NATIONAL UNIVERSITY (AN AFFILIATE OF THE NATIONAL UNIVERSITY SYSTEM)

Transcription

1 REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS WITH FEDERAL AWARDS SUPPLEMENTARY INFORMATION FOR NATIONAL UNIVERSITY (AN AFFILIATE OF THE NATIONAL UNIVERSITY SYSTEM) June 30, 2017 and 2016

2 Table of Contents Report of Independent Auditors 1-2 PAGE Financial Statements Statements of Financial Position 3 Statement of Activities and Changes in Net Assets Statement of Activities and Changes in Net Assets Statements of Cash Flows Supplementary Information Schedule of Expenditures of Federal Awards 32 Notes to Schedule of Expenditures of Federal Awards 33 Report of Independent Auditors on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Report of Independent Auditors on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance as Required by the Uniform Guidance Schedule of Findings and Questioned Costs Summary Schedule of Prior Audit Findings 41

3 Report of Independent Auditors To the Board of Trustees National University Report on the Financial Statements We have audited the accompanying financial statements of National University (an affiliate of the National University System), which comprise the statements of financial position as of June 30, 2017 and 2016, and the related statements of activities and changes in net assets, 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 audits to obtain reasonable assurance about whether the financial statements are free from 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. 1

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of National University as of June 30, 2017 and 2016, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Supplementary Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The 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 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 information 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 October 5, 2017 on our consideration of National University s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering National University s internal control over financial reporting and compliance. San Diego, California October 5,

5 Statements of Financial Position June 30, 2017 and 2016 June 30, ASSETS ASSETS Cash and cash equivalents $ 54,195,199 $ 52,900,617 Restricted cash 14,051,776 8,046,151 Student accounts receivable, net 21,728,663 26,942,355 Government receivables 951,334 1,643,816 Student loans receivable, net 2,612,927 2,677,041 Institutional loans receivable, net 5,199,478 5,019,640 Note receivable from JFKU 12,798,596 13,427,858 Note receivable from WMC 249, ,244 Due from affiliates, net 5,122,581 2,160,571 Prepaid expenses and other assets 7,146,524 9,204,054 Investments 645,465, ,827,688 Property and equipment, net 85,614,160 94,139,109 Total assets $ 855,136,223 $ 790,688,144 LIABILITIES AND NET ASSETS LIABILITIES Accounts payable $ 6,460,067 $ 8,021,960 Accrued compensation 5,491,909 5,070,891 Deferred compensation 1,036,288 2,350,910 Other accrued expenses 3,803,391 4,046,492 Student deposits 23,577,928 31,129,930 Deferred rent 2,457,536 3,229,917 Line of credit due to NUVHS 3,639,451 3,586,404 Amounts held on behalf of others 9,640,814 4,775,879 Federal Perkins Loan program 3,407,963 3,945,201 Total liabilities 59,515,347 66,157,584 Commitments and Contingencies (Note 8) Net Assets Unrestricted: Board designated 574,661, ,357,171 Undesignated 186,564, ,031,108 Total unrestricted 761,226, ,388,279 Temporarily restricted 10,692,805 11,820,928 Permanently restricted 23,701,543 20,321,353 Total net assets 795,620, ,530,560 Total liabilities and net assets $ 855,136,223 $ 790,688,144 See accompanying notes. 3

6 Statement of Activities and Changes in Net Assets Year Ended June 30, 2017 Temporarily Permanently 2017 Unrestricted Restricted Restricted Total REVENUE Tuition and fees, net of scholarships and grants to students of $7,159,328 $ 216,975,749 $ - $ - $ 216,975,749 Auxiliary services 1,052, ,052,265 Contributions/grants 1,641, ,750 3,380,190 5,665,282 Rental income 1,763, ,763,772 Other revenue 3,092, ,092,704 Net assets released from restrictions 5,157,575 (5,157,575) - - Total revenue 229,683,407 (4,513,825) 3,380, ,549,772 EXPENSES Academic support 29,122, ,122,614 Instruction 81,091, ,091,576 Institutional support 75,129, ,129,186 Student services 39,724, ,724,423 Research 2,577, ,577,379 Total expenses 227,645, ,645,178 CHANGE IN NET ASSETS FROM OPERATIONS 2,038,229 (4,513,825) 3,380, ,594 INVESTMENT RETURNS Total investment returns 73,064,077 3,385,702-76,449,779 NONOPERATING EXPENSE Contributions to affiliates 673, ,207 Extinguishment of related-party debt 5,590, ,590,850 Total nonoperating expense 6,264, ,264,057 CHANGE IN NET ASSETS 68,838,249 (1,128,123) 3,380,190 71,090,316 NET ASSETS Beginning of year 692,388,279 11,820,928 20,321, ,530,560 End of year $ 761,226,528 $ 10,692,805 $ 23,701,543 $ 795,620,876 4 See accompanying notes.

7 Statement of Activities and Changes in Net Assets Year Ended June 30, 2016 Temporarily Permanently 2016 Unrestricted Restricted Restricted Total REVENUE Tuition and fees, net of scholarships and grants to students of $5,194,968 $ 216,037,565 $ - $ - $ 216,037,565 Auxiliary services 1,205, ,205,121 Contributions/grants 2,047,418 3,363,353 3,352,848 8,763,619 Rental income 2,073, ,073,466 Other revenue 1,076, ,076,066 Net assets released from restrictions 4,185,856 (4,185,856) - - Total revenue 226,625,492 (822,503) 3,352, ,155,837 EXPENSES Academic support 30,598, ,598,929 Instruction 80,606, ,606,526 Institutional support 63,931, ,931,206 Student services 39,871, ,871,140 Research 2,848, ,848,913 Total expenses 217,856, ,856,714 CHANGE IN NET ASSETS FROM OPERATIONS 8,768,778 (822,503) 3,352,848 11,299,123 INVESTMENT RETURNS Total investment returns (18,424,361) (747,273) - (19,171,634) NONOPERATING EXPENSE Contributions to affiliates 276, ,817 Extinguishment of related-party debt 500, ,000 Total nonoperating expense 776, ,817 CHANGE IN NET ASSETS (10,432,400) (1,569,776) 3,352,848 (8,649,328) NET ASSETS Beginning of year 702,820,679 13,390,704 16,968, ,179,888 End of year $ 692,388,279 $ 11,820,928 $ 20,321,353 $ 724,530,560 See accompanying notes. 5

8 Statements of Cash Flows Years Ended June 30, 2017 and 2016 Years Ended June 30, OPERATING ACTIVITIES Changes in net assets $ 71,090,316 $ (8,649,328) Adjustments to reconcile changes in net assets to net cash (used in) provided by operating activities: Depreciation and amortization of property and equipment 11,482,782 12,892,496 Provision for doubtful accounts and bad debt 2,179,745 1,331,196 Net unrealized (gain) loss on investments (41,657,798) 24,142,256 Net realized (gain) on investments (30,438,377) (1,701,221) Contributions restricted for endowment and donor purposes (4,023,940) (6,716,201) (Gain) on disposal of property and equipment (1,673,041) (65,854) Forgiveness of amounts due to and notes receivable from affiliates 5,590, ,000 Changes in operating assets and liabilities: Restricted cash (6,005,625) (8,046,151) Student accounts receivable 3,332,292 (1,452,190) Government receivables 692,482 1,098,116 Due from affiliates (10,845,135) (3,556,217) Prepaids and other assets 2,057,530 (3,742,231) Accounts payable (1,561,893) 244,948 Accrued expenses (243,101) (1,346,023) Accrued compensation 421, ,526 Deferred compensation (1,314,622) (4,371,562) Student deposits (7,552,002) (49,459) Deferred rent (772,381) 434,840 Net cash (used in) provided by operating activities (9,240,900) 1,526,941 INVESTING ACTIVITIES Proceeds from sale of property and equipment 3,451,075 1,907,015 Purchases of property and equipment (4,735,867) (5,527,029) Proceeds from sale of investments 129,632, ,504,376 Purchases of investments (129,173,844) (110,888,646) Amounts held on behalf of others 4,864,935 (144,270) Advances on institutional loans (1,218,768) (1,837,825) Repayment on institutional loans 742, ,521 Advances on student loans (529,200) (225,392) Repayment on student loans 591, ,927 Net cash provided by (used in) investing activities 3,624,867 (4,921,323) (Continued) 6 See accompanying notes.

9 Statements of Cash Flows (continued) Years Ended June 30, 2017 and 2016 Years Ended June 30, FINANCING ACTIVITIES Contributions restricted for endowment and donor purposes $ 4,023,940 $ 6,716,201 Refunds of Federal Perkins Loan Program (537,238) (50,539) Advances on line of credit - due to affiliate for expenses paid (1,488,221) (1,577,763) Payments on line of credit - due to affiliate 1,641,268 1,956,580 Payments on note receivable from WMC 2,641,604 2,583,002 Payments on note payable to JFKU 629, ,236 Net cash provided by financing activities 6,910,615 10,090,717 NET INCREASE IN CASH AND CASH EQUIVALENTS 1,294,582 6,696,335 CASH AND CASH EQUIVALENTS Beginning of year 52,900,617 46,204,282 End of year $ 54,195,199 $ 52,900,617 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ - $ 186 SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES Conversion of due from affiliate to note receivable $ 2,192,275 $ 2,982,884 See accompanying notes. 7

10 Note 1 Organization and Summary of Significant Accounting Policies Nature of operations National University ( NU ) is a not-for-profit university, headquartered in La Jolla, California, founded in 1971 to serve the needs of a diverse group of students. NU provides innovative, challenging, accessible degree opportunities to mid-career adults, women re-entering the workforce, military personnel, and cultural and ethnic minority groups. NU is accredited by the Accrediting Commission for Senior Colleges and Universities of the Western Association of Schools and Colleges. The accompanying financial statements reflect the financial position and changes in net assets of NU. These financial statements do not include the financial position and changes in its net assets of other affiliates within the National University System ( NUS ), which consists of these affiliated entities: National University Virtual High School ( NUVHS ), System Management Group ( SMG ), WestMed College ( WMC ), City University of Seattle ( CU ), and John F. Kennedy University ( JFKU ). These financial statements should be read in conjunction with the separate financial statements of the other entities and the combined financial statements of NUS. Basis of presentation NU's financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. NU's accounts are maintained in accordance with the principles of fund accounting, a procedure by which resources are classified for accounting and reporting into funds established according to their nature and purpose. The financial statements funds that have similar characteristics are combined into three net asset categories: Unrestricted net assets represent expendable funds available for operations, which are not otherwise limited by donor restrictions. Unrestricted net assets may be designated for specific purposes by action of the Board of Trustees (the Board ) or may otherwise be limited by contractual agreements with outside parties. Temporarily restricted net assets consist of contributed funds, subject to specific donor-imposed restrictions, contingent upon specific performance of a future event or a specific passage of time before NU may spend the funds. Temporarily restricted net assets also include earnings and appreciation/depreciation on permanently restricted net assets not yet released for expenditure. Permanently restricted net assets are subject to irrevocable donor restrictions, requiring the funds to be held in perpetuity, usually for the purpose of generating investment income to fund current operations. Cash and cash equivalents NU considers all highly liquid investments with an original maturity of three months or less when acquired to be cash equivalents. 8

11 Note 1 Organization and Summary of Significant Accounting Policies (continued) Included in cash in the accompanying statements of financial position are funds NU receives directly from participating lenders involved with providing loans for students and funds available for loans under the Federal Perkins Loan Program. As of June 30, 2017 and 2016, cash restricted for these purposes was $2,555,954 and $1,952,534, respectively. Restricted cash During the year ended June 30, 2017, NU provided funds to be used as collateral for an affiliated entity s note payable to a bank. The funds, totaling $6,000,000, are held in an interest bearing account and are restricted through June 1, During the year ended June 30, 2017, NU provided funds to be used as collateral letter of credit related to an affiliate s participation in the Department of Education ( DOE ) s Title IV programs. The funds, totaling $8,051,776, are held in a long-term certificate of deposit expiring in July Funds described above are presented as restricted cash on the accompanying statement of financial position as of June 30, Student accounts receivable, net Student accounts receivable are recorded at the net realizable value expected to be received from students or third-party payors. Accounts receivable include amounts billed to students less payments received and allowances for doubtful accounts. The allowance for doubtful accounts is determined by an analysis of current accounts receivable and based on historical experience. A student receivable is considered to be past due if any portion of the receivable balance is outstanding for more than 90 days from the date of the original billing. Student accounts receivable are written off against the allowance when deemed uncollectible. Recoveries of student accounts receivable previously written off are recorded when received. As of June 30, 2017 and 2016, the allowance for doubtful student accounts receivable was approximately $9,031,400 and $7,150,000, respectively. Government receivables NU recognizes revenue under government grants and contracts as qualifying program expenditures are incurred. Receivables are recognized to the extent costs have been incurred, but not reimbursed. Amounts received in advance are recorded as refundable advances. Grants require the fulfillment of certain conditions as set forth in the grant instrument. Failure to fulfill the conditions could result in the return of funds to grantors. NU participates in student loan programs through the DOE s Direct Lending Program. Government receivables represent monies owed to NU from the Federal government under the Direct Lending Program and from Federal and State agencies under grant agreements for which NU has expended funds and is to receive reimbursement. Handling of funds with these student loan programs is not included as revenue and expenses in the accompanying financial statements. 9

12 Note 1 Organization and Summary of Significant Accounting Policies (continued) Student loans receivable, net Student loans constitute amounts due from students who have borrowed money from NU under the Federal Perkins Loan Program. Federal regulations permit re-lending proceeds from loan collections. Funds not used are immediately refundable to the Federal government. Interest income on student loans receivable is recognized as it is received. The allowance for doubtful student loans receivable was approximately $1,878,000 and $1,876,000 as of June 30, 2017 and 2016, respectively. As of October 1, 2017, under Federal law, all institutions of higher education, including NU, may no longer award new Perkins Loans to undergraduate students and may not make subsequent disbursements to undergraduate students after June 30, Concurrently, as of July 1, 2017, all institutions of higher education, including NU, may not disburse Perkins loans to graduate students. Institutional loans receivable, net Institutional loans receivable constitute amounts due from students who have borrowed money from NU. Institutional loans receivable are considered past due when payments are not received per the loan terms. Interest income on institutional loans receivable is recognized as it is received. NU has provided an allowance for doubtful accounts based on historical experience with a corresponding charge to bad debt expense. Institutional loans receivable are written off against the allowance when deemed uncollectible. The allowance for doubtful accounts for institutional loans receivable as of June 30, 2017 and 2016 was approximately $3,715,000 and $3,418,000, respectively. Investments Investments are recorded in the financial statements at fair value. The values of publicly-traded securities are based on quoted market prices and exchange rates, if applicable. The fair value of nonmarketable securities is based on the valuations provided by external investment managers. These investments are generally less liquid than other investments and the values reported by the general partner or investment manager may differ from the values that would have been reported had a ready market for these securities existed. NU exercises due diligence in assessing the policies, procedures and controls implemented by its external investment managers, and believes the carrying amount of these assets is a reasonable estimate of fair value. NU has various processes and controls in place to ensure that fair value is reasonably estimated. Under the direction of the Investment Committee, the Finance Office, under supervision of the Vice Chancellor, Finance, sets the valuation policies and is responsible for the determination of fair value. The fair value of nonmarketable securities is based on valuations provided by external investment managers. The Investment Committee, in conjunction with the external investment managers, monitors and analyzes the valuations of the investments four times during the academic year. The Investment Committee reports to the Board. The valuations consider variables such as financial performance of the investment, recent sales prices of investments, and other pertinent information. For the nonmarketable securities, NU uses the net asset value ( NAV ) provided by the external investment managers to determine the fair value of these investments (see Notes 2 and 3). Realized and unrealized gains and losses are included in investment return in the statements of activities and changes in net assets. 10

13 Note 1 Organization and Summary of Significant Accounting Policies (continued) NUS holds NU's and its other affiliates' investments in a custodial account with a financial institution called the National University System Pool of Investments. The recordkeeping of investments and investment related activity between NU and its other affiliates is maintained by the bank separately within the National University System Pool of Investments. Other affiliate managed investment balances are not included in NU's financial statements. Property and equipment Purchased assets are recorded at cost or, if donated, at fair value at the date of donation. NU's policy is to capitalize purchased and donated assets of $2,500 or more. Expenditures for maintenance and repairs are expensed when incurred. Renewals and replacements, which extend the useful life of property and equipment, are capitalized. For assets sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in change in net assets for the period. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the length of the lease or the useful life of the asset. The estimated useful lives are as follows: Building and improvements Land improvement Furniture and equipment Library assets Years 20 Years 3 7 Years 3 Years Impairment of long-lived assets NU evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than the carrying value, a write-down will be recorded to reduce the related asset to its estimated fair value. For the years ended June 30, 2017 and 2016, no such write-downs have occurred. Student deposits Payments on student accounts in advance of the class term are recorded as a credit within the student s account and presented as student deposits on the statement of financial position. In addition, financial aid is typically funded in two disbursement periods and may contain funding for up to four courses. Since the majority of disbursements cover more than the existing term the student is enrolled in, the amount received in excess effectively represents a prepayment from the student. The prepayment credit balances due to financial aid funding are also presented as student deposits on the statement of financial position. Deferred rent Rent expense on operating leases with scheduled or minimum rent increases is expensed on the straightline basis over the lease terms. Deferred rent represents the excess of rent charged to expense over rent payable under the lease agreements due to the amortization of rent holidays and lease incentives (i.e. tenant improvement reimbursements). 11

14 Note 1 Organization and Summary of Significant Accounting Policies (continued) Revenue recognition Tuition and fees NU recognizes tuition and fees based on the academic sessions to which they apply, typically four week sessions, and are presented net of scholarships and grants. Auxiliary services Fees charged for goods and services for students, faculty, staff and incidentally to the general public are recognized when goods are sold or services are provided. Rental income Income is recognized as rental space is occupied. Scholarships NU-funded scholarships are recorded as discounts to tuition or as employee benefits, as appropriate. These charges are recorded concurrent with the recognition of tuition revenue from related class charges. For the years ended June 30, 2017 and 2016, NU provided scholarships and grants as follows: Discounts to tuition $ 7,159,328 $ 5,194,968 Employee benefits 2,242,425 2,008,819 Total $ 9,401,753 $ 7,203,787 Contributions Contributions received, as well as collectible unconditional promises to give, are recognized in the period the contribution is received. Conditional contributions are not recorded until the conditions have been met. Contributions with donor-imposed restrictions are reported as temporarily or permanently restricted revenues, as applicable. Temporarily restricted net assets are reclassified to unrestricted net assets when the donor restrictions are satisfied. Contributions received with donor-imposed restrictions that are satisfied within the same reporting period are reported as unrestricted support in that period. Contributed services Contributions of services are recognized when received if the services received: (a) create or enhance nonfinancial assets or (b) require specialized skills, and are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. During the years ended June 30, 2017 and 2016, no amounts were reflected in the financial statements for such services as the requirements for recognition were not met. Advertising NU expenses all advertising as incurred or the first time the advertising takes place. The expenses, which consist of television, radio, and print, are classified as a component of institutional support in the statements of activities and changes in net assets. For the years ended June 30, 2017 and 2016, NU incurred advertising expense of approximately $18,749,000 and $18,337,000, respectively. 12

15 Note 1 Organization and Summary of Significant Accounting Policies (continued) Fundraising NU incurred direct fundraising expenses in the amount of $874,359 and $963,120 for the years ended June 30, 2017 and 2016, respectively. The expenses were incurred to promote charitable contributions, including contributions or gifts directed toward NU's endowment. The fundraising expenses are classified as a component of institutional support in the statements of activities and changes in net assets. Functional allocation of expenses The costs of providing various programs and activities have been summarized on a functional basis in the statements of activities and changes in net assets. Accordingly, certain costs have been allocated among the programs and supporting services benefited. Income tax status NU is a non-profit organization under Section 501(c)(3) of the Internal Revenue Code and related state provisions and as such is not subject to Federal and state income taxes except to the extent of unrelated business income. Accordingly, no provision for income taxes has been reflected in the accompanying financial statements. Income tax benefits and/or liabilities are recognized for income tax positions taken or expected to be taken in a tax return, only when it is determined that the income tax position will more-likely-than-not be sustained upon examination by taxing authorities. NU has analyzed the tax positions taken in its filings with the Internal Revenue Service ( IRS ) and the California Franchise Tax Board. NU believes that its income tax filing positions will be sustained upon examination and does not anticipate any adjustments that would result in a material adverse effect on NU's financial condition, changes in net assets, or cash flows. Accordingly, NU has not recorded any reserves, or related accruals for interest and penalties for uncertain income tax positions at June 30, 2017 and Fair value of financial instruments With the exception of the fair value of investments (see Note 3), NU considers the carrying value of all other financial instruments to approximate the fair value due to the relatively short period of time between origination of the instruments and their expected realization. These other financial instruments are considered to be Level 1 measurements in the fair value hierarchy. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and those differences could be significant. 13

16 Note 1 Organization and Summary of Significant Accounting Policies (continued) Subsequent events Subsequent events are events or transactions that occur after the statement of financial position date, but before the financial statements are issued. NU recognizes in the financial statements the effects of all significant subsequent events that provide additional evidence about conditions that existed at the date of the statement of financial position, including the estimates inherent in the process of preparing the financial statements. NU s financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the statement of financial position, but arose after the statement of financial position date and before the financial statements are available to be issued. NU has evaluated subsequent events through October 5, 2017, which is the date the financial statements were available to be issued. New accounting pronouncement The June 30, 2017 financial statements reflect adoption of Financial Accounting Standards Board ( FASB ) Accounting Standards Update ( ASU ) No , Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern. The adoption of this update does not have a material effect on the financial statements. ASU defines management s responsibility to evaluate whether there is a substantial doubt about an organization s ability to continue as a going concern and to provide related footnote disclosures. Note 2 Investments Investments, stated, at fair value, consist of the following at June 30, 2017 and 2016: Domestic equity $ 158,435,950 $ 124,073,119 Foreign equity 150,286, ,795,613 Absolute return 143,046, ,956,721 Venture capital/private equity 87,664,053 60,373,272 Fixed income 68,880,519 55,489,548 Real assets 30,102,936 31,819,325 Energy equity 7,049,340 8,320,090 Total investments $ 645,465,070 $ 573,827,688 Investment assets are not specifically limited in use by the Board of NU. NU maintains deferred compensation plans that include certain investments as assets designated for the plans. Plan investments, which amounted to $4,639,013 and $4,335,311 as of June 30, 2017 and 2016, respectively, are included in the totals above. 14

17 Note 2 Investments (continued) Investment return consists of the following for the years ended June 30, 2017 and 2016: Temporarily 2017 Unrestricted Restricted Total Interest income and dividends $ 6,328,689 $ 269,435 $ 6,598,124 Net realized gain 29,115,544 1,322,833 30,438,377 Net unrealized gain 39,773,620 1,884,178 41,657,798 Investment advisory and custodial fees (2,153,776) (90,744) (2,244,520) Total $ 73,064,077 $ 3,385,702 $ 76,449,779 Temporarily 2016 Unrestricted Restricted Total Interest income and dividends $ 5,461,103 $ 204,084 $ 5,665,187 Net realized gain 1,641,019 60,202 1,701,221 Net unrealized loss (23,219,169) (923,087) (24,142,256) Investment advisory and custodial fees (2,307,314) (88,472) (2,395,786) Total $ (18,424,361) $ (747,273) $ (19,171,634) Note 3 Fair Value of Investments Fair value is the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value: Level 1 Quoted prices in active markets for identical assets or liabilities; Level 2 Inputs, other than quoted prices, that are observable for the asset or liability, directly or indirectly, including inputs in markets that are not considered to be active; and Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. 15

18 Note 3 Fair Value of Investments (continued) Asset classes NU invests across a broad range of asset classes, including Domestic Equity, Foreign Equity, Absolute Return, Venture Capital/Private Equity, Fixed Income, Real Assets, and Energy Equity. NU may invest directly in the securities of these asset classes or indirectly through interest in funds and limited partnerships. Securities held directly by NU are valued at their observable market prices. The values of holdings in funds and limited partnerships are in accordance with valuations provided by their investment managers. Funds and limited partnerships may make investments in securities that are publicly traded, which are generally valued based on observable market prices, unless a restriction exists. Managers of investment funds and limited partnerships value those investments based upon the best information available for a given circumstance and may incorporate assumptions that are the investment manager's best estimates after consideration of a variety of internal and external factors. If no public market exists for the investments, the fair value is determined by the investment manager taking into consideration, among other things, the cost of the investment, prices of recent significant placements of similar investment of the same issuer and subsequent developments concerning the companies to which the investments relate. Investments held in NU's investment pool are categorized as follows: Domestic equity This category includes investments in traditional equities and funds that invest primarily in publicly traded equity securities of companies in domestic markets. These investments bring diversity to NU's portfolio with the objective of long-term growth to NU's endowment funds. The majority of these investments are highly liquid with settlements within 90 days. Foreign equity This category includes investments in funds that invest in international equities in emerging markets. The investments follow a value-based stock selection approach, buying companies whose shares appear under-valued on the basis of long-term earning power or asset backing. The majority of these investments are highly liquid with settlements from 1 to 30 days. Absolute return This category includes investments in single strategy and multi-strategy investment managers in various hedged strategies such as merger and risk arbitrage, distressed securities, asset-backed securities, and other credit and volatility strategies. These strategies are designed to provide equity like returns regardless of the economic environment with limited correlation to the traditional equity and fixed-income markets. Investments eligible for redemption provide for redemptions ranging from daily to annually, with prior notification. NU does not have redemption rights in $7,735,901 of absolute return funds. 16

19 Note 3 Fair Value of Investments (continued) Venture capital/private equity This category consists of several investments in venture capital and private equity funds. The funds' holdings primarily include privately-owned domestic companies in a wide variety of industries. Investment redemptions within this category are varied with some providing liquidity within 30 days and others that represent closed-end funds. NU does not have any redemption rights in $67,708,402 of these investments and the investments have remaining lives between 1 and 10 years. Fixed income This category includes investment in bond funds that invest in domestic instruments and sovereign debt instruments of global markets. These investments are highly liquid with settlements from 1 to 30 days. Real assets This category includes investments in partnerships or funds that invest in foreign and domestic real estate, domestic and foreign energy and natural resources. Investment redemptions within this category are varied with some providing liquidity within 30 days and others that represent closed-end funds. NU does not have redemption rights in $13,170,199 of real assets investments. Energy equity This category includes investments in partnerships that invest in commodities to enhance NU's portfolio and provide a partial inflation hedge. NU does not have any redemption rights in these investments which have remaining lives between 1 and 30 years. The following table presents the fair value of investments within the fair value hierarchy at June 30, 2017: Fair Value Measurements at June 30, 2017 Level 1 Level 2 Level 3 Total Investments: Domestic equity $ 103,472,920 $ - $ - $ 103,472,920 Fixed income 68,880, ,880,519 Foreign equity 24,056, ,056,804 Total $ 196,410,243 $ - $ - 196,410,243 Investments measured at net asset value 449,054,827 Investments at fair value $ 645,465,070 17

20 Note 3 Fair Value of Investments (continued) The following table presents the fair value of investments within the fair value hierarchy at June 30, 2016: Fair Value Measurements at June 30, 2016 Level 1 Level 2 Level 3 Total Investments: Domestic equity $ 66,207,619 $ - $ - $ 66,207,619 Fixed income 55,489, ,489,548 Foreign equity 41,304, ,304,070 Total $ 163,001,237 $ - $ - 163,001,237 Investments measured at net asset value 410,826,451 Investments at fair value $ 573,827,688 Note 4 Fair Value Measurements of Investments in Certain Entities that Calculate Net Asset Value Per Share (or its Equivalent) The following table provides additional information for investments valued at NAV at June 30, 2017: Number Unfunded Asset NAV in of Redemption Redemption Commitments at Category Funds Funds Terms Instructions Year End Absolute return $ 143,046, One day to closed end funds not eligible for redemption 1 day notice to not redeemable $ - Foreign equity 126,229,212 8 Daily to Monthly 5 to 31 days notice - Domestic equity 54,963,030 1 Quarterly 60-day notice - Venture capital/private equity 87,664, Real assets 30,102, Energy equity 7,049,340 8 Monthly to closed end funds not eligible for redemption Monthly to closed end funds not eligible for redemption Closed end funds not eligible for redemption 5 days to not redeemable 15 days notice to not redeemable 65,211,481 16,184,042 Not redeemable 7,414,661 $ 449,054,827 $ 88,810,184 18

21 Note 5 Net Assets Unrestricted, Board-designated net assets consist of the following at June 30, 2017 and 2016: Unrestricted - Board-Designated Capital reserve fund $ 574,661,997 $ - Endowment fund - 513,357,171 Total unrestricted, Board designated $ 574,661,997 $ 513,357,171 During the year ended June 30, 2017, the Board released the Board-designated endowment fund from the endowment designation and transferred the balance to the Board-designated capital reserve fund. Temporarily restricted net assets are available for the following purposes at June 30, 2017 and 2016: Temporarily Restricted Special projects, new facilities and equipment, and new programs $ 3,660,550 $ 6,567,939 Technology 3,864,228 3,140,160 Academic and other programs 1,750, ,599 Scholarship funds 1,147, ,643 Faculty scholarship funds 269, ,587 Total temporarily restricted net assets $ 10,692,805 $ 11,820,928 Temporarily restricted net assets totaling $5,157,575 and $4,185,856 were released from restriction by satisfying donor restrictions through use for special projects, new facilities and equipment, and new programs during the years ended June 30, 2017 and 2016, respectively. Note 6 Endowment Funds NU's endowment funds included both donor-restricted endowment funds and funds designated by the Board to function as endowments. As required by accounting principles generally accepted in the United States of America, net assets associated with endowment funds, including funds designated by the Board to function as endowments, are classified and reported based on the existence or absence of donorimposed restrictions. NU's endowment funds were established by donor-restricted contributions to provide a permanent endowment, which is to provide a permanent source of income. The portion of an endowment that must be maintained permanently not used, expended, or otherwise exhausted is classified as permanently restricted net assets. In addition, the Board had earmarked a portion of NU's unrestricted net assets as Board-designated endowment funds to be invested to provide income for a long but unspecified period. The Board-designated endowment funds, which resulted from an internal designation, were not donor-restricted and were classified as unrestricted net assets. 19

22 Note 6 Endowment Funds (continued) Funds with deficiencies From time to time, the fair value of assets associated with individual donor- restricted endowment funds may fall below the level that the donor requires NU to retain as a fund of perpetual duration. Deficiencies of this nature are reported in unrestricted net assets unless the income of such assets are restricted to use in which case such amounts are reflected in temporarily restricted net assets. There were no such deficiencies at June 30, 2017 and Interpretation of relevant law NU has interpreted the Uniform Prudent Management of Institutional Funds Act ( UPMIFA ) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment fund absent explicit donor stipulations to the contrary. As a result of this interpretation, NU classifies as permanently restricted net assets: (1) the original value of the gifts donated to permanent endowment; (2) the original value of subsequent gifts to the permanent endowment; and (3) accumulations of 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 as permanently restricted net assets is characterized as temporarily restricted net assets until those amounts are appropriated for expenditure prescribed by UPMIFA. In accordance with UPMIFA, NU considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: 1. The duration and preservation of the fund; 2. The purpose of NU and the donor-restricted endowment fund; 3. General economic conditions; 4. The possible effects of inflation and deflation; 5. The expected total return from income and the appreciation of investments; 6. Other resources of NU; and 7. NU's investment policy. Return objectives and risk parameters NU has adopted investment and spending policies for endowment assets that are meant to ensure that the endowment's purchasing power is maintained over time by keeping the long-term rate of annual spending from the endowment equal to or less than the long-term real (inflation-adjusted) investment return of the endowment fund. Endowment assets include those assets of donor-restricted funds that NU must hold in perpetuity or for a donor specified period as well as Board-designated funds. Under this policy, as approved by the Board, the endowment assets are invested in a manner that is intended to produce results that have NU finishing in the top half of universities, as measured by annual university performance surveys. This return (net of investment management fees) is expected to be in excess of the annual set spending rate over the long-term. 20

23 Note 6 Endowment Funds (continued) Strategies employed for achieving objectives NU's target asset allocation is a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). NU targets a diversified asset allocation that places an emphasis on equity-based and absolute return funds to achieve its long-term return objectives within prudent risk constraints. Spending policy NU has a policy of providing for distributions up to five percent of a five-year moving average of the permanent endowment's monthly market values. The policy reflects expectations about long-term returns and inflation rates. The endowment net asset composition by type of fund consists of the following as of June 30, 2017 and 2016: 2017 Temporarily Permanently Unrestricted Restricted Restricted Total Donor restricted $ - $ 9,966,781 $ 23,701,543 $ 33,668,324 Board designated Total endowment funds $ - $ 9,966,781 $ 23,701,543 $ 33,668, Temporarily Permanently Unrestricted Restricted Restricted Total Donor restricted $ - $ 7,400,163 $ 20,321,353 $ 27,721,516 Board designated 513,357, ,357,171 Total endowment funds $ 513,357,171 $ 7,400,163 $ 20,321,353 $ 541,078,687 21

24 Note 6 Endowment Funds (continued) Donor-restricted endowment funds are restricted for the following purposes at June 30, 2017 and 2016: Special projects, new facilities and equipment, and new programs $ 15,777,268 $ 12,402,878 Academic and other programs 3,810,974 3,805,414 Technology 2,281,769 2,281,768 Scholarship funds 1,442,735 1,442,496 Faculty scholarship funds 388, ,797 Total permanently restricted net assets $ 23,701,543 $ 20,321,353 22

25 Note 6 Endowment Funds (continued) Changes in endowment net assets for the years ended June 30, 2017 and 2016 are as follows: 2017 Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, July 1, 2016 $ 513,357,171 $ 7,400,163 $ 20,321,353 $ 541,078,687 Investment return: Investment income 5,369, ,435-5,639,400 Net appreciation 62,782,050 3,116,267-65,898,317 Total investment return 68,152,015 3,385,702-71,537,717 Contributions - - 3,380,190 3,380,190 Appropriation of endowment assets for expenditure (6,847,189) (819,084) - (7,666,273) Board released transfer (574,661,997) - - (574,661,997) Endowment net assets, June 30, 2017 $ - $ 9,966,781 $ 23,701,543 $ 33,668, Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, July 1, 2015 $ 532,125,197 $ 8,147,436 $ 16,968,505 $ 557,241,138 Investment return: Investment income 4,691, ,084-4,895,188 Net depreciation (22,032,388) (951,357) - (22,983,745) Total investment return (17,341,284) (747,273) - (18,088,557) Contributions - - 3,352,848 3,352,848 Appropriation of endowment assets for expenditure (1,426,742) - - (1,426,742) Endowment net assets, June 30, 2016 $ 513,357,171 $ 7,400,163 $ 20,321,353 $ 541,078,687 23

26 Note 7 Property and Equipment Property and equipment at June 30, 2017 and 2016 are as follows: Land and land improvements $ 32,867,644 $ 33,841,094 Buildings 56,714,681 57,047,181 Buildings and leasehold improvements 41,583,862 42,074,805 Furniture and equipment 56,731,911 53,790,025 Library assets 31,181,217 30,335, ,079, ,088,910 Less accumulated depreciation and amortization (133,465,155) (122,949,801) Property and equipment, net $ 85,614,160 $ 94,139,109 Depreciation and amortization expense for the years ended June 30, 2017 and 2016 was $11,482,782 and $12,892,496, respectively. Note 8 Commitments and Contingencies Operating leases-lessee NU leases classroom space, administrative offices, and certain equipment under operating lease agreements which require monthly aggregate rental payments of approximately $900,000, expiring through September These leases contain various renewal options and rental escalations as defined in the rental agreements. The minimum annual rentals under these leases are being charged to expense on a straight-line basis over the lease terms. As of June 30, 2017 and 2016, deferred rent was $2,457,536 and $3,229,917, respectively. Rent expense for the years ended June 30, 2017 and 2016 was $15,908,547 and $16,513,517, respectively. Future minimum lease payments in each of the years subsequent to June 30, 2017 are as follows: Years ending June 30, 2018 $ 10,138, ,898, ,024, ,151, ,253,352 Thereafter 1,294,610 Total outgoing payments $ 31,760,846 24

27 Note 8 Commitments and Contingencies (continued) Operating leases-lessor NU also leases property to third parties under operating lease agreements which require monthly rental income payments of approximately $87,000 through February Future minimum rental income payments for each of the years subsequent to June 30, 2017 are as follows: Years ending June 30, 2018 $ 1,352, ,150, , , ,120 Thereafter 4,798,003 Total incoming payments $ 10,052,238 Federal and state financial aid NU participates in various Federal and state financial aid programs for the benefit of students who attend NU. These programs have strict requirements for participation and NU is subject to government program reviews covering compliance with laws and regulations. Specific areas of review include student program eligibility, coordination of financial aid programs, and other matters. Federal, state and private grants and contracts NU receives funds from Federal, state, and private agencies under grants and contracts for training and other activities. Both direct and indirect costs charged to these grants and contracts are subject to audit and possible disallowance by the sponsoring agency. It is NU's belief that disallowances or adjustments, if any, would not have a material effect on the financial statements. Litigation NU is subject to claims and actions arising in the ordinary course of business. In the opinion of management, based in part upon the advice of legal counsel, these matters are of such a nature that unfavorable disposition would not have a material adverse effect on the financial position of NU. Letters of credit NU's insurance carriers require that NU maintain secured letters of credit for claims that do not exceed certain deductible amounts. For both of the years ended June 30, 2017 and 2016, the amount of the letter of credit facilities was $1,475,000. The letters of credit were not used during the years ended June 30, 2017 and 2016, and therefore no liability has been recorded in the accompanying statements of financial position. 25

28 Note 8 Commitments and Contingencies (continued) Guarantee NU guarantees the performance of an operating lease for a third-party. The lease which commenced in November 2016 requires monthly payments of $20,200, subject to 3 percent annual increases, through July Note 9 Employee Retirement Plans NU sponsors a 403(b) plan for its employees and the employees of NUVHS, WMC, and JFKU. Employees are eligible to participate in the NU 403(b) Plan, which covers employees ages 21 or older. Employees may defer salaries into the plan up to the maximum allowed by the IRS. Generally, NU provides matching contributions dollar for dollar plus 1 percent of participants' elective deferrals to the plan, limited to 7 percent of compensation. Matching contributions are immediately vested. For the years ended June 30, 2017 and 2016, NU recorded $4,311,108 and $3,836,377, respectively, in matching contributions relating to the 403(b) plan. Note 10 Related-Party Transactions NU performs various services for the NUS affiliates as described in detail in the paragraphs below. Management and administrative services NU provides support for employment and operating services for the related parties listed below. These costs include executive compensation and certain fringe benefits (medical, dental and vision insurance and employer contributions to the 403(b) retirement plan) and, at times, payment of invoices for other goods and services. System services The related parties listed below utilize NU for some of their administrative functions such as technology support, human resources, accounting, facilities, facilities management and communications. The costs charged by NU for such administrative support services are NU's costs allocated based upon usage determined by number of employees, square footage, or revenue, as appropriate. Revenues received by NU on behalf of the affiliates Certain affiliates utilize NU for the collection of tuition and fees. 26

29 Note 10 Related-Party Transactions (continued) SMG: SMG owed NU $15,967 and $3,476 during the years ended June 30, 2017 and 2016, respectively, for management and administrative services. NUVHS: NUVHS and NU have a line of credit promissory note which provides for borrowing up to $3,750,000 and bears an annual interest rate of 0.37 percent. Interest accrues monthly, but shall not be due and payable until such time as when the principal balance of the note becomes due and payable, under an extension, on June 30, Interest paid on this line of credit promissory note during the years ended June 30, 2017 and 2016 was $12,809 and $12,308, respectively. During the year ended June 30, 2017, NUVHS forgave $100,000 of the outstanding balance of the line of credit; the forgiveness is reflected in the statement of activities and changes in net asset. During the year ended June 30, 2016, there was no forgiveness of debt by NUVHS. Activity in the affiliate accounts for the years ended June 30, 2017 and 2016 was as follows: Due from Affiliate Line of Credit Due from (to) NUVHS, July 1, 2015 $ 103,360 $ (3,207,587) Management and administrative services - 1,197,481 System services - 276,922 Revenues received by NU on behalf of NUVHS - (1,944,272) Conversion of due from affiliate to line of credit - 103,360 Curriculum revenues (103,360) - Interest charged by NUVHS - (12,308) Due from (to) NUVHS, June 30, (3,586,404) Management and administrative services - 1,228,790 System services - 259,431 Revenues received by NU on behalf of NUVHS - (1,628,459) Amounts forgiven by NUVHS - 100,000 Interest charged by NUVHS - (12,809) Due to NUVHS, June 30, 2017 $ - $ (3,639,451) 27

30 Note 10 Related-Party Transactions (continued) WMC: WMC has a line of credit promissory note with NU. The unsecured note provided for borrowings up to $7,500,000, bears interest at 1.63 percent, and was due on September 30, 2016 but was not repaid as of June 30, The line is now due on demand but NU has not required repayment. Amounts owed to NU for support services, payroll and benefits, rent and other system service expenses are added to the note and reduced by any payments made by WMC to NU. For the years ended June 30, 2017 and 2016, total interest revenue on the note was $5,151 and $13,412, respectively. During the years ended June 30, 2017 and 2016, NU forgave $0 and $500,000, respectively, of the outstanding balance of the line of credit promissory note due from affiliate. The 2016 note forgiveness was reflected in the statement of activities and changes in net assets. Activity in the affiliate accounts with WMC for the years ended June 30, 2017 and 2016 was as follows: Due from Affiliate Line of Credit Due from WMC, June 30, 2015 $ 2,685 $ 799,361 Management and administrative services 2,845,768 - System services 135,921 - Conversion due from WMC to note due from WMC (2,982,884) 2,982,884 Interest revenue from WMC 13,412 - Amounts forgiven by NU - (500,000) Cash payments from WMC (10,476) (2,583,001) Due from WMC, June 30, , ,244 Management and administrative services 2,055,949 - System services 135,922 - Conversion due from WMC to note due from WMC (2,192,275) 2,192,275 Interest revenue from WMC 5,151 - Cash payments from WMC (8,396) (2,641,604) Due from WMC, June 30, 2017 $ 777 $ 249,915 28

31 Note 10 Related-Party Transactions (continued) JFKU: On April 3, 2009 (the first day of affiliation with NU), JFKU entered into a 25-year promissory note with NU for $13,891,094. This note is secured by assigned rent revenues and a deed of trust on the Pleasant Hill building and called for interest only payments until October 2015 after which the note is payable in monthly installments of principal and interest of approximately $76,000 through April For the years ended June 30, 2017 and 2016, JFKU incurred and paid $279,894 and $292,601, respectively, in interest expense to NU. During the years ended June 30, 2017 and 2016, NU forgave amounts owed to NU by JFKU totaling $5,690,850 and $0, respectively. During the year ended June 30, 2017, NU contributed $309,150 to JFKU for certain project and affiliation financial support. During the year ended June 30, 2016, NU contributed $109,567 to JFKU for construction-related projects. Rent JFKU leases classrooms in San Jose, California from NU under a noncancelable operating lease agreement. Rents and rent-related charges paid to NU for this facility for the years ended June 30, 2017 and 2016 were $553,809 and $601,718, respectively. Activity in the due from affiliate account for the years ended June 30, 2017 and 2016 was as follows: Due from JFKU, June 30, 2015 $ 1,433,594 Management and administrative services 4,155,210 System services 453,986 Rent 601,718 Cash paid by JFKU (5,197,342) Due from JFKU, June 30, ,447,166 Management and administrative services 16,527,828 Software 1,700,427 System services 453,986 Rent 553,809 Amounts forgiven by NU (5,690,850) Cash paid by JFKU (11,934,840) Due from JFKU, June 30, 2017 $ 3,057,526 29

32 Note 10 Related-Party Transactions (continued) CU: On May 1, 2013, CU entered into a contract of Affiliation and Financial Support (the Contract ) with SMG and NU that resulted in CU becoming an affiliate of NUS. The Contract includes a guarantee by NU of all outstanding obligations of CU on May 1, 2013 of $7,059,616. For the years ended June 30, 2017 and 2016, NU recorded contribution expense to CU of $364,057 and $167,250, respectively, for certain project and affiliation financial support. Activity in the due from affiliate account for the years ended June 30, 2017 and 2016 was as follows: Due from CU, July 1, 2015 $ 47,050 Management and administrative services 570,527 System services 387,926 Cash paid by CU (300,000) Due from CU, June 30, ,503 Management and administrative services 2,354,882 System services 387,926 Cash paid by CU (1,400,000) Due from CU, June 30, 2017 $ 2,048,311 Other: NU participates in the Student Financial Aid ( SFA ) programs under the Title IV programs administered by the U.S. Department of Education pursuant to the Higher Education Act of 1965, as amended ( HEA ). NU must comply with the regulations promulgated under the HEA. Those regulations require that all related-party transactions be disclosed, regardless of their materiality to the financial statements. Board Members immediate family members received tuition waivers in the amount of $31,743 and $33,878 for the years ended June 30, 2017 and 2016, respectively. Certain Board Members provide consultation services to NU. Fees earned were $15,815 and $8,040 for the years ended June 30, 2017 and 2016, respectively. This information in Note 10 is required by the U.S. Department of Education and is presented for purposes of additional analysis. 30

33 Note 11 Concentrations of Credit Risk Financial instruments which potentially subject NU to concentrations of credit risk consist primarily of cash and cash equivalents, student accounts, and loans receivable and investments. NU maintains its cash and cash equivalents in bank deposit accounts which exceed federally-insured deposit limits. The risk associated with these deposits is considered low as they are held in highly-rated financial institutions. NU has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk. Activity in the due to/from affiliate accounts for the years ended June 30, 2017 and 2016 is a concentration of credit risk. With respect to student accounts and loans receivable, the concentration of credit risk is limited due to the large number of students, generally short payment terms, and participation in government financial aid programs. On a periodic basis, NU evaluates its receivables balances and establishes an allowance for doubtful accounts, based on a history of collections, graduation rates, and current credit considerations. Management closely monitors these balances while maintaining allowances for potential losses. A significant number of students attending NU receive financial assistance from Federal Student Financial Aid Programs. These programs require NU to comply with recordkeeping, eligibility, and other requirements. Failure to comply with such federal requirements in the future could result in the loss of federal financial assistance to NU's students and adversely impact the operations of NU. Note 12 Deferred Compensation Plans NU maintains two deferred compensation plans for key employees. One deferred compensation plan is funded only with employee contributions and accordingly, an offsetting liability is recorded on the statements of financial position. The other deferred compensation plan calls for payments only if services are rendered after termination and therefore no liability has been recorded. Investments held on behalf of the key employees who are contributing under one of the plans and for the potential payment of benefits under the second plan are included in investments in the statements of financial position (see Note 2). Note 13 Self-insurance NU is self-insured up to certain limits ($125,000 per individual and cumulative monthly aggregate limits) for employee health care claims. Self-insurance liabilities are determined by management based on claims filed and an estimate for claims incurred but not reported. While management believes that the amounts are adequate, there can be no assurance that changes to the estimates may not occur due to limitations inherent in the estimation process. 31

34 Supplementary Information

35 Supplementary Information Schedule of Expenditures of Federal Awards Year Ended June 30, 2017 Federal Grantor/Pass-Through Grantor Program Title/Project Title Pass-through Federal Agency CFDA Passed through Federal Number Number to Subrecipients Expenditures U.S. Department of Education Student Financial Assistance Cluster: Federal Pell Grant Program $ - $ 14,610,591 Federal Supplemental Educational Opportunity Grants Program ,500 Federal Work Study Program ,202 Teacher Education Assistance for College and Higher Education (TEACH) Grants ,190,408 Federal Direct Student Loans ,824,465 Federal Perkins Loan Program ,082,401 Total Student Financial Assistance Cluster - 194,146,567 Higher Education Institutional Aid A - 443,739 Total U.S. Department of Education - 194,590,306 U.S. Department of Health and Human Services Nurse Education, Practice Quality and Retention Grants , ,510 Nurse Anesthetist Traineeships ,068 Total U.S. Department of Health and Human Services 49, ,578 U.S. Department of Defense Passed through from the State of Colorado: Mountain Pacific Troops to Teachers Program PO DAA PO DAA 14 CNTLUNIV ,484 Total U.S. Department of Defense - 228,484 Total Expenditures of Federal Awards $ 49,886 $ 195,703,368 See accompanying notes to schedule of expenditures of federal awards. 32

36 Supplementary Information Notes to Schedule of Expenditures of Federal Awards Year Ended June 30, 2017 Note 1 Basis of presentation The accompanying schedule of expenditures of federal awards (the Schedule ) includes the federal grant activity of National University ( NU ), under programs of the federal government for the year ended June 30, The information in this Schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards ( Uniform Guidance ). Because the Schedule presents only a selected portion of the operations of NU, it is not intended to and does not present the financial position, changes in net assets, or cash flows of NU. Note 2 Summary of Significant Accounting Policies Expenditures reported in the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. Pass-through identifying numbers are presented where available. NU recognizes grants to the extent that eligible grant costs are incurred. NU has elected not to use the 10 percent de minimis indirect cost rate as allowed under the Uniform Guidance. Note 3 Student Financial Assistance The Perkins Loan Program is administered directly by NU, and balances and transactions related to this program are included in NU s basic financial statements. Student loans totaling $529,200 made during the year are included as part of the federal expenditures presented in the Schedule. The balance of loans outstanding at June 30, 2017 consists of the following: Outstanding CFDA Balance at Number June 30, 2017 U.S. Department of Education: Federal Perkins Loan Program $ 4,490,550 33

37 Report of Independent Auditors on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards To the Board of Trustees National University We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of National University (an affiliate of the National University System), which comprise the statement of financial position as of June 30, 2017, and the related statements of activities and changes in net assets, and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated October 5, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered National University s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of National University s internal control. Accordingly, we do not express an opinion on the effectiveness of National University s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. 34

38 Compliance and Other Matters As part of obtaining reasonable assurance about whether National University s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the result of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. San Diego, California October 5,

39 Report of Independent Auditors on Compliance for Each Major Federal Program and Report on Internal Control Over Compliance as Required by the Uniform Guidance To the Board of Trustees National University Report on Compliance for Each Major Federal Program We have audited National University s (an affiliate of the National University System) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of National University s major federal programs for the year ended June 30, National University s major federal programs are identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for each of National University s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards ( Uniform Guidance ). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about National University s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of National University s compliance. 36

40 Opinion on Each Major Federal Program In our opinion, National University complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, Report on Internal Control Over Compliance Management of National University is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered National University s internal control over compliance with the types of requirements that could have a direct and material effect on the major federal programs to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for the major federal programs and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of National University s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. We did not identify any deficiencies in internal control over compliances that we consider to be material weaknesses. However, we identified a deficiency in internal control over compliance, as described in the accompanying schedule of findings and questioned costs as item that we consider to be a significant deficiency. National University s response to the internal control over compliance finding identified in our audit is described in the accompanying schedule of findings and questioned costs. National University s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the response. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. San Diego, California October 5,

41 Schedule of Findings and Questioned Costs Year Ended June 30, 2017 Section I Summary of Auditor s Results Financial Statements Type of report the auditor issued on whether the financial statements audited were prepared in accordance with GAAP: Unmodified Internal control over financial reporting: Material weakness(es) identified? Yes No Significant deficiency(ies) identified? Yes None reported Noncompliance material to financial statements noted? Yes No Federal Awards Internal control over major federal programs: Material weakness(es) identified? Yes No Significant deficiency(ies) identified? Yes None reported Any audit findings disclosed that are required to be reported in accordance with 2 CFR (a)? Yes No Identification of the Major Federal Programs Type of auditor s report CFDA Number Name of Federal Program or Cluster issued on compliance for each major federal program: Various Student Financial Assistance Cluster Unmodified Nurse Education, Practice Quality and Retention Grants Unmodified Dollar threshold used to distinguish between Type A and Type B programs: $750,000 Auditee qualified as low-risk auditee? Yes No Section II Financial Statement Findings None reported. 38

42 Schedule of Findings and Questioned Costs (continued) Year Ended June 30, 2017 Section III Federal Award Findings and Questioned Costs FINDING Special Tests and Provisions Return of Title IV: Significant Deficiency in Internal Control CFDA Number Federal Agency/Pass-through Entity Program Name Award Number Award Year Questioned Costs Various U.S Department of Education Student financial assistance cluster n/a Year Ended June 30, 2017 $0 Criteria 34 CFR section (j): Timeframe for the return of Title IV funds. (1) An institution must return the amount of Title IV funds for which it is responsible under paragraph (g) of this section as soon as possible, but no later than 45 days after the date of the institution s determination that the student withdrew as defined in paragraph (l)(3) of this section. Condition/Context A sample of 60 students who were recipients of Title IV funding and had withdrawn during the year was selected and the student records were compared to the calculation of the return of Title IV funds, if any, and the federal government's Common Origination and Disbursement system. One student had stopped attending classes for 45 days which was identified during the disbursement process. The withdrawal was not communicated to the individual responsible for the processing of returns of Title IV funds. Title IV funds were eventually returned to the federal government in June 2017, which exceeded the timeframe required per the applicable criteria. Cause The individual who was informed of the student s withdrawal did not subsequently inform the appropriate financial aid personnel. This caused the return of Title IV funds to be delayed. NU queries a report from their system identifying students who have a 45-day lapse in classes. This student was not included on the report and therefore was not identified as a withdrawn student. Effect If Title IV funds are not returned in a timely manner, it may result in overpayment of loaned funds and students retaining funds they did not earn. Repeat Finding This is not a repeat finding. Recommendation We recommend the University implement a process in which individuals checking eligibility during the disbursement process automatically report any withdrawals to the individuals in charge of calculating the return of Title IV funds. 39

43 Schedule of Findings and Questioned Costs (continued) Year Ended June 30, 2017 FINDING Special Tests and Provisions Return of Title IV: Significant Deficiency in Internal Control (continued) Views of Responsible Officials and Planned Corrective Actions Management agrees with the finding and the importance of ensuring that the return of Title IV funds (R2T4) are performed within the required timeframe. The financial aid director, in September 2017, sent communication to all financial aid staff, and all staff involved with students, of the process related to students no longer in class. The reiterated that students with changes in course schedules, and students no longer in class, are to be communicated to the central processing staff; whether found through authorization of disbursements, communication through the student communication portal, or by . In addition, additional training of central staff of the importance of forwarding students no longer in class to the financial aid generalists, the Assistant Director, or the Director, for R2T4 considerations will be held in October The financial aid department utilizes a query to identify students no longer in class for R2T4 calculations. The query logic will be reviewed/refined, as needed, as well to ensure the report is timely identifying students no longer in class. In addition, consideration of adding a flag, or other system indicator, to the student s file when they are noted as being out of class for easier identification is being considered which would serve as another backstop for the query mentioned above, of notifying students who may require a R2T4 calculation. 40

44 Summary Schedule of Prior Audit Findings Year Ended June 30, 2017 FINDING Special Tests and Provisions Return of Title IV: Significant Deficiency in Internal Control CFDA Number Federal Agency/Pass-through Entity Program Name Award Number Award Year Questioned Costs Various U.S Department of Education Student financial assistance cluster n/a Year Ended June 30, 2016 $0 Condition One student s Title IV funds had not been returned to the federal government within the 45-day timeframe from the date NU identified them as a withdrawal. The student withdrew from classes in September 2015 and was identified as a withdrawal in October Title IV funds were returned to the federal government in August 2016, which exceeded the timeframe required per the applicable criteria. The system contained errors which caused an initial rejection of the return of funds to the federal government. Existing controls over the process identified the rejected return; however, controls were not appropriately designed to ensure the rejection was resolved timely. Recommendation The auditors recommend NU implement a control to ensure returns that are rejected by their system or the federal Common Origination and Disbursement system are subsequently tracked to ensure they are returned timely. Current year status Fully corrected. FINDING Special Tests and Provisions Disbursements: Material Weakness in Internal Control CFDA Number Federal Agency/Pass-through Entity Program Name Award Number Award Year Questioned Costs Various U.S Department of Education Student financial assistance cluster n/a Year Ended June 30, 2016 $0 Condition NU has not returned federal loan amounts drawn and applied to student accounts, in excess of institutional charges in a timely manner. NU has identified approximately 2,500 former students with outstanding federal deposit balances. Recommendation The auditors recommend NU implement controls to ensure graduated and withdrawn students have their account closed out to ensure that no remaining credit balances exist when the loan period ends. Current year status Fully corrected. 41