American University of Beirut

Transcription

1 American University of Beirut Financial Statements as of June 30, 2012 and 2011, and for the Year Ended June 30, 2012 and Nine- Month Period Ended June 30, 2011, and Independent Auditors Report

2 AMERICAN UNIVERSITY OF BEIRUT TABLE OF CONTENTS Page INDEPENDENT AUDITORS REPORT FINANCIAL STATEMENTS AS OF JUNE 30, 2012 AND 2011, AND FOR THE YEAR ENDED JUNE 30, 2012 AND NINE-MONTH PERIOD ENDED JUNE 30, 2011 Statements of Financial Position 2 Statements of Activities 3 Statements of Cash Flows 4 Notes to Financial Statements 5

3 Deloitte & Touche LLP Two World Financial Center New York, NY USA Tel: Fax: INDEPENDENT AUDITORS REPORT To the Board of Trustees of American University of Beirut: We have audited the accompanying statements of financial position of American University of Beirut (the University ) as of June 30, 2012 and 2011, and the related statements of activities and cash flows for the year ended June 30, 2012 and for the Nine-Month Period Ended June 30, These financial statements are the responsibility of the University s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the University s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the University as of June 30, 2012 and 2011, and the changes in its net assets and its cash flows for the year ended June 30, 2012 and for the Nine-Month Period Ended June 30, 2011 in conformity with accounting principles generally accepted in the United States of America. February 28, 2013

4 AMERICAN UNIVERSITY OF BEIRUT STATEMENTS OF FINANCIAL POSITION AS OF JUNE 30, 2012 AND ASSETS Cash and cash equivalents $ 74,049,607 $ 68,664,814 Accounts and grants receivable net of allowance for doubtful accounts of $14,544,000 and $10,677,000 for 2012 and 2011, respectively 63,835,888 76,083,561 Inventories and prepaid expenses 16,586,322 12,618,794 Contributions receivable net of allowances 53,260,723 33,672,206 Investments 501,542, ,624,717 Property and equipment net 305,042, ,073,922 TOTAL $ 1,014,317,510 $ 1,009,738,014 LIABILITIES AND NET ASSETS LIABILITIES: Accounts payable and accrued expenses $ 74,924,984 $ 61,770,774 Deposits and deferred revenues 15,416,433 23,314,916 Interest rate swap valuation liability 5,730,095 2,072,288 Term loan and credit agreements payable 59,268,824 65,638,891 Accrued end-of-service benefits 84,300,000 76,800,000 Total liabilities 239,640, ,596,869 NET ASSETS: Unrestricted 452,479, ,223,419 Temporarily restricted 172,545, ,511,707 Permanently restricted 149,652, ,406,019 Total net assets 774,677, ,141,145 TOTAL $ 1,014,317,510 $ 1,009,738,014 See notes to financial statements. 2

5 AMERICAN UNIVERSITY OF BEIRUT STATEMENTS OF ACTIVITIES FOR THE YEAR ENDED June 30, 2012 AND THE NINE-MONTH PERIOD ENDED JUNE 30, Temporarily Permanently Temporarily Permanently Unrestricted Restricted Restricted Total Unrestricted Restricted Restricted Total OPERATING: Revenues contributions, grants, and contracts $ 1,909,613 $ 24,296,740 $ - $ 26,206,353 $ 3,630,868 $ 15,931,166 $ - $ 19,562,034 Fees from services: Educational services net of financial aid 2012, $17,924,000; 2011, $14,062, ,917, ,917,311 94,657, ,657,074 Health services 143,968, ,968,328 94,663, ,663,471 Auxiliary enterprises 9,135, ,135,614 4,421, ,421,972 Net investment return recognized in operations 5,802,990 9,426,348-15,229,338 19,863,694 7,322,449-27,186, ,733,856 33,723, ,456, ,237,079 23,253, ,490,694 Net assets released from restrictions 29,289,681 (29,289,681) ,595,050 (18,595,050) - - Total operating revenues 301,023,537 4,433, ,456, ,832,129 4,658, ,490,694 EXPENSES: Educational services 134,879, ,879, ,672, ,672,245 Health services 126,953, ,953,799 92,946, ,946,838 Auxiliary enterprises 7,507, ,507,826 3,295, ,295,156 Management and general 40,897, ,897,488 25,190, ,190,149 Development and public relations 6,319, ,319,179 4,564, ,564,343 Total operating expenses 316,558, ,558, ,668, ,668,731 (DEFICIENCY) EXCESS OF OPERATING REVENUES OVER OPERATING EXPENSES (15,534,698) 4,433,407 - (11,101,291) (4,836,602) 4,658,565 - (178,037) NONOPERATING ACTIVITIES: Endowment and property and equipment acquisition contributions - 10,492,024 18,224,531 28,716,555 2,280,853 8,231,271 10,512,124 Net investment return (deficit) in excess of amounts recognized in operations (7,414,736) (11,413,229) 21,640 (18,806,325) 10,948,123 16,215, ,693 27,474,027 Net assets released from restrictions 8,477,949 (8,477,949) - - 6,142,334 (6,142,334) - - (Loss) Gain on valuation of interest rate swaps (3,657,807) - - (3,657,807) 2,053, ,053,248 Loss on disposal of fixed assets (615,103) - - (615,103) (948,101) - - (948,101) Total nonoperating activities net (3,209,697) (9,399,154) 18,246,171 5,637,320 18,195,604 12,353,730 8,541,964 39,091,298 CHANGE IN NET ASSETS (18,744,395) (4,965,747) 18,246,171 (5,463,971) 13,359,002 17,012,295 8,541,964 38,913,261 NET ASSETS: Beginning of period 471,223, ,511, ,406, ,141, ,864, ,499, ,864, ,227,884 End of period $ 452,479,024 $ 172,545,960 $ 149,652,190 $ 774,677,174 $ 471,223,419 $ 177,511,707 $ 131,406,019 $ 780,141,145 See notes to financial statements. 3

6 AMERICAN UNIVERSITY OF BEIRUT STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2012 AND THE NINE-MONTH PERIOD ENDED JUNE 30, CASH FLOWS FROM OPERATING ACTIVITIES: Total change in net assets $ (5,463,971) $ 38,913,261 Adjustments to reconcile total change in net assets to net cash provided by (used in) operating activities: Depreciation 13,701,612 9,428,190 Provision for doubtful accounts and grants receivable 3,876,558 (2,640,575) Loss (Gain) on valuation of interest rate swaps 3,657,807 (2,053,248) Loss on disposal of fixed assets 615, ,101 Contributions restricted for endowment and property and equipment acquisitions (28,716,554) (10,512,124) Net appreciation in fair value of investments 25,518,692 (43,023,613) Contributions of property and equipment (44,217) Decrease in accounts and grants receivable 8,371,109 4,694,825 Increase in inventories and prepaid expenses (3,967,528) (1,187,010) (Increase) decrease in contributions receivable, excluding amounts for endowment and property and equipment acquisitions (7,126,840) 461,299 Increase in accounts payable and accrued expenses 13,154,210 7,777,951 (Decrease) in deposits and deferred revenues (7,898,484) (25,594,618) Increase in accrued end-of-service benefits 7,500,000 14,600,000 Net cash provided by (used in) operating activities 23,221,714 (8,231,778) CASH FLOW FROM INVESTING ACTIVITIES: Proceeds from sale of investments 139,035, ,648,637 Purchase of investments (137,493,522) (138,838,105) Purchase of property and equipment (29,285,587) (14,730,637) Net cash used in investing activities (27,743,377) (10,920,105) CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from contributions restricted for: Endowment 9,202,770 5,735,705 Property and equipment 7,052,107 4,468,167 Investment income received restricted for long-term investment 21, ,693 Repayment of term loan (6,370,067) (5,024,998) Net cash provided by financing activities 9,906,456 5,489,567 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,384,793 (13,662,316) CASH AND CASH EQUIVALENTS: Beginning of period 68,664,814 82,327,130 End of period $ 74,049,607 $ 68,664,814 SUPPLEMENTAL DATA Cash paid for interest $ 2,006,522 $ 1,657,949 See notes to financial statements. 4

7 AMERICAN UNIVERSITY OF BEIRUT NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 2012 AND 2011 AND FOR THER YEAR ENDED JUNE 30, 2012 AND THE PERIOD ENDED JUNE 30, Nature of Operations American University of Beirut (the University ) is an independent, not-for-profit, coeducational, nonsectarian institution of higher learning located in Beirut, Lebanon, where it also operates a 421-bed medical center. The University was granted its charter in 1863 by the State of New York and was founded in It is exempt from federal income taxes under the provisions of Section 501(c)(3) of the U.S. Internal Revenue Code. The purpose of the University, as an institution of higher learning, is to share in the education of the youth of the Middle East, in service of its people, and in the advancement of knowledge. The University presently serves approximately 6,342 undergraduate students and 1,601 graduate and professional students in the faculties of Arts and Sciences, Agriculture and Food Sciences, Engineering and Architecture, Medicine and Public Health, Business and Nursing. At June 30, 2012 and 2011, approximately 44% and 41%, respectively, of the University s assets are located in the Republic of Lebanon. Approximately 67% and 69%, respectively, of those assets are property and equipment. 2. Summary of Significant Accounting Policies Change in Fiscal Year Effective October 1, 2010, the University changed its fiscal year from September 30 to June 30. Accordingly, the results of its operations and changes in cash flows for the year ended June 30, 2012 represent a full year of activity and are not comparative to the 9 months of activity reported for the period ended June 30, Basis of Presentation The financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ( generally accepted accounting principles ) and the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) , Presentation of Financial Statements Not-for-Profit Entities. The University reports its net assets in one of the following three classes: Unrestricted net assets Net assets not subject to donor-imposed restrictions. Unrestricted net assets may be designated for specific purposes by action of the Board of Trustees. In addition, accumulated unexpended gains drawn against the spending policy are included in unrestricted net assets and may only be expended pursuant to the University s spending policy. Temporarily restricted net assets Net assets subject to donor-imposed restrictions that will be met by actions of the University or the passage of time. Permanently restricted net assets Net assets subject to donor-imposed restrictions that stipulate they be maintained permanently, but permit the use of part or all of the income derived from these assets. 5

8 Revenues are reported as increases in unrestricted net assets, unless use of the related assets is limited by explicit donor-imposed restrictions or by law. When such restrictions expire, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the statements of activities as net assets released from restrictions. Expenses are reported as decreases in unrestricted net assets. Contributions, including unconditional promises to give (pledges and grants), are reported as revenues in the appropriate net asset class in the period received at the estimated present value of future cash flows, net of an allowance for estimated uncollectible contributions receivable. Amortization of the present value discount is recorded as additional contribution revenue in the appropriate net asset class. 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, including property and equipment, are recorded at their estimated fair value as increases in unrestricted net assets, unless the donor restricts their use. Health services revenues are recorded at the University s established rates, with provisions for third-party contractual adjustments, charity care, and bad debts deducted to arrive at net patient service revenues. Estimated contractual adjustments, including prospective rate adjustments arising under third-party agreements, are accrued in the period services are rendered. Differences between estimated retroactive third-party settlements for prior periods and subsequent final settlements are recorded as current-period adjustments to revenues. The estimated settlements at June 30, 2012, relate to the year ended June 30, 2012, and period ended June 30, 2011, and the year ended September 30, The estimated settlements at June 30, 2011, relate to the nine month period ended June 30, 2011, and the years ended September 30, 2010, and Final settlements have been made for all other prior years. The University recognizes tuition and fee revenue in the period in which the educational instruction is performed. Accordingly, tuition and fees received in advance are deferred until the educational instruction is provided and related expenses incurred. Grants and contracts are reported as revenues when expenses are incurred in accordance with the terms of the agreements. Contract amounts received in advance are recognized as deferred revenues. Expenses are charged to the functions incurring or benefiting from their occurrence. Certain expenses are allocated between medical educational services and health services based on actual levels of effort of the faculty members providing services to each function. Other expenses are allocated among functions on the basis of direct salary cost, metered usage, or other appropriate measures of the expenses incurred. Operations Operations include all revenues earned and expenses incurred by the University, except for net investment returns in excess of amounts allowed to support operations under the spending rate, contributions for property and equipment acquisitions or for permanently restricted purposes, net assets released from restrictions for capital expenditures, exchange gains and losses on translation of assets and liabilities denominated in Lebanese pounds, interest rate swap valuation adjustments, gains and losses on sales or disposal of fixed assets, and other nonrecurring transactions. Cash Equivalents Cash equivalents include all investments with maturities of three months or less at time of purchase, except for such assets held in brokerage accounts by the University s investment managers as part of their long-term investment strategies. 6

9 Investments Investments are reported at their fair market value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Gains or losses on investments are recognized as increases or decreases in unrestricted net assets, unless their use is temporarily or permanently restricted by explicit donor stipulations or by law. Certain investments in limited partnership interests in absolute return funds, hedge funds, private equity funds, real estate fund, and natural resource funds are not publicly traded and are referred to as alternative investments. These alternative investments are carried at their estimated fair value. In some cases, net asset value (NAV) serves as the fair value equivalent. The Trustees have interpreted state law as requiring realized and unrealized gains of permanently restricted net assets to be retained in a restricted net asset classification until appropriated by the Trustees and expended. State law allows the Trustees to appropriate as much of net appreciation of permanently restricted net assets as is prudent considering the University s long- and short-term needs, present and anticipated financial requirements, expected total return on its investments, price level trends, and general economic conditions. The University invests in various securities, including U.S. government securities, corporate debt instruments, hedge funds, private equities, and corporate stocks. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes could occur and materially affect the amounts reported in the financial statements. Endowment Investment and Spending Policies The University s management and investment of donorrestricted endowment funds is subject to the provisions of the New York Prudent Management of Institutional Funds Act (NYPMIFA). The University has adopted investment and spending policies for endowment assets to provide long-term capital appreciation to supply funds for the specified purposes for which the original endowed gifts were given (e.g., scholarships, endowed chairs, and operations). The time horizon for the endowment is perpetuity. The assets of the University are managed accordingly by external professional investment managers or invested in professionally managed funds, including funds of funds or managers of managers. The appointment of such managers or funds is the responsibility of the investment committee, a standing committee of the Board of Trustees. Investment managers have full discretion over their investment programs, subject to appropriate constraints reflected in the University s investment policy statement or in the applicable investment management contracts. The long-term objective of the University is to stabilize annual spending levels to preserve the real value of the endowment portfolio over time. The expected return is the sum of the annual spending rate, the long-term inflation rate, and any growth factor, which the investment committee may deem appropriate. The spending rate for the years ended June 30, 2012 and 2011, was 4.75%. The annual spending rate is based on a 20-quarter average of the market values. To the extent that current yield is inadequate to meet the spending rule, a portion of cumulative accumulated unexpended gains is available for current use. Property and Equipment Land, buildings, and improvements are stated at values from an appraisal made in 1965 by the University, plus subsequent additions at cost, less accumulated depreciation. Equipment and construction in progress are stated at cost. Library books are valued at $1 per volume, except for 1,233 volumes of rare books valued at a total amount of $41,820, based on appraisals made in 1967 and

10 Depreciation is determined using the straight-line method over the estimated useful lives of the assets. Depreciable lives for land improvements and buildings and building improvements range from 20 to 50 years and estimated useful lives of equipment range from 3 to 20 years. Impairment of Long-Lived Assets Long-lived assets, which consist primarily of property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. When such events occur, the University compares the carrying amounts of the assets to the undiscounted expected future cash flows. If this comparison indicates that there may be an impairment, the amount of the impairment is calculated as the difference between the carrying value and fair value. During the fiscal years ended June 30, 2012 and 2011, no impairments have occurred. Collections The University collections include paintings by distinguished Lebanese artists. The university has not capitalized the collections. These collections are maintained for public exhibition, education, and research in furtherance of public service rather than for financial gain. Collections are valuable assets of the University and are protected, kept unencumbered, cared for, and preserved. The proceeds of items in collections that are sold are used to acquire other items for collections. Inventories Inventories are stated at the lower of cost (stated at average cost) or market. Currency Exchange As indicated in Note 1, the University conducts its educational, health, and auxiliary activities from facilities located in the Republic of Lebanon. The local currency is the Lebanese pound and many of the University s transactions are denominated in that currency. Other transactions occur in U.S. dollars. Assets, liabilities, and related net assets are recorded in the currency in which they are denominated (i.e., Lebanese pounds or U.S. dollars). To provide for reporting of revenue and expense transactions in U.S. dollars at the time of their occurrence, the University establishes exchange rates between the pound and the U.S. dollar at the beginning of each month and translates assets and liabilities at the month-end rate. Exchange gains or losses are recognized as revenue or expense. The monthly exchange rate established between the Lebanese pound and the U.S. dollar is L 1,508 = $1. This rate has remained unchanged since Fair Value of Financial Information The fair value of the University s investments is discussed in Note 4. The fair value of the University s interest rate swap agreements is discussed in Notes 4 and 11. The fair value of the University s other financial instruments, other than term loan payable, approximates their carrying value because of the short maturity of these instruments. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could be different from those estimates. In the case of the University, significant estimates include the valuation allowance for accounts and Grant/pledges receivable, Valuation allowance for contribution receivable, obsolete inventories, the valuation of interest rate swap agreements, investments, and the Lebanese end-of-service liabilities. Income Taxes The University has been granted tax-exempt status as a not-for-profit organization under Section 501(c) (3) of the Internal Revenue Code and, accordingly, files Federal Tax Form 990 (return of organization exempt from income tax) annually. No provision for income taxes is required in the accompanying financial statements. 8

11 Accounting for Uncertainty in Income Taxes The University adopts ASC , which prescribes the minimum recognition threshold a tax provision must meet in connection with accounting for uncertainties in income tax provisions taken or expected to be taken by an entity, before being measured and recognized in the financial statements. The adoption of this standard has no material impact on the University s financial position or results of operations. Recently Adopted Accounting Pronouncements Effective for the fiscal year ended June 30, 2012, the University adopted ASU , which requires separate disclosures about purchases, sales, issuances, and other settlements in the roll-forward of activity in Level 3 fair value measurements. The adoption of the additional Level 3 roll-forward disclosure requirements did not materially impact the University s financial statement disclosures. In May 2011, the FASB issued ASU No , Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ( ASU ), which amends the existing fair value guidance. The amendments include: (1) application of the concepts of highest and best use and valuation premise only to measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) an exception to fair value measurement principles for financial assets and financial liabilities (and derivatives) with offsetting positions in market risks or counterparty credit risk, which allows an entity to measure the fair value of the net risk position, when several criteria are met; (3) extension of the prohibition of a blockage factor application to all fair value measurements; (4) a model for the fair value measurement of instruments classified within an entity s shareholders equity which is consistent with the guidance of measuring the fair value for liabilities; (5) additional disclosures for fair value measurements categorized in Level 3 of the fair value hierarchy: (i) quantitative information about unobservable inputs used, (ii) a description of the valuation processes used by the entity, and (iii) a qualitative discussion about the sensitivity of the measurements; (6) disclosure of the level in the fair value hierarchy of assets and liabilities not recorded at fair value, but where fair value is disclosed, and (7) disclosure of any transfers between Level 1 and Level 2 of the fair value hierarchy, not just significant transfers. The amended guidance is effective for interim and annual periods beginning after December 15, As the impact of the guidance is primarily limited to enhanced disclosures, adoption is not expected to have a material impact on the University s financial statements. 9

12 3. Investments The composition of investments as of June 30, 2012 and 2011, is as follows: Cost Fair value Cost Fair value Cash and cash equivalents $ 669,650 $ 669,650 $ 1,169 $ 1,341 Money market funds 3,357,302 3,357,302 4,241,355 4,241,355 Mutual funds fixed income Domestic 47,950,345 49,617,731 64,516,498 67,147,263 International 11,721,759 11,681,049 10,534,612 10,840,863 Alternative investments: Hedge funds 66,162, ,695,380 74,981, ,735,539 Real estate 16,631,661 18,348,466 14,055,050 15,276,731 Private equity 23,494,964 27,954,336 19,970,093 23,673,704 Venture capital 8,845,444 12,747,603 8,434,219 11,935,971 Mutual funds equities 126,740, ,521, ,840, ,478,515 Mutual funds emerging markets 36,889,723 35,870,143 35,789,090 41,243,936 Mutual funds commodities 16,326,856 14,240,645 10,115,539 11,219,454 International equities 2,128,647 2,567,102 2,155,737 2,742,699 Corporate stocks 40,544,418 50,335,933 53,434,733 68,124,082 Accrued fees and amounts due to broker (64,823) (64,782) (37,059) (36,736) $ 401,398,525 $ 501,542,169 $ 406,033,197 $ 528,624,717 At June 30, 2012 and 2011, the University had funding commitments outstanding of approximately $34 million and $27 million, respectively, under the terms of certain investment agreements. The University maintains sufficient liquidity in its investment portfolio to cover such commitments. From time to time, the fund managers will hold cash and cash equivalents in brokerage accounts for future investments. At June 30, 2012 and 2011, such amounts represented $669,650 and $1,341, respectively. Certain securities, with a fair value of $90 million and $104.6 million, are pledged as collateral for the term loan payable to bank at June 30, 2012 and 2011, respectively (see Note 11). 10

13 A summary of the University s total investment return and its classification in the financial statements for the year ended June 30, 2012 and the nine-month period ended June 30, 2011 is as follows: Temporarily Permanently 2012 Unrestricted restricted restricted Total Dividends and interest on investments net of expenses of $1,487,500 $ 10,213,465 $ 9,282,955 $ 76,708 $ 19,573,128 Net appreciation in fair value of investments (14,073,944) (11,270,851) (173,897) (25,518,692) Net return on investments (3,860,479) (1,987,896) (97,189) (5,945,564) Interest on cash and cash equivalents 2,246,705 1, ,829 2,366,549 Total return (1,613,774) (1,986,881) 21,640 (3,579,015) Less allocated to annuity funds 2,028 2,028 (1,611,746) (1,986,881) 21,640 (3,576,987) Less: Net investment return recognized in operations 5,802,990 9,426,348 15,229,338 Net investment return in excess of amounts recognized in operations $ (7,414,736) $ (11,413,229) $ 21,640 $ (18,806,325) 11

14 Temporarily Permanently 2011 Unrestricted restricted restricted Total Dividends and interest on investments net of expenses of $1,147,000 $ 4,458,821 $ 4,136,103 $ 19,416 $ 8,614,340 Net appreciation in fair value of investments 23,398,986 19,395, ,559 43,023,613 Net return on investments 27,857,807 23,531, ,975 51,637,953 Interest on cash and cash equivalents 2,973,504 6,489 61,718 3,041,711 Total return 30,831,311 23,537, ,693 54,679,664 Less allocated to annuity funds (19,494) (19,494) 30,811,817 23,537, ,693 54,660,170 Less: Net investment return recognized in operations 19,863,694 7,322,449 27,186,143 Net investment return in excess of amounts recognized in operations $ 10,948,123 $ 16,215,211 $ 310,693 $ 27,474, Fair Value Measurements The University establishes the fair value as an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques. As a basis for considering assumptions, the University uses a three-tier fair value hierarchy, based upon whether the value of the asset or liability can be readily determined from publicly available data or not. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Observable inputs mean the market data is readily available from independent sources to help quantify the valuations, while unobservable inputs mean that the market data is not readily available and, therefore, the value of the assets or liability in the portfolio must be based on other information, including the reporting entity s own assumptions about how market agents would value the assets or liability. The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by the University for financial instruments measured at fair value on a recurring basis. A financial instrument s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs are as follows: Level 1 Quoted prices in active markets for identical assets or liabilities. Market price data is generally obtained from exchange or dealer markets. Instruments categorized in Level 1 primarily consist of a broadly traded range of equities and debt securities. 12

15 Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the same term of the assets or liabilities. Financial instruments that are included in this category generally include the University s ownership interest in mutual funds without quoted prices in an active market, and certain hedge funds valued based on NAV (or its equivalent) where the University has the ability to redeem its investment at the measurement date or within the near term without redemption restrictions. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Financial instruments that are included in this category generally include the University s ownership interest in real estate funds, private equity funds, venture capital funds, and certain hedge funds valued based on NAV (or its equivalent) where the University may not have the ability to redeem its investment at the measurement date or within the near term without redemption restrictions. A financial instrument s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future values. In addition, 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 University s assets measured at fair value as of June 30, 2012 and 2011 are as follows: 2012 Level 1 Level 2 Level 3 Total Cash and Cash Equivalents $ 669,650 $ - $ - $ 669,650 Money market funds 3,357,302 3,357,302 Mutual funds fixed income Domestic 49,617,731 49,617,731 International 11,681,049 11,681,049 Alternative investments: Hedge funds 58,914,790 65,780, ,695,380 Real estate 18,348,466 18,348,466 Private equity 27,954,336 27,954,336 Venture capital 12,747,603 12,747,603 Mutual funds equities 124,873,896 24,647, ,521,611 Mutual funds emerging markets 25,261,130 10,609,013 35,870,143 Mutual funds commodities 14,240,645 14,240,645 International equities 2,567,102 2,567,102 Corporate stocks 50,335,933 50,335,933 Accrued fees and due to broker (64,782) (64,782) Total $ 270,858,607 $ 105,852,567 $ 124,830,995 $ 501,542,169 13

16 2011 Level 1 Level 2 Level 3 Total Cash and Cash Equivalents $ 1,341 $ - $ - $ 1,341 Money market funds 4,241,355 4,241,355 Mutual funds fixed income - Domestic 67,147,263 67,147,263 International 10,840,863 10,840,863 Alternative investments: Hedge funds 36,353,695 99,381, ,735,539 Real estate 15,276,731 15,276,731 Private equity 23,673,704 23,673,704 Venture capital 11,935,971 11,935,971 Mutual funds equities 115,291,085 21,187, ,478,515 Mutual funds emerging markets 29,932,888 11,311,048 41,243,936 Mutual funds commodities 11,219,454 11,219,454 International equities 2,742,699 2,742,699 Corporate stocks 68,124,082 68,124,082 Accrued fees and due to broker (36,736) (36,736) Total $ 298,663,431 $ 79,693,036 $ 150,268,250 $ 528,624,717 The additional information about Level 3 assets measured at fair value for year ended June 30, 2012 and the nine-month period ended June 30, 2011, is as follows: Beginning balance $ 150,268,250 $ 134,862,332 Transferred from Level 3 to Level 2 (33,940,025) Net appreciation in fair value 6,418,814 13,397,358 Sales net of fees (7,683,792) (5,196,890) Purchases 9,767,748 7,205,450 Ending balance $ 124,830,995 $ 150,268,250 Changes in net unrealized gains (losses) included in net appreciation in fair value related to the Level 3 investments detailed still held at June 30, 2012 and 2011, are $1,649,938 and $5,744,460, respectively. As more fully disclosed in Note 11, the University maintains three interest rate swaps as a hedge related to interest on its long-term loans. The fair value of the interest rate swaps totals a liability of $5,730,095 and $2,072,288 at June 30, 2012 and 2011, respectively. The swaps are considered Level 3 liabilities. The change in the balance of the interest rate swaps from 2011 to 2012 is due solely to a change in the fair value of these instruments. 14

17 Investments in Certain Entities that Calculate NAV Per Share As a practical expedient to value certain investments, the University relies on NAVs as the fair value for certain investments. The information regarding all investments that use a fair value measurement to account for both their financial assets and financial liabilities in their calculation of a NAV per share (or its equivalent) at June 30, 2012 and 2011, respectively, is as follows: 2012 Redemption Unfunded Frequency (If Redemption Category Fair Value Commitments Currently Eligible) Notice Period International emerging market equity long funds (a) $ 35,256,728 $ - Daily 1-7 days Fixed-income funds (b) 11,681,049 - Monthly 10 days Event-driven hedge funds (c) 24,850,197 - Quarterly days Multistrategy hedge funds (d) 99,845,183 - Real estate funds (e) 18,348,466 21,507,267 Private equity fund funds (f) 27,954,336 7,847,389 Venture capital (g) 12,747,603 4,301,055 $ 230,683,562 $ 33,655, Redemption Unfunded Frequency (If Redemption Category Fair Value Commitments Currently Eligible) Notice Period International emerging market equity long funds (a) $ 32,498,478 $ - Daily 1-7 days Fixed-income funds (b) 10,840,863 - Monthly 10 days Event-driven hedge funds (c) 36,353,695 - Quarterly days Multistrategy hedge funds (d) 99,381,844 - Real estate funds (e) 15,276,731 15,117,386 Private equity fund funds (f) 23,673,704 10,216,478 Venture capital (g) 11,935,971 1,980,380 $ 229,961,286 $ 27,314,244 (a) (b) (c) (d) International emerging market/equity long funds: This category includes a strong value discipline investor, investing predominately in developed international equity/emerging markets. This category will trade on a long basis. Fixed income funds: This category includes investments in global bond funds with the objective to provide a rate of return that compensates for the risk of inflation. Sovereign bonds issued by G-7 and G-20 countries (in their respective local currencies) are the preferred type of investment of these funds. The local currency exposure provides a hedge against a potential depreciation in the U.S. dollar. Event-driven hedge funds: This category includes investments with the objective of earning absolute returns by making long- and short-term investments in equity, debt, and derivative instruments which are based on near-term catalysts, including mergers, spin-offs, and restructurings. Multistrategy hedge funds: This category includes investments with the objective of earning absolute returns by making long- and short-term investments in equity, debt, and derivative instruments which attempt to exploit differences in relative value. These 15

18 (e) (f) (g) investments have lock-up provisions ranging from none to three years. Real estate funds: This category includes investments with the objective to achieve long-term returns higher than public equity markets on a risk-adjusted basis by allowing fund managers to invest in varying forms of real estate and to generate revenue through rental yields and property appreciation. The ability to earn revenue through property appreciation can allow real estate to also serve as an inflation hedge. These investments are not redeemable in the near future. Instead, the nature of the investments in this category is that distributions are received through the liquidation of the underlying assets of the fund. Private equity funds: This category includes investments with the objective to achieve long-term returns higher than public equity markets on a risk-adjusted basis by allowing fund managers to invest long-term locked-up capital directly into private companies. These investments are not redeemable in the near future. Instead, the nature of the investments in this category is that distributions are received through the liquidation of the underlying assets of the fund. Venture capital: This category includes investments with the objective to achieve long-term returns higher than public entity markets on a risk-adjusted basis by allowing fund managers to invest in early stage companies that require capital and guidance in order to continue their development. These investments are not redeemable in the near future. Instead, the nature of the investments in this category is distributions are received through the liquidation of the underlying assets of the fund. 5. Endowment The University s endowment consists of separate funds established over many years for a wide variety of purposes. The endowment includes both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. As defined by generally accepted accounting principles, 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 composition and changes in the University s endowment net assets as of June 30, 2012 and 2011, are as follows: 2012 Temporarily Permanently Unrestricted Restricted Restricted Net Assets Net Assets Net Assets Total Changes in endowment net assets: Beginning balance June 30, 2011 $ 156,602,224 $ 122,213,568 $ 131,406,019 $ 410,221,811 Investment returns: Investment income 5,949,782 9,283, ,537 15,429,289 Net appreciation (6,720,365) (11,270,851) (173,897) (18,165,113) Total investment return (770,583) (1,986,881) 21,640 (2,735,824) Gifts 28,266,389 18,224,531 46,490,920 Other changes release from restriction (16,916,831) (37,767,630) (54,684,461) Ending balance June 30, 2012 $ 138,914,810 $ 110,725,446 $ 149,652,190 $ 399,292,446 The fair value of donor- restricted endowment funds may depreciate below the amount that the donor requires the University to maintain permanently. In such cases, the losses have been charged to unrestricted investments functioning as endowment. The deficiency was $632,000 and $229,000 at June 30, 2012 and 2011, respectively. 16

19 2011 Temporarily Permanently Unrestricted Restricted Restricted Net Assets Net Assets Net Assets Total Changes in endowment net assets: Beginning balance October 1, 2010 $ 153,735,261 $ 105,529,367 $ 122,864,055 $ 382,128,683 Investment returns: Investment income 2,728,014 7,322,449 61,718 10,112,181 Net appreciation 13,710,701 16,215, ,975 30,174,887 Total investment return 16,438,715 23,537, ,693 40,287,068 Gifts 17,883,925 8,231,271 26,115,196 Other changes release from restriction (13,571,752) (24,737,384) (38,309,136) Ending balance June 30, 2011 $ 156,602,224 $ 122,213,568 $ 131,406,019 $ 410,221, Contributions Receivable Contributions receivable as of June 30 consist of the following: Amounts expected to be collected in: Less than one year $ 28,087,233 $ 21,151,019 One to five years 17,880,242 11,259,000 More than five years 13,116,875 5,049,750 59,084,350 37,459,769 Discount to present value at 0.71% to 6.60% (3,483,137) (2,738,034) Allowance for doubtful collection (2,340,490) (1,049,529) Contributions receivable $ 53,260,723 $ 33,672, Accounts and Grants Receivables: Accounts and Grants Receivables consist of grants that the University has received from Federal and local governmental agencies; as well as, private sponsored grants and contracts from entities for certain agreed projects. The amounts billed for reimbursement are recorded as a receivable. The Medical Center receivables consist of receivables from the Lebanese Social Security Fund, other governmental agencies, Private insurance Companies and private individuals. 17

20 Accounts and Grants receivables as of June 30 consist of the following: Grants receivable $ 4,457,804 $ 13,441,269 Medical center receivable 58,587,593 58,296,951 Student receivable 1,658, ,190 Other receivable 13,676,366 14,063,151 78,379,888 86,750,561 Allowance for Doubtful Collection (14,544,000) (10,667,000) Total Accounts and Grants Receivables $ 63,835,888 $ 76,083, Property and Equipment Property and equipment as of June 30 consist of the following: Land and land improvements $ 73,559,430 $ 73,559,430 Buildings and building improvements 211,999, ,042,097 Equipment 151,611, ,200,513 Library books 753, ,067 Construction in progress 29,613,860 14,057,637 Total property and equipment 467,537, ,612,744 Less accumulated depreciation (162,494,600) (151,538,822) Property and equipment net $ 305,042,801 $ 290,073,922 In connection with a number of projects now in the construction phase and others still in the design phase, the University has commitments aggregating $34.6 million and $32.6 million at June 30, 2012 and 2011, respectively. 9. Employee Benefit Plans The University has contributory and noncontributory employee benefit plans designed to provide pension benefits and, in accordance with Lebanese law, end-of-service indemnities. Plan A is a defined contribution plan established to cover academic and management U.S. citizens or resident aliens employed by the University. The plan requires an employee to contribute at least 5% of basic salary in order to receive AUB s contribution of 10% of basic salary to this plan. Total expense under this plan for the year ended June 30, 2012 and nine-month period ended June 30, 2011, was $1,450,151 and $1,044,139, respectively. Assets for this plan are maintained by an independent custodian. 18

21 Plan B is a defined contribution plan established to cover all academic non-u.s. citizen or nonresident alien employees of the University. The University records in each participating employee memorandum account, a future service benefit, in an amount equal to 12.5% of basic salary if the employees contribute 5% to a plan managed and maintained by an independent provider. The liability reflected in the financial statements for this plan is $57,800,000 and $56,100,000 at June 30, 2012 and 2011, respectively. Total expense under this plan for the year ended June 30, 2012 and the nine-month period ended June 30, 2011, was $3,436,136 and $6,938,266, respectively. Assets for this plan, totaling $57,800,000 and $56,100,000 at June 30, 2012 and 2011, respectively, are reported as a component of investments in the statements of financial position. In addition to the Plan A and Plan B detailed above, the University is also required to contribute to the end-of-service indemnity plan mandated by Lebanese social security law for Lebanese nationals (referred to hereafter as Plan C ). Plan C is the end-of-service indemnity plan mandated by Lebanese social security law. This plan covers all nonacademic Lebanese national employees of the University. The University is required to make contributions to this plan in an amount equal to 8.5% of the employee s compensation. The University s exposure for ongoing payment of benefits to retirees is subject to the provisions of Lebanese law. The liability recorded for such benefits in the financial statements is $26,500,000 and $20,700,000 at June 30, 2012 and 2011, respectively. Total expense under this plan for year ended June 30, 2012 and the nine-month period ended June 30, 2011 was $5,838,346 and $7,504,301, respectively. Assets for this plan totaling $26,500,000 and $20,700,000 at June 30, 2012 and 2011, respectively, are reported as a component of investments in the statements of financial position. 10. Temporarily and Permanently Restricted Net Assets Temporarily restricted net assets as of June 30, 2012 and 2011, are available for the following purposes: Educational services: Instruction $ 26,110,585 $ 29,217,209 Research 9,344,552 11,245,975 Academic support 4,485,384 4,968,591 Student aid 36,180,943 39,378,088 Health services 3,419,111 3,087,784 Property and equipment 16,110,500 5,488,600 College hall fund 3,291,678 3,473,315 Other 3,619,315 3,021,020 General institutional support subject to spending policy 69,983,892 77,631,125 Total temporarily restricted net assets $ 172,545,960 $ 177,511,707 19

22 Permanently restricted net assets are restricted for investment in perpetuity as of June 30, 2012 and 2011, with investment return available to support the following activities: Educational services: Instruction $ 97,192,342 $ 82,355,413 Research 3,214,621 3,108,291 Academic support 1,700, ,157 Student aid 43,566,843 40,991,063 Health services 864, ,928 Other 3,113,342 2,991,167 Total permanently restricted net assets $ 149,652,190 $ 131,406, Medical Malpractice Insurance and Litigation The University has obtained medical malpractice liability coverage, under public liability insurance coverage from a commercial carrier, for claims made during the policy period with coverage limits dependent on the time of occurrence of the alleged event and subject to deductibles dependent on the jurisdiction in which the claim arises. The cost of providing the public liability insurance coverage, including that for medical malpractice, was $386,000 and $290,000 for the year ended June 30, 2012 and the nine-month period ended June 30, 2011, respectively. The University is a defendant to various claims alleging medical malpractice or arising out of the operations of its educational programs at its Beirut campus. The outcome of these actions, seeking damages potentially in excess of the University s insurance coverage, cannot be determined at this time. University management believes that the University has good and meritorious defenses against these claims and does not expect the ultimate resolution of these actions to have a material adverse effect on the University s financial position. The University receives financial assistance from the U.S. Federal government. Entitlements to the resources are generally conditional upon compliance with the terms and conditions of the grant agreements and applicable federal regulations, including the expenditure of resources for eligible purposes. Substantially all federal financial assistance is subject to financial and compliance audits. Any disallowances become liabilities of the University. 20