OUACHITA BAPTIST UNIVERSITY

Transcription

1 OUACHITA BAPTIST UNIVERSITY Financial Statements and Schedule of Expenditures of Federal Awards For the years ended May 31, 2016 and 2015 Together With Independent Auditor s Reports

2 CONTENTS Independent Auditor s Report 1-2 Financial Statements as of May 31, 2016 and 2015 and for the years then ended: Statements of Financial Position 3 Statements of Activities 4-5 Statements of Cash Flows 6 Notes to Financial Statements 7-30 Supplemental Information for the year ended May 31, 2016: Schedule of Expenditures of Federal Awards 31 Notes to the Schedule of Expenditures of Federal Awards Independent Auditor s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards Independent Auditor s Report on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance in Accordance With the Uniform Guidance Schedule of Findings and Questioned Costs Summary Schedule of Prior Audit Findings 41

3 INDEPENDENT AUDITOR S REPORT The Board of Trustees Ouachita Baptist University Arkadelphia, Arkansas Report on the Financial Statements We have audited the accompanying financial statements of Ouachita Baptist University, which comprise the statements of financial position as of May 31, 2016 and 2015, and the related statements of activities and cash flows for the years then ended and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the 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 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ouachita Baptist University as of May 31, 2016 and 2015, and the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. 1

4 Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis as required by the audit requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), and is not a required part of the 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 financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the Schedule of Expenditures of Federal Awards is fairly stated in all material respects in relation to the 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 August 15, 2016 on our consideration of Ouachita Baptist University s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements and other matters. The purpose of 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 the 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 Ouachita Baptist University s internal control over financial reporting and compliance. Little Rock, Arkansas August 15,

5 OUACHITA BAPTIST UNIVERSITY STATEMENTS OF FINANCIAL POSITION May 31, 2016 and 2015 ASSETS Cash and cash equivalents $ 1,822,194 $ 1,325,675 Interest-bearing deposits 59,158 58,147 Student accounts receivable, net of allowance for uncollectible accounts of $90,007 and $82,664 in 2016 and 2015, respectively 254, ,070 Accounts receivable - federal programs 608, ,652 Accounts receivable - other 248, ,056 Grants receivable 74,382 54,966 Investments, at fair value 65,655,261 89,627,161 Internal notes receivable 20,976,311 1,133,023 Promises to give, net of allowance for uncollectible promises of $69,162 and $57,412 in 2016 and 2015, respectively 1,825,336 1,670,011 Notes receivable 71, ,721 Student loans, net of allowance for loan losses of $184,171 and $143,685 in 2016 and 2015, respectively 1,025,602 1,237,134 Investment in real estate 1,320,891 1,495,891 Bookstore and supplies inventories 442, ,217 Property, plant and equipment, net 92,585,061 95,273,731 Unamortized debt issuance costs 851, ,798 Interests in perpetual trusts 17,420,331 18,471,163 Contributions receivable from remainder trusts 1,491,832 1,606,338 Other assets 648, ,338 Total assets $ 207,382,044 $ 215,184,092 LIABILITIES AND NET ASSETS Accounts payable and other accrued expenses $ 1,190,748 $ 1,404,019 Credit balances - student accounts receivable 25,121 11,932 Accrued payroll liabilities 570, ,702 Housing deposits 147, ,602 Annuities payable 36,691 39,102 Liability for prepaid tuition 333, ,672 Deferred revenue 809, ,429 Refundable advances on federal government loans 776, ,157 Notes payable 60,037,063 82,412,881 Internal borrowings from endowment funds 20,976,311 1,133,023 Total liabilities 84,904,307 87,818,519 Unrestricted net assets 18,931,012 21,340,429 Temporarily restricted net assets 13,944,663 16,869,152 Permanently restricted net assets 89,602,062 89,155,992 Total net assets 122,477, ,365,573 Total liabilities and net assets $ 207,382,044 $ 215,184,092 See accompanying notes 3

6 OUACHITA BAPTIST UNIVERSITY STATEMENT OF ACTIVITIES For the Year Ended May 31, 2016 Temporarily Permanently Unrestricted Restricted Restricted Total Revenues, gains and support: Gross tuition and fees $ 34,001,138 $ - $ - $ 34,001,138 Less: scholarships and fellowships (18,432,889) - - (18,432,889) Net tuition and fees 15,568, ,568,249 Private gifts, grants and contributions 3,901,319 1,775,949 1,344,880 7,022,148 Less amounts deemed uncollectible (21,633) (35,118) (1,506) (58,257) Governmental grants and programs - 1,817,099-1,817,099 Auxiliary enterprises 10,526,513 28,191-10,554,704 Return on investments (278,984) 1,031,085 (42,032) 710,069 Losses in excess of temporarily restricted endowment assets (13,330) 13, Other current revenues 238, ,972-1,176,987 Change in value of split - interest agreements - 10,436 (1,105,272) (1,094,836) Net assets released from restriction 8,254,433 (8,504,433) 250,000 - Total revenues, gains and support 38,174,582 (2,924,489) 446,070 35,696,163 Expenses: Instruction 14,470, ,470,413 Student services 8,033, ,033,489 Public service 1,440, ,440,543 Research 241, ,283 Auxiliary enterprises 9,080, ,080,769 Academic support 1,588, ,588,109 Institutional support 5,013, ,013,095 Fund raising 716, ,298 Total expenses 40,583, ,583,999 Changes in net assets (2,409,417) (2,924,489) 446,070 (4,887,836) Net assets at beginning of year 21,340,429 16,869,152 89,155, ,365,573 Net assets at end of year $ 18,931,012 $ 13,944,663 $ 89,602,062 $ 122,477,737 See accompanying notes 4

7 OUACHITA BAPTIST UNIVERSITY STATEMENT OF ACTIVITIES For the Year Ended May 31, 2015 Temporarily Permanently Unrestricted Restricted Restricted Total Revenues, gains and support: Gross tuition and fees $ 32,968,473 $ - $ - $ 32,968,473 Less: scholarships and fellowships (17,247,336) - - (17,247,336) Net tuition and fees 15,721, ,721,137 Private gifts, grants and contributions 4,159,255 4,336,448 1,386,631 9,882,334 Less amounts deemed uncollectible (42,473) (17,104) (12,601) (72,178) Governmental grants and programs - 2,021,853-2,021,853 Auxiliary enterprises 10,746,540 57,196-10,803,736 Return on investments 450,104 4,595,430 24,729 5,070,263 Losses in excess of temporarily restricted endowment assets (1,120) 1, Other current revenues 271, ,672-1,253,152 Change in value of split - interest agreements - 10, , ,789 Net assets released from restriction 12,184,279 (12,184,279) - - Total revenues, gains and support 43,489,202 (197,085) 1,761,969 45,054,086 Expenses: Instruction 14,084, ,084,420 Student services 8,023, ,023,037 Public service 1,373, ,373,032 Research 243, ,188 Auxiliary enterprises 10,062, ,062,468 Academic support 1,677, ,677,948 Institutional support 5,297, ,297,136 Fund raising 845, ,271 Total expenses 41,606, ,606,500 Changes in net assets 1,882,702 (197,085) 1,761,969 3,447,586 Net assets at beginning of year 19,457,727 17,066,237 87,394, ,917,987 Net assets at end of year $ 21,340,429 $ 16,869,152 $ 89,155,992 $ 127,365,573 See accompanying notes 5

8 OUACHITA BAPTIST UNIVERSITY STATEMENTS OF CASH FLOWS For the Years Ended May 31, 2016 and Cash flows from operating activities: Changes in net assets $ (4,887,836) $ 3,447,586 Adjustments to reconcile changes in net assets to net cash provided (used) by operating activities Depreciation and amortization 4,141,480 4,306,473 Accretion of bond discount 42, ,895 Gains on disposal of property, plant and equipment (4,276) (22,227) Provisions for uncollectible receivables 166,077 84,640 Net unrealized and realized (gains) losses on investments 1,445,075 (2,344,557) Noncash gifts, grants and contributions (65,956) (462,730) Change in value of split-interest agreements 1,162,927 12,555 Contributions restricted for endowment and plant improvements (1,986,334) (4,600,296) Investment return restricted for reinvestment 42,032 (21,695) Changes in assets and liabilities: (Increase) decrease in accounts receivable 56,988 (289,436) (Increase) decrease in grants receivable (19,416) 870 Increase in contributions receivable (213,582) (42,875) (Increase) decrease in other assets (107,357) 92,952 Decrease in accounts payable (217,428) (644,074) Decrease in other liabilities (64,454) (15,990) Increase (decrease) in deferred revenue (98,478) 908,429 Net cash (used) provided by operating activities (608,338) 708,520 Cash flows from investing activities: Net increase in interest-bearing deposits (1,011) (10) Proceeds from disposition of investments 64,480,445 38,029,854 Proceeds from disposition of real estate 166,383 6,604 Proceeds from disposition of property, plant and equipment 38,253 39,104 Purchases of investments (41,917,664) (38,154,075) Net decrease in loans and notes receivable 231,358 50,397 Net (funding) repayment of internal borrowings from endowment (19,843,288) 111,812 Purchases of property, plant and equipment (1,356,437) (6,393,425) Net cash provided (used) by investing activities 1,798,039 (6,309,739) Cash flows from financing activities: Contributions restricted for endowment 1,357,076 1,562,851 Contributions restricted for plant improvements 629,258 3,037,445 Investment return restricted for reinvestment (42,032) 21,695 Net internal borrowings (repayments) from endowment funds 19,843,288 (111,812) Net borrowings (repayments) under bank credit line (4,250,000) 3,250,000 Proceeds from issuance of notes payable - 779,723 Payment of debt issuance costs - (236,400) Principal payments on notes payable (18,214,515) (2,414,314) Increase (decrease) in refundable advances on federal government loan (16,257) 37,474 Net cash (used) provided by financing activities (693,182) 5,926,662 Net increase in cash 496, ,443 Cash and cash equivalents, beginning of year 1,325,675 1,000,232 Cash and cash equivalents, end of year $ 1,822,194 $ 1,325,675 Supplemental disclosures of cash flow information Cash paid for interest $ 3,511,864 $ 4,233,813 Repayments of notes payable through external refinancing 43,379 14,639,104 Repayments of notes payable through internal refinancing 18,501,649 - Amounts included in accounts payable related to purchases of property, plant and equipment 4, ,403 See accompanying notes 6

9 OUACHITA BAPTIST UNIVERSITY NOTES TO FINANCIAL STATEMENTS May 31, 2016 and 2015 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Nature of activities Ouachita Baptist University (OBU) is a church-related, four-year liberal arts university located in Arkadelphia, Arkansas. OBU s revenues are derived principally from student tuition and fees and from private donations. Basis of presentation and use of estimates The accounting principles of OBU and the methods of applying them conform with U.S. generally accepted accounting principles (GAAP). The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting and reporting principles for nonprofit organizations generally accepted in the United States of America. Net assets and revenues, gains, and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets and changes therein are classified and reported as follows: Unrestricted net assets Net assets that are not subject to donor-imposed stipulations. Temporarily restricted net assets Net assets subject to donor-imposed stipulations that may or will be met, either by actions of OBU and/or the passage of time. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Permanently restricted net assets Net assets subject to donor-imposed stipulations that they be maintained in perpetuity by OBU. Generally, the donors of these assets permit OBU to use all or part of the income earned on any related investments for general or specific purposes. Revenues are reported as increases in unrestricted net assets unless the use of the related assets is limited by donor-imposed restrictions. Donor-restricted support, including support in which restrictions are met in the same period as received, is reported as an increase in temporarily or permanently restricted net assets, depending on the nature of the restriction. When a stipulated time restriction ends or a purpose restriction is accomplished, restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restriction. Investment earnings are recorded as unrestricted, temporarily restricted, or permanently restricted according to the terms of the governing documents. Expenses are reported as decreases in unrestricted net assets. Changes or clarification in donor-imposed restrictions may cause certain net assets to be reclassified between permanently restricted, temporarily restricted, or unrestricted net assets. These reclassifications are reported as net assets released from restrictions among applicable net asset classes. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. 7

10 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.): Cash and cash equivalents For presentation in the Statements of Cash Flows, cash and cash equivalents include cash on hand, bank deposits, certificates of deposits, and all highly liquid cash instruments with original maturities of three months of less. At May 31, 2015, cash and cash equivalents included $500,000 contractually restricted for auxiliary enterprise capital improvements. Promises to give OBU recognizes unconditional promises to give as grant or contribution support in the period received and in the appropriate net asset class based on donor-imposed restrictions. Conditional promises to give are recognized when the conditions on which they depend are substantially met. Contributions of assets other than cash are recorded at their estimated fair value at the date of the gift. Unconditional promises to give expected to be collected in one year or less are reported at net realizable value. Unconditional promises to give that are expected to be collected in more than one year are reported at fair value initially and in subsequent periods. Changes in fair value are reported in the Statement of Activities as increases or decreases in grant or contribution support as they occur. Management believes that the use of fair value reduces the cost of measuring unconditional promises to give in periods subsequent to their receipt and provides equal or better information to users of its financial statements than if those promises to give were measured using present value techniques and historical discount rates. An allowance for uncollectible promises is maintained at a level that management believes is adequate to value promises to give at the amount estimated to be collectible based upon such factors as prior collection history, type of contribution, and nature of fund-raising activity. Because of the uncertainty described above and the inherent uncertainty involved with the estimation process related to promises to give, it is reasonably possible that management s estimate of the recorded allowance may change in the near term. Student loans Student loans receivable are carried at unpaid principal balances, less an allowance for uncollectible loans. The allowance for uncollectible loans is increased by charges to income and decreased by charge-offs (net of recoveries). Management s periodic evaluation of the adequacy of the allowance is based on Perkins loan program requirements, OBU s past loan loss experience, adverse situations that may affect the borrower s ability to repay, the estimated value of any underlying collateral, and current economic conditions. OBU s practice is to charge off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower s failure to meet repayment terms, the borrower s deteriorating or deteriorated financial condition, or for other reasons. Interest on loans is recognized over the term of the loan and is calculated using the simpleinterest method on principal amounts outstanding. 8

11 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.): Investments OBU s investments are reported at their estimated fair values in the accompanying Statements of Financial Position. Fair values for money market funds and certificates of deposit are based on cost, which approximates fair value. Fair values for stocks, mutual funds, real estate investment trust funds, and other publicly traded securities are based on quoted market prices. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities, broker quotes, third party pricing models, net asset values, and other relevant information generated by market transactions. Debt securities are valued using pricing models maximizing the use of observable inputs for similar securities. For investment securities traded in a market that is not active, fair value is determined using unobservable inputs. Mineral interests, consisting primarily of oil and gas producing properties, are valued at a multiple of historical revenues. The estimated fair value of alternative assets is based on the most recent valuations provided by the external investment managers. Management believes the carrying amount of these financial instruments is a reasonable estimate of fair value. Other investments for which fair value is not readily determinable are included in the Statements of Financial Position at cost. Management believes any differences between cost and fair value for these investments are not material. OBU has investments held in various common trust funds managed by the Arkansas Baptist Foundation (ABF) of the Arkansas Baptist State Convention, a nonprofit organization. Income from each common fund is distributed regularly to participating accounts. Contributions and withdrawals from each common fund are calculated at net asset value. Some common funds restrict the frequency of purchases or redemptions to weekly or monthly. Fair values for common funds are determined by ABF at the net asset value of units held at each month end based on the fair values of underlying assets held by the funds. OBU has limited transparency into the underlying positions of common funds and therefore cannot independently assess the value of these underlying positions through a public exchange or over the counter market. Common funds managed by ABF are exempt from registration requirements of the federal securities laws, pursuant to the exemption for collective investment trusts and similar funds maintained by charitable organizations under the Philanthropy Protection Act of 1995 (P.L ), and are exempt from registration requirements of Arkansas state security laws pursuant to an order issued by the Arkansas Securities Commissioner. A summary of the objectives and underlying securities included in ABF common funds are as follows: Group Equity Fund: The Group Equity Fund is a broadly diversified equity portfolio of U.S. and non-u.s. stocks. The objective of the Fund is to provide exposure to a broadly diversified range of equities. Group Bond Fund: The Group Bond Fund is a broadly diversified portfolio of debt securities designed for total return. Strategic Allocation Fund: The Strategic Allocation Fund is a broadly diversified portfolio of various alternative investments which are designed to generate returns independent of traditional bond and stock markets. Balanced Fund: The Balanced Fund maintains a balance of primarily fixed income investments including treasuries; insured CD s; debt securities including mortgage-backed securities and collateralized mortgage obligations issued by government, government agencies or investment grade bonds; and preferred stock. The objective of the Fund is to provide current income and some growth to counteract inflation. 9

12 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.): Total Return Fund: The Total Return Fund maintains primarily a balance of U.S. and international stocks and bonds, along with some fixed income and alternative investments. The objective of the Fund is to provide growth with some current income. Spending Plan Fund: The Spending Plan Fund is a broadly diversified portfolio designed for total return. The Fund s objective is to seek total return while distributing a pre-determined annual percentage as set by ABF s board. Gift Annuity Fund: The Gift Annuity Fund maintains primarily a balance of U.S. and international stocks and bonds, along with some fixed income and alternative investments. The objective of the Fund is to provide growth with some current income. In obtaining valuation information from third-party providers, OBU s management has evaluated the valuation methodologies used to develop the fair values in order to determine whether such valuations are representative of an exit price in its principal markets. While management believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Unrealized gains and losses are included in changes in net assets. Purchased investments are initially recorded at cost at the date of acquisition and subsequently re-measured at fair value. Investments received by gift are recorded at fair value as of the date the gifts are received. OBU invests in a diversified mix of financial instruments. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of marketable securities will occur in the near term and that such changes could materially affect the amounts reported in the Statements of Financial Position and Statements of Activities. Significant fluctuations in fair values could occur and the amounts OBU will ultimately realize could differ materially from their current carrying values. OBU has limited transactions subject to FASB ASC 815, the accounting and reporting standards for derivative instruments and hedging activities. OBU does not use derivatives for trading purposes. The managers of OBU s various alternative assets may use derivatives for asset management and hedging purposes. The use of these derivatives is not believed to materially increase the credit or market risk of these investments. Credit risk Financial instruments which subject OBU to concentrations of credit risk consist primarily of investments in long-term corporate and U. S. government and agency bonds. Credit risk for student accounts and loans receivable, accounts receivable from federal programs, grants receivable, other accounts and notes receivable, and contributions receivable is represented by the carrying value of those receivables. Substantially all of these receivables are unsecured. At May 31, 2016, OBU had bank deposits in several area banks in excess of FDIC-insured limits. OBU also invests excess cash in short-term investment sweep accounts managed by area banks. Management periodically reviews the soundness of these financial institutions and believes that these deposits are not exposed to significant credit risk. Bookstore and supplies inventories Inventories related to OBU s bookstore are valued at the lower of cost or market. Supplies inventories are valued at cost. 10

13 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.): Property, plant, and equipment Property, plant, and equipment is stated at cost at the date of acquisition or fair value at the date of donation in the case of gifts, except properties acquired prior to May 31, 1960, which are recorded at their appraised value at that date, less accumulated depreciation. OBU generally capitalizes all individual expenditures for property, plant, and equipment in excess of $1,500. Depreciation is computed on the straight-line method, using composite balances for library books, over the estimated useful lives of the assets (2 to 80 years). OBU records impairments to its property, plant, and equipment when it becomes probable that the carrying values of these assets will not be fully recovered over the estimated remaining lives of the assets. Impairments, if any, are recorded to reduce the carrying value of the asset to net realizable value based on facts and circumstances in existence at the time of the determination, anticipated future economic conditions, and other available information. Endowment funds OBU s endowment consists of approximately 575 individual funds and split-interest agreements established over many years for a variety of purposes. Endowment fund balances include both donor-restricted funds and funds designated by the Board of Trustees to function as endowments. Endowment fund balances, including funds functioning as endowments, are classified and reported as unrestricted, temporarily restricted, or permanently restricted net assets in accordance with donor specifications. OBU follows the Arkansas Uniform Prudent Management of Institutional Funds Act (UPMIFA) and its own governing documents to manage its endowment funds. Its Board of Trustees has interpreted UPMIFA as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, OBU classifies as permanently restricted net assets: the original value of gifts donated to the endowment; the original value of subsequent gifts donated to the endowment; and, if directed by the donor gift instrument, accumulations to the endowment. The remaining portion of the donor-restricted endowment fund that is not classified as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure in a manner consistent with donor gift instruments and the standard of prudence prescribed by UPMIFA. OBU considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: the duration and preservation of the funds, the purposes of the donor-restricted endowment funds, general economic conditions, the possible effects of inflation and deflation, the expected total return from income and the appreciation of investments, other resources, and its investment policies. In November of 2015, based on consultation with legal counsel to ensure compliance with provisions of OBU s charter, bylaws, UPMIFA and endowment governing documents, the Board of Trustees authorized the use of endowment resources to repay and replace a term note payable and a bank credit line of up to $18,600,000 and $5,000,000, respectively. Internal borrowings from endowment funds are more fully described in Note 8. 11

14 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.): OBU has adopted investment and spending policies, approved by the Board of Trustees, for endowment assets that attempt to provide a predictable stream of funding to activities supported by its endowment funds while also preserving the purchasing power of those endowment assets over the long-term. Accordingly, the investment process seeks to achieve a stable and continuously growing income stream as well as capital appreciation. The majority of endowment assets are invested in OBU s Endowment Pool (Pool). The Pool is made up of a diversified asset mix that includes equity, fixed income and cash equivalent securities, real estate, other alternative investments, and internal notes receivable. The Pool is invested in a manner that is intended to produce results (net of spending) that exceed the Consumer Price Index on a consistent basis over time while assuming a moderate level of investment risk. To satisfy its long-term return objectives, OBU relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). OBU targets a diversified asset allocation that is intended to be more aggressive than fixed income oriented portfolios and less aggressive than equity oriented portfolios to achieve its long-term return objectives within prudent risk constraints. The investment policies related to OBU s interests in perpetual trusts and contributions receivable from remainder trusts are determined by the trustees of those trusts rather than OBU. OBU utilizes a spending rate approach to designate a portion of its endowment investment returns to support current operational budget requirements. Amounts distributed from the investment returns for pooled investments in any one year may include interest, dividends, and a portion of accumulated investment gains. The distribution is based on 5.5% for the year ended May 31, 2016 and 5.0% for the year ended May 31, 2015 of the average market value of the Pool for the preceding three years. Under this policy, investment returns in some periods may not be sufficient to fully fund distributions. Under those circumstances, distributions in excess of investment returns are considered to be funded from cumulative undistributed investment returns from prior years. At May 31, 2016 and 2015, the fair value of the assets of certain donor-restricted endowments was less than the amount required to be retained permanently by $46,698 and $33,368, respectively. During the years ended May 31, 2016 and 2015, losses on the assets of donor-restricted endowment funds in excess of related temporarily restricted net assets reduced unrestricted net assets by $13,330 and $1,120. Collections OBU s collections are made up of items of historical significance and art objects that are held for educational purposes. Each of the items is preserved and cared for, and activities verifying their existence and assessing their condition are performed periodically. The collections, which were acquired through contributions since OBU s inception, are not recognized as assets in the Statements of Financial Position. Deferred revenue Deferred revenue consists of amounts received under a contract with OBU s auxiliary services provider that have not yet been earned. Compensated absences Employees of OBU are entitled to paid vacations, paid sick-days and personal days off, depending on job classification, length of service, and other factors. It is impracticable to estimate the amount of compensation for future absences; therefore no liability has been recorded in the accompanying financial statements. OBU s policy is to recognize costs of compensated absences when paid to employees. 12

15 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.): Functional allocation of expenses The expenses of providing various programs and support services have been categorized on a functional basis in the Statement of Activities. Accordingly, expenses such as depreciation, interest expense, and operation and maintenance of plant have been allocated directly or based on square footage among the functional categories. Income taxes OBU is a nonprofit organization exempt from federal income taxes under section 501(c)(3) of the Internal Revenue Code. OBU is no longer subject to federal or state tax examinations by tax authorities for years ended prior to May 31, Reclassifications Certain reclassifications have been made to the 2015 financial statements to conform to the 2016 basis of presentation. Subsequent events OBU has evaluated subsequent events through August 15, 2016, the date these financial statements were available to be issued. Recent accounting pronouncements In April 2015, the FASB issued Accounting Standard Update (ASU) , Interest Imputation of Interest (Subtopic ). ASU simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the statement of financial position as a direct deduction from the carrying amount of that debt liability rather than as an asset. The recognition and measurement guidance for debt issuance costs is not affected. Upon adoption, ASU must be applied retrospectively and entities are required to comply with the applicable disclosures for a change in an accounting principle. ASU is effective for fiscal years beginning after December 15, In February 2016, the FASB issued ASU , Leases (Topic 842). ASU will generally require lessees to recognize assets and liabilities associated with leases (other than those leases with terms of 12 months or less, for which the entity is permitted to elect not to recognize lease assets and lease liabilities) on the lessee entity s statement of financial position. ASU will also require certain quantitative and qualitative financial statement disclosures regarding the amount, timing and uncertainty of cash flows from leases. Upon adoption, ASU will require the recognition and measurement of leases at the beginning of the earliest period presented using a modified retrospective approach which includes a number of practical expedients that entities may elect to apply. ASU is effective for fiscal years beginning after December 15, Early adoption is permitted for all entities. OBU s management has not yet determined the impact that adoption of ASU will have on its financial statements. 13

16 (2) INVESTMENTS: follows: Investments at May 31, 2016 and 2015 are carried at fair value and are summarized as Arkansas Baptist Foundation Pooled Funds $ 3,521,336 $ 21,871,780 Arkansas Baptist Foundation Non Pooled Funds 245,660 2,488,608 Money market funds 4,926,742 2,673,729 Certificates of deposit - 2,000,570 Common stocks 38,745,020 38,767,944 Mutual funds 7,652,975 13,356,196 Debt securities 6,168,595 2,398,307 Real estate investment trust funds 1,464,227 2,326,724 Mineral interests 1,476,953 2,232,630 Alternative assets 1,146,640 1,217,276 Other 307, ,397 $ 65,655,261 $ 89,627,161 At May 31, 2016 and 2015, investments held at ABF by type were as follows: Pooled funds: Common funds: Demand Cash Fund $ 3,521,336 $ - Group Equity Fund - 4,302,829 Group Bond Fund - 15,472,540 Strategic Allocation Fund - 1,007,837 Preferred stocks - 156,420 Mutual funds - 659,480 Debt securities - 272,674 $ 3,521,336 $ 21,871,780 Non pooled funds: Common funds: Balanced Fund $ 238,225 $ 215,840 Total Return Fund 3, ,273 Spending Plan Fund - 1,768,643 Gift Annuity Fund 3,983 4,424 Preferred stock - 10,428 $ 245,660 $ 2,488,608 14

17 (2) INVESTMENTS (continued): The following schedule summarizes the return on investments and its classification in the accompanying Statements of Activities for the years ended May 31, 2016 and 2015: Temporarily Permanently 2016 Unrestricted Restricted Restricted Total Dividends and interest (net of expenses of $204,519) $ 79,543 $ 1,104,709 $ 4,273 $ 1,188,525 Royalties from mineral interests 244, ,725 Income from perpetual trusts 146, , ,894 Net realized and unrealized gains (losses) (750,152) (648,618) (46,305) (1,445,075) Return on investments $ (278,984) $ 1,031,085 $ (42,032) $ 710,069 Temporarily Permanently 2015 Unrestricted Restricted Restricted Total Dividends and interest (net of expenses of $260,086) $ 139,556 $ 1,469,183 $ 14,286 $ 1,623,025 Royalties from mineral interests 369, ,546 Income from perpetual trusts 120, , ,135 Net realized and unrealized gains (losses) (179,875) 2,513,989 10,443 2,344,557 Return on investments $ 450,104 $ 4,595,430 $ 24,729 $ 5,070,263 At May 31, 2016 and 2015, investments totaling $6,570,495 and $6,594,125 were restricted for debt service. (3) PROMISES TO GIVE: At May 31, 2016 and 2015, unconditional promises to give from donors were expected to be collected as follows: Receivable in one year or less $ 661,491 $ 665,226 Receivable in one through five years 1,210,420 1,004,493 Receivable in more than five years 75, ,000 1,946,911 1,769,719 Less: discount to net present value (52,413) (42,296) Allowance for uncollectible promises (69,162) (57,412) $ 1,825,336 $ 1,670,011 15

18 (4) STUDENT LOANS: Student loans consist of short-term loans to students and loans made under the Federal Perkins Loan Program. The balances at May 31, 2016 and 2015 were comprised of the following: Short-term loans $ 310,752 $ 370,509 Federal Perkins loans 899,021 1,010,310 1,209,773 1,380,819 Allowance for loan losses (184,171) (143,685) Students loans receivable, net $ 1,025,602 $ 1,237,134 U.S. government loan funds refundable under the Federal Perkins Loan Program are distributable to the federal government upon liquidation of the loan program and thus are reflected as a liability, refundable advances on federal government loans, in the accompanying Statements of Financial Position. (5) PROPERTY, PLANT AND EQUIPMENT: 2015: The following is a summary of property, plant and equipment at May 31, 2016 and Land and land improvements $ 9,424,875 $ 9,424,875 Stadium and tennis courts 6,217,626 5,906,248 Buildings 112,568, ,713,422 Equipment 9,294,653 9,044,166 Vehicles 980, ,195 Library books 4,939,244 4,889,762 Construction in progress 57,416 1,215, ,482, ,125,371 Less: accumulated depreciation (50,897,733) (46,851,640) $ 92,585,061 $ 95,273,731 Depreciation expense totalled $4,100,401 and $4,023,586 for the years ended May 31, 2016 and 2015, respectively. 16

19 (6) UNAMORTIZED DEBT ISSUANCE COSTS: Fees and other expenses associated with the borrowings under 2008, 2012, 2013, 2014, and 2015 Arkadelphia Public Facilities Board loans are being amortized using the straight-line method over the terms of the loans. Debt issuance costs of $236,400 were incurred during the year ended May 31, 2015 in connection with the refinancing of its 2009 loan. During the year ended May 31, 2015, unamortized debt issuance costs of $231,761 were written off as additional amortization as a result of this refinancing. As of May 31, 2016 and 2015, the gross amount of unamortized debt issuance costs was $1,092,333. Accumulated amortization of those costs was $240,614 and $199,535, respectively. Total amortization recognized during 2016 and 2015 was $41,079 and $282,887, respectively. (7) NOTES PAYABLE: In June of 2008, OBU entered into a thirty year loan agreement, funded by the issuance of tax-exempt bonds, with the City of Arkadelphia Public Facilities Board. The loan agreement provided funds for the construction of student housing facilities as well as other campus improvements. The loan bears interest at rates varying from 4.625% to 6.0% and is secured by a lien on all tuition and fee revenue. The bonds are subject to optional redemption on or after March 1, In December of 2012, OBU entered into a seven year loan agreement, funded by the issuance of tax-exempt bonds, with the City of Arkadelphia Public Facilities Board. The loan agreement refinanced the December 2002 Public Facilities Board bond issue. The loan bears interest at rates varying from 1.4% to 1.85% and is secured by a lien on all tuition and fee revenue similar to the lien securing the 2008 bond issue. The bonds are subject to optional redemption on or after March 1, In June of 2013, OBU entered into a ten year loan agreement, funded by the issuance of tax-exempt bonds, with the City of Arkadelphia Public Facilities Board. The loan agreement refinanced the September 2005 Public Facilities Board bond issue. The loan bears interest at rates varying from 1.5% to 3.5% and is secured by a lien on all tuition and fee revenue similar to the lien securing the 2008 and 2012 bond issues. The bonds are subject to optional redemption on or after September 1, In December of 2014, OBU entered into a twenty-three year loan agreement, funded by the issuance of tax-exempt bonds, with the City of Arkadelphia Public Facilities Board. The loan agreement refinanced a portion of the October 2009 Public Facilities Board bond issue. The loan bears interest at rates varying from 2.0% to 4.25% and is secured by a lien on all tuition and fee revenue similar to the lien securing the 2008, 2012, and 2013 bond issues. The bonds are subject to optional redemption on or after March 1, In January of 2015, OBU entered into a twenty-three year loan agreement, funded by the issuance of tax-exempt bonds, with the City of Arkadelphia Public Facilities Board. The loan agreement refinanced the remaining portion of the October 2009 Public Facilities Board bond issue. The loan bears interest at rates varying from 1.0% to 4.25% and is secured by a lien on all tuition and fee revenue similar to the lien securing the 2008, 2012, 2013, and 2014 bond issues. The bonds are subject to optional redemption on or after March 1,

20 (7) NOTES PAYABLE (continued): The 2008, 2012, 2013, 2014, and 2015 loan agreements require OBU to fund and maintain debt reserve accounts in amounts sufficient to pay the principal and interest on the bonds as they are due. The combined annual debt service requirements under the 2008, 2012, 2013, 2014, and 2015 loans range from a low of approximately $5,213,000 to a high of $5,218,000 for the years ending May 31, 2017 through The combined annual debt service requirements under the 2008, 2013, 2014, and 2015 loans range from a low of approximately $4,674,000 to a high of $4,686,000 for the years ending May 31, 2020 through Annual debt service requirements from May 31, 2031 through 2038 for the 2008, 2014, and 2015 loan agreements are expected to average approximately $4,073,000. The 2008, 2012, 2013, 2014, and 2015 loan agreements contain certain compliance requirements and covenants including maintenance of specified levels of tuition and fee revenues, maintenance of debt service reserve balances, and limitations on real property that can be used to secure other debt. Management believes OBU was in compliance with all such requirements as of May 31, 2016 and Investments at May 31, 2016 and 2015 include $6,570,495 and $6,594,125 of debt service reserves, respectively. As described in Note 8, both the bank term note payable and the bank credit line were repaid and replaced by internal borrowings from OBU s endowment funds during November Interest expense was $3,436,121 and $4,204,511 for the years ended May 31, 2016 and 2015, respectively, exclusive of bond discount accretion related to the 2008, 2012, 2013, 2014, and 2015 loan agreements. Bond discount accretion totaled $42,200 and $43,170 for the years ended May 31, 2016 and 2015, respectively, and is being accreted over the life of the loan agreements. During the year ended May 31, 2015, remaining unaccreted bond discount of $231,761 related to the 2009 bond issue refinanced during the year was written off as additional interest expense. 18

21 (7) NOTES PAYABLE (continued): Following is a summary of notes payable at May 31, 2016 and 2015: Loan Agreement, as described above $ 36,898,045 $ 37,745, Loan Agreement, as described above 1,550,210 2,055, Loan Agreement, as described above 6,915,768 7,329, Loan Agreement, as described above 6,399,038 6,604, Loan Agreement, as described above 7,731,757 7,983,203 Bank term note payable at a fixed rate of 5.00%; principal and interest due in monthly installments of $121,151 through October 2014 and $123,093 from November 2014 through October 2019 with balloon payment due November 2019, secured by real estate, mineral interests, student loans and accounts receivable, unrestricted endowment income and other unrestricted income and distributions, equipment, and all deposit accounts - 15,859,866 Bank credit line at prime plus 1% with a floor of 4.75% (4.75% at May 31, 2015); interest due monthly with principal due at maturity in November 2015; secured by real estate, mineral interests, student loans and accounts receivable, unrestricted endowment income and other unrestricted income and distributions, equipment, and all deposit accounts - 4,250,000 Note payable at a fixed rate of 5.5%; principal and interest due in monthly installments of $4,944 with balloon payment due March 2018; secured by real estate 509, ,444 Note payable at a fixed rate of 4.5%; principal and interest due in monthly installments of $1,137 through December 2018; secured by a vehicle - 45,953 Note payable at a fixed rate of 2.94%; principal and interest due in monthly installments of $1,353 through September 2018; secured by a vehicle 33,165 - $ 60,037,063 $ 82,412,881 Scheduled principal payments for years subsequent to May 31, 2016 are as follows: 2017 $ 2,325, ,392, ,460, ,000, ,077,673 Thereafter 48,780,545 $ 60,037,063 19

22 (8) INTERNAL BORROWINGS FROM ENDOWMENT FUNDS: In December of 2012, the Board of Trustees approved an internal borrowing from OBU s endowment funds not to exceed $1,500,000 in order to facilitate the completion of several campus construction projects. The loan carries an interest rate of 5.0% which was based on similar instruments at the time of authorization. Monthly payments are required based on a 15-year amortization schedule and are funded with payments received from donors on promises to give specified for these construction projects. At May 31, 2016 and 2015, the principal amount outstanding was $1,007,273 and $1,133,023, respectively. In November of 2015, the Board of Trustees approved an internal borrowing from endowment funds not to exceed $18,600,000 to repay a bank term note payable and credit line (Note 7). The loan carries an interest rate of 3.5% which was based on projected market returns for instruments similar to debt instruments included in the fixed income portfolio of endowment funds. Monthly payments of $83,537 are required from unrestricted funds based on a 30-year amortization schedule with the remaining balance due at maturity in December At May 31, 2016, the principal amount outstanding was $18,469,038. are as follows: Scheduled principal payments on the above loans for years subsequent to May 31, $ 358, , , , ,923 Thereafter 17,310,666 $ 19,476,311 In November of 2015, the Board of Trustees approved a credit line from the endowment of up to $5,000,000 to repay and replace a bank credit line. Interest on this credit line is based on the prime rate of interest, as reported by The Wall Street Journal, plus 25 basis points and is reset annually. At May 31, 2016, the principal amount outstanding was $1,500,000. (9) NET ASSETS: Temporarily restricted net assets at May 31, 2016 and 2015 consist of the following: Charitable gift annuities $ 150,075 $ 148,902 Charitable remainder trusts 202, ,036 Federally funded programs 541, ,679 Scholarships 2,515,316 2,363,392 Acquisition of property, plant and equipment 50,056 (121,339) Student loan programs 805, ,462 Other specific programs 2,552,796 2,375,302 Unappropriated net investment return on permanently restricted net assets 7,126,922 10,548,718 $ 13,944,663 $ 16,869,152 20