UPPER IOWA UNIVERSITY AND SUBSIDIARIES Fayette, Iowa

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1 UPPER IOWA UNIVERSITY AND SUBSIDIARIES Fayette, Iowa CONSOLIDATED FINANCIAL STATEMENTS Including Independent Auditors' Report

2 TABLE OF CONTENTS Independent Auditors' Report 1-2 Consolidated Statements of Financial Position 3 Consolidated Statements of Activities 4-5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7-31

3 Baker Tilly Virchow Krause, LLP 225 S Sixth St, Ste 2300 Minneapolis, MN tel fax bakertilly.com INDEPENDENT AUDITORS' REPORT To the Board of Trustees Upper Iowa University and Subsidiaries Fayette, Iowa We have audited the accompanying consolidated financial statements of Upper Iowa University and Subsidiaries, (the University ) which comprise the consolidated statements of financial position as of June 30, 2015 and 2014, 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 financial statements that are free from material misstatement, whether due to fraud or error. Auditors 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. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of 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 auditors' 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. Page 1

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Upper Iowa University and Subsidiaries as of June 30, 2015 and 2014, and the changes in their consolidated net assets and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Minneapolis, Minnesota October 21, 2015 Page 2

5 UPPER IOWA UNIVERSITY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As of June 30, 2015 and 2014 ASSETS CURRENT ASSETS Cash and cash equivalents $ 12,363,412 $ 6,615,195 Cash and cash equivalents - restricted 2,631,576 2,193,050 Receivables Student accounts, net of allowance for doubtful accounts of $945,612 and $679,042 2,718,343 2,265,556 Other 1,916, ,291 Pledges, net 23, ,971 Investments 1,810, ,266 Prepaid expenses 188, ,087 Inventories 96, ,811 Total Current Assets 21,747,844 12,638,227 NONCURRENT ASSETS Cash and cash equivalents - restricted debt service reserves 4,750,282 4,749,367 Pledges receivable, less current portion 2,876,228 4,201,656 Deferred debt acquisition costs 1,749,475 1,816,983 Long-term investments 11,421,361 11,335,449 Student loans, net of allowance for doubtful notes 312, ,893 Beneficial interest in trusts held by others 4,560,393 4,776,273 Land, buildings, library books and equipment, net 90,269,713 93,193,831 TOTAL ASSETS $ 137,687,770 $ 133,008,679 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts payable $ 1,332,047 $ 1,057,493 Accounts payable construction - 5,205 Accrued wages and related expenses 1,940,229 2,092,462 Accrued expenses 2,472,537 1,910,366 Accrued tax payable 76,839 4,416 Deferred tuition and rent 5,701,024 2,555,948 Deferred revenue 818, ,545 Other post retirement benefit payable, current portion 55,500 38,000 Line of credit payable - 1,000,000 Bonds payable, current portion 845, ,000 Lease payable, current portion 101,490 87,118 Total Current Liabilities 13,342,848 10,520,553 LONG-TERM LIABILITIES Bonds payable 64,642,724 65,516,680 Lease payable 186, ,701 Post retirement benefit payable 1,104,393 1,262,000 Federal student loan funds 293, ,682 Total Long-Term Liabilities 66,227,259 67,405,063 TOTAL LIABILITIES 79,570,107 77,925,616 NET ASSETS Unrestricted 40,287,651 37,265,994 Temporarily restricted 6,431,929 6,343,790 Permanently restricted 11,398,083 11,473,279 Total Net Assets 58,117,663 55,083,063 TOTAL LIABILITIES AND NET ASSETS $ 137,687,770 $ 133,008,679 See accompanying notes to consolidated financial statements. Page 3

6 UPPER IOWA UNIVERSITY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF ACTIVITIES For the Year Ended June 30, 2015 With Comparative Totals for Temporarily Permanently 2014 Unrestricted Restricted Restricted Total Total OPERATING REVENUES, GAINS AND OTHER SUPPORT Tuition and fees $ 67,835,552 $ - $ - $ 67,835,552 $ 60,214,293 Less: Scholarships and aids (17,875,566) - - (17,875,566) (13,191,664) Net tuition and fees 49,959, ,959,986 47,022,629 Government grants 404, , ,893 Beneficial interest in trusts distribution 92, , ,188 Private gifts, grants and pledges 70, , ,255 1,545,304 Educational activities 14, ,400 9,143 Auxiliary enterprises - sales and services 6,467, ,467,509 4,980,051 Investment income 9, ,538 11,938 Endowment spending allocated for operations 60, , , ,880 Other revenue 527, , ,599 57,606, ,931 57,926,163 54,586,625 Net assets released from restrictions 525,886 (525,886) Total Operating Revenues, Gains and Other Support 58,132,118 (205,955) - 57,926,163 54,586,625 OPERATING EXPENSES Program expenses Instruction 23,502, ,502,303 22,132,128 Academic support 8,569, ,569,664 9,803,987 Student services 9,150, ,150,977 9,551,705 Auxiliary enterprises 7,134, ,134,947 6,114,666 Support expenses Institutional support 9,814, ,814,255 9,653,126 Total Operating Expenses 58,172, ,172,146 57,255,612 Change in Net Assets from Operating Activities (40,028) (205,955) - (245,983) (2,668,987) NONOPERATING ACTIVITIES Long-term investment activities 88,245 92, ,291 1,245,563 Endowment spending allocated for operations (60,183) (156,827) - (217,010) (154,880) Loss on asset disposal (5,154) - - (5,154) (39,550) Private gifts, grants and pledges 202, , ,684 1,039,700 1,560,933 Beneficial interest in trusts held by others - - (215,880) (215,880) 256,415 Bad debt allowance 25, ,428 12,414 Foreign currency translation reserve (174,110) - - (174,110) (10,019) Insurance proceeds 1,398,282 1,370,036 2,768,318 - Income tax expense (121,000) - - (121,000) (122,461) Net assets released from restrictions 1,707,504 (1,707,504) Change in Net Assets from Nonoperating Activities 3,061, ,094 (75,196) 3,280,583 2,748,415 Change in Net Assets 3,021,657 88,139 (75,196) 3,034,600 79,428 Net Assets - Beginning of Year 37,265,994 6,343,790 11,473,279 55,083,063 55,003,635 NET ASSETS - END OF YEAR $ 40,287,651 $ 6,431,929 $ 11,398,083 $ 58,117,663 $ 55,083,063 See accompanying notes to consolidated financial statements. Page 4

7 UPPER IOWA UNIVERSITY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF ACTIVITIES For the Year Ended June 30, Temporarily Permanently Unrestricted Restricted Restricted Total OPERATING REVENUES, GAINS AND OTHER SUPPORT Tuition and fees $ 60,214,293 $ - $ - $ 60,214,293 Less: Scholarships and aids (13,191,664) - - (13,191,664) Net tuition and fees 47,022, ,022,629 Government grants 294, ,893 Beneficial interest in trusts distribution 252, ,188 Private gifts, grants and pledges 354,022 1,191,282-1,545,304 Educational activities 9, ,143 Auxiliary enterprises - sales and services 4,980, ,980,051 Investment income 11, ,938 Endowment spending allocated for operations 43, , ,880 Other revenue 312,185 3, ,599 53,280,337 1,306,288 54,586,625 Net assets released from restrictions 1,336,654 (1,336,654) - - Total Operating Revenues, Gains and Other Support 54,616,991 (30,366) - 54,586,625 OPERATING EXPENSES Program expenses Instruction 22,132, ,132,128 Academic support 9,803, ,803,987 Student services 9,551, ,551,705 Auxiliary enterprises 6,114, ,114,666 Support expenses Institutional support 9,653, ,653,126 Total Operating Expenses 57,255, ,255,612 Change in Net Assets from Operating Activities (2,638,621) (30,366) - (2,668,987) NONOPERATING ACTIVITIES Long-term investment activities 401, ,087-1,245,563 Endowment spending allocated for operations (43,288) (111,592) - (154,880) Loss on asset disposal (39,550) - - (39,550) Private gifts, grants and pledges 22,183 1,538,750 1,560,933 Beneficial interest in trusts held by others , ,415 Bad debt allowance 12, ,414 Foreign currency translation reserve (10,019) - - (10,019) Income tax expense (122,461) - - (122,461) Net assets released from restrictions 1,764,683 (1,764,683) - - Change in Net Assets from Nonoperating Activities 1,985,438 (1,032,188) 1,795,165 2,748,415 Change in Net Assets (653,183) (1,062,554) 1,795,165 79,428 Net Assets - Beginning of Year 37,919,177 7,406,344 9,678,114 55,003,635 NET ASSETS - END OF YEAR $ 37,265,994 $ 6,343,790 $ 11,473,279 $ 55,083,063 See accompanying notes to consolidated financial statements. Page 5

8 UPPER IOWA UNIVERSITY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended June 30, 2015 and 2014 CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ 3,034,600 $ 79,428 Adjustments to reconcile change in net assets to net cash flows from operating activities Depreciation 3,144,555 3,217,751 Amortization of debt issuance costs 67,508 67,508 Amortization of bond discount (premium) (28,956) (28,890) Provision (gain) for post retirement benefit (140,107) 500,000 Loans cancellations, assignments and write-offs 5,750 30,198 Change in allowance for uncollectible student receivables 290, ,700 Change in allowance for pledges receivable 334 (530) Net (gain) loss on investments 4,731 (998,629) Change in restricted cash reserves (915) (192) Change in beneficial interest in trusts held by others 215,880 (256,416) Unrealized loss on foreign exchange 29,161 11,499 Net loss on asset disposal 5,154 39,550 Change in assets - (increase) decrease: Student accounts receivable (810,690) (682,509) Other receivables (1,627,953) (180,935) Pledges receivable for operations 12, ,564 Prepaid expenses 63,572 4,962 Inventories 39,084 (70,360) Change in liabilities - increase (decrease): Accounts payable 291,085 (716,578) Accrued wages and related liabilities (152,233) (840,142) Accrued expenses 562, ,889 Accrued tax payable 72,423 (104,402) Deferred tuition and rent 3,179, ,789 Deferred revenue (136,363) (136,363) Insurance proceeds received for investment in plant (1,370,036) - Gifts and grants for long-term investment and plant (553,507) (1,538,749) Net Cash Flows from Operating Activities 6,197,773 (406,857) CASH FLOWS USED BY INVESTING ACTIVITIES Purchase of land, building, library books and equipment (234,178) (753,110) Proceeds from disposition of land, buildings and equipment 3,289 24,904 Purchases of investments (12,405,861) (2,510,404) Proceeds from sales of investments 10,946,305 2,313,749 Disbursements of loans to students (100,000) (57,250) Repayments of loans by students 78,669 98,185 Net Cash Flows Used by Investing Activities (1,711,776) (883,926) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from short-term bank note payable - 1,000,000 Payments on short-term bank note payable (1,000,000) - Principal repayments of indebtedness (815,000) (710,000) Refund of debt issuance costs - 11,798 Payment of lease payable (136,724) (87,143) Federal student loan funds (350) (23,035) Repayment to Upper Iowa University (10) - Insurance proceeds received for investment in plant 1,370,036 - Gifts and grants received for long-term investment and plant 2,282,794 1,713,627 Net Cash Flows from Financing Activities 1,700,746 1,905,247 Net Change in Cash and Cash Equivalents 6,186, ,464 CASH AND CASH EQUIVALENTS - Beginning of Year 8,808,245 8,193,781 CASH AND CASH EQUIVALENTS - END OF YEAR $ 14,994,988 $ 8,808,245 Supplemental disclosures of cash flow information Interest paid $ 3,852,402 $ 3,567,967 Income taxes paid 121, ,461 Noncash investing and financing activities Property, plant and equipment included in accounts payable - 5,205 Equipment purchased by a lease payable - 267,328 See accompanying notes to consolidated financial statements. Page 6

9 NOTE 1 SIGNIFICANT ACCOUNTING POLICIES Organization - Founded in 1857, Upper Iowa University (the University) is a private liberal arts University located in Fayette, Iowa. The University provides student-centered undergraduate and graduate educational programs through flexible, multiple delivery systems in an environment in which diversity is respected, encouraged, and nurtured. These programs are provided at the Fayette, Iowa campus, at off-campus centers throughout Iowa, Arizona, Illinois, Wisconsin, Kansas, Louisiana, and Oklahoma, and with on-line curriculum and international programs. The University provides educational programs to more than 6,200 undergraduate and graduate students around the world. Principles of Consolidation - The consolidated financial statements include the accounts of Upper Iowa University and Upper Iowa University - Hong Kong Campus Limited, Upper Iowa University Malaysia SDN BHD, and Upper Iowa University Malaysia Foundation, wholly owned subsidiaries of Upper Iowa University, as of and for the year ended June 30, For the year ended June 30, 2014, the consolidated financial statements include the accounts of Upper Iowa University and Upper Iowa University - Hong Kong Campus Limited and Upper Iowa University Malaysia SDN BHD, wholly owned subsidiaries of Upper Iowa University. All interrelated balances and significant transactions between the two entities have been eliminated in consolidation. Foreign currency denominated assets and liabilities are translated into U.S. dollars at the exchange rate existing at the statement of financial position date, and income and expenses are translated at the exchange rate existing at the transaction dates. Exchange gains or losses are included in change in net assets from nonoperating activities. Foreign operations consist of the following at June 30: Total assets $ 1,610,811 $ 2,150,365 Total liabilities 1,321,342 1,751,821 Total revenues 3,394,106 3,414,595 Total net assets (deficit) 289, ,544 Total change in net assets (109,075) 440,990 Basis of Financial Statements - The accounting policies of the University reflect practices common to universities and are prepared in accordance with accounting principles generally accepted in the United States of America. The more significant accounting policies are summarized below: Net Asset Classifications For the purposes of financial reporting, the University classifies resources into three net asset categories pursuant to any donor-imposed restrictions and applicable law. Accordingly, the net assets of the University are classified in the accompanying financial statements in the categories that follow: Unrestricted Net Assets - Net assets that are not subject to donor-imposed restrictions. (See Note 2) The Board of Trustees, through voluntary resolutions, has set aside portions of the University s unrestricted net assets to function as endowments, for property, plant and equipment purposes, and for other specific operating purposes. Temporarily Restricted Net Assets - Net assets subject to donor-imposed restrictions that will be met by action of the University and/or the passage of time. (See Note 2) Page 7

10 NOTE 1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Permanently Restricted Net Assets - Net assets subject to donor-imposed restrictions that they be maintained permanently by the University. Generally, the donors of these assets permit the University to use all or part of the income earned on related investments for general or specific purposes. (See Note 2) Releases from Restrictions - Expirations of temporary restrictions on net assets (i.e., the donorstipulated purpose has been fulfilled and/or the stipulated time period has elapsed and the law allows the release of the restriction) are reported on the statement of activities as net assets released from restrictions. (See Note 3) Occasionally donor restrictions related to net assets may be clarified or changed, at which time they are reflected as reclassification of prior year net assets on the statement of activities. Revenue Recognition - The timing and classification of revenue are summarized below: Tuition and Fees and Auxiliary Enterprises Revenue - Revenues from tuition and auxiliary enterprises are recognized in the period the goods or services are provided as increases in unrestricted net assets. Financial assistance in the form of scholarships and grants that cover a portion of tuition, living and other costs is reflected as a reduction of tuition and fees revenues. Private Gifts Revenue - Contributions are recognized as revenues when the donor s commitments are received, as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Conditional promises to give are not recognized until they become unconditional, that is, when the conditions on which they depend are substantially met. The University has a conditional promise to receive $1,000,000 related to a revocable trust in an estate and has received a conditional contribution from a food service vendor (see Note 10) at June 30, 2015 and Gifts of assets other than cash are recorded at their estimated fair value at the date of gift. The University s policy has been to sell donated securities soon after receipt to be able to use the funds for their specified purpose. Contributions received with donor-imposed restrictions that are met in the same year as received are reported as revenues of the temporarily restricted net asset class, and a release to unrestricted net assets is made to reflect the expiration of such restrictions. Donated services are only recognized when the criteria for recognition are satisfied. No amounts have been reflected in these financial statements. Investment Gains and Losses - 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. Income and net gains on investments of endowment and similar funds are reported in the statement of activities as follows: > as increases in unrestricted net assets for board-designated endowment funds and to restore donor-restricted endowment funds with deficiencies; > as increases in permanently restricted net assets if the terms of the gift that gave rise to the investment require that they be added to the principal of a permanent endowment fund; > as increases in temporarily restricted net assets in all other cases. Page 8

11 NOTE 1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Losses from investments on donor-restricted endowment funds are reported as decreases in permanently or temporarily restricted net assets to the extent of the prior accumulated earnings of each individual endowment fund, with the remainder reflected as reductions to unrestricted net assets. Cash and Cash Equivalents - The University considers all highly liquid investments, except for those held for long-term investment, with a maturity of three months or less when purchased to be cash equivalents. Certain cash held by the University is restricted for the Perkins Loan Fund and approximates $84,800 and $111,000 at June 30, 2015 and 2014, respectively. Cash held restricted for the McElroy Loan Fund approximates $338,000 and $326,000 at June 30, 2015 and 2014, respectively. Cash equivalents restricted for debt service purposes are also reflected as restricted on the statement of financial position. (See Note 13) Receivables - An allowance for doubtful accounts is recorded annually based on historical experience and management s evaluation of receivables at the end of each year. It is reasonably possible that changes in this estimate could occur in the near term and that actual results could differ from this estimate and could have a material impact on the financial statements. Bad debts are written-off when deemed uncollectible. Interest income on student loan receivables is recognized when received, and fees and costs are recognized when incurred. Receivables are generally unsecured. Government student loan program receivables (Perkins) that become uncollectible can be assigned to the federal government. (See Note 5) Inventories Inventories, consisting of books, clothing, gift items, office supplies and sundries, are valued at the lower of cost or market. The inventory value is determined by specific identification. Investments - Investments in publicly traded securities are stated at quoted market value. Other investments, for which no such quoted market values or valuations are readily available, are carried at fair value as estimated by management using values provided by external investment managers. Changes in fair value are recorded as unrealized gains or losses in the period of change. (See Note 6) Deferred Debt Acquisition Costs - Costs of bond issuance are deferred and amortized over the term of the bonds. Future amortization is projected to approximate $67,500 annually. (See Note 12) Beneficial Interest in Trusts Held by Others The beneficial interest in trusts held by others and related contribution revenue are recognized at the date the trusts are established for the present value of estimated future payments to be received. Perpetual trusts are valued based upon the market value of the assets contributed to the trusts which approximates fair value of the beneficial interest in the trusts. The University is entitled to receive annual earnings on its beneficial interest. Physical Plant and Equipment - Physical plant assets are stated at cost at date of acquisition or market value if donated, less accumulated depreciation. The University typically depreciates its assets on the straight-line basis over estimated useful lives as follows: Land improvements Buildings Building improvements Equipment Library materials Hong-Kong/Malaysia equipment 20 years 45 years years 5-15 years 8 years 1-3 years Page 9

12 NOTE 1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Normal repair and maintenance expenses are charged to operations as incurred. Major improvements are capitalized. The University capitalizes physical plant additions and equipment in excess of $5,000. Impairment of Long-Lived Assets - The University reviews long-lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss would be recognized when the estimated future cash flows from the use of the asset are less than the carrying amount of that asset. To date, there have been no such losses. Deferred Tuition and Rent - Certain revenue related to summer and fall courses and programs is deferred and recognized as revenue in the same period expenses are recognized. Students are generally billed for courses and programs prior to the start of the course or program. Federal Student Loan Funds Refundable - Funds provided by the United States Government under the Federal Perkins Loan Program are loaned to qualified students and may be reloaned after collections. These funds are ultimately refundable to the government and are included as liabilities on the statements of financial position. Revenues from other government grants are recognized as they are earned in accordance with the agreement. Any funding received before it is earned is recorded as a refundable advance. Expenses incurred before cash is received are shown as a reduction in the government grants refundable liability on the statement of financial position. (See Note 5) Deposits Held in Trust for Others - The University acts as trustee for funds transferred from various organizations for investment management and administrative purposes. The funds are to be distributed back to these organizations as they request them. The University recognizes the funds as an accrued liability and cash and cash equivalents in the accompanying statement of financial position. 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Functional Allocation of Expenses - The costs of providing the various programs and other activities have been summarized on a functional basis in the statement of activities. Accordingly, certain expenses have been allocated among the programs and supporting services benefited. (See Note 17) Income Tax Status - The Internal Revenue Service has determined that the University is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code. The University is also exempt from state income taxes. However, any unrelated business income may be subject to taxation. The foreign subsidiaries are taxable entities in the countries they are located. Accrued tax payable and income tax expense are related to the foreign subsidiaries. The University follows the accounting standards for contingencies in evaluating uncertain tax positions. This guidance prescribes recognition threshold principles for the financial statement recognition of tax positions taken or expected to be taken on a tax return that are not certain to be realized. No liability has been recognized by the University for uncertain tax positions as of June 30, 2015 and The University s tax returns are subject to review and examination by federal and state authorities. The tax returns for the current year as well as fiscal years 2012 through 2014 are open to examination by federal and state authorities. Page 10

13 NOTE 1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Fund-Raising Expenses - Total fund-raising expense for the years ended June 30, 2015 and 2014 was approximately $800,000 and $610,000, respectively. Advertising Costs - Advertising costs are generally expensed as incurred. Advertising expense was approximately $2,300,000 and $1,400,000 for the years ended June 30, 2015 and 2014, respectively. Grants to Specified Students - Amounts received from state and federal agencies designated for the benefit of specified students (Federal Pell grants, Iowa tuition grants and Federal direct loans) are considered agency transactions and, therefore, are not reflected as revenues and expenses of the University. Reclassifications - Certain prior year amounts have been reclassified to conform with the June 30, 2015 financial statement presentation. These reclassifications, however, had no effect on total net assets or change in net assets. New Accounting Pronouncement Not Yet Effective - In May 2014, new accounting guidance was issued that outlines a single comprehensive model for organizations to use in accounting for revenue from contracts with customers. This guidance is effective for the University s fiscal year ending June 30, The University is assessing the impact this guidance will have on its financial statements. Subsequent Event Review - The University has evaluated subsequent events through October 21, 2015, which is the date that the financial statements were issued. Page 11

14 NOTE 2 RESTRICTIONS AND LIMITATIONS ON NET ASSETS BALANCES At June 30, 2015 and 2014, the University's unrestricted net assets were allocated as follows: Operations (deficit) $ (4,900,085) $ (5,971,345) Board designated endowment funds, long term investments (Note 7) 4,070,668 4,077,653 Other board designated funds 1,143,796 - Debt service restricted cash 6,959,042 6,942,417 Unexpended plant 7,745,745 5,988,805 Invested in plant, net of debt 25,092,943 26,054,777 Student loan programs 175, ,687 Temporarily restricted net assets consist of the following at June 30, 2015 and 2014: $ 40,287,651 $ 37,265,994 Gifts and other unexpended revenues and gains available for: Scholarships, instruction and other support $ 1,160,084 $ 659,602 McElroy loan funds 349, ,675 Endowment funds Earnings not yet appropriated for spending (Note 7) 2,058,902 2,123,673 Pledges (Note 4) 1,493,791 3,213,840 Repairs and maintenance 1,370,036 - Permanently restricted net assets consist of the following at June 30, 2015 and 2014: $ 6,431,929 $ 6,343,790 Endowment funds (Note 7) $ 5,432,020 $ 5,269,219 Endowment pledges (Note 4) 1,405,670 1,427,787 Beneficial interest in funds held by others 4,560,393 4,776,273 $ 11,398,083 $ 11,473,279 Page 12

15 NOTE 3 NET ASSETS RELEASED FROM RESTRICTIONS Net assets were released from temporary donor restrictions by incurring expenses satisfying the restricted purposes or by occurrence of events specified by the donors as follows for the years ended June 30: Purpose restriction accomplished: Pledge payments and change in allowance $ 1,720,049 $ 2,675,910 Scholarships and Other 513, ,427 $ 2,233,390 $ 3,101,337 Releases - Operating $ 525,886 $ 1,336,654 Releases - Nonoperating 1,707,504 1,764,683 $ 2,233,390 $ 3,101,337 NOTE 4 PLEDGES RECEIVABLE Pledges receivable include the following unconditional promises to give at June 30: Unconditional promises expected to be collected in: Less than one year $ 1,943,714 $ 2,003,450 One to five years 1,055,000 2,621,700 Over five years 200, ,000 Gross unconditional promises to give 3,198,714 5,031,150 Less: Unamortized discount (297,075) (387,678) Allowance for uncollectible promises (2,178) (1,845) $ 2,899,461 $ 4,641,627 Reported under current assets $ 23,233 $ 439,971 Reported under noncurrent assets 2,876,228 4,201,656 $ 2,899,461 $ 4,641,627 Pledges receivable due within one year are not discounted. Pledges receivable expected to be collected in more than one year have been discounted using a historic rate of 5.00%. As of June 30, 2015 and 2014, net contributions receivable consisted of $1,442,658 and $3,150,162, respectively, for plant projects, $1,405,670 and $1,427,787 for endowment, respectively and $51,133 and $63,678, respectively, for programs and operations. Gross pledges receivable of $1.5 million and $4.8 million as of June 30, 2015 and 2014, respectively, was due from two donors. Such amounts are recorded as temporarily restricted net assets. Page 13

16 NOTE 5 CREDIT QUALITY OF STUDENT NOTES RECEIVABLE The University issues uncollateralized loans to students based on financial need. Student loans are funded through Federal government loan programs or institutional resources. Allowances for doubtful accounts are established based on prior collection experience and current economic factors which, in management s judgment, could influence the ability of loan recipients to repay the amounts per the loan terms. At June 30, 2015 and 2014, student loans represented.3% of total assets each year. At June 30, student loans consisted of the following: Federal government programs $ 362,417 $ 337,023 Institutional programs (McElroy) 189, , , ,393 Less allowance for doubtful accounts (239,500) (239,500) Student loans receivable, net $ 312,474 $ 296,893 Federal student loan funds advanced by the Federal government of $293,332 and $293,682 at June 30, 2015 and 2014, respectively, are ultimately refundable to the government and are classified as liabilities in the statement of financial position. These amounts are partially offset by related receivables from the Federal government. After a student is no longer enrolled in an institution of higher education and after a grace period, interest is charged on student loans receivable and is recognized as it is charged. Student loans receivable through the loan programs are considered to be past due if a payment is not made within 30 days of the payment due date, at which time, late charges are charged and recognized. The Federal Perkins Loan program receivables may be assigned to the U.S. Department of Education (ED). Students may be granted deferment, forbearance, or cancellation of their student loan receivable based on eligibility requirements defined by ED. At June 30, 2015 and 2014, the past due and current amounts under student loan programs were as follows: Past due loan receivables: 1-59 days past due $ 2,824 $ 5, days past due 2,458 1, days to 1 year past due 29,203 29, years past due 61,766 64, years past due 140, ,725 Total past due 237, ,832 Current loan receivables 314, ,561 Total student loan receivables, gross $ 551,974 $ 536,393 Page 14

17 NOTE 5 CREDIT QUALITY OF STUDENT NOTES RECEIVABLE (CONTINUED) The Federal Perkins Loan Program expired on September 30, The Department of Education ( ED ) issued guidance in January 2015 (Dear Colleague Letter GEN-15-03) which addressed the grandfathering of Perkins loans for students who received loans prior to June 30, According to the guidance issued by ED, if these students meet certain conditions, they will still be able to receive Perkins loans until 2020 to allow them to continue or complete their courses of study. However, Perkins loans may not be made to new borrowers for whom the first disbursement of a Federal Perkins loan will occur on or after October 1, Other issues, including the settlement of school revolving funds and outstanding loan portfolios, still need to be addressed. The University is monitoring this issue and is currently assessing the impact on its financial statements. NOTE 6 INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS Investments are comprised of the following at June 30: Investments (current) Certificates of deposit (cost) $ 1,675,142 $ 303,932 Equity 22,326 24,183 Mutual funds 11,737 12,281 Pooled income funds 100, ,870 Total investments (current) (fair value) 135, ,334 Total Investments (current) 1,810, ,266 Long-term Investments Mutual funds 31,324 31,113 Pooled income funds 11,390,037 11,304,336 Total long-term investments (fair value) 11,421,361 11,335,449 Total investments $ 13,231,540 $ 11,776,715 Page 15

18 NOTE 6 INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following schedule summarizes the return on investments during 2015 and 2014 and its classification on the statement of activities. Interest and dividends, net of investment expenses of $63,527 and $68,671, respectively $ 194,560 $ 258,872 Net gain (loss) on investments and other assets (4,731) 998,629 Total return on investments $ 189,829 $ 1,257,501 Operating Interest and dividends $ 9,538 $ 18,853 Net loss on investments and other assets - (6,915) 9,538 11,938 Nonoperating Interest and dividends, net Gain on other investments 34, Interest and dividends on endowments, net 184, ,592 Gain (loss) on endowments (39,482) 1,004, ,291 1,245,563 Total return on investments $ 189,829 $ 1,257,501 Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, grants receivable, other receivables, accounts payable and deposits held in custody for others approximate fair value because of the short term maturity of these financial instruments. A reasonable estimate of the fair value of the receivables from students under government loan programs and grants refundable to the government for student loans could not be made because the notes receivable are not saleable and can only be assigned to the U.S. government or its designee. The fair value of receivables under institutional loan programs approximates carrying value. The fair value of contributions receivable (pledges) is based on a discounted cash flow methodology using discount rates consistent with the expected maturities of the pledges, adjusted for consideration of the donor s credit. The fair value of the contributions receivable approximates carrying value and would be considered Level 3 in the fair value hierarchy. The fair value for fixed rate debt is calculated using the rates currently offered for comparable debt instruments with similar remaining maturities. Based on these inputs, if recorded at fair value the long-term debt would be classified as a Level 2 liability. Management believes the carrying amount of long term debt approximates fair value as of June 30, 2015 and Contributions of assets other than cash are recorded at their estimated fair value at the date of the gift. Estimates of fair value involve assumptions and estimation methods that are uncertain and, therefore, the estimates could differ from actual results. Page 16

19 NOTE 6 INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Fair value Hierarchy Fair value is defined in the accounting guidance as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the assets or liability in an orderly transaction between market participants at the measurement date. Under this guidance, a threelevel hierarchy is used for fair value measurements which are based on the transparency of information, such as the pricing source, used in the valuation of an asset or liability as of the measurement date. Financial instruments measured and reported at fair value are classified and disclosed in one of the following three categories. : Level 1 - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data. Level 3 - Inputs are unobservable for the asset or liability. Unobservable inputs reflect the reporting entity s own assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. Valuation Techniques and Inputs Level 1 - Level 1 assets include investments in short-term investments, consisting primarily of money market funds, mutual funds, equity, pooled income - fixed income funds, and pooled income - equity funds for which quoted prices are readily available. Level 2 - Investments in private equity funds for which quoted prices are not readily available, but where the University has the ability to redeem its interest at or near the statement of financial position date. The University has estimated the fair value of such funds by using the net asset value ( NAV ) provided by the investee as of December 31, adjusted for cash receipts, cash disbursements, and significant known valuation changes in market values of publicly held securities contained in the portfolio and security distributions through June 30. Level 3 - Level 3 assets include funds administered by a third party for which quoted prices are not readily available. The fair values are estimated using an income approach by calculating the present value of the future distributions expected to be received based on a combination of Level 2 inputs (interest rates and yield curves) and significant unobservable inputs (entity specific estimates of cash flows). There have been no changes in the techniques and inputs used as of June 30, 2015 and In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset. Page 17

20 NOTE 6 INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) While the University believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The following table presents information about the University s assets measured at fair value on a recurring basis as of June 30, 2015 based upon the three-tier hierarchy: Total Level 1 Level 2 Level 3 ASSETS Investments (current) Money market funds $ 100,974 $ 100,974 $ - $ - Mutual funds 11,737 11,737 Equity 22,326 22, Total Investments (current) 135, , Long-term investments Money market funds 148, ,443 Mutual funds 31,324 31,324 Pooled income fixed income funds Corporate 2,078,631 2,078,631 Government 544, ,399 Inflation protected 700, ,455 Mortgage/asset backed 423, ,044 Pooled income equity funds International 1,706,338 1,706,338 Growth 1,950,696 1,950,696 Value 1,932,697 1,932,697 Emerging market 871, ,480 Commodity - - Small cap and other 648, ,854 Private equity international funds 385, ,000 - Total Long-term Investments 11,421,361 11,036, ,000 - Beneficial interest in trusts held by others 4,560, ,560,393 Total Investments at Fair Value $ 16,116,791 $ 11,171,398 $ 385,000 $ 4,560,393 Page 18

21 NOTE 6 INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following table presents information about the University s assets measured at fair value on a recurring basis as of June 30, 2014 based upon the three-tier hierarchy: Total Level 1 Level 2 Level 3 ASSETS Investments (current) Money market funds $ 100,870 $ 100,870 $ - $ - Mutual funds 12,281 12,281 Equity 24,183 24, Total Investments (current) 137, , Long-term investments Money market funds 2,071,447 2,071,447 Mutual funds 31,113 31,113 Pooled income fixed income funds Corporate 1,357,282 1,357,282 Government 533, ,089 Inflation protected 1,004,155 1,004,155 Mortgage/asset backed 492, ,555 Pooled income equity funds International 1,988,593 1,988,593 Growth 1,101,364 1,101,364 Value 713, ,411 Emerging market 841, ,913 Commodity 625, ,881 Small cap and other 272, ,191 Private equity international funds 302, ,455 - Total Long-term Investments 11,335,449 11,032, ,455 - Beneficial interest in trusts held by others 4,776, ,776,273 Total Investments at Fair Value $ 16,249,056 $ 11,170,328 $ 302,455 $ 4,776,273 Page 19

22 NOTE 6 INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following table presents a reconciliation of the statement of financial position amounts for assets measured at fair value on a recurring basis using significant unobservable inputs (level 3) for the year ended June 30, 2015: Balance June 30, 2014 Net realized and unrealized losses Purchases Sales (Distributions) Net transfers in (out) of Level 3 Balance June 30, 2015 Assets Beneficial interest in trusts held by others $ 4,776,273 $ (118,479) $ - $ (97,401) $ - $ 4,560,393 The amount of total losses for the period included in change in net assets attributable to the change in unrealized losses relating to assets measured at fair value still held at June 30, $ (215,880) The following table presents a reconciliation of the statement of financial position amounts for assets measured at fair value on a recurring basis using significant unobservable inputs (level 3) for the year ended June 30, 2014: Balance June 30, 2013 Net realized and unrealized gains Purchases Sales (Distributions) Net transfers in (out) of Level 3 Balance June 30, 2014 Assets Beneficial interest in trusts held by others $ 4,519,858 $ 508,603 $ - $ (252,188) $ - $ 4,776,273 The amount of total gains for the period included in change in net assets attributable to the change in unrealized gains relating to assets measured at fair value still held at June 30, $ 256,415 Page 20

23 NOTE 7 ENDOWMENT The University s endowment consists of approximately 90 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. As required by U.S. generally accepted accounting principles, net assets associated with endowment funds, including funds designated by the Board of Trustees as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. Interpretation of Relevant Law - The University s Board of Trustees has interpreted the Iowa State Prudent Management of Institutional Funds Act (SPMIFA) as allowing the University to appropriate for expenditure or accumulate so much of an endowment fund as the University determines is prudent for the uses, benefits, purposes and duration for which the endowment fund is established, subject to the intent of the donor as expressed in the gift instrument. The University s Board of Trustees has determined it is prudent to preserve the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. The University classifies as permanently restricted net assets (a) the original value of the 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 a 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 University through the Board of Trustee s approval of the annual budget, which is inclusive of the spending rate for its endowment funds established pursuant to the University s spending policy. See Note 1 for further information on net asset classifications. Funds functioning as endowment have also been established by the Board of Trustees as long-term reserves for operations. Funds functioning as endowment differ from true endowment because any portion of these funds may be expended, and accordingly, are classified as unrestricted net assets. Endowment net asset composition by type of fund consists of the following as of June 30, 2015: Unrestricted Temporarily Restricted Permanently Restricted Total Donor-restricted endowment funds $ - $ 2,058,902 $ 5,432,020 $ 7,490,922 Board-designated endowment funds 4,070, ,070,668 Total endowment net assets $ 4,070,668 $ 2,058,902 $ 5,432,020 $ 11,561,590 Endowment net asset composition by type of fund consists of the following as of June 30, 2014: Unrestricted Temporarily Restricted Permanently Restricted Total Donor-restricted endowment funds $ - $ 2,123,673 $ 5,269,219 $ 7,392,892 Board-designated endowment funds 4,077, ,077,653 Total endowment net assets $ 4,077,653 $ 2,123,673 $ 5,269,219 $ 11,470,545 Page 21

24 NOTE 7 ENDOWMENT (CONTINUED) Changes in endowment net assets for the year ended June 30, 2015 are as follows: Unrestricted Temporarily Restricted Permanently Restricted Total Endowment net assets, June 30, 2014 $ 4,077,653 $ 2,123,673 $ 5,269,219 $ 11,470,545 Investment return 66, , ,511 Net depreciation (13,441) (26,041) - (39,482) Contributions , ,026 Appropriation of endowment assets for operating expenditures (60,193) (156,817) - (217,010) Endowment net assets, June 30, 2015 $ 4,070,668 $ 2,058,902 $ 5,432,020 $ 11,561,590 Changes in endowment net assets for the year ended June 30, 2014 are as follows: Unrestricted Temporarily Restricted Permanently Restricted Total Endowment net assets, June 30, 2013 $ 3,688,100 $ 1,391,177 $ 5,120,427 $ 10,199,704 Investment return 91, , ,592 Net appreciation 308, ,874-1,004,736 Contributions 21, , ,254 Appropriation of endowment assets for operating expenditures (43,288) (111,592) - (154,880) Other changes: Change of donor restriction 11, ,139 Endowment net assets, June 30, 2014 $ 4,077,653 $ 2,123,673 $ 5,269,219 $ 11,470,545 Funds with Deficiencies - From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the original value of the gifts contributed to each endowment fund. There were no deficiencies of this nature as of June 30, 2015 and Return Objectives and Risk Parameters - The University has adopted investment and spending policies, approved by the Board of Trustees, for endowment assets that strive to provide a source of income for spending that is reasonably stable and predictable from year-to-year, while seeking to preserve capital, maintain the purchasing power of the endowment assets, and prudently earn the highest possible rate of return consistent with the University s ability to accommodate risk. Endowment assets include those assets of donor-restricted funds that the University intends to hold indefinitely or for a donor-specified period(s) as well as board-designated funds. Under this policy the endowment assets are invested in a manner that is intended to achieve an after-cost total real rate of return, including investment income as well as capital appreciation, which exceeds annual distributions with acceptable levels of risk. Page 22