Consolidated Financial Statements (With Independent Auditors Report Thereon)
Table of Contents Page(s) Independent Auditors Report 1 2 Consolidated Financial Statements: Consolidated Statements of Financial Position 3 Consolidated Statements of Activities 4 5 Consolidated Statements of Cash Flows 6 7 33 Schedules Schedule 1 Consolidating Schedules of Financial Position 34 35 Schedule 2 Consolidating Schedules of Activities 36 37
KPMG LLP Suite 2000 303 Peachtree Street, N.E. Atlanta, GA 30308-3210 Independent Auditors Report The Board of Trustees The University of Georgia Foundation: We have audited the accompanying consolidated financial statements of The University of Georgia Foundation and subsidiary, which comprise the consolidated statements of financial position as of June 30, 2013 and 2012, 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 Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. 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 audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the 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 opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The University of Georgia Foundation and subsidiary as of June 30, 2013 and 2012, and the results of their operations and their cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.
Other Matter Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary information included in Schedules 1 and 2 is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. September 27, 2013 2
Consolidated Statements of Financial Position Assets 2013 2012 Cash and cash equivalents $ 6,106,255 14,990,244 Temporary investments (notes 5 and 6) 73,846,972 77,794,931 Accounts receivable 1,032,524 1,474,477 Contributions receivable, net (note 3) 41,510,876 41,020,344 Beneficial interest in perpetual trust 4,316,369 Accrued interest receivable 515,381 377,121 Prepaid expenses and other assets 224,152 193,503 Investments (notes 5 and 6) 701,257,179 583,405,696 Real property net of accumulated depreciation of $2,977,065 and $2,607,784, respectively 29,067,206 30,474,334 Construction in progress (note 13) 3,923,824 Works of art 2,345,908 2,345,908 Furniture, fixtures, and equipment net of accumulated depreciation of $784,392 and $727,860, respectively 245,423 293,350 Cash value of life insurance policies 2,138,300 2,039,246 Total $ 866,530,369 754,409,154 Liabilities and Net Assets Accounts payable and accrued expenses $ 4,081,726 3,555,147 Derivative financial instrument (note 9) 1,836,826 2,692,835 Funds held for others (note 12(d)) 35,109,979 3,816,288 Deferred affinity contract obligation (note 7) 2,326,045 Obligations related to deferred gifts (note 10) 10,630,136 11,012,617 Notes payable (note 8) 5,697,543 5,798,919 Total liabilities 57,356,210 29,201,851 Net assets: Unrestricted 68,115,733 47,737,471 Temporarily restricted (note 15) 345,125,294 302,355,153 Permanently restricted (note 15) 395,933,132 375,114,679 Total net assets 809,174,159 725,207,303 Commitments and contingencies (notes 5, 7, 8, 9, 10, 11, and 12) Total liabilities and net assets $ 866,530,369 754,409,154 See accompanying notes to consolidated financial statements. 3
Consolidated Statement of Activities Year ended June 30, 2013 (with summarized consolidated financial information for the year ended June 30, 2012) 2013 2012 Temporarily Permanently Unrestricted restricted restricted Total Total Revenues: Rental income (note 12(a)) $ 582,322 582,322 670,287 Contributions 3,518,769 41,685,452 16,482,121 61,686,342 37,247,711 Net realized and unrealized gain (loss) on investments (note 5) 6,174,565 63,783,117 833,170 70,790,852 (14,199,862) Interest and dividends 579,017 7,646,037 297,086 8,522,140 6,122,579 Change in value of annuities 22,161 198,247 220,408 106,434 Change in cash surrender value of life insurance 107,109 107,109 108,180 Change in fair value of derivative financial instrument (note 9) 856,009 856,009 (1,219,566) Change in value of beneficial interest in perpetual trust 148,336 148,336 Other 9,019,527 1,349,606 2,752,384 13,121,517 9,898,847 Net assets released from restrictions (note 14) 71,716,232 (71,716,232) Total revenues 92,446,441 42,770,141 20,818,453 156,035,035 38,734,610 Expenses: UGA administrative support 142,539 142,539 125,793 Programs and scholarships (note 12(b)): Donor restricted program support 53,274,925 53,274,925 25,518,720 Scholarships 9,228,576 9,228,576 9,373,598 Direct program support 1,621,937 1,621,937 3,527,728 General operations: Alumni Association 1,449,419 1,449,419 1,123,506 Administrative services 1,390,468 1,390,468 1,386,367 Special programs and events 931,672 931,672 715,322 Foundation board 213,127 213,127 223,625 Development and External Affairs 2,000,346 2,000,346 1,297,260 Management and administrative fees 95,292 95,292 122,150 Interest expense net (note 8) 342,301 342,301 393,728 Distributions to beneficiaries 445,723 445,723 424,591 Foreign currency adjustment 19,300 Other expenses 931,854 931,854 1,328,507 Total expenses 72,068,179 72,068,179 45,580,195 Change in net assets 20,378,262 42,770,141 20,818,453 83,966,856 (6,845,585) Net assets: Beginning of year 47,737,471 302,355,153 375,114,679 725,207,303 732,052,888 End of year $ 68,115,733 345,125,294 395,933,132 809,174,159 725,207,303 See accompanying notes to consolidated financial statements. 4
Consolidated Statement of Activities Year ended June 30, 2012 Temporarily Permanently Unrestricted restricted restricted Total Revenues: Rental income (note 12(a)) $ 670,287 670,287 Contributions 2,440,543 22,652,529 12,154,639 37,247,711 Net realized and unrealized loss on investments (note 5) (1,023,074) (13,049,658) (127,130) (14,199,862) Interest and dividends 406,591 5,366,778 349,210 6,122,579 Change in value of annuities (28,535) 134,969 106,434 Change in cash surrender value of life insurance 108,180 108,180 Change in fair value of derivative financial instrument (note 9) (1,219,566) (1,219,566) Transfer of realized and unrealized losses on endowment funds with deficits (719,819) 719,819 Other 5,215,428 4,597,419 86,000 9,898,847 Net assets released from restrictions (note 14) 40,848,905 (40,848,905) Total revenues 46,619,295 (20,590,553) 12,705,868 38,734,610 Expenses: UGA administrative support 125,793 125,793 Programs and scholarships (note 12(b)): Donor restricted program support 25,518,720 25,518,720 Scholarships 9,373,598 9,373,598 Direct program support 3,527,728 3,527,728 General operations: Alumni Association 1,123,506 1,123,506 Administrative services 1,386,367 1,386,367 Special programs and events 715,322 715,322 Foundation board 223,625 223,625 Development and External Affairs 1,297,260 1,297,260 Management and administrative fees 122,150 122,150 Interest expense net (note 8) 393,728 393,728 Distributions to beneficiaries 424,591 424,591 Foreign currency adjustment 19,300 19,300 Other expenses 1,328,507 1,328,507 Total expenses 45,580,195 45,580,195 Change in net assets 1,039,100 (20,590,553) 12,705,868 (6,845,585) Net assets: Beginning of year 46,698,371 322,945,706 362,408,811 732,052,888 End of year $ 47,737,471 302,355,153 375,114,679 725,207,303 See accompanying notes to consolidated financial statements. 5
Consolidated Statements of Cash Flows Years ended 2013 2012 Cash flows from operating activities: Change in net assets $ 83,966,856 (6,845,585) Adjustments to reconcile change in net assets to net cash (used in) provided by operating activities: Depreciation 369,281 376,814 Contributions restricted for long-term investment (11,884,260) (9,837,191) Interest and dividends restricted for long-term investment (297,086) (349,210) Net realized and unrealized (gain) loss on investments (70,790,852) 14,199,862 Net loss on impairment and sales of real estate and personal property 320,121 302,886 Change in fair value of derivative financial instrument (856,009) 1,219,566 Change in value of beneficial interest in perpetual trust (148,336) Foreign currency adjustment 19,300 Actuarial loss on deferred gift obligations 207,499 319,890 Contributed services for software development, testing, and implementation (931,730) Donated property (228,533) Contribution of beneficial interest in perpetual trust (4,168,033) Changes in: Accounts receivable and accrued interest receivable 303,693 2,070,358 Contributions receivable (490,532) 1,478,669 Prepaid expenses and other assets (30,649) (121,217) Accounts payable and accrued expenses 526,579 2,378,567 Deferred affinity contract obligation (2,326,045) 419,624 Net cash (used in) provided by operating activities (6,229,503) 5,403,800 Cash flows from investing activities: Capital expenditures (3,349,930) (12,641) Proceeds from sale of real property 1,123,489 65,000 Purchases of investments (162,515,728) (218,127,818) Proceeds from sale of investments 119,403,056 164,758,532 Increase in funds held for others 31,293,691 225,205 Change in cash value of life insurance policies (99,054) (63,746) Net cash used in investing activities (14,144,476) (53,155,468) Cash flows from financing activities: Proceeds from contributions restricted for long-term investment 11,884,260 9,837,191 Interest and dividends restricted for long-term investments 297,086 349,210 Payments on deferred gift obligations (1,122,128) (1,156,901) Investments subject to annuity agreements 532,148 402,380 Repayment on notes payable (101,376) (921,202) Net cash provided by financing activities 11,489,990 8,510,678 Net change in cash and cash equivalents (8,883,989) (39,240,990) Cash and cash equivalents beginning of year 14,990,244 54,231,234 Cash and cash equivalents end of year $ 6,106,255 14,990,244 Supplemental cash flow information: Cash paid for interest $ 342,301 393,728 In-kind gifts: Land $ 153,000 Timber 75,533 Software development, testing, and implementation costs 931,730 Cost of specialized services 850,376 791,568 Total in-kind gifts $ 1,782,106 1,020,101 See accompanying notes to consolidated financial statements. 6
(1) Organization and Purpose The University of Georgia Foundation (the Foundation) is a not-for-profit foundation that was chartered in 1937 to receive and administer contributions for the support of the academic programs of the University of Georgia (the University). The University is governed by the Board of Regents of the University System of Georgia (the Board of Regents). The Foundation performs the following primary functions: Receives and manages funds for the support and enhancement of the University Provides financial support to the University for scholarships, faculty salary supplements, awards and lectureships, travel, research, and other institutional programs Owns and operates a study-abroad facility in Costa Rica for the benefit of the University through a wholly owned foreign corporation, UGA Ecolodge and Research Station S.A. (the Costa Rica Entity), established under Costa Rican law. (2) Summary of Significant Accounting Policies (a) Basis of Presentation The accompanying consolidated financial statements have been prepared on the accrual basis in conformity with U.S. generally accounting principles and include the accounts of the Costa Rica Entity. All balances and transactions between the Foundation and the Costa Rica Entity have been eliminated in consolidation. (b) (c) Cash and Cash Equivalents All highly liquid investments with an original maturity of three months or less are considered to be cash and cash equivalents. Cash and cash equivalents that are part of the Foundation s pooled investments are shown within investments in the accompanying consolidated statements of financial position as these funds are generally not used for daily operating needs. Substantially, all of the Foundation s cash is invested through one financial institution. Investments and Temporary Investments Investments consist predominantly of marketable securities, privately held limited partnerships, hedge funds, real assets, and real estate. Investments in equity and debt securities with readily determinable fair values are reported at fair value. The fair values are estimated based on quoted market prices for those or similar investments where a market price is available. Realized and unrealized gains (losses) are allocated to the appropriate net asset class. The Foundation uses the net asset value (NAV) per share or its equivalent reported by the investment managers as a practical expedient to estimate fair value for certain investments, although NAV in many instances may not equal fair value. The NAV per share or its equivalent was applied to certain investments that do not have readily determinable fair values, including hedge funds, private equities, private limited partnership interests, real assets, and natural resources, unless it is probable that all or a portion of the investment will be sold for an amount different from NAV. As of June 30, 2013 and 2012, the Foundation had no plans or intentions to sell investments at amounts different from NAV. 7 (Continued)
General partners of funds invested in marketable securities provide fair values based on quoted market prices and exchange rates for publicly held securities and valuation estimates of derivative instruments. Investment managers are authorized to employ derivative instruments, including swaps, futures, forwards, and options. These derivatives are generally used for managing interest rate or foreign currency risk or to attain or hedge a specific financial market position. The Foundation does not have direct investments in such instruments. Real estate partnerships and funds are valued at NAV based on appraisals of properties held and conducted by third party appraisers retained by the general partner or investment manager. Valuation processes and methodologies utilized by the general partners and investment managers are reviewed by Foundation management. Management reviews and evaluates valuation information provided by general partners and investment managers, and management believes such values are reasonable estimates of fair value. Temporary investments are held in money market funds and treasury yield accounts, have an original maturity of greater than three months, and represent operating funds in excess of immediate cash requirements. (d) (e) Investment Fees Consultants, custodial managers, and investment managers receive payments for the service they provide in managing investment securities for the Foundation. Fees of $7,475,940 and $6,601,356 paid to investment managers during 2013 and 2012, respectively, are netted against net realized and unrealized loss in the accompanying consolidated statements of activities. Custodial and consultant expenses of $380,155 and $342,705 were paid directly to custodial managers and consultants during 2013 and 2012, respectively, and are netted against interest and dividends in the accompanying consolidated statements of activities. Investment Strategy for Cash Balances The Foundation employs a three-tier investment strategy for short-term balances of restricted and unrestricted funds. All short-term funds are pooled for investment. The allocations to the three levels take into account cash flow requirements of funds held for construction and cash flow requirements for the current and the next two years operations. Tier 1 is invested in institutional money market funds and short-term U.S. Treasuries and includes cash flow requirements for the current year and construction funding. Tier 2 is invested in low duration fixed income funds, A1-P1 commercial paper, treasuries, agencies, CDs, and money market funds, and is used to replenish Tier 1. Tier 3 is invested in the Foundation s long-term investment portfolio. The Tier 1 investment return percentage is distributed to building and endowed funds that participate in the short-term portfolio based on each fund s share of the total short-term investments. The remainder of the Tier 1 investment returns related to the short-term investment of nonendowed funds is returned to unrestricted net assets. Any investment returns recognized from Tier 2 and Tier 3 are returned to unrestricted net assets for annual operations. For the years ended, the accumulated net gain of Tier 2 and Tier 3 was $2,659,352 and $912,431, respectively, which is 8 (Continued)
reflected as an increase of unrestricted net assets within the accompanying consolidated statements of activities. (f) (g) (h) (i) (j) (k) Real Property Real property includes land, timber, and buildings. Land and timber are stated at cost and are not depreciated. Buildings are stated at cost, less accumulated depreciation. Donated real property is recorded at the estimated fair value at the date of the gift. Depreciation is computed using the straight-line method over the lesser of the estimated useful lives of approximately 30 years or the remaining term of the underlying leases (note 12(a)). Expenditures for maintenance and repairs are charged to operations as incurred, while renewals and betterments are capitalized. Works of Art The Foundation capitalizes art collections and recognizes contribution revenue at the fair value of the gift at the date of receipt. Art collections are not depreciated. Furniture, Fixtures, and Equipment Furniture, fixtures, and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from three to seven years. Impairment The Foundation regularly evaluates whether events and circumstances have occurred that indicate the carrying amount of real property, and furniture, fixtures, and equipment may warrant revision or may not be recoverable. When factors indicate that these long-lived assets should be evaluated for possible impairment, the Foundation assesses the potential impairment by determining whether the carrying value of such long-lived assets will be recovered through the future undiscounted cash flows expected from use of the asset and its eventual disposition. If the carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded, based on quoted market values, discounted cash flows, or external appraisals, as applicable. In addition, the Foundation regularly evaluates whether events and circumstances have occurred that indicate the useful lives of long-lived assets may warrant revision. Derivative Financial Instruments The Foundation s derivative financial instruments manage interest rate risk associated with a portion of current and future borrowings. These derivative financial instruments are recorded at fair value in the accompanying consolidated statements of financial position. Changes in the fair value of the derivative financial instruments are included in the accompanying consolidated statements of activities (note 9). Contributions and Net Assets Unconditional promises to give are recognized as revenue in the appropriate class of net assets when the underlying promises are received by the Foundation. Gifts of cash and other assets are reported 9 (Continued)
as either temporarily or permanently restricted revenue if they are received with donor stipulations that limit the use of the donated asset. The Foundation s net assets and revenue, expenses, gains, and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, the net assets of the Foundation and changes therein are classified and reported as follows: Unrestricted net assets Net assets that are not subject to donor-imposed stipulations or time restrictions. Net assets included in this class include unrestricted gifts and board-designated endowment funds. Temporarily restricted net assets Net assets subject to donor-imposed stipulations or time restrictions that may or will be met either by actions of the Foundation in accordance with donor stipulations and/or the passage of time. When donor restrictions on cash and other assets reported as temporarily restricted net assets expire (that is, when a stipulated time restriction ends or purpose restriction is accomplished), temporarily restricted net assets are transferred to unrestricted net assets and reported in the consolidated statements of activities as net assets released from restrictions. The Foundation s policy is to use such funds for the restricted purpose as soon as it is practical and prudent. Temporarily restricted net assets are used to provide facility support, including building construction and renovation, and program support of the University. Permanently restricted net assets Net assets subject to donor-imposed stipulations requiring that the net assets be maintained permanently by the Foundation. The permanently restricted classification is used if the donor stipulations are restricted for a specified purpose, whereby gifts of cash and other assets must be invested in perpetuity to provide a permanent source of income for the Foundation. A substantial portion of the income from permanently restricted net assets is used to provide scholarship and professorship support. The Foundation s endowment spending rate for permanently restricted net assets was 4.0% of the average market value of the long-term invested assets for both the years ended. The method used to calculate the annual endowment spending budget is described in note 4(d). (l) Split-Interest Agreements and Beneficial Interest in Perpetual Trust The Foundation is the remainder beneficiary under agreements for certain life income and life interest gifts. The underlying assets of these agreements are included in investments in the accompanying consolidated statements of financial position. Life income gifts are invested in pooled income funds established pursuant to agreements between the Foundation and the trustees of the funds. At the time of receipt, a gift is recorded based upon the fair value of assets donated less the estimated annuity payment liability. The liability is recognized at the present value of projected future distributions to be paid to the donor or other designee. The principal amount of such gifts has been classified within net assets based on donor restrictions. Certain of these life income agreements include cash and cash equivalents that the Foundation includes in investments as the access to these amounts is controlled by the trustees and not by the Foundation. 10 (Continued)
Life interest gifts consist of real estate in which the donor has retained certain life interests in the property. The fair value of the gift at the date of receipt has been discounted for the estimated value of the life interest retained by the donor and has been classified within net assets based on donor restrictions. The real estate value is being accreted to the fair value of the gift at the date of receipt over the estimated life expectancy of the donor. The Foundation also holds a beneficial interest in a perpetual trust created by a donor, the assets of which are not in the possession of the Foundation. The Foundation has legally enforceable rights or claims to such assets, including the sole right to income therefrom. The change in value of the Foundation s beneficial interest in perpetual trust is reported as a change in permanently restricted net assets in the consolidated statements of activities. (m) (n) (o) (p) Life Insurance Gifts Life insurance gifts consist of life insurance policies purchased by donors where the Foundation is the owner and beneficiary of the policy. The cash value of life insurance policies, net of policy loans, has been classified within net assets based on donor restrictions. Rental Income Rental income is recognized monthly when earned and collectability of the associated receivable is reasonably assured. Any rental payments received, but not yet earned, are included in accounts payable and accrued expenses in the consolidated statements of financial position. Administrative Fees The Foundation charges an administrative fee to restricted endowed funds and transfers this amount to the unrestricted fund to cover operating expenses. For the years ended, the administrative fees charged were $5,793,952 and $5,291,891, respectively. This fee was calculated quarterly based on a flat rate of 1.0% for endowed accounts for both the years ended June 30, 2013 and 2012. The applicable rate is applied to each restricted fund s average fund balance as of the end of each quarter. Such administrative fees are transferred to unrestricted net assets from temporarily restricted net assets through net assets released from restrictions. Upon release from restriction, such administrative fees and corresponding income are netted within management and administrative fees within the consolidated statements of activities. Estimates in the Consolidated Financial Statements The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the assumptions used in the determination of the fair value of certain investments without readily determinable fair values, allowance for contributions receivable, and liabilities to life beneficiaries. 11 (Continued)
(q) (r) (s) Commitments and Contingencies Liabilities for loss contingencies arising from the ordinary course of business are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Management believes that any pending litigation of the Foundation, when fully concluded and determined, will not, in the opinion of management, have a material adverse effect upon the financial position of the Foundation. Recently Implemented Accounting Standards In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The new standards do not extend the use of fair value but, rather, provide guidance about how fair value should be applied where it already is required or permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS. A nonpublic entity is required to apply the ASU prospectively for annual periods beginning after December 15, 2011. The Foundation s adoption of ASU 2011-04 during fiscal 2013 did not have a material impact on its consolidated financial statements. Reclassifications Certain 2012 amounts have been reclassified to conform to the 2013 presentation. (3) Contributions Receivable Unconditional promises to give as of are due as follows: 2013 2012 Within one year $ 14,309,742 11,503,271 One to five years 40,327,586 39,512,758 More than five years 3,185,599 4,679,514 Gross contributions receivable 57,822,927 55,695,543 Less allowance for uncollectible contributions (10,253,334) (7,969,473) Less present value component (6,058,717) (6,705,726) Net contributions receivable $ 41,510,876 41,020,344 The discount rates used to calculate the present value component range from 2.46% to 6.69%. An allowance for uncollectible contributions is necessary as, from time to time, the Foundation may be unable to collect an outstanding pledge recorded as contributions receivable. The allowance is management s estimate of the potential future write-offs of uncollectible contributions and is based on historical write-offs, age of contributions, and other factors. Contributions receivable beyond one year are 12 (Continued)
discounted to their present value using treasury rates consistent with the life of the pledge, commensurate with the risks involved. The 10 largest outstanding donor pledge balances represented 49% of the Foundation s gross contributions receivable as of both. Fundraising expenses incurred by the Foundation totaled $2,764,325 and $1,910,359 during 2013 and 2012, respectively, and are included in development and external affairs, special programs and events, and donor restricted program support in the accompanying consolidated statements of activities. Fundraising expenses incurred by the University are not included in the accompanying consolidated statements of activities. (4) Net Asset Endowments The Foundation s endowment funds consist of individual donor restricted endowment funds and funds designated by the Board of Trustees (Board) to function as endowments. The net assets associated with such endowment funds, including those funds designated by the Board to function as endowments, are classified and reported based on the existence or absence of donor imposed restrictions. As of July 1, 2008, the Foundation adopted the State of Georgia s Uniform Prudent Management of Institutional Funds Act (UPMIFA), which requires the preservation of the fair value of the original gift as of the gift date of the donor restricted endowment funds absent explicit donor stipulations to the contrary. The Foundation classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Foundation in a manner consistent with the standard of prudence prescribed by UPMIFA. The Foundation allows spending from endowment funds based on the current spending policy. Fund spending is limited to the lesser of the established spending rate or available cash balance and investment return. In accordance with UPMIFA, the Foundation considered the following factors in making its determination to appropriate or accumulate endowment funds: The duration and preservation of the fund The purposes of the Foundation and the donor restricted endowment fund General economic conditions The possible effect of inflation and deflation The expected total return from income and appreciation of investments Other resources of the Foundation The investment policies of the Foundation 13 (Continued)
Where the Board designates unrestricted funds to function as endowments, they are classified as unrestricted net assets. The following tables present the Foundation s endowment composition, changes, and net asset classifications as of and for the years ended : 2013 Endowment net asset composition Temporarily Permanently by type of fund Unrestricted restricted restricted Total Donor restricted endowment funds $ (1,407,171) 244,351,044 372,375,854 615,319,727 Board-designated endowment funds 53,626,017 53,626,017 Total funds $ 52,218,846 244,351,044 372,375,854 668,945,744 Temporarily Permanently Changes in endowment net assets Unrestricted restricted restricted Total Endowment net assets, beginning of year $ 37,091,249 191,278,877 358,099,906 586,470,032 Investment return: Investment income 559,387 6,363,923 709 6,924,019 Market value adjustment 5,977,616 62,392,300 68,369,916 Total investment return 6,537,003 68,756,223 709 75,293,935 Contributions 8,779,117 3,229,353 12,538,134 24,546,604 Appropriation of endowment assets for expenditure (188,523) (19,000,431) (19,188,954) Other income 87,022 1,737,105 1,824,127 Endowment net assets, end of year $ 52,218,846 244,351,044 372,375,854 668,945,744 14 (Continued)
2012 Endowment net asset composition Temporarily Permanently by type of fund Unrestricted restricted restricted Total Donor restricted endowment funds $ (1,631,848) 191,278,877 358,099,906 547,746,935 Board-designated endowment funds 38,723,097 38,723,097 Total funds $ 37,091,249 191,278,877 358,099,906 586,470,032 Temporarily Permanently Changes in endowment net assets Unrestricted restricted restricted Total Endowment net assets, beginning of year $ 36,967,713 215,503,333 345,967,340 598,438,386 Investment return: Investment income 318,230 4,490,277 42,849 4,851,356 Market value adjustment (1,013,897) (13,493,426) 27,005 (14,480,318) Total investment return (695,667) (9,003,149) 69,854 (9,628,962) Contributions 1,345,799 2,676,471 11,942,397 15,964,667 Appropriation of endowment assets for expenditure (859,440) (17,996,895) (18,856,335) Other income 332,844 99,117 120,315 552,276 Endowment net assets, end of year $ 37,091,249 191,278,877 358,099,906 586,470,032 (a) (b) Endowment Funds with Deficits From time to time, the fair value of assets associated with individual donor endowment funds may fall below the value of the initial and subsequent donor gift amounts. Donor endowment deficits are classified as a reduction of unrestricted net assets. Deficits occurred during 2013 and 2012 due to unfavorable market conditions that resulted in negative investment returns accumulated. Deficits of this nature reported in unrestricted net assets were $1,407,171 and $1,631,848 as of June 30, 2013 and 2012, respectively. Subsequent recovery of investment market value will reduce these accumulated deficits, through the reinstatement of unrestricted amounts. Return Objectives and Risk Parameters The Foundation has adopted endowment investment and spending policies that attempt to provide a predictable stream of funding to programs supported by its endowment, while seeking to maintain the purchasing power of endowment assets. Under this policy, endowment assets are invested in a manner that is intended to yield a long-term rate of return of approximately 7.23% annually, while assuming a moderate level of investment risk. Actual returns in any given year may vary from this amount. 15 (Continued)
(c) (d) Strategies Employed for Achieving Investment Objectives To achieve its long-term rate of return objectives, the Foundation relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized gains) and current yield (interest and dividends). The Foundation targets a diversified asset allocation that places greater emphasis on equity-based investments to achieve its long-term objectives within prudent risk constraints. Relationship of Spending Policy to Investment Objectives The Foundation s Investment Committee (the Committee) determines the method to be used to appropriate endowment funds for expenditure. The appropriation amount for the following fiscal year s spending rate is determined using investment values on a calendar-year basis. In 2012 and 2011, the Committee established a 4.0% spending rate for fiscal years 2013 and 2012 based on the endowment value at December 31, 2011 and 2010, respectively. The method used to calculate the spending budget was adopted by the Committee and put into practice beginning in fiscal year 2012 to reduce the spending volatility and include a predetermined inflation factor. The formula used for the fiscal 2013 spending budget is ((80% * (1 + Consumer Price Index)) * fiscal year 2012 spending amount) + (20% * (fiscal year 2013 spending rate * endowment market value at December 31, 2011)). In establishing this method, the Committee considered the expected long-term rate of return on the investment of the Foundation s endowment funds. Accordingly, over the long term, the Foundation expects the current spending policy to allow its endowment to grow at an average of approximately 2.23% annually, consistent with its intention to maintain the purchasing power of the endowment assets. Depending upon market conditions and the needs and available resources of the Foundation, appropriations for expenditure from individual endowments may be temporarily suspended to facilitate preservation of the individual endowment. (5) Investment Securities and Temporary Investments The fair value of investment securities and temporary investments as of totaled $775,104,151 and $661,200,627, respectively, (note 6). Included in the fair value of investments is $313,008,204 and $211,714,220 related to investments with estimated fair values based on quoted market prices or other observable market inputs and $462,095,947 and $449,486,407 related to investments that do not have readily determinable fair values that use NAV provided by external investment managers as an estimate of fair value at, respectively. Net realized and unrealized gain (loss) on investments include $23,784,800 and $(14,918,544) for investments with estimated fair values based on quoted market prices and $47,006,052 and $718,682 for investments with estimated fair values based on NAV provided by external investment managers at, respectively. The Foundation s investments are exposed to several risks, such as changes in interest rates, currency fluctuations, market fluctuations, and credit risks. Changes in financial markets occur daily and it is quite likely that changes in the carrying values of investments will occur. Such changes could materially affect the amounts reported in the Foundation s consolidated financial statements. 16 (Continued)
Investments in private equity funds provide growth equity or take full ownership of the companies they invest. Private equity funds that take significant ownership positions in start-up or early stage companies are largely invested in the technology or healthcare industries. There are currently no plans to sell any of these investments prior to their liquidation so the assets are carried at NAV as estimated by the investment manager. Investments in real estate equity funds take ownership of properties ranging from office, retail, multifamily, land, hotel, and various other commodities. There are currently no plans to sell any of these investments prior to their liquidation so the assets are carried at NAV as estimated by the investment manager. Investments in hedge funds take long and short positions largely in equity securities, credit securities, and event-driven situations. Managers vary in style, market cap focus, geographic focus, sectors of focus, and types of securities, with some having considerable flexibility in each of these areas. The funds also vary in net long/short positioning with most equity funds generally maintaining a low net short position and little or no leverage. Most credit funds generally maintain a moderate net long position and little or no leverage. As of, the Foundation had outstanding commitments of $44,735,274 and $47,941,590, respectively, for the purchase of additional nonmarketable investments. The Foundation estimates that the additional capital amounts will be paid over the next eight years depending on timing of potential investment opportunities identified by investment managers in the following investment strategies: 2013 2012 Private equity $ 16,546,102 18,993,453 Real assets 28,189,172 28,948,137 $ 44,735,274 47,941,590 (6) Fair Value Measurements The Foundation applies a fair value hierarchy, which prioritizes and ranks the level of market input observability used in measuring investments at fair value. Market input observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market input observability and a lesser degree of judgment used in measuring fair value. Investments measured and reported at fair value are classified and disclosed in one of the following categories: Level 1 Quoted prices are available in active markets for identical investments as of the reporting date. The types of investments that would generally be included in Level 1 include listed equity securities, mutual funds, and money market funds. The Foundation, to the extent that it holds such investments, does 17 (Continued)
not adjust the quoted price for these investments, even in situations where the Foundation holds a large position and a sale could reasonably impact the quoted price. Level 2 Pricing inputs are observable for the investments, either directly or indirectly, as of the reporting date, but are not the same as those used in Level 1. Fair value is determined through the use of models or other valuation methodologies. The types of investments, which would generally be included in this category include comingled funds, publicly traded securities with restrictions on disposition, corporate obligations, U.S. government and agency treasury inflation protected securities, and interest rate derivatives primarily valued using pricing models that rely on market observable inputs, such as yield curves. Level 3 Pricing inputs are unobservable for the investment and include situations where little, if any, market activity exists for the investment. The inputs into the determination of fair value require significant judgment or estimation. Inputs used may include the original transaction price, recent transactions in the same or a similar market, completed or pending third-party transactions in the underlying investment or comparable issuers, and subsequent rounds of financing. When observable prices are not available these investments are valued using one or more valuation techniques described below. Market Approach: This approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Income Approach: This approach determines a valuation by discounting future estimated cash flows. Cost Approach: This approach is based on the principle of substitution and the concept that a market participant would not pay more than the amount that would currently be required to replace the asset. Although a secondary market exists for these investments, it is not active and individual transactions are typically not observable. When transactions do occur in this limited secondary market, they may occur at discounts to the reported NAV. The types of investments that would generally be included in this category include debt and equity securities issued by private entities and partnerships. In certain cases, the inputs used to measure fair value may fall into multiple levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Foundation s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment. Foundation investments for which NAV is used as a practical expedient to estimate fair value are classified as either Level 2 or Level 3 in the fair value hierarchy, depending on the classifications of the underlying fund assets and the Foundation s ability to redeem its interest in the fund, at or near the financial reporting date. If the underlying fund assets are available for redemption at NAV at or near the financial reporting date (generally within 90 days), then the Foundation s interest in the fund may be classified as a Level 2 investment. 18 (Continued)
The classification of assets and liabilities in the fair value hierarchy is not necessarily an indication of the risks or liquidity, but is based on the observability of the valuation inputs. The levels of the fair value hierarchy into which the Foundation s financial instruments are categorized as of are as follows: 2013 Redemption Days Level 1 Level 2 Level 3 Total or liquidation notice Assets: Recurring: Cash and cash equivalents $ 6,106,255 6,106,255 Daily None Investments and temporary investments: Separately managed accounts: Large cap equity 61,340,115 61,340,115 Daily 1 International equity 18,417,707 18,417,707 Daily 5 Total 79,757,822 79,757,822 Exchange traded funds: International equity 15,808,706 15,808,706 Daily 1 Large cap equity 3,210,745 3,210,745 Daily 1 U.S. fixed income 5,193,143 5,193,143 Daily 1 U.S. commodities 2,153,413 2,153,413 Daily 1 Total 26,366,007 26,366,007 Mutual funds: Large cap equity 19,312,416 19,312,416 Daily 1 Small cap equity 16,908,794 16,908,794 Daily 1 International equity 59,471,440 59,471,440 Daily 1 Emerging markets equity 30,041,416 30,041,416 Daily 1 Global core fixed income 15,977,204 15,977,204 Daily 1 U.S. Treasury and related securities 24,990,818 24,990,818 Daily 1 Total 166,702,088 166,702,088 19 (Continued)
2013 Redemption Days Level 1 Level 2 Level 3 Total or liquidation notice Other commingled funds: International equity $ 25,122,248 25,122,248 Monthly 5 15 Global fixed income 20,379,231 20,379,231 Monthly 10 Real estate investment trust securities 18,222,335 18,222,335 Monthly 15 Total 63,723,814 63,723,814 Portable alpha strategies: U.S. government securities 18,105,300 18,105,300 Quarterly 60 Commodity index 3,743,565 3,743,565 Quarterly 60 Total 21,848,865 21,848,865 Hedge fund limited partnerships: Event-driven absolute return 13,294,408 68,535,560 81,829,968 Quarterly or Annual 30 90 Fund of funds 19,330,879 19,330,879 Quarterly 45 Equity long/short 93,231,713 34,062,391 127,294,104 Quarterly or Annual 30 90 Total 125,857,000 102,597,951 228,454,951 Private equity limited partnerships: Direct private equity 17,828,605 17,828,605 Illiquid N/A Private venture 4,223,275 4,223,275 Illiquid N/A Secondary private equity 6,623,016 6,623,016 Illiquid N/A Diversified private equity distressed oriented 2,994,293 2,994,293 Illiquid N/A Fund of Funds 5,030,736 5,030,736 Illiquid N/A Total 36,699,925 36,699,925 Real asset limited partnerships diversified private real estate 24,192,267 24,192,267 Illiquid N/A Timber/oil/gas: Real assets common trust fund 10,511,652 10,511,652 Monthly 9 Fund of Funds timber/oil/gas 296,306 296,306 Illiquid N/A Total 10,511,652 296,306 10,807,958 Certain split-interest investments: Cash and cash equivalents 479,991 479,991 Illiquid N/A Equities 3,957,734 3,957,734 Illiquid N/A Fixed income 4,332,849 4,332,849 Illiquid N/A Mutual funds 2,920,305 2,920,305 Illiquid N/A Nonmarketable 2,373,654 2,373,654 Illiquid N/A Total 14,064,533 14,064,533 20 (Continued)