Berry College, Inc. Consolidated Financial Statements and Reports and Schedules Related to the Uniform Guidance Years Ended June 30, 2017 and 2016

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1 Consolidated Financial Statements and Reports and Schedules Related to the Uniform Guidance Years Ended June 30, 2017 and 2016 The report accompanying these financial statements was issued by BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of BDO International Limited, a UK company limited by guarantee.

2 Consolidated Financial Statements and Reports and Schedules Related to the Uniform Guidance Years Ended June 30, 2017 and 2016

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 Uniform Guidance 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 Required by the Uniform Guidance Schedule of Expenditures of Federal Awards 37 Notes to Schedule of Expenditures of Federal Awards Schedule of Findings and Questioned Costs Summary Schedule of Prior Year Findings Management s Corrective Action Plan

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, 2017 and 2016, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDOisthebrandnamefortheBDOnetwork 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, 2017 and 2016, and the changes in their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying schedule of expenditures of federal 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. The schedule of expenditures of federal awards 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. Such information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 17, 2017 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 October 17,

6 Consolidated Financial Statements

7 Consolidated Statements of Financial Position June 30, Assets Cash $ 4,144,822 $ 3,035,367 Accounts receivable, less allowance for doubtful accounts of $213,588 in 2017 and $201,148 in ,727,943 2,406,917 Contributions receivable, net 12,034,074 11,078,477 Loans and notes receivable, net 9,383,989 5,026,435 Inventories 637, ,659 Investments 285,811, ,265,535 Beneficial interests in perpetual trusts 653,322, ,831,105 Investments in remainder interest trusts 6,481,108 6,275,215 Contributions receivable from remainder interest trusts 20,207 17,356 Prepaid expenses and other assets 689, ,419 Land held for sale 1,149,198 1,263,133 Property and equipment, net 186,023, ,099,149 Total Assets $ 1,162,425,895 $ 1,131,586,767 Liabilities and Net Assets Liabilities Accounts payable and accrued expenses $ 7,006,143 $ 6,949,314 Interest rate swaps 17,730,675 27,598,238 Bonds payable 98,854, ,218,200 Line of credit 650,000 1,300,000 Annuities payable 3,268,914 3,151,973 Deposits and deferred credits 5,093,431 4,801,521 Accrued post-retirement benefits 29,206,023 31,746,075 Advances from Federal government 1,531,469 1,765,744 Total Liabilities 163,340, ,531,065 Net Assets Unrestricted 101,130,519 86,259,284 Temporarily restricted 148,148, ,742,516 Permanently restricted 749,806, ,053,902 Total Net Assets 999,085, ,055,702 Total Liabilities and Net Assets $ 1,162,425,895 $ 1,131,586,767 See accompanying notes to consolidated financial statements. 6

8 Consolidated Statements of Activities Year Ended June 30, 2017 Temporarily Permanently Unrestricted Restricted Restricted Total Revenues, gains, and other support: Tuition and fees $ 69,564,379 $ - $ - $ 69,564,379 Less student assistance (37,735,165) - - (37,735,165) Net tuition and fees 31,829, ,829,214 Federal and state grants and contracts 432, ,342 Private gifts, grants, and contracts 1,160,650 5,144,601-6,305,251 Sales and services of auxiliary enterprises 22,892, ,892,104 Sales and services of educational departments 2,358, ,358,413 Appropriation of endowment spending 4,970,655 9,159,080-14,129,735 Other investment income - 27,253-27,253 Income from beneficial interests in perpetual trusts 21,303, ,303,578 Other additions 1,706,983 7,374-1,714,357 86,653,939 14,338, ,992,247 Net assets released from restrictions 10,838,147 (10,838,147) - - Total revenues, gains, and other support 97,492,086 3,500, ,992,247 Expenditures and losses: Operating: Instruction 30,343, ,343,919 Academic support 9,827, ,827,126 Student services 18,540, ,540,941 Institutional support 17,099, ,099,839 Auxiliary enterprises 15,395, ,395,038 Total operating expenses 91,206, ,206,863 Change in net assets, operating 6,285,223 3,500,161-9,785,384 Nonoperating activities: Private gifts and grants - - 2,277,072 2,277,072 Total endowment return, net of management fees 5,793,303 33,293, ,395 39,541,774 Appropriation of endowment spending (4,918,926) (9,638,814) - (14,557,740) Net (loss) gain on other nonoperating investments (5,050,101) 196, ,153 (4,591,353) Net change in beneficial interests in perpetual trusts - - 2,491,251 2,491,251 Gain on interest rate swap agreements 9,867, ,867,563 Decrease in post-retirement benefit obligation 2,540, ,540,052 Other income (expense) 354,121 54,517 (733,303) (324,665) Change in net assets from nonoperating activities 8,586,012 23,905,374 4,752,568 37,243,954 Change in net assets 14,871,235 27,405,535 4,752,568 47,029,338 Net assets, beginning of year 86,259, ,742, ,053, ,055,702 Net assets, end of year $ 101,130,519 $ 148,148,051 $ 749,806,470 $ 999,085,040 See accompanying notes to consolidated financial statements. 7

9 Consolidated Statements of Activities Year 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 income (expense) 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. 8

10 Consolidated Statements of Cash Flows Years Ended June 30, Operating Activities Change in net assets $ 47,029,338 $ 54,660,293 Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation 6,361,563 6,458,326 Contributions in-kind (628,789) (769,648) Net realized and unrealized (gains) losses on investments (33,120,856) 2,632,325 Loss on disposal of property and equipment 3,251 2,829 Gifts restricted for long-term investment (2,277,072) (2,041,078) Increase in beneficial interests in perpetual trusts (2,491,251) (73,878,805) Receipt of agency funds 1,948,695 2,105,333 Disbursement of agency funds (1,948,695) (2,105,333) Changes in operating assets and liabilities: Accounts receivable (321,026) (510,133) Contributions receivable (955,597) (527,383) Inventories 19,647 89,968 Contributions receivable from remainder interest trusts (2,851) 14,795 Prepaid expenses and other assets (15,004) 38,808 Accounts payable and accrued expenses 56,829 (210,252) Interest rate swaps (9,867,563) 7,937,742 Annuities payable 116,941 (184,464) Deposits and deferred credits 291, ,565 Accrued post-retirement benefits (2,540,052) 5,264,788 Net cash provided by (used in) operating activities 1,659,418 (1,193,028) Investing Activities Purchases of property and equipment (11,208,637) (6,287,288) Proceeds from sales of investments and land held for investments 34,352,368 24,849,524 Purchases of investments (17,364,937) (16,607,343) Increase in loans and notes receivable (4,357,554) (985,704) Net cash provided by investing activities 1,421,240 1,954,893 Financing Activities Payments on line of credit (650,000) (650,000) Payments on bonds payable (3,364,000) (3,206,000) Change in advances from Federal government (234,275) 11,014 Gifts restricted for long-term investment 2,277,072 2,041,078 Net cash used in financing activities (1,971,203) (1,803,908) Net increase (decrease) in cash 1,109,455 (1,042,043) Cash at beginning of year 3,035,367 4,077,410 Cash at end of year $ 4,144,822 $ 3,035,367 Supplemental disclosure of cash flow information: Cash paid for interest $ 4,607,762 $ 4,894,176 Contributions in kind: Property and equipment $ 80,520 $ - Investments $ 504,066 $ 729,410 Inventory $ 14,948 $ 18,299 Other assets $ 29,255 $ 21,939 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. Principles of Consolidation The 2017 and 2016 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, 2017 and 2016, the College had no deferred tax assets or liabilities. The College analyzed its tax positions for the years ended June 30, 2017 and 2016 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: 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. 10

12 Notes to Consolidated Financial Statements 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. 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, 2017 and 2016, the College incurred expenses of approximately $3,277,263 and $3,322,693, respectively, in connection with its fundraising activities. As of June 30, 2017 and 2016, one contribution receivable comprised 66% and 67% of the balance of contributions receivable. This receivable is related to the future donation of the Winshape complex to the College in fiscal year

13 Notes to Consolidated Financial Statements 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, 2017 and 2016, the College incurred investment related expenses of $845,684 and $840,300, respectively. Concentrations of Investment Portfolio Approximately 79% and 83% of the College s beneficial interest in perpetual trusts at June 30, 2017 and 2016, respectively, are invested in common stock of the Coca-Cola Company. The value of the common stock of the Coca-Cola Company was $44.85 per share and $45.33 per share at June 30, 2017 and 2016, respectively. 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, 2017 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. 12

14 Notes to Consolidated Financial Statements 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 fair values of investments, beneficial interests in perpetual trusts, and investments in remainder interest trusts are determined as described in Note 2. 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, 2017 and 2016 certain parcels of land were identified as available for sale. The current fair value of this property approximated $37.2 million at June 30, 2017 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. 13

15 Notes to Consolidated Financial Statements Sales and services of educational departments The College operates Berry College Elementary and Middle School ( BCEMS ), which is a private coeducational laboratory school for students in kindergarten through eighth grade. Tuition and fees earned by BCEMS primarily comprise the balance in sales and services of educational departments. 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 currently evaluating 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 that begin after December 15, 2019, with early adoption permitted. The College is currentlyevaluating 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 currently evaluating the impact of the ASU on its financial statements. 14

16 Notes to Consolidated 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 currently evaluating 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, 2017 and 2016, respectively, on the statements of financial position by ASC 820 valuation hierarchy, as previously described: June 30, 2017 Level 1 Level 2 Level 3 Total Cash equivalents $ 31,105,081 $ - $ - $ 31,105,081 Equities domestic 64,135,157 34,724,653-98,859,810 Equities international 8,780,146 29,642,529 20,846,099 59,268,774 Private equity ,991,423 10,991,423 Alternative strategies 2,349,961-37,749,807 40,099,768 Real assets 3,667,858-13,671,801 17,339,659 Real estate held as investment - 21,066,170-21,066,170 Fixed income and other 8,671,530-4,889,961 13,561,491 Beneficial interest in perpetual trusts - 649,494,841 3,827, ,322,356 Total Assets $ 118,709,733 $ 734,928,193 $ 91,976,606 $ 945,614,532 Obligation under interest rate swap agreements $ - $ (17,730,675) $ - $ (17,730,675) Annuities payable - (3,268,914) - (3,268,914) Total Liabilities $ - $ (20,999,589) $ - $ (20,999,589) 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 At June 30, 2017 and 2016, 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. 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, 2017 Alternative Investments Balance, July 1, 2016 $ 99,687,909 Purchases 5,600,363 Sales (23,823,718) Net realized and unrealized gains 10,512,052 Balance, June 30, 2017 $ 91,976,606 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 (losses) (2,902,153) Balance, June 30, 2016 $ 99,687,909 17

19 Notes to Consolidated Financial Statements The 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, 2017 and Transfers, when made, are deemed to be made at the end of the year. 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 ,822 $ 2,197, ,987 $ 2,507,271 Pine Chip-N-Saw ,150 1,592, ,570 2,414,993 Pine Sawtimber ,299 6,876, ,174 7,760,250 Hardwood Pulpwood ,837 4,108, ,435 4,609,232 Hardwood Sawtimber ,957 6,290, ,773 8,725,611 Grand Totals 1,428,065 $ 21,066,170 1,478,939 $ 26,017,357 The unrealized gain/loss on the College s timber balance of $4,951,187 is accounted for in the net gain /(loss) on other nonoperating investments in non operating activities. Net unrealized gains (losses) on investments held at year end are summarized as follows: Year ended June 30, Investments $ 25,555,438 $ (7,504,081) Investments in remainder interest trusts and annuities 380,895 (113,680) Beneficial interest in perpetual trusts 2,491,251 73,878,805 Net unrealized gains $ 28,427,584 $ 66,261,044 18

20 Notes to Consolidated Financial Statements 3. Contributions Receivable, Net Contributions receivable, net is summarized as follows: June 30, Unconditional pledges expected to be collected in: Less than one year $ 667,536 $ 886,076 One year to five years 2,501,087 2,859,858 Over five years 9,649,309 7,631,632 12,817,932 11,377,566 Less: unamortized discount (641,543) (194,383) Less: allowance for uncollectible pledges (142,315) (104,706) Contributions receivable, net $ 12,034,074 $ 11,078,477 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 $ 7,266,193 $ 2,769,078 Institutional loans 866, ,848 Perkins loans 1,364,264 1,532,909 9,497,389 5,139,835 Less: allowance for doubtful loans (113,400) (113,400) Loans receivable, net $ 9,383,989 $ 5,026,435 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. The Notes receivable include a loan of $7 million to Lavender Mountain Senior Living, Inc., a Georgia not-for-profit corporation that will be a continuing care retirement community located on the College s campus. The note bears interest at a rate of 9.75% per year and will become payable in forty quarterly payments upon satisfaction of a number of conditions, including occupancy of the living units, days cash on hand, and debt ratios. For the years ended June 30, 2017 and 2016, the note bore interest of $455,395 and $77,954 respectively. Members of the College s management hold non-majority seats on the Lavendaer Mountian Board of Directors. 19

21 Notes to Consolidated Financial Statements 5. Inventories Inventories are summarized as follows: June 30, Livestock and horses $ 286,600 $ 330,500 Merchandise, materials, supplies and farm products 351, ,159 Total inventories $ 637,960 $ 642,659 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. 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 $ 31,105,081 $ 31,105,081 $ 25,424,062 $ 25,424,062 Equities domestic 96,049,292 27,398,918 81,637,648 27,876,860 Equities international 58,085,089 38,772,844 45,360,778 37,188,702 Private equity 10,991,423 2,872,299 13,584,957 5,614,851 Alternative strategies 40,099,768 29,295,549 45,247,552 37,581,033 Real assets 17,011,314 14,136,847 14,809,462 13,230,471 Real estate held as investment 21,066,170-26,017,357 - Fixed income and other 11,402,931 9,676,051 17,183,719 14,967,375 Total investments $ 285,811,068 $ 153,257,589 $ 269,265,535 $ 161,883,354 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 22% and 27% of total investment securities at June 30, 2017 and 2016, respectively. These investments contain underlying funds, which may include limited partnerships, limited liability companies, offshore investment funds, real estate funds, or non-us corporations. 20

22 Notes to Consolidated Financial Statements 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. Redemption rights for applicable investments are summarized as follows: June 30, 2017 Frequency* Notice Period Ending Fair Market Value Daily - $ 3,415,936 Monthly 10 days 55,378,589 Quarterly days 34,724,653 Semi-Annually 60 days - Annually 45 days 37,749,807 *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. 21

23 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 2017 and 2016, 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 $2.9 million and $3.82 million in fiscal year 2017 and 2016, 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 $14.1 million. The endowment net asset composition by type of fund consisted of the following: Temporarily Permanently June 30, 2017 Unrestricted Restricted Restricted Total (Dollars in Thousands) Donor-restricted funds $ (30) $ 124,571 $ 91,727 $ 216,268 Board-designated funds 32, ,894 Total funds $ 32,864 $ 124,571 $ 91,727 $ 249,162 22

24 Notes to Consolidated Financial Statements 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 Changes in endowment funds consisted of the following: Temporarily Permanently Year ended June 30, 2017 Unrestricted Restricted Restricted Total (Dollars in Thousands) Net assets, beginning of the year $ 31,868 $ 100,970 $ 89,837 $ 222,675 Investment return: Investment income Net appreciation (realized and unrealized) 5,720 32,862-38,582 Total investment return 5,793 33, ,542 Contributions 183-1,553 1,736 Appropriation of endowment assets for expenditure (4,919) (9,639) - (14,558) Other changes: Transfers to/from board-designated funds (373) - - (373) Transfers to/from other funds 312 (54) (118) 140 Net assets, end of the year $ 32,864 $ 124,571 $ 91,727 $ 249,162 23

25 Notes to Consolidated Financial Statements 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 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 $30 thousand and $199 thousand as of June 30, 2017 and 2016, 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. 24