781 50,609 11,172 Debt securities Commercial Mortgage Backed Securities 4,137 4,137 Government Mortgage Backed Securities Corporate Bond Funds 8,573 5,412 3,161 Government Bond Funds 2,403 2,403 Government Agency Funds 5,532 55,332 Domestic Corporate Bonds 4,075 4,075 International Corporate Bond Funds US Treasury Bond Funds International Corporate Bonds 1,333 1,333 US Treasury Bonds 6,263 6,263 Total Debt securities 33,309 63,567 16,381 3,161 Total redeemable assets $ 95,090 $ 114,176 $ 16,381 $ $ 14,333 Hedge Fund Investments Long/Short International Hedge Funds $ 12,598 $ $ $ $ 12,598 Interest rate swaps liability $ (4,759) $ $ (4,759) $ $ 17

20 Note 6 Fair Value of Assets and Liabilities (continued) The following table represents the liquidity and redemption restrictions on the above investments that do not have a readily determinable fair value or utilize net asset value per share (or equivalent) to determine fair value as of June 30, 2016: 2016 Fair Value at Unfunded Redemption Redemption Year End Commitments Frequency Notice Period Private Equity $ 11,472 $ Quarterly 60 Days Corporate Bond Funds 3,132 Quarterly 60 Days Long/Short International Hedge Funds 2,979 (1) 95 Days Long/Short International Hedge Funds 8,707 (2) 95 Days $ 26,290 $ (1) Two year rolling commitment period, ending October 1, The commitment period for contributions made other than on the first day of a calendar quarter will commence on the first day of the next calendar quarter. The above withdrawal amounts are at cost, market fluctuations will cause the actual amounts available for withdrawal to be different. (2) Two year rolling commitment period, ending December 1, The commitment period for contributions made other than on the first day of a calendar quarter will commence on the first day of the next calendar quarter. The above withdrawal amounts are at cost, market fluctuations will cause the actual amounts available for withdrawal to be different. Private Equities investment strategy is to seek long term appreciation and to earn a total rate of return in excess of the total rate of return on the Standard & Poor s 500 Composite Stock Price Index, by primarily investing in debt securities and other fixed income securities. Corporate Bond funds investment strategy is to provide high current income consistent with reasonable risk through investments in multi asset class, diversified portfolios of primarily below investment grade debt securities. The second objective is to seek capital appreciation consistent with its primary objective. Hedge funds investment strategy is to preserve and grow capital by identifying high quality investment managers with above average investments histories and/or prospects ( Portfolio Managers ), and allocating and reallocating the Fund s assets to discretional investments accounts and/or private investment vehicles ( Investment Funds ) managed by the Portfolio Managers. The Fund may invest in any type of Investment Fund. Generally, these Investment Funds may be liquidated and other Investment Funds may be added or liquidated at the discretion of the Investment Manager. 18 S

21 Note 7 Endowments The College s endowment consists of approximately 119 individual donor restricted endowment funds. The net assets associated with endowment funds are classified and reported based on the existence or absence of donor imposed restrictions. The Board of Trustees of the College has interpreted the California "Uniform Prudent Management of Institutional Funds Act" (UPMIFA) as requiring the preservation 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. Donorrestricted endowment income and accumulated gains are classified as temporarily restricted net assets until those amounts are appropriated for expenditure of 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 endowment funds: 1) The duration and preservation of the fund 2) The purposes of the College and the donor restricted endowment fund 3) General economic conditions 4) The possible effect of inflation and deflation 5) The expected total return from income and the appreciation of investments 6) Other resources of the College 7) The investment policies of the College 19

22 Note 7 Endowments (continued) The following tables present the College s endowment composition, changes, and net asset classifications: Endowment net asset composition by type of fund as of June 30, 2016 (in thousands): Unrestricted Temporarily Restricted 2016 Permanently Restricted Total Board designated $ 21,276 $ $ $ 21,276 Donor restricted 10,829 48,700 59,529 Total $ 21,276 $ 10,829 $ 48,700 $ 80,805 Endowment net asset composition by type of fund as of June 30, 2015 (in thousands): Unrestricted Temporarily Restricted 2015 Permanently Restricted Total Board designated $ 22,390 $ $ $ 22,390 Donor restricted 16,096 48,123 64,219 Total $ 22,390 $ 16,096 $ 48,123 $ 86, S

23 Note 7 Endowments (continued) ART CENTER COLLEGE OF DESIGN AND SUBSIDIARY Changes in endowment net assets for the year ended June 30, 2016 (in thousands): Unrestricted Temporarily Restricted Permanently Restricted Total Endowment net assets beginning of year $ 22,390 $ 16,095 $ 48,124 $ 86,609 Investment return Investment income Net appreciation (realized and unrealized) (1,617) (4,188) (5,805) Total investment return 21,025 12,584 48,124 81,733 Gifts Other Designation for endowment 1,000 1,000 Appropriation of endowment assets for expenditure (749) (2,215) (2,964) Endowment net assets end of year $ 21,276 $ 10,829 $ 48,700 $ 80,805 21

24 Note 7 Endowments (continued) Changes in endowment net assets for the year ended June 30, 2015 (in thousands): Unrestricted Temporarily Restricted Permanently Restricted Total Endowment net assets beginning of year $ 21,655 $ 16,491 $ 47,002 $ 85,148 Investment return Investment income ,118 Net appreciation (realized and unrealized) Total investment return 22,091 17,892 47,002 86,985 Gifts 1,020 1,020 Other Donor Redesignation (101) 101 Designation for endowment 1,000 1,000 Appropriation of endowment assets for expenditure (701) (2,205) (2,906) Endowment net assets end of year $ 22,390 $ 16,096 $ 48,123 $ 86,609 Endowment funds with deficits From time to time, the fair value of assets associated with individual donor restricted endowment funds may fall below the value of the initial and subsequent donor gift amounts (deficit). When donor endowment deficits exist, they are classified as a reduction of unrestricted net assets. Deficits of this nature reported in unrestricted net assets were $138 and $0 as of June 30, 2016 and 2015, respectively. These deficits resulted from unfavorable market fluctuations that occurred shortly after the investment of newly established endowments, and authorized appropriation that was deemed prudent. Future gains will be used to restore this deficiency in unrestricted net assets before any net appreciation above the historical cost value of such funds increases temporary restricted net assets. 22 S

25 Note 7 Endowments (continued) ART CENTER COLLEGE OF DESIGN AND SUBSIDIARY Return objectives and risk parameters The College has adopted endowment investment and spending policies that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of endowment assets. Under this policy, the return objective for the endowment assets, measured over a full market cycle, shall be to maximize the return against a blended index, based on the endowment s target allocation applied to the appropriate individual benchmarks. Strategies employed for achieving investment objectives To achieve its long term rate of return objectives, the College relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized gains) and current yield (interest and dividends). The College targets a diversified asset allocation that places greater emphasis on equity based investments to achieve its long term objectives within prudent risk constraints. Relationship of spending policy to investment objectives The Board of Trustees of the College determines the method to be used to appropriate endowment funds for expenditure. The method established by the Board multiplies the average fair value for the preceding five fiscal years by 4.0%, and appropriates that amount for expenditure one year subsequent to the calculation. In establishing this policy, the Board considered the expected long term rate of return on its endowment. Accordingly, over the long term, the College expects the current spending policy to allow its endowment to grow at an average of 4.0% annually, consistent with its intention to maintain the purchasing power of the endowment assets as well as to provide additional real growth through new gifts. Note 8 Property, Plant and Equipment Property, plant and equipment, net of accumulated depreciation, are summarized as follows at June 30, 2016 and 2015 (in thousands): Land $ 9,980 $ 9,980 Building and improvements 93,875 87,214 Library books 1,293 1,318 Furniture and equipment 2,799 2,198 Computer hardware & software Construction in progress 5,269 2,892 Total 113, ,710 Less accumulated depreciation (21,285) (18,708) Property, plant and equipment, net $ 91,972 $ 85,002 Total depreciation expense for the years ended June 30, 2016 and 2015 was approximately $2,991 and $2,769, respectively. 23

26 Note 9 Bonds Payable Bonds payable included the following at June 30, 2016 (in thousands): Effective Interest Rates 2016 Maturity Dates Total California Educational Facilities Authority ("CEFA") Refunding Revenue Bonds Series 2014A 1.58% 2044 $ 43,980 ("CEFA") Revenue Bonds Series 2014B 1.73% ,800 Bond issuance costs, net (313) Total $ 63,467 Bonds payable included the following at June 30, 2015 (in thousands): Effective Interest Rates 2015 Maturity Dates Total California Educational Facilities Authority ("CEFA") Refunding Revenue Bonds Series 2014A 1.38% 2044 $ 44,790 ("CEFA") Revenue Bonds Series 2014B 1.53% ,155 Bond issuance costs, net (324) Total $ 64,621 The CEFA Series 2014A and 2014B bonds contain covenants relating to maintenance of the College, compliance with specified financial ratios, insurance, and other general items. Additionally, the College has certain restrictions on future borrowings. The College granted a lien on the real property at 1700 Lida Street (Main Campus), 870 and 950 South Raymond, and 1111 South Arroyo Parkway (South Campus). 24 S

27 Note 9 Bonds Payable (continued) ART CENTER COLLEGE OF DESIGN AND SUBSIDIARY Principal payments on the 2014 Bond obligations for each of the next five fiscal years and beyond are as follows (in thousands): Principal Payment 2017 $ 1, , , , , and thereafter $ 57,175 63,780 The bonds bear interest at a weekly interest rate. The specific interest rate for each interest rate period is to be determined by the remarketing agent as provided in the indenture. The interest payment for bonds bearing interest as a weekly interest rate is the first business day of each calendar month. As of June 30, 2016, the interest rates on the Bonds ranged from 1.58% to 1.73%. Interest expense for the years ended June 30, 2016 and 2015 totaled approximately $996 and $931, respectively. Bonds payable is presented as a net amount on the consolidated statements of financial position net of bond issuance costs. The total bond issuance costs and the related accumulated amortization totaled approximately $335 and $22 at June 30, 2016 and $335 and $11 at June 30, Issuance costs are being amortized over the term of the Bonds on the straight line method, which approximates the interest method. The estimated fair value of the College s bonds payable was approximately $49,728 and $50,754 at June 30, 2016 and 2015, respectively. The fair value estimate is based upon the discounted amount of future cash outflows utilizing current rates offered for debt of similar maturities. The College determined these CEFA bonds to be level 2 measurements in the fair value hierarchy. The College has three interest rate swap agreements designed to manage the College s interest costs and risks associated with variable interest rate debt. Under the terms of the swap agreements, the College paid $1,551 and $1,649 to the swap counterparty for the years ended June 30, 2016 and 2015, respectively, which has been recorded as interest expense in the accompanying consolidated financial statements. The fair value of the interest rate swap agreements was a liability of approximately $8,888 and $4,759 at June 30, 2016 and 2015, respectively. The College fair values the interest rate swaps using readily available market inputs. 25

28 Note 9 Bonds Payable (continued) The following table provides a summary of the College s swaps as of June 30, 2016 and 2015: 2016 Swap Counter Effective Expiration Notional Swap Party Date Date Amount Liability Wells Fargo Bank February 1, 2012 December 1, 2039 $25,335 ($4,993) Wells Fargo Bank June 1, 2013 December 1, 2041 $17,340 ($2,107) Wells Fargo Bank June 1, 2016 December 1, 2044 $21,105 ($1,788) 2015 Swap Counter Effective Expiration Notional Swap Party Date Date Amount Liability Wells Fargo Bank February 1, 2012 December 1, 2039 $26,135 ($3,080) Wells Fargo Bank June 1, 2013 December 1, 2041 $18,005 ($617) Wells Fargo Bank July 16, 2014 December 1, 2044 $20,805 ($1,062) Note 10 Net Assets The net asset categories by purpose and time at June 30, 2016 were as follows (in thousands): Unrestricted Temporarily Restricted 2016 Permanently Restricted Total Unallocated or internally designated $ 7,814 $ $ $ 7,814 Donor restricted funds: Educational project and events 14,571 14,571 7,814 14,571 22,385 Contributions receivable, net 6, ,636 Investment in plant 34,136 34,136 Quasi Endowment 21,276 21,276 Endowment (138) 10,829 48,700 59,391 Revolving student loans $ 63,093 $ 32,032 $ 48,888 $ 144, S

29 Note 10 Net Assets (continued) ART CENTER COLLEGE OF DESIGN AND SUBSIDIARY The net asset categories by purpose and time at June 30, 2015 were as follows (in thousands): Unrestricted Temporarily Restricted 2015 Permanently Restricted Total Unallocated or internally designated $ 20,243 $ $ $ 25,799 Donor restricted funds: Educational project and events 9,579 4,023 20,243 9,579 29,822 Contributions receivable, net 5, ,365 Investment in plant 20,057 20,057 Quasi Endowment 22,390 22,390 Endowment 16,095 48,124 64,219 Revolving student loans 4 (213) (209) $ 62,694 $ 31,638 $ 48,312 $ 142,644 The endowment is comprised of donor restricted gifts for scholarships and restricted gifts supporting educational initiatives. Note 11 Net Tuition and Fees Tuition and fee revenue for the years ended June 30, 2016 and 2015 consists of the following (in thousands): Tuition and fees $ 99,366 $ 95,122 Less College sponsored financial aid (16,655) (15,386) Donor sponsored financial aid (2,889) (3,472) Net tuition and fees $ 79,822 $ 76,264 27

30 Note 12 Fundraising Expense Fundraising expenses for the years ended June 30, 2016 and 2015 were approximately $1,820 and $1,793, respectively. Note 13 Retirement Plans The College sponsors a noncontributory defined contribution plan (the "Defined Contribution Plan"), which provides retirement benefits for certain academic and administrative employees. The expense associated with this plan was approximately $2,805 and $2,895 for the years ended June 30, 2016 and 2015, respectively. Note 14 Commitments and Contingencies Operating leases The College leases certain equipment and facilities under non cancelable operating leases. Future minimum lease commitments under such leases at June 30, 2016 are as follows (in thousands): Years Ending Amount 2017 $ 1, Total $ 2,758 Rent expense under operating leases was approximately $2,065 and $1,972 for the years ended June 30, 2016 and 2015, respectively. Litigation In the normal course of operations, the College is named as a defendant in lawsuits and is subject to periodic examinations by regulatory agencies. After consultation with legal counsel, management is of the opinion that liabilities, if any, arising from such litigation and examinations would not have a material effect on the College s financial position. Federal grants Certain federal grants including financial aid which the College administers and for which it receives reimbursements are subject to audit and final acceptance by federal granting agencies. Current and prior year costs of such grants are subject to adjustments upon audit. The amount of expenditures that may be disallowed by the grantor, if any, cannot be documented at the time, although the College expects such amounts, if any, would not have a significant impact on the financial position of the College. 28 S

31 REPORT OF INDEPENDENT AUDITORS 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 Art Center College of Design and Subsidiary 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 Art Center College of Design (the College ) and Subsidiary, 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 10, Internal Control Over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered the College s internal control over financial reporting ( internal control ) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of the College s internal control. Accordingly, we do not express an opinion on the effectiveness of the College s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the 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. 29

32 Compliance and Other Matters As part of obtaining reasonable assurance about whether the College s consolidated 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 result 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. Los Angeles, California October 10,

33 REPORT OF INDEPENDENT AUDITORS ON COMPLIANCE FOR THE MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE To the Board of Trustees Art Center College of Design and Subsidiary Report on Compliance for the Major Federal Program We have audited Art Center College of Design (the College ) and Subsidiary s 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 federal statutes, regulations, and the terms and conditions of its federal awards 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 Requirements 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 major federal program. However, our audit does not provide a legal determination of the College s compliance. 31