WESTERN UNIVERSITY OF HEALTH SCIENCES

Transcription

1 Consolidated Financial Statements and Report of Independent Certified Public Accountants WESTERN UNIVERSITY OF HEALTH SCIENCES (with comparative summarized financial information for June 30, 2014)

2 Contents Page Report of Independent Certified Public Accountants 1 Consolidated Statement of Financial Position 3 Consolidated Statement of Activities and Changes in Net Assets 4 Consolidated Statement of Cash Flows 5 Notes to Consolidated Financial Statements 7

3 Report of Independent Certified Public Accountants Board of Trustees Western University of Health Sciences Audit Tax Advisory Grant Thornton LLP 515 South Flower Street, 7 th Floor Los Angeles, CA T F Report on the financial statements We have audited the accompanying consolidated financial statements of Western University of Health Sciences (a nonprofit organization) and subsidiaries (the University ), which comprise the consolidated statement of financial position as of, and the related consolidated statements of activities and changes in net assets and cash flows for the year then ended, and the related notes to the consolidated financial statements. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit 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 auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the University 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 University 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. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd

4 2 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Western University of Health Sciences and subsidiaries as of, and the changes in their net assets and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Report on 2014 summarized comparative information We have previously audited the University s 2014 consolidated financial statements (not presented herein), and we expressed an unmodified audit opinion on those audited consolidated financial statements in our report dated October 24, In our opinion, the accompanying summarized financial information as of and for the year ended June 30, 2014, is consistent, in all material respects, with the audited financial statements from which it has been derived. Los Angeles, California October 29, 2015 Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd

5 CONSOLIDATED STATEMENT OF FINANCIAL POSITION (with comparative summarized financial information at June 30, 2014) ASSETS Cash and cash equivalents $ 1,371,506 $ 2,076,581 Accounts receivable, net 2,344,651 2,358,203 Prepaid expenses 1,827,594 1,403,878 Contributions receivable, net 3,669,796 4,838,920 Inventories 1,255,288 1,094,452 Other assets 6,494,631 6,804,255 Notes receivable, net 29,354,636 29,253,859 Investments 131,818, ,838,446 Property, plant and equipment, net 136,659, ,819,068 TOTAL ASSETS $ 314,795,884 $ 300,487,662 LIABILITIES AND NET ASSETS Accounts payable and accrued liabilities $ 24,495,464 $ 22,044,678 Accrued bond interest payable 303, ,841 Deposits for agency funds 474, ,350 Deferred revenues 30,463,298 31,108,631 Capital lease obligations 281, ,313 Interest rate swap agreement 22,595,150 20,159,273 Liability on split-interest agreements 2,908,205 3,076,073 Government advances for student loans 29,826,325 29,523,634 Bonds payable 93,930,000 95,685,000 Total liabilities 205,278, ,661,793 NET ASSETS Unrestricted 91,169,129 78,608,251 Temporarily restricted 10,117,867 11,130,103 Permanently restricted 8,230,701 8,087,515 Total net assets 109,517,697 97,825,869 TOTAL LIABILITIES AND NET ASSETS $ 314,795,884 $ 300,487,662 The accompanying notes are an integral part of this consolidated financial statement. 3

6 CONSOLIDATED STATEMENT OF ACTIVITIES AND CHANGES IN NET ASSETS Year Ended (with comparative summarized financial information for the year ended June 30, 2014) Temporarily Permanently Unrestricted Restricted Restricted Total Total Revenues: Student tuition $ 171,440,506 $ - $ - $ 171,440,506 $ 160,392,205 Less: scholarships and grants (4,639,705) - - (4,639,705) (3,967,322) Net tuition 166,800, ,800, ,424,883 Government contracts and grants 1,861, ,861,711 2,120,366 Private gifts, contracts and grants 5,152, ,917 49,819 5,608,828 6,223,381 Sales and services of auxiliary enterprises 1,488, ,488,708 1,322,978 Sales and services of educational activities Net patient revenue 4,613, ,613,894 3,985,091 Other sales and services 1,532, ,532,443 1,094,294 Other operating revenues 3,655, ,655,652 3,175,256 Net assets released from restrictions 1,857,408 (1,857,408) Total revenues 186,962,709 (1,450,491) 49, ,562, ,346,249 Expenses: Educational and general expenditures: Research 6,878, ,878,941 6,067,928 Instruction 113,131, ,131, ,029,876 Academic support 22,810, ,810,410 20,627,540 Student services 9,206, ,206,040 8,529,019 Institutional support 14,144, ,144,860 12,649,860 Auxiliary enterprises 2,239, ,239,187 1,629,390 Development and fundraising 3,791, ,791,392 3,676,322 Total expenses 172,202, ,202, ,209,935 Change in net assets from operating activities 14,760,294 (1,450,491) 49,819 13,359,622 13,136,314 Other changes in net assets: Net investment return 285, ,770 23, ,499 2,086,873 Change in value of split-interest agreements (7,046) 66,729-59,683 (10,320) Differential in value of swap contract (2,435,877) - - (2,435,877) 784,703 Other non-operating expenses - - (4,099) (4,099) (63,142) Redesignation of net assets (42,064) (32,244) 74, Change in net assets from non-operating activities (2,199,416) 438,255 93,367 (1,667,794) 2,798,114 Increase (decrease) in net assets 12,560,878 (1,012,236) 143,186 11,691,828 15,934,428 Net assets at beginning of year 78,608,251 11,130,103 8,087,515 97,825,869 81,891,441 Net assets at end of year $ 91,169,129 $ 10,117,867 $ 8,230,701 $ 109,517,697 $ 97,825,869 The accompanying notes are an integral part of this consolidated financial statement. 4

7 CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended (with comparative summarized financial information for the year ended June 30, 2014) Cash flows from operating and non-operating activities: Increase in net assets $ 11,691,828 $ 15,934,428 Adjustments to reconcile increase in net assets to net cash provided by operating and non-operating activities: Depreciation and amortization 8,500,870 8,369,760 Loss on disposal of property, plant and equipment 31,725 - Change in fair value of interest rate swap agreement 2,435,877 (784,703) Amortization of bond issuance costs 173, ,441 Provision for uncollectible accounts (48,569) 230,292 Net realized/unrealized losses (gains) on investments 811,922 (1,583,744) Contributions restricted for long-term purposes (139) (15,375) Contributions restricted for endowment and loans (49,819) (597,099) (Increase) decrease in assets: Accounts receivable 62,121 (605,658) Contributions receivable 1,169,124 1,110,929 Inventories, prepaid expenses and other assets (589,233) 208,591 Increase (decrease) in liabilities: Accounts payable and accrued liabilities 2,450, ,363 Accrued bond interest payable (7,510) (122,960) Deposits for agency funds 101,193 16,683 Deferred revenues (645,333) 4,494,408 Liability on split-interest agreements 445, ,040 Net cash provided by operating and non-operating activities $ 26,534,222 $ 27,474,396 The accompanying notes are an integral part of this consolidated financial statement. 5

8 CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED Year Ended (with comparative summarized financial information for the year ended June 30, 2014) Cash flows from investing activities: Proceeds from sale of investments $ 717,270,859 $ 353,365,446 Purchases of investments (738,063,082) (371,358,218) Increase in notes receivables, net (100,777) (4,341,591) Purchase of property, plant and equipment (4,232,193) (8,661,400) Net cash used in investing activities (25,125,193) (30,995,763) Cash flows from financing activities: Principal payments on bonds payable (1,755,000) (1,660,000) Payments to beneficiaries of split-interest agreements (613,312) (621,253) Contributions restricted for endowment and loans 49, ,099 Collections of contributions restricted for long-term purposes ,375 Increase in government advances for student loans 302,691 4,800,421 Principal payments on capital lease obligations (98,441) (72,865) Net cash (used in) provided by financing activities (2,114,104) 3,058,777 Net decrease in cash and cash equivalents (705,075) (462,589) Cash and cash equivalents at beginning of year 2,076,581 2,539,170 Cash and cash equivalents at end of year $ 1,371,506 $ 2,076,581 Supplemental Cash Flow Information: Cash paid for interest $ 5,094,647 $ 5,456,513 The accompanying notes are an integral part of this consolidated financial statement. 6

9 NOTE 1 ORGANIZATION Western University of Health Sciences NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Western University of Health Sciences (the "University") is a private, nonprofit, accredited institution of higher learning and an academic health center, whose main campus occupies approximately 18 acres in Pomona, California, and includes other locations in California and Oregon. The University is committed to the education of primary care health professionals with a distinctive philosophy centered in the osteopathic tradition, which embraces the concept that health involves the whole person and the person's relationship to others and the world. The University was founded in 1977 as the College of Osteopathic Medicine of the Pacific ( COMP ), a four-year medical school educating osteopathic physicians. The institution expanded its mission by adding primary care-focused educational programs in the allied health professions, pharmacy and advanced nursing. In 1996, the institution officially became a university and changed its name to Western University of Health Sciences. The University further expanded its educational programs by adding the College of Veterinary Medicine and in 2009, added four new colleges in dentistry, optometry, podiatry and biomedical sciences. For the fall semester of 2015, approximately 3,850 students were enrolled in the University's nine colleges. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Basis of Accounting The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ( US GAAP ). B. Principles of Consolidation The consolidated financial statements include the accounts of Western University of Health Sciences and those of Park Hospital Inc., a majority-owned subsidiary; Paso Oro Verde Inc., a wholly owned subsidiary; Western Center for Drug Development, a wholly owned subsidiary; and COMP Enterprises Inc., a wholly owned subsidiary. All significant intercompany transactions have been eliminated. 7

10 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued B. Principles of Consolidation - continued A related entity, OPTI-West Educational Consortium, is a 501(c)(3) entity and is not owned or controlled by the University. Though the University was responsible for establishing and incorporating this organization, the University s role is in facilitating the academic activities among the member hospitals and health centers and in the administration of OPTI business activities. This non-profit organization is governed by a board consisting of mostly member hospitals and medical centers and the University s faculty designees. The University does not have a majority or controlling vote on the board. The consolidated financial statements of OPTI-West Educational Consortium reflect net assets totaling $469,513 and $243,995 at and 2014, respectively. This amount is not consolidated in the University s financial statements. C. Basis of Presentation Revenues, expenses, gains and losses are classified based on the existence or absence of donorimposed restrictions. Accordingly, the net assets of the University and changes therein are classified and reported as follows: Unrestricted net assets Net assets that are not subject to donor-imposed restrictions. Temporarily restricted net assets Net assets subject to sponsor or donor-imposed restrictions that will be met by actions of the University and/or the passage of time and for which the ultimate purpose of the proceeds is not permanently restricted. Permanently restricted net assets Net assets subject to donor-imposed restrictions that are maintained by the University in perpetuity. Generally, the donors of these assets permit the University to use all or part of the income earned on related investments for general or specific purposes. D. Estimates The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses, including allocations to various program costs, during the reporting period. Actual results could differ from those estimates. Significant estimates in the University s consolidated financial statements include allowance for uncollectible accounts for accounts and pledges receivable, discount rate for long-term pledges, unobservable investment inputs, non-public investment values, patient service revenue to include contractual discounts and allowances, asset impairments, inventory reserves, expense allocation and the present value of future benefits payable on split-interest agreements. 8

11 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued E. Revenue and Expense Recognition and Donor-Imposed Restrictions Contributions, including unconditional promises to give, are recognized as revenues when made and are reported as unrestricted or restricted depending on the existence of donor stipulations that limit the use of the support. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the accompanying consolidated statement of activities and changes in net assets as net assets released from restrictions. Contributions of assets, other than cash, are recorded at their estimated fair values on the date of receipt. Contributions to be received after one year are discounted using a discount rate commensurate with the risks involved. An allowance for uncollectible promises to give is recorded based on management s judgment, including such factors as prior collections history, type of contribution and nature of fundraising activity. Conditional promises to give are not recognized until they become unconditional, that is, when the conditions on which they depend are met. Gains and losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or by law. Income and realized net gains on investments are reported as follows: As increases in permanently restricted net assets if the terms of the gift require that they be added to the principal of a permanent endowment fund. As increases in temporarily restricted net assets if the terms of the gift impose restrictions on the use of the income. As increases in unrestricted net assets in all other cases. F. Patient Revenues and Patient Receivables Net patient service revenue is reported at estimated net realizable amounts in the period in which services are provided. The majority of University Patient Care Center ( UPCC ) services are rendered to patients under Medicare, Medical Assistance Programs, Aetna and Anthem Blue Cross Blue Shield. Reimbursement under these programs is based on a combination of prospectively determined rates and historical costs. Amounts received under Medicare and Medical Assistance programs are subject to review and final determination by program intermediaries or their agents. These adjustments are recorded when identified. 9

12 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued F. Patient Revenues and Patient Receivables (continued) The percentage of patient service revenue, net of contractual allowances and discounts, derived from third-party payors and self-pay patients is as follows: Twelve Months Ended June 30, 2014 Commercial insurance and other 45% 34% Medicare 25% 24% Self-pay 5% 22% Medicaid 25% 20% The University, in the ordinary course of business, enters into various incentive-sharing agreements with managed care payors and other providers. These agreements require retroactive settlement based on data that may not be available or finalized until all claims are processed. Settlement amounts have been estimated for such incentives based on available information. However, it is reasonably possible that these estimates may change in the near term. Laws and regulations governing the Medicare and Medical Assistance programs are extremely complex and subject to interpretation. Compliance with such laws and regulations are subject to government review and interpretation as well as significant regulatory action including fines, penalties and exclusion from the Medicare and Medical Assistance programs. As a result, there is at least a reasonable possibility that the recorded estimates may change by a material amount in the near term. Presentation and disclosure for net patient service revenue requires patient service revenue to be presented net of the provision for uncollectible accounts. Net patient service revenue for the years ended June 30 is as follows: Patient service revenue, gross $ 7,457,772 $ 6,488,699 Contractual discounts and allowances (2,775,927) (2,358,442) Allowance for uncollectible accounts (67,951) (145,166) Patient service revenue, net $ 4,613,894 $ 3,985,091 The provision for uncollectible accounts is based upon management s assessment of historical and expected net collections considering historical business and economic conditions, trends in health care coverage and other collection indicators. The UPCC records a significant provision for uncollectible accounts in the period services are provided related to self-pay patients, including both uninsured patients and patients with deductible and copayment balances due for which third-party coverage exists for a portion of their balances. Periodically throughout the year, management assesses the adequacy of the provision for uncollectible accounts based upon historical write-off experience. 10

13 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued F. Patient Revenues and Patient Receivables (continued) The results of this review are then used to make any modifications to the provision for uncollectible accounts to establish an appropriate provision for uncollectible accounts. Accounts receivable are written off after collection efforts have been followed in accordance with internal policies. The following is a reconciliation of allowance for uncollectible patient care center accounts receivable by payor for the years ended June 30: Balance, beginning of the year $ 300,498 $ 246,536 Write off (59,740) (91,204) Provision for uncollectible accounts 67, ,166 Balance, end of the year $ 308,709 $ 300,498 G. Investments In accordance with authoritative guidance, investments in equity securities with readily determinable fair market values and all debt securities are reported at fair value with gains and losses included in the consolidated statement of activities and changes in net assets. Non-marketable securities (alternative investments) for which quoted market prices are not available are valued at fair value by the investment managers based on factors deemed relevant by the investment managers including, but not limited to: market transfer conditions, purchase price, estimated liquidation value, restriction on transfer and third-party transactions in the private market. The University s management reviews and evaluates the fair values and methodologies provided by the third-party investment managers and agree with the valuation methods and assumptions used in determining the fair value of the alternative investments. For these investments, the University used the net asset value ( NAV ) provided by the investment managers to evaluate the fair value of the investments. The NAV may be adjusted based on factors or other information about the investments that management considers significant to the valuation of the investments. Other investments, including real estate, are reported at fair value as determined by appraisals performed by independent third-parties on a periodic basis (generally, every few years) unless market conditions would indicate more frequent appraisals are required. H. Cash and Cash Equivalents Cash and cash equivalents consist of cash available for immediate use. Money market accounts, certificates of deposit and other short-term investments with original maturities of less than 90 days are classified as investments. 11

14 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued I. Endowments The University s endowments consist of several individual donor-designated funds established to support scholarship and loan funds recorded in permanently restricted net assets. Net assets associated with the endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. The University has interpreted the California Uniform Prudent Management of Institutional Funds Act ( UPMIFA ) as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment fund absent explicit donor stipulations to the contrary. As a result of this interpretation, the University classifies as permanently restricted net assets: (a) the original value of the gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of 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 University in a manner consistent with the standard prudence prescribed by UPMIFA. In accordance with UPMIFA, the University considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) The duration and preservation of the fund (2) The purposes of the organization and the donor-restricted endowment fund (3) General economic conditions (4) The possible effect of inflation and deflation (5) The expected total return from income and the appreciation of investments (6) Other resources of the organization (7) The investment policies of the organization Unless otherwise acknowledged by the donor, the spending policy for the consolidated investment endowment pool follows the objective of the investment policy and establishes the amount made available for spending from the endowment pool. The current Board of Trustees approved spending policy is 5% of the market value of the endowment pool on the weighted average over the trailing three years. In the event the current market value of the endowment is less than the historical gift value, spending will continue at 5% for the remaining of the University s fiscal year. Should the permanently restricted endowment fall under the original donor contribution, any shortage is covered from the board-designated quasi funds. 12

15 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued I. Endowments continued Income derived from the investment of the endowment funds has been accounted for by utilizing the market value unit method for maintaining pooled endowment funds. The following schedule summarizes data pertaining to this method of accounting for the years ended June 30: Unit market value at beginning of year $ 9.31 $ 8.57 Unit market value at June 30 $ 8.94 $ 9.31 Units outstanding at June 30 2,666,953 1,534,942 J. Notes and Accounts Receivables Due From Students Included in accounts receivable is student tuition stated at the amounts billed to students less loan proceeds, grants and scholarships. Military scholarships are separately billed and collected by semester from the corresponding military agencies (e.g., Army, Navy, Air Force, etc.). Approximately 95% of all currently enrolled students rely on some form of financial aid. As a policy, students are required to settle their financial obligations and account balances before they are allowed to attend and be promoted to the next academic year. The student accounts receivable balance as of and 2014, is settled by the subsequent receipt of the corresponding financial aid funds for the academic period. Notes receivable consist of amounts due under the federal loan programs and University loan programs and are stated at their outstanding principal amount, net of an allowance for uncollectible accounts. A third-party organization administers the collection process. Loans are made to students based on demonstrated financial need and satisfaction of federal eligibility requirements for the federal loan programs. Principal and interest payments on loans generally do not commence until after the borrower graduates or otherwise ceases enrollment. K. Tuition Revenue Tuition is generally due at the beginning of the term. Tuition revenue is recognized as it is earned and amounts received in advance are deferred and recognized as instruction takes place. L. Perpetual Trusts Held by Others Perpetual trusts held by others are resources not in the University s possession nor under its control. These funds are held and administered by outside trustees. The University derives income or a residual interest from such funds. Perpetual trusts held by others are reported at the estimated fair value of the assets or at the present value of the future cash flows when the irrevocable trust is established or the University is notified of its existence. At and 2014, trust assets of $113,902 and $113,194, respectively, are included in investments in the accompanying consolidated statement of financial position. 13

16 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued M. Contributions Receivable The University records unconditional promises to give (a pledge) as a contribution receivable and revenue in the year the pledge is made (see Note 5). The allowance for uncollectible accounts is accounted for using the reserve method. N. Inventories Inventories consist of bookstore merchandise, general supplies, and medical supplies at the Veterinary Wellness Clinic and UPCCs and are valued at the lower of cost or market on a first-in, first-out basis. O. Other Assets Other assets include costs and discounts related to the issuance of bonds (see Note 14) and are being amortized over the life of the bonds utilizing the straight-line method, which approximates the effective interest method. Other assets also include computer-based network installation costs, which are amortized over an estimated 15-year life. P. Property, Plant and Equipment Property, plant and equipment are stated at cost or if a gift, at fair value at the date of the gift. Depreciation is calculated on a straight-line basis over the estimated useful lives by major category of assets as follows: Buildings and improvements (considering the date originally constructed or purchased and remaining useful life) Equipment, furniture and library books years 5-7 years The University, using its best estimates based on reasonable and supportable assumptions and projections, reviews long-lived assets to be held and considered for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets might not be recoverable. No impairment charges on long-lived assets were recorded during the years ended and When assets are retired or sold, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss arising from such disposition is recorded. Expenditures for repairs and maintenance are charged to expenses as incurred and included in the accompanying consolidated statement of activities and changes in net assets. 14

17 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued Q. Gift Annuities and Unitrust Agreements (Split-Interest Agreements) The University has a variety of gift agreements, including charitable gift annuities and charitable remainder trusts for which the University is the trustee. Upon receipt, the present value of each gift annuity or unitrust is recorded as an asset, the present value of the University s obligation to beneficiaries is recorded as a liability, and the remaining amount is included in net assets. Annually, an adjustment is made between the liability and the net assets to record the actuarial gain or loss due to recomputation of the liability based upon the revised life expectancy of the annuitants (also see Note 15). The fair values of these assets amounted to $7,479,265 and $7,422,097 at and 2014, respectively, and are included in investments in the accompanying consolidated statement of financial position. R. Functional Expenses The consolidated statement of activities and change in net assets presents expenses by functional classification based upon specific identification. Depreciation, amortization and interest expenses are allocated based upon total expense by function. S. Comparative Totals The consolidated financial statements and footnotes include certain prior-year summarized comparative financial information in total, but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with US GAAP. Accordingly, such information should be read in conjunction with the University s consolidated financial statements for the year ended June 30, 2014, from which the information was derived. T. Operating and Non-Operating Classification Revenues, expenses, gains and losses are allocated between operating and non-operating classifications based on the underlying influence, control and discretion of management in using these resources toward general operations that support the core mission of the University. Accordingly, operating revenue includes net tuition, government contracts and grants, private gifts, auxiliary enterprise revenue, other sales and services, and miscellaneous income. Operating expenses (for which operating revenues are used) include salaries and benefits, departmental expenses, facility maintenance costs, supplies, professional services, amortization, depreciation and interest on debt. Excluded from operating expenses are adjustments to the value of split-interest agreements, fair value adjustments of the interest rate swap arrangement and other miscellaneous expenses. 15

18 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued U. Income Taxes Western University of Health Sciences is a California non-profit corporation exempt from federal income taxes pursuant to Section 501(c)(3) of the Internal Revenue Code and has received a favorable determination letter from the Internal Revenue Service indicating the qualification for tax-exempt status. The University is also exempt from California and Oregon income taxes under the related State provisions. Management believes that the University will continue to be exempt from income taxes. The University is subject to income taxes for unrelated business income realized in connection with its unrelated business activities, if any. Park Hospital Inc., a majority-owned for-profit subsidiary; Paso Oro Verde Inc., a wholly owned subsidiary; Western Center for Drug Development, a wholly owned subsidiary; and COMP Enterprises Inc., a wholly owned subsidiary, are consolidated into the University s consolidated financial statements. Deferred income taxes are recognized for the tax consequences of temporary differences by applying statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Temporary differences were not significant at and Accordingly, no provision for income taxes is made in these consolidated financial statements. Under current accounting guidance related to uncertain tax positions, management is required to determine whether a tax position of the University is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously recognized could result in the University recording a tax liability that would reduce net assets. The University has reviewed all significant tax positions for material tax jurisdictions including US federal, and California and Oregon state tax jurisdictions for which the statute of limitations remained open, which is generally three years for federal and four years for state. The open tax years also include tax years to the extent of net operating loss carry forwards, which add the tax years June 30, 2000 through June 30, 2010, for federal tax purposes and the years ended June 30, 2003 through June 30, 2009, for state tax purposes. The University determined there were no material unrecognized tax benefits in the open tax years. However, the statute can be extended if there was a failure to file a necessary tax return. In addition, there have been no material changes in unrecognized benefits since July 1, 2014, nor are any anticipated in the 12 months following. However, management s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analyses of and changes to tax laws, regulations and interpretations thereof. There have been no related tax penalties or interest, which would be classified as operating or interest expense in the accompanying consolidated statement of activities and changes in net assets. 16

19 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued V. New Accounting Pronouncements In May 2015, the Financial Accounting Standards Board ( FASB ) issued ASU , Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent). The guidance specifically classified how investments valued using the net asset value (NAV) practical expedient within the fair value hierarchy should be classified. The ASU was issued in order to address diversity in practice. The amended standard s key provision exempts investments measured using the NAV practical expedient from categorization within the fair value hierarchy and related disclosures. The new guidance is effective for the University for the year ending June 30, 2017, with early adoption permitted. In April 2015, the FASB issued ASU , Interest Imputation of Interest (Subtopic ): Simplifying the Presentation of Debt Issuance Costs which requires an entity to present debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. This ASU requires retrospective adoption and is effective for annual reporting periods beginning after December 15, Early adoption is permitted. The University is currently in the process of evaluating the impact of adoption of this ASU on its consolidated financial statements. W. Re-Designation of Net Assets Certain amounts previously received from donors have been transferred among net asset categories due to changes in donor designations or required minimum balances have been obtained. NOTE 3 ACCOUNTS RECEIVABLE, NET Accounts receivable, net, consisted of the following at June 30: Student accounts receivable $ 592,007 $ 555,356 Patient care center accounts receivable 725, ,412 Grants and contracts receivable 1,035,638 1,217,122 Other receivables 409, ,568 Less: Allowance for uncollectible accounts (417,696) (433,255) Total accounts receivable, net $ 2,344,651 $ 2,358,203 17

20 NOTE 4 INVESTMENTS The following summarizes the University's investments at June 30: Cost Fair Value Cost Fair Value Short-term investments $ 56,369,045 $ 56,380,656 $ 62,598,121 $ 62,601,295 Certificates of deposits 3,570,000 3,572,113 2,408,087 2,409,936 Mutual funds 10,373,481 9,679,179 6,992,276 8,296,317 Corporate and government bonds 40,580,586 40,939,107 25,001,922 25,186,527 Equities 16,378,826 17,330,036 8,568,587 9,007,710 Trust deed receivables 50,000 50, , ,000 Cash surrender value of life insurance 276, , , ,202 Investments in real estate 2,105,476 3,590,959 2,786,173 3,963,459 Total $ 129,704,111 $ 131,818,747 $ 108,728,368 $ 111,838,446 Net investment return consisted of the following for the years ended June 30: Dividends, interest and other investment income $ 1,252,549 $ 873,125 Net realized and unrealized (loss) gain (540,050) 1,213,748 Total investment gain $ 712,499 $ 2,086,873 NOTE 5 CONTRIBUTIONS RECEIVABLE, NET The following unconditional promises to give are included in the consolidated financial statements as contributions receivable, net, at June 30: Contributions receivable $ 6,920,475 $ 7,417,558 Less: Unamortized discount (1,720,423) (1,843,182) Less: Allowance for uncollectible accounts (1,530,256) (735,456) Total contributions receivable, net $ 3,669,796 $ 4,838,920 The University used rates between 1.0% and 4.0% to discount gross unconditional promises to give in consideration of the present value of the future cash flows. 18

21 NOTE 5 CONTRIBUTIONS RECEIVABLE, NET - continued Unconditional promises to give as of June 30 are expected to be collected in the following periods: In one year or less $ 1,392,912 $ 1,448,433 Between one year and five years 527, ,125 More than five years 5,000,000 5,000,000 Total gross pledges $ 6,920,475 $ 7,417,558 NOTE 6 NOTES RECEIVABLE, NET Student loans receivable are primarily federally sponsored student loans with United States government-mandated interest rates and repayment terms subject to significant restrictions as to their transfer and disposition. The University makes uncollateralized loans to students based on financial need. Student loans are funded through Federal government loan programs or institutional resources. At June 30, student loan receivables, which are included in notes receivable, net, in the accompanying consolidated statement of financial position, consisted of the following: Federal government programs $ 29,234,930 $ 29,129,433 Institutional programs 196, ,311 29,431,521 29,330,744 Less: Allowance for uncollectible accounts (76,885) (76,885) Notes receivable, net $ 29,354,636 $ 29,253,859 The University participates in the Perkins federal revolving loan program. The availability of funds for loans under this program is dependent on reimbursements to the pool from repayments on outstanding loans. Funds advanced by the Federal government of $29.8 million and $29.5 million at and 2014, respectively, are ultimately refundable to the government and are classified as government advances for student loans in the accompanying consolidated statement of financial position. Outstanding loans cancelled under the program result in a reduction of the funds available for loan and a decrease in the liability to the government. 19

22 NOTE 6 NOTES RECEIVABLE, NET - Continued At June 30, the following amounts were past due under the Perkins loan programs: Days Past Due to 60 $ 2,708 $ 4, to 90 1, , ,150 Total $ 142,806 $ 177,567 Allowances for uncollectible accounts are established based on prior collection experience and current economic factors which, in management s judgment, could influence the ability of loan recipients to repay the amounts per the loan terms. Institutional loan balances are written off only when they are deemed to be permanently uncollectible. Amounts due under the Perkins loan program are guaranteed by the government and therefore, no reserves are placed on any past-due balances under the program. NOTE 7 OTHER ASSETS Other assets consisted of the following at June 30: Campus-based computer network and installation $ 2,105,481 $ 2,105,481 Less: Accumulated amortization (1,754,605) (1,614,235) Cash surrender value of life insurance contract 2,063,301 2,063,301 Bond costs and discounts 5,084,245 5,084,245 Less: Accumulated amortization (1,208,032) (1,034,097) Deposits 204, ,560 Total $ 6,494,631 $ 6,804,255 20

23 NOTE 8 ENDOWMENTS Endowment net assets are comprised of the following as of : Unrestricted Temporarily Restricted Permanently Restricted Total Donor restricted endowment funds $ - $ 3,078,281 $ 6,697,354 $ 9,775,635 Net unrealized loss on donor endowment funds (316,671) - - (316,671) Board designated/operating surplus endowment funds 15,656, ,656,174 Net unrealized loss on boarddesignated endowment funds (64,002) - - (64,002) Total funds $ 15,275,501 $ 3,078,281 $ 6,697,354 $ 25,051,136 Endowment net assets are comprised of the following as of June 30, 2014: Unrestricted Temporarily Restricted Permanently Restricted Total Donor restricted endowment funds $ - $3,070,210 $6,414,261 $ 9,484,471 Net unrealized loss on donor endowment funds (199,780) - - (199,780) Board designated/operating surplus endowment funds 5,555, ,555,386 Net unrealized gain on boarddesignated endowment funds 653, ,693 Total funds $ 6,009,299 $3,070,210 $6,414,261 $15,493,770 21

24 NOTE 8 ENDOWMENTS Continued From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor requires the University to maintain as a fund of perpetual duration. In such circumstances, the University maintains the donor-required fund level as permanently restricted net assets and includes any deficiency within unrestricted net assets. At and 2014, certain individual endowment funds were below the donor-required levels of perpetual duration and a deficiency totaling $316,671 and $199,780, respectively, was recognized within unrestricted net assets to maintain donor required funding levels as permanently restricted net assets. The investment objectives for the management of endowment assets are to manage contributions in a manner that will maximize the benefit intended by the donor, to produce current income to support the programs of the University and donor objectives and to achieve growth of both principal value and income over time sufficient to preserve or increase the purchasing power of the assets, thus protecting the assets against inflation. The University s distributable spending policy is calculated at 5% of the three-year trailing average endowment pool market value. Under the current spending policy, if the ordinary income of pooled investments is insufficient to provide the full amount of the spending rate, the balance to be expended may be appropriated from the accumulated realized and unrealized gains of the pooled endowment or if accumulations are not sufficient, appropriation will be from operating investment revenues. The following represents a description of the changes in net endowment assets for the years ended and 2014, excluding permanently restricted pledges of $313,119 and $472,083 in 2015 and 2014, respectively: 2015 Unrestricted Temporarily Restricted Permanently Restricted Total Net endowment assets, beginning of year $ 6,009,299 $3,070,210 $6,414,261 $15,493,770 Investment income, net 163, ,275 2, ,288 New gifts 1, ,354 84, ,136 Appropriation for expenditures (994,444) (259,290) - (1,253,734) Other changes, including redesignations 10,095,675 (437,268) 196,269 9,854,676 Net endowment assets, end of year $ 15,275,501 $3,078,281 $6,697,354 $25,051,136 22

25 NOTE 8 ENDOWMENTS Continued 2014 Unrestricted Temporarily Restricted Permanently Restricted Total Net endowment assets, beginning of year $ 4,760,995 $2,915,703 $5,528,342 $13,205,040 Investment income, net 1,734, ,196 2,003 2,099,267 New gifts 2, , , ,304 Appropriation for expenditures (615,771) (460,296) - (1,076,067) Other changes, including redesignations 127,947 17, , ,226 Net endowment assets, end of year $ 6,009,299 $3,070,210 $6,414,261 $15,493,770 NOTE 9 LIFE INSURANCE POLICIES The University maintains a program whereby donors can make a contribution to the University, which is used to purchase whole life and term insurance policies with the University as owner and beneficiary. The cash surrender value is included in investments. The face amount of these policies was $1,251,319 as of and 2014, and is not recorded in the University s financial statements. NOTE 10 PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment consisted of the following at June 30: Buildings $ 124,342,446 $ 124,342,446 Building improvements 30,729,744 29,938,996 Equipment and furniture 41,107,127 50,331,353 Library books 1,812,996 1,763, ,992, ,376,018 Less: Accumulated depreciation (67,589,346) (70,813,018) 130,402, ,563,000 Land 6,256,068 5,256,068 Total property, plant and equipment, net $ 136,659,035 $ 140,819,068 23

26 NOTE 10 PROPERTY, PLANT AND EQUIPMENT, NET - Continued Depreciation expense amounted to $8,360,500 and $8,229,390 during the years ended and 2014, respectively. NOTE 11 CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the University to concentrations of credit risk consist principally of cash, short-term investments, marketable securities and other investments and accounts and notes receivable. The University places substantially all of its cash and liquid investments with established commercial financial institutions and limits the amount of credit exposure to any one financial institution; however, cash balances periodically exceed federally insured limits. Cash balances in excess of federally insured limits at and 2014, amounted to $3,287,122 and $3,377,581, respectively. Marketable securities, consisting of both debt and equity instruments, are generally placed in a variety of managed funds administered by different investment managers in order to limit credit risk. NOTE 12 OPERATING AND CAPITAL LEASES The University s ongoing significant lease obligations are from the building and space usage due to expansion and academic growth. Additionally, there are operational equipment, primarily copiers, which continue to be leased and renewed periodically. Rent and lease expense for the years ended and 2014, amounted to $7,541,634 and $6,357,997, respectively. The cost of equipment under capital lease was $481,604 as of and The related accumulated depreciation as of and 2014 was $240,802 and $144,481, respectively. The following minimum lease payments will continue after : Years Ending June 30, Operating Capital 2016 $ 6,661,350 $ 147, ,025, , ,070,653 36, ,029, ,035,380 - Thereafter 58,533,063-89,355, ,762 Less amount representing interest - (50,891) Total $ 89,355,155 $ 281,871 24