Berry College, Inc. Consolidated Financial Statements and Reports and Schedules Related to the Uniform Guidance Years Ended June 30, 2016 and 2015

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1 Consolidated Financial Statements and Reports and Schedules Related to the Uniform Guidance Years Ended June 30, 2016 and 2015 The report accompanying these financial statements was issued by BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of BDO International Limited, a UK company limited by guarantee.

2 Consolidated Financial Statements and Reports and Schedules Related to the Uniform Guidance Years Ended June 30, 2016 and 2015

3 Contents Independent Auditor s Report 3-4 Consolidated Financial Statements Consolidated Statements of Financial Position 6 Consolidated Statements of Activities 7-8 Consolidated Statements of Cash Flows 9 Notes to Consolidated Financial Statements Reports and Schedules Related to Office of Management and Budget Circular A-133 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 Schedule of Expenditures of Federal Awards 40 Notes to Schedule of Expenditures of Federal Awards Schedule of Findings and Questioned Costs Summary Schedule of Prior Year Findings

4 Tel: Fax: Fayetteville St Suite 300 Raleigh, NC Independent Auditor s Report The Board of Trustees Berry College, Inc. Report on the Financial Statements We have audited the accompanying consolidated financial statements of Berry College, Inc. (the College), which comprise the consolidated statement 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 Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDOisthebrandnamefortheBDO network and for each of the BDO Member Firms. 3

5 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the College as of June 30, 2016 and 2015, and the changes in their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying schedule of expenditures of federal 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 December 5, 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. Raleigh, NC December 5, 2016, except for our report on the Schedule of Expenditures of Federal Awards, for which the date is February 7,

6 Consolidated Financial Statements

7 Consolidated Statements of Financial Position June 30, Assets Cash $ 3,035,367 $ 4,077,410 Accounts receivable, less allowance for doubtful accounts of $201,148 in 2016 and $131,354 in ,406,917 1,896,784 Contributions receivable, net 11,078,477 10,551,094 Loans and notes receivable, net 5,026,435 4,040,731 Inventories 642, ,328 Investments 269,265, ,650,348 Beneficial interests in perpetual trusts 650,831, ,952,300 Investments in remainder interest trusts 6,275,215 6,035,498 Contributions receivable from remainder interest trusts 17,356 32,151 Prepaid expenses and other assets 645, ,288 Land held for sale 1,263,133 1,367,073 Property and equipment, net 181,099, ,169,076 Total Assets $ 1,131,586,767 $ 1,067,149,081 Liabilities and Net Assets Liabilities Accounts payable and accrued expenses $ 6,949,314 $ 7,159,566 Interest rate swaps 27,598,238 19,660,496 Bonds payable 102,218, ,424,200 Line of credit 1,300,000 1,950,000 Annuities payable 3,151,973 3,336,437 Deposits and deferred credits 4,801,521 3,986,956 Accrued post-retirement benefits 31,746,075 26,481,287 Advances from Federal government 1,765,744 1,754,730 Total Liabilities 179,531, ,753,672 Net Assets Unrestricted 86,259,284 80,034,979 Temporarily restricted 120,742, ,886,479 Permanently restricted 745,053, ,473,951 Total Net Assets 952,055, ,395,409 Total Liabilities and Net Assets $ 1,131,586,767 $ 1,067,149,081 See accompanying notes to consolidated financial statements. 6

8 Consolidated Statements of Activities Years Ended June 30, 2016 Temporarily Permanently Unrestricted Restricted Restricted Total Revenues, gains, and other support: Tuition and fees $ 68,000,025 $ - $ - $ 68,000,025 Less student assistance (36,053,780) - - (36,053,780) Net tuition and fees 31,946, ,946,245 Federal and state grants and contracts 389, ,500 Private gifts, grants, and contracts 1,345,397 4,714,879-6,060,276 Sales and services of auxiliary enterprises 22,547, ,547,179 Sales and services of educational departments 2,396, ,396,597 Appropriation of endowment spending 4,308,070 9,606,172-13,914,242 Other investment income 74,017 28, ,291 Income from beneficial interests in perpetual trusts 20,080, ,080,701 Other additions 1,926,899 7,546-1,934,445 85,014,605 14,356,871-99,371,476 Net assets released from restrictions 14,687,449 (14,687,449) - - Total revenues, gains, and other support 99,702,054 (330,578) - 99,371,476 Expenditures and losses: Operating: Instruction 29,890, ,890,969 Academic support 9,967, ,967,366 Student services 18,474, ,474,044 Institutional support 17,213, ,213,721 Auxiliary enterprises 15,689, ,689,689 Total operating expenses 91,235, ,235,789 Change in net assets, operating 8,466,265 (330,578) - 8,135,687 Nonoperating activities: Private gifts and grants - - 2,041,078 2,041,078 Total endowment return, net of management fees 504,107 (3,853,846) 527,855 (2,821,884) Appropriation of endowment spending (4,308,070) (10,158,058) - (14,466,128) Net gain (loss) on other nonoperating investments 1,562,603 (130,692) (308,532) 1,123,379 Net change in beneficial interests in perpetual trusts ,878,805 73,878,805 Loss on interest rate swap agreements (7,937,742) - - (7,937,742) Increase in post-retirement benefit obligation (5,264,788) - - (5,264,788) Other 57,100 (36,133) (49,081) (28,114) Change in donor intent 13,144,830 3,365,344 (16,510,174) - Change in net assets from nonoperating activities (2,241,960) (10,813,385) 59,579,951 46,524,606 Change in net assets 6,224,305 (11,143,963) 59,579,951 54,660,293 Net assets, beginning of year 80,034, ,886, ,473, ,395,409 Net assets, end of year $ 86,259,284 $ 120,742,516 $ 745,053,902 $ 952,055,702 See accompanying notes to consolidated financial statements. 7

9 Consolidated Statements of Activities Years Ended June 30, 2015 Temporarily Permanently Unrestricted Restricted Restricted Total Revenues, gains, and other support: Tuition and fees $ 63,562,388 $ - $ - $ 63,562,388 Less student assistance (33,393,981) - - (33,393,981) Net tuition and fees 30,168, ,168,407 Federal and state grants and contracts 453, ,597 Private gifts, grants, and contracts 973,466 5,049,704-6,023,170 Sales and services of auxiliary enterprises 21,251, ,251,456 Sales and services of educational departments 2,516, ,516,416 Appropriation of endowment spending 4,084,981 9,188,767-13,273,748 Other investment income 95,864 24, ,013 Income from beneficial interests in perpetual trusts 18,736, ,736,455 Other additions 2,088,645 7,569-2,096,214 80,369,287 14,270,189-94,639,476 Net assets released from restrictions 12,048,084 (12,048,084) - - Total revenues, gains, and other support 92,417,371 2,222,105-94,639,476 Expenditures and losses: Operating: Instruction 28,922, ,922,450 Academic support 9,912, ,912,992 Student services 17,689, ,689,651 Institutional support 16,766, ,766,959 Auxiliary enterprises 15,111, ,111,789 Total operating expenses 88,403, ,403,841 Change in net assets, operating 4,013,530 2,222,105-6,235,635 Nonoperating activities: Private gifts and grants - - 1,859,908 1,859,908 Total endowment return, net of management fees 1,898,707 12,675, ,139 14,838,643 Appropriation of endowment spending to operating (4,084,981) (9,704,787) - (13,789,768) Net gain (loss) on other nonoperating investments 1,684,254 (110,557) (231,493) 1,342,204 Net change in beneficial interests in perpetual trusts - - (41,556,684) (41,556,684) Loss on interest rate swap agreements (1,729,790) - - (1,729,790) Increase in post-retirement benefit obligation (2,291,635) - - (2,291,635) Other (103,771) (103,552) 202,729 (4,594) Change in net assets from nonoperating activities (4,627,216) 2,756,901 (39,461,401) (41,331,716) Change in net assets (613,686) 4,979,006 (39,461,401) (35,096,081) Net assets, beginning of year 80,648, ,907, ,935, ,491,490 Net assets, end of year $ 80,034,979 $ 131,886,479 $ 685,473,951 $ 897,395,409 See accompanying notes to consolidated financial statements. 8

10 Consolidated Statements of Cash Flows Years Ended June 30, Operating Activities Change in net assets $ 54,660,293 $ (35,096,081) Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation 6,458,326 6,320,545 Contributions in-kind (769,648) (731,601) Net realized and unrealized losses (gains) on investments 2,632,325 (14,108,410) Loss (gain) on disposal of property and equipment 2,829 (267,441) Gifts restricted for long-term investment (2,041,078) (1,859,908) (Increase) decrease in beneficial interests in perpetual trusts (73,878,805) 41,556,684 Receipt of agency funds 2,105,333 2,189,449 Disbursement of agency funds (2,105,333) (2,189,449) Increase in accounts receivable (510,133) (379,923) Increase in contributions receivable (527,383) (343,151) (Increase) decrease in loans and notes receivable (985,704) 130,432 Decrease in inventories 89, ,589 Decrease in contributions receivable from remainder interest trusts 14, Decrease (increase) in prepaid expenses and other assets 38,808 (29,275) Decrease in accounts payable and accrued expenses (210,252) (100,202) Increase in interest rate swaps 7,937,742 1,729,789 Decrease in annuities payable (184,464) (415,568) Increase in deposits and deferred credits 814, ,677 Increase in accrued post-retirement benefits 5,264,788 2,291,635 Net cash used in operating activities (1,193,028) (185,089) Investing Activities Purchases of property and equipment (6,287,288) (8,920,153) Proceeds from sales of property and equipment - 738,068 Proceeds from sales of investments and land held for investments 24,849,524 38,620,361 Purchases of investments (16,607,343) (30,938,362) Net cash provided by (used in) investing activities 1,954,893 (500,086) Financing Activities Payments on line of credit (650,000) (1,950,000) Proceeds on line of credit - 1,950,000 Payments on bonds payable (3,206,000) (2,791,500) Change in advances from Federal government 11,014 22,651 Gifts restricted for long-term investment 2,041,078 1,859,908 Net cash used in financing activities (1,803,908) (908,941) Net decrease in cash (1,042,043) (1,594,116) Cash at beginning of year 4,077,410 5,671,526 Cash at end of year $ 3,035,367 $ 4,077,410 Supplemental disclosure of cash flow information: Cash paid for interest $ 4,894,176 $ 4,892,446 Contributions in kind: Property and equipment $ - $ 85,000 Investments $ 729,410 $ 608,552 Inventory $ 18,299 $ 4,999 Other assets $ 21,939 $ 33,050 See accompanying notes to consolidated financial statements. 9

11 Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Berry College, Inc. ( the College ) is an independent, co-educational college with fully accredited arts, sciences, and professional programs, as well as specialized graduate programs in education and business administration. Located in Rome, Georgia, the College was founded in A summary of the College s significant accounting policies follows: Basis of Accounting The consolidated financial statements of the College have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles (GAAP) in the United States of America. Limited Liability Companies The 2016 and 2015 consolidated financial statements include the activities of Lavender Mountain Property and Development, LLC ( Lavender Mountain ) and Berry Student Enterprises, LLC, whollyowned subsidiaries of the College. The activities and balances of Lavender Mountain and Berry Student Enterprises are reflected in the statements of activities and statements of position, and all intercompany transactions have been eliminated in consolidation. Income Tax Status The College is recognized as an organization exempt from Federal income tax under Section 501(a) of the Internal Revenue Code (the Code) as an organization described in Section 501(c)(3) whereby only unrelated business income, as defined by Section 512(a)(1) of the Code, is subject to Federal income tax. With respect to any unrelated business income generated by the College, it records income taxes using the liability method under which deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax basis of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the currently enacted tax rate expected to apply to taxable income in the period that the deferred tax asset or liability is expected to be realized or to be settled. As of June 30, 2016 and 2015, the College had no deferred tax assets or liabilities. The College analyzed its tax positions for the years ended June 30, 2016 and 2015 and determined that there were no uncertain tax positions that would have a material impact on the College s consolidated financial statements. Basis of Presentation Net assets and revenues, expenses, gains, and losses of the College are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net asset changes therein are classified and reported as follows: 10

12 Notes to Consolidated Financial Statements Unrestricted net assets Net assets that are not subject to donor-imposed stipulations. Any deficiency in the fair value of assets associated with individual donor-restricted endowment funds that fall below the level of the contribution are included in unrestricted net assets. Temporarily restricted net assets Net assets subject to donor-imposed stipulations that may or will be met either by actions of the College and/or the passage of time. At such time, these assets will be reclassified as 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 permanently by the College. Generally, the donors of these assets permit the College to use all or part of the return on related investments for general or specific purposes. Revenues are reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by law. Cash The College maintains its cash on deposit with financial institutions. Balances at these institutions exceed federally insured limits. Accounts Receivable Accounts receivable from students are reported net of an allowance for doubtful accounts. The allowance is an estimate by management based upon an analysis of delinquent amounts and the respective student s ability and intent to repay. These estimated uncollectible amounts can be affected by changes in the student s economic circumstances, and as a result, it is possible that the allowance for doubtful accounts could change. The College does not charge interest on past due student receivables. Contributions Receivable Contributions, including unconditional promises to give, are recognized as revenues in the period received. Conditional promises to give are not recognized until they become unconditional, that is, when the conditions on which they depend are substantially met. Contributions of assets other than cash are recorded at their estimated fair value. Contributions to be received after one year are recorded at the present value of estimated future cash flows (using an appropriate discount rate commensurate with the risks involved) which approximates fair value. 11

13 Notes to Consolidated Financial Statements Amortization of discounts is recorded as additional contribution revenue in accordance with donorimposed restrictions, if any, on the contributions. An allowance for uncollectible contributions receivable is provided based upon management s judgment including such factors as prior collection history, type of contribution, and nature of fund-raising activity. For the years ended June 30, 2016 and 2015, the College incurred expenses of approximately $3,322,693 and $3,133,738, respectively, in connection with its fundraising activities. As of June 30, 2016 and 2015, one contribution receivable comprised 67% and 67% of the balance of contributions receivable. This receivable is related to the future donation of the Winshape building to the College in fiscal year Investments The College considers all cash and cash equivalents used for investing purposes to be investments. Marketable securities are carried at fair value as determined by quoted market prices. The cost basis of investments received by gift is the fair value at the date of receipt by the College. Net realized and unrealized gains (losses) on investments are reflected in the accompanying statements of activities. Investments which are not publicly traded consist of investments in limited partnerships, limited liability companies, offshore investment funds, and real estate funds and are reflected at fair value. Depending on the underlying asset, the fair value is determined through national exchange price for securities with a readily determinable value or valuations and estimates typically determined by the underlying asset manager. Certain investment values may differ from the values that would have been used had a ready market for these investments existed and the differences could be material. The financial statements of these investments are audited annually (typically at December 31) by independent auditors. Investment securities are exposed to several risks, such as interest rate, market, and credit risks. Due to the level of risk associated with certain investments, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the College s statement of financial position and statement of activities. Investment returns are reported net of related expenses on the consolidated statements of activities. For the years ended June 30, 2016 and 2015, the College incurred investment related expenses of $840,300 and $684,440, respectively. Concentrations of Investment Portfolio Approximately 83% and 84% of the College s beneficial interest in perpetual trusts at June 30, 2016 and 2015, respectively, are invested in common stock of the Coca-Cola Company. The value of the common stock of the Coca-Cola Company was $45.33 per share and $39.23 per share at June 30, 2016 and 2015, respectively. 12

14 Notes to Consolidated Financial Statements Property and Equipment Property and equipment are stated at cost at the date of acquisition or, in the case of gifts, at fair value at the date of donation. Depreciation on property, other improvements, and equipment is calculated on the straight-line method over estimated useful lives of 70 years for buildings; 20 years for building improvements; 10 years for other improvements; 10 years for furnishings, equipment, and library books; and 4 years for computer equipment and software. Repairs and maintenance expenses are charged to expense as incurred. Property and equipment are reviewed for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable. Impairment losses are recognized if expected future cash flows from the assets are less than their carrying values. The College did not recognize impairment losses during the fiscal years ended June 30, 2016 and The College capitalizes property and equipment when the unit cost is equal to or exceeds $5,000 and has a useful life of more than one year. Split Interest Agreements The College accepts gifts subject to split interest agreements. These gifts may be in the form of annuities, perpetual trusts, or charitable remainder trusts and provide for payment of distributions to designated beneficiaries over the designated beneficiaries lifetime. At the end of the trust s term, the remaining assets are available for the College s use. At the time of receipt, a gift is recorded based upon the fair value of assets donated less any applicable liabilities. Liabilities include the present value of projected future distributions to the annuity or trust beneficiary and are determined using appropriate discount rates. On an annual basis, the liability for future payments to beneficiaries is adjusted based on actuarial assumptions. Interest Rate Swaps In November 2013, the College entered into an interest rate swap agreement with a financial institution. This agreement involves the payments of fixed rate interest amounts in exchange for the receipt of variable-rate interest payments over the life of the agreement, without an exchange of the underlying principal amount. The swap is recorded at fair value in the statements of financial position and changes in value are recognized on the statements of activities. Fair Value of Financial Instruments The carrying amounts of cash, and accounts receivables which qualify as financial assets and accounts payable and accrued expenses which qualify as financial liabilities approximate fair value due to the relative terms of these financial instruments. The carrying values approximate fair value of investments, beneficial interests in perpetual trusts, and investments in remainder interest trusts are determined as described in Note 2. 13

15 Notes to Consolidated Financial Statements A reasonable estimate of the fair value of the loans receivable from students under government loan programs and advances from Federal government for student loans could not be made because the loans receivable are not salable and can only be assigned to the U.S. government or its designees. The carrying amount of the note payable and bonds payable approximates fair value since these financial instruments bear interest at variable rates which approximate current market rates for notes with similar maturities and credit quality. The carrying amounts of annuities payable and contributions receivable approximate fair value since these instruments are recorded at net present value. Fair Value of Certain Property The College owns significant land resources in Rome, Georgia and surrounding areas. At June 30, 2016 and 2015 certain parcels of land were identified as available for sale. The current fair value of this property approximated $37.2 million at June 30, 2016 and The carrying values of these assets are reflected in the accompanying statements of financial position in property and equipment and other assets at cost or, in the case of gifts, fair value at the date of donation. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. New Accounting Pronouncements In January 2016, the FASB issued ASU , Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in ASU , require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income and separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). The amendments in ASU are effective for a not-for-profit s financial statements issued for fiscal years beginning after December 15, 2018, with early adoption permitted. The College is evailuating the impact of the ASU on its financial statements. In February 2016, the FASB issued ASU , Leases (Topic 842), which will require lessees to recognize at the commencement date a lease liability measured on a discounted basis and a rightof-use asset for the lease term. Lessees (for capital and operating leases) and lessors (for salestype, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The amendments in ASU are effective for an entity s annual reporting periods in fiscal years 14

16 Notes to Consolidated Financial Statements that begin after December 15, 2019, with early adoption permitted. The College is evailuating the impact of the ASU on its financial statements. The FASB issued ASU , Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, in August These amendments change presentation and disclosure requirements for not-for-profit entities to provide more relevant information about their resources (and the changes in those resources) to donors, grantors, creditors, and other users. These include qualitative and quantitative requirements to net asset classes, investment return, expenses, liquidity and availability of resources, and presentation of operating cash flows. The amendments in ASU are effective for an entity s financial statements issued for fiscal years beginning after December 15, Early adoption is permitted. The College is evailuating the impact of the ASU on its financial statements. In August 2016, FASB issued ASU , Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provide cash flow statement classification guidance for various categories. The amendments in ASU are effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The College is evailuating the impact of the ASU on its financial statements. 2. Fair Value Measurements Accounting Standards Codification (ASC) 820, Fair Value Measurement, defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements. The College adopted these standards, which define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. These standards established a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active and inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. 15

17 Notes to Consolidated Financial Statements The following table presents the College s financial instruments carried at fair value as of June 30, 2016 and 2015, respectively, on the statements of financial position by ASC 820 valuation hierarchy, as previously described: June 30, 2016 Level 1 Level 2 Level 3 Total Cash equivalents $ 25,424,062 $ - $ - $ 25,424,062 Equities domestic 50,015,865 31,368,013 2,993,586 84,377,464 Equities international 7,011,198 23,920,123 15,533,624 46,464,945 Private equity ,584,957 13,584,957 Alternative strategies 3,035,671-42,211,881 45,247,552 Real assets 1,751,954-13,378,352 15,130,306 Real estate held as investment - 26,017,357-26,017,357 Fixed income and other 10,798,656-8,495,451 19,294,107 Beneficial interest in perpetual trusts - 647,341,047 3,490, ,831,105 Total Assets $ 98,037,406 $ 728,646,540 $ 99,687,909 $ 926,371,855 Obligation under interest rate swap agreements $ - $ (27,598,238) $ - $ (27,598,238) Annuities Payable - (3,151,973) - (3,151,973) Total Liabilities $ - $ (30,750,211) $ - $ (30,750,211) 16

18 Notes to Consolidated Financial Statements June 30, 2015 Level 1 Level 2 Level 3 Total Cash equivalents $ 15,858,811 $ - $ - $ 15,858,811 Equities domestic 45,605,302 36,736,936 6,100,929 88,433,167 Equities international 7,946,542 26,090,571 17,033,996 51,071,109 Private equity ,490,652 12,490,652 Alternative strategies 3,291,244-50,770,450 54,061,694 Real assets 1,750,797-17,868,228 19,619,025 Real estate held as investment - 24,583,668-24,583,668 Fixed income and other 11,675,156-7,892,564 19,567,720 Beneficial interest in perpetual trusts - 574,571,101 2,381, ,952,300 Total Assets $ 86,127,852 $ 661,982,276 $ 114,538,018 $ 862,638,146 Obligation under interest rate swap agreements $ - $ (19,660,496) $ - $ (19,660,496) Annuities Payable - (3,336,437) - (3,336,437) Total Liabilities $ - $ (22,996,933) $ - $ (22,996,933) At June 30, 2016 and 2015, valuation methodologies used to measure fair value of financial assets and financial liabilities were as follows: Investments to the extent that the College directly owns and controls the investment, valuation is based on unadjusted quoted prices for identical assets in active markets that the College can access. For other investments, predominately alternative investments (including private equity, alternative hedge strategies and real assets), valuation is based on information supplied by external investment managers. The College believes this information is a reasonable estimate of fair value. Therefore, the College uses the practical expedient provision in ASC 820 which permits the measurement of fair value based on the net asset value of the investment, without further adjustment, unless it is probable that the investment will be sold at a value significantly less than the net asset value. However, because these investments are not readily marketable, their fair value is subject to uncertainty and therefore, may differ from the value that would have been used had an active market for such investment existed. Real estate held as investment is valued using appraisals and current sales prices which may be adjusted for growth and usage of timber resources. Obligations under interest rate swap agreements valuation is provided by an experienced financial institution on a mark-to-market basis and, whenever possible, utilizes observable market data including yields and spreads, but may be based in part on assumptions concerning interest rates, credit rates, discount rates and other factors. 17

19 Notes to Consolidated Financial Statements The following table reconciles the beginning and ending balances of the College s investments measured at fair value on a recurring basis using significant unobservable inputs (Level 3): Year ended June 30, 2016 Alternative Investments Balance, July 1, 2015 $114,538,018 Purchases 1,856,683 Sales (16,268,083) Transfers from Level 2 2,463,444 Net realized and unrealized gains (losses) (2,902,153) Balance, June 30, 2016 $ 99,687,909 Year ended June 30, 2015 Alternative Investments Balance, July 1, 2014 $ 104,588,472 Purchases 19,140,646 Sales (10,963,454) Net realized and unrealized gains (losses) 1,772,354 Balance, June 30, 2015 $ 114,538,018 Change in value of alternative investments is included in total endowment return on the statements of activities. There were no transfers from Level 3 to Level 2 during the years ended June 30, 2016 and Transfers, when made, are deemed to be made at the end of the year. 18

20 Notes to Consolidated Financial Statements The College s level 2 investments include real estate held as investments, which is made up of the College s investment in timber. The following table discloses the fair value of each major category of timber on the statements of financial position as of: June 30, Average Price Ending Inventory Ending Fair Market Value Average Price Ending Inventory Ending Fair Market Value Pine Pulpwood ,897 $ 2,507, ,820 $ 2,509,962 Pine Chip-N-Saw ,570 2,414, ,920 2,340,139 Pine Sawtimber ,174 7,760, ,630 8,004,276 Hardwood Pulpwood ,435 4,609, ,144 4,953,971 Hardwood Sawtimber ,773 8,725, ,004 6,775,320 Grand Totals 1,478,939 $ 26,017,357 1,493,518 $ 24,583,668 Net unrealized (losses) gains on investments held at year end are summarized as follows: Year ended June 30, Investments $ (7,504,081) $ 12,038,393 Investments in remainder interest trusts and annuities (113,680) (393,823) Beneficial interest in perpetual trusts 73,878,805 (41,556,684) Net unrealized gains (losses) $ 66,261,044 $ (29,912,114) 3. Contributions Receivable, Net Contributions receivable, net is summarized as follows: June 30, Unconditional pledges expected to be collected in: Less than one year $ 886,076 $ 368,750 One year to five years 2,859,858 3,250,754 Over five years 7,631,632 7,247,925 11,377,566 10,867,429 Less: unamortized discount (194,383) (209,138) Less: allowance for uncollectible pledges (104,706) (107,197) Contributions receivable, net $ 11,078,477 $ 10,551,094 19

21 Notes to Consolidated Financial Statements Unamortized discount rates range from 3.25% to 8.25%. 4. Loans and Notes Receivable, Net Loans and notes receivable are summarized as follows: June 30, Notes receivable $ 2,769,078 $ 1,656,400 Institutional loans 837, ,610 Perkins loans 1,532,909 1,676,121 5,139,835 4,154,131 Less: allowance for doubtful loans (113,400) (113,400) Loans receivable, net $ 5,026,435 $ 4,040,731 Advances from the Federal government under the Federal Perkins Student Loan program are distributable to the Federal government upon liquidation of the fund and thus are reflected as a liability on the statements of financial position. 5. Inventories Inventories are summarized as follows: June 30, Livestock and horses $ 330,500 $ 342,700 Merchandise, materials, supplies and farm products 312, ,628 Total inventories $ 642,659 $ 714,328 Livestock and horses are valued using a unit value method, which the College believes approximates the lower of cost or market. Merchandise, materials, supplies, and farm products are valued at the lower of cost or market. 20

22 Notes to Consolidated Financial Statements 6. Investments and Concentration of Credit Risk Cost and fair values of investments are summarized as follows: June 30, Investments: Fair Value Cost Fair Value Cost Cash and cash equivalents $ 25,424,062 $ 25,424,062 $ 15,858,811 $ 15,858,811 Equities domestic 81,637,648 27,876,860 85,828,268 29,103,519 Equities international 45,360,778 37,188,702 49,968,451 37,525,548 Private equity 13,584,957 5,614,851 12,490,652 6,026,697 Alternative strategies 45,247,552 37,581,033 54,061,694 44,110,782 Real assets 14,809,462 13,230,471 19,340,439 17,197,165 Real estate held as investment 26,017,357-24,583,668 - Fixed income and other 17,183,719 14,967,375 17,518,365 14,863,229 Total investments $ 269,265,535 $ 161,883,354 $ 279,650,348 $ 164,685,751 Financial instruments that potentially expose the College to concentrations of credit and market risk consist primarily of cash and cash equivalents and marketable securities. Cash and cash equivalents are maintained at large multi-state financial institutions and credit exposure is limited to the amount of deposits at any one institution in excess of the federally insured limit. The College has not experienced any losses on its cash and cash equivalents. The College s marketable securities do not represent significant concentrations of market risk as the College s marketable securities portfolio is diversified among a variety of issuers. The College is invested in certain limited partnerships, limited liability companies, offshore investment funds, real estate funds, and real estate held as investments that are not publicly traded, which comprise 27% and 31% of total investment securities at June 30, 2016 and 2015, respectively. These investments contain underlying funds, which may include limited partnerships, limited liability companies, offshore investment funds, real estate funds, or non-us corporations. These investments may entail liquidity risks to the extent that they are difficult to sell or convert to cash quickly at favorable prices. The investment risk of these investments without readily determinable values with respect to each underlying investment will be limited to the capital committed to it by the College. 21

23 Notes to Consolidated Financial Statements Redemption rights for applicable investments are summarized as follows: June 30, 2016 Frequency* Notice Period Ending Fair Market Value Daily - $ 4,845,948 Monthly 10 days 44,323,486 Quarterly days 48,311,058 Semi-Annually 60 days - Annually 45 days 28,262,422 *Redemption rights may be subject to return thresholds and other specified criteria for certain funds. 7. Endowment The College endowment consists of 665 individual funds established for a variety of purposes. The endowment includes both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. Net assets associated with endowment funds, including funds designated by the Board of Trustees to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. The Board of Trustees of the College has interpreted UPMIFA as requiring the preservation of the historical value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the College classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the College in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the College considers the following factors in making a determination to appropriate or accumulate donor-restricted funds: 1) The duration and preservation of the fund; 2) The purposes of the College and the endowment fund; 3) General economic conditions; 4) The possible effect of inflation and deflation; 5) The expected total return from income and the appreciation of investments; 6) Other resources of the College; and 7) The investment policies of the College. 22

24 Notes to Consolidated Financial Statements The College has adopted investment and spending policies for endowment assets. The goal for the College s endowment investment pool is to provide a real total return that preserves the purchasing power of the endowment s assets, while generating an income stream to support the activities in support of the College. The endowment s real total return will be sought from an investment strategy that provides an opportunity for superior total returns within acceptable levels of risk and volatility. For the long-term, the primary investment objective for the endowment pool is to earn a total return (net of portfolio management fees), within prudent levels of risk, which is sufficient to maintain in real terms the purchasing power of the endowment s assets and support the defined spending policy. To satisfy 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) and current yield (interest and dividends). The College targets a diversified asset allocation among seven asset classes. The asset classes are domestic equity, international equity, private capital, hedge funds/absolute return, real assets, fixed income and cash. The purpose of allocating assets to these asset classes is to ensure the proper level of diversification within the endowment pool. As part of the current spending policy, the College computes a rate of 80% of the previous year s income distribution, adjusted for inflation, plus 20% of the long-term spending rate applied to the endowment pool s beginning of the calendar year market level. For fiscal year 2016 and 2015, the long-term spending rate was set at 5.0%. The computed value is adjusted for contributions and withdrawals using an ending quarter buy-in basis for the first quarter of the contribution/withdrawal. With these policies, the annual dollar amount available for spending will be substantially known at the beginning of the year. Quarterly transfers of approximately 25% of the estimated annual draws will be scheduled to be transferred to the College s main cash account. Additionally, the Board of Trustees may authorize the use of previously reinvested income, capital gains and principal related to unrestricted funds functioning as endowment to support academic or institutional initiatives or to support the operations and maintenance of certain facilities. The endowment distributions reported in the statements of activities include supplemental endowment distributions totaling $3.82 million and $2.9 million in fiscal year 2016 and 2015, respectively. All investment income earned on the endowment is classified as nonoperating income until such time as they are appropriated by the Board of Trustees for use by the College. Current year appropriations of endowment earnings to operating income were $13.9 million. 23

25 Notes to Consolidated Financial Statements The endowment net asset composition by type of fund consisted of the following: Temporarily Permanently June 30, 2016 Unrestricted Restricted Restricted Total (Dollars in Thousands) Donor-restricted funds $ (199) $ 100,970 $ 89,837 $ 190,608 Board-designated funds 32, ,067 Total funds $ 31,868 $ 100,970 $ 89,837 $ 222,675 Temporarily Permanently June 30, 2015 Unrestricted Restricted Restricted Total (Dollars in Thousands) Donor-restricted funds $ (1,051) $ 113,100 $ 104,377 $ 216,426 Board-designated funds 23, ,368 Total funds $ 22,317 $ 113,100 $ 104,377 $ 239,794 Changes in endowment funds consisted of the following: Temporarily Permanently Year ended June 30, 2016 Unrestricted Restricted Restricted Total (Dollars in Thousands) Net assets, beginning of the year $ 22,317 $ 113,100 $ 104,377 $ 239,794 Investment return: Investment income ,210 Net appreciation (realized and unrealized) 454 (4,486) - (4,032) Total investment return 503 (3,853) 528 (2,822) Contributions 4-1,370 1,374 Appropriation of endowment assets for expenditure (4,308) (10,158) - (14,466) Other changes: Transfers to/from board-designated funds Transfers to/from other funds Change in donor intent 13,145 1,865 (16,510) (1,500) Net assets, end of the year $ 31,868 $ 100,970 $ 89,837 $ 222,675 24

26 Notes to Consolidated Financial Statements Temporarily Permanently Year ended June 30, 2015 Unrestricted Restricted Restricted Total (Dollars in Thousands) Net assets, beginning of the year $ 24,990 $ 110,130 $ 102,208 $ 237,328 Investment return: Investment income 144 1, ,670 Net appreciation (realized and unrealized) 1,755 11,642 (229) 13,168 Total investment return 1,899 12, ,838 Contributions 6-1,905 1,911 Appropriation of endowment assets for expenditure (4,085) (9,705) - (13,790) Other changes: Transfers to/from board-designated funds (493) - - (493) Net assets, end of the year $ 22,317 $ 113,100 $ 104,377 $ 239,794 From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the College classifies as permanently restricted. This results from either unfavorable market fluctuations, continuing appropriation for certain programs that are deemed prudent by the Board of Trustees or a combination thereof. These deficiencies totaled approximately $0.2 million and $1.1 million as of June 30, 2016 and 2015, respectively. 8. Beneficial Interests in Perpetual Trusts The College is a beneficiary of various trusts created by donors, the assets of which are not in the possession of the College. The College has legally enforceable rights or claims to such assets, including the sole right to the related income. 25