RANDOLPH-MACON COLLEGE FINANCIAL REPORT

Transcription

1 FINANCIAL REPORT JUNE 30, 2012

2 FINANCIAL REPORT

3 CONTENTS Page INDEPENDENT AUDITOR S REPORT... 3 FINANCIAL STATEMENTS Statements of Financial Position... 4 Statements of Activities... 5 Statements of Cash Flows... 7 Notes to Financial Statements... 9

4 INDEPENDENT AUDITOR S REPORT To the Board of Trustees Randolph-Macon College Ashland, Virginia We have audited the accompanying statements of financial position of Randolph-Macon College as of and 2011, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the College s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the College s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Randolph-Macon College as of and 2011, and its changes in net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Roanoke, Virginia October 24, 2012 CERTIFIED PUBLIC ACCOUNTANTS Your Success is Our Focus 319 McClanahan Street, S.W. P.O. Box Roanoke, VA Fax:

5 STATEMENTS OF FINANCIAL POSITION and 2011 ASSETS Cash and cash equivalents $ 6,689,171 $ 8,512,337 Receivables and other assets 2,057,810 1,517,150 Inventories 208, ,283 Cash surrender value of life insurance policies 275, ,086 Notes receivable, college and government student loans 4,442,750 4,302,075 Contributions receivable (Note 2) 7,066,957 16,408,145 Investments (Note 3) 119,933, ,186,503 Deferred loan costs, net of accumulated amortization 438, ,475 Funds designated for investment in land, buildings, and equipment 11,621,829 5,904,330 Land, buildings, and equipment, net of accumulated depreciation (Note 4) 64,859,397 58,824,857 Funds held in trust by others 1,753,691 1,766,778 Total assets $ 219,346,600 $ 220,084,019 LIABILITIES AND NET ASSETS Accounts payable $ 2,751,266 $ 3,386,391 Accrued and other liabilities 1,538,287 1,426,208 Student and other deposits 2,247,229 2,525,741 Postretirement benefit obligation (Note 5) 11,097,895 10,063,903 Trust and annuity obligations 1,486,083 1,425,797 U.S. government grants refundable 2,406,832 2,380,553 Debt (Note 6) 30,600,793 31,161,343 Total liabilities 52,128,385 52,369,936 Net assets (Note 7) Unrestricted 87,460,804 88,825,395 Temporarily restricted 35,312,673 37,754,478 Permanently restricted 44,444,738 41,134,210 Total net assets 167,218, ,714,083 Total liabilities and net assets $ 219,346,600 $ 220,084,019 The Notes to Financial Statements are an integral part of these statements. 4

6 STATEMENT OF ACTIVITIES Year Ended 2012 Temporarily Permanently Unrestricted Restricted Restricted Total OPERATING REVENUES Tuition and fees $ 39,458,827 $ - $ - $ 39,458,827 Less financial aid (19,821,179) - - (19,821,179) Net tuition and fees (Note 8) 19,637, ,637,648 Contributions 1,434, ,598-1,878,558 Investment income, endowment, and other (Note 3) 4,854,404 1,957,334 3,852 6,815,590 Investment income, temporary investments (Note 3) 22,758 88, ,409 Government and private grants - 616, ,552 Auxiliary services 11,172, ,172,659 Other 352,439 (42,238) ,890 Net assets released from restrictions and reclassifications (Note 9) 4,432,835 (4,432,835) - - Total operating revenues 41,907,703 (1,368,938) 4,541 40,543,306 OPERATING EXPENSES Educational and general: Instruction 12,434, ,434,782 Academic support 3,649, ,649,403 Student services 9,050, ,050,346 Institutional support 9,907, ,907,993 Auxiliary services 8,210, ,210,784 Total operating expenses (Note 10) 43,253, ,253,308 Change in net assets, operating (1,345,605) (1,368,938) 4,541 (2,710,002) NON-OPERATING INCOME Contributions 220,300 4,602,042 3,323,550 8,145,892 Investment income (Note 3) 13,006 41,494 17,942 72,442 Investment return, net of amount available to support current operations (Note 3) (4,075,796) (1,353,299) (14,740) (5,443,835) Other 543,665 (18,828) (10,205) 514,632 Change in value of split interest agreements (12,209) (28,292) (504) (41,005) Change in postretirement benefit obligation (Note 5) (1,033,992) - - (1,033,992) Net assets released from restrictions and reclassifications (Note 9) 4,326,040 (4,315,984) (10,056) - Change in net assets, non-operating (18,986) (1,072,867) 3,305,987 2,214,134 Change in net assets (1,364,591) (2,441,805) 3,310,528 (495,868) NET ASSETS Beginning 88,825,395 37,754,478 41,134, ,714,083 Ending $ 87,460,804 $ 35,312,673 $ 44,444,738 $ 167,218,215 The Notes to Financial Statements are an integral part of these statements. 5

7 STATEMENT OF ACTIVITIES Year Ended June 30, Temporarily Permanently Unrestricted Restricted Restricted Total OPERATING REVENUES Tuition and fees $ 36,688,634 $ - $ - $ 36,688,634 Less financial aid (17,736,379) - - (17,736,379) Net tuition and fees (Note 8) 18,952, ,952,255 Contributions 1,352,448 2,889,647-4,242,095 Investment income, endowment, and other (Note 3) 4,829,447 1,948,924 4,020 6,782,391 Investment income, temporary investments (Note 3) 20, , ,255 Government and private grants - 723, ,737 Auxiliary services 9,778, ,778,495 Other 383,129 (39,606) 14, ,789 Net assets released from restrictions and reclassifications (Note 9) 4,605,521 (4,605,521) - - Total operating revenues 39,921,874 1,018,857 18,286 40,959,017 OPERATING EXPENSES Educational and general: Instruction 11,650, ,650,584 Academic support 3,357, ,357,352 Student services 8,767, ,767,580 Institutional support 9,719, ,719,010 Auxiliary services 6,796, ,796,204 Total operating expenses (Note 10) 40,290, ,290,730 Change in net assets, operating (368,856) 1,018,857 18, ,287 NON-OPERATING INCOME Contributions 832,225 12,727,080 1,731,046 15,290,351 Investment income (Note 3) 10,499 37,062 17,063 64,624 Investment return, net of amount available to support current operations (Note 3) 7,406,635 8,090,481 63,584 15,560,700 Other (779,300) (1,750) 154,762 (626,288) Change in value of split interest agreements (3,057) (228,006) (29,018) (260,081) Change in postretirement benefit obligation (Note 5) (499,644) - - (499,644) Net assets released from restrictions and reclassifications (Note 9) 8,203,800 (8,100,410) (103,390) - Change in net assets, non-operating 15,171,158 12,524,457 1,834,047 29,529,662 Change in net assets 14,802,302 13,543,314 1,852,333 30,197,949 NET ASSETS Beginning 74,023,093 24,211,164 39,281, ,516,134 Ending $ 88,825,395 $ 37,754,478 $ 41,134,210 $ 167,714,083 The Notes to Financial Statements are an integral part of these statements. 6

8 STATEMENTS OF CASH FLOWS Years Ended and 2011 CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ (495,868) $ 30,197,949 Adjustments to reconcile change in net assets to net cash used in operating activities: Non-operating and noncash items: Contributions restricted for plant expansion and endowment (16,833,563) (3,144,904) Net realized and unrealized gains on investments (288,996) (21,007,102) Change in cash surrender value of life insurance policies (12,089) (18,096) Change in funds held in trust 13,087 (148,000) Loss on disposal of fixed assets 21,925 12,272 Depreciation and amortization 2,491,204 2,024,598 Noncash assets received as contributions (228,188) (1,377,506) Change in certain operating assets and liabilities: (Increase) decrease in: Receivables and other assets (540,660) (181,903) Inventories (53,204) 54,088 Contributions receivable 9,341,188 (10,566,981) (Decrease) increase in: Accounts payable, accrued, and other liabilities (16,862) 711,860 Student and other deposits (278,512) (91,683) Postretirement benefit obligation 1,033, ,644 Trust and annuity obligations, net of payments 253, ,768 U.S. government grants refundable 26,279 27,694 Net cash used in operating activities (5,566,777) (2,665,302) CASH FLOWS FROM INVESTING ACTIVITIES Change in notes receivable, net (140,675) 4,065 Purchases of land, buildings, and equipment (8,296,749) (13,723,650) Less new debt incurred on purchases - 10,047,854 Less change in accounts payable incurred on purchases (506,184) 1,639,233 Change in funds designated to investment in land, building, and equipment (5,717,499) (4,179) Change in investments, net of proceeds from sales 2,550,246 5,251,870 Net cash provided by (used in) investing activities (12,110,861) 3,215,193 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from contributions restricted for plant expansion and endowment 16,833,563 3,144,904 Payments of trust and annuity obligations (193,204) (341,615) Proceeds from issuance of debt - 10,047,854 Less new debt incurred to finance land, buildings, and equipment additions - (10,047,854) Payments of debt (560,550) (545,703) Payment for deferred loan costs (225,337) (123,450) Net cash provided by financing activities 15,854,472 2,134,136 Increase (decrease) in cash and cash equivalents (1,823,166) 2,684,027 CASH AND CASH EQUIVALENTS Beginning 8,512,337 5,828,310 Ending $ 6,689,171 $ 8,512,337 (Continued) The Notes to Financial Statements are an integral part of these statements. 7

9 STATEMENTS OF CASH FLOWS Years Ended and 2011 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for interest $ 1,113,944 $ 765,356 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Debt incurred to acquire land, buildings, and equipment $ - $ 47,854 Purchases of land, buildings, and equipment included in accounts payable $ 1,133,049 $ 1,639,233 Noncash assets received as contributions $ 228,188 $ 1,377,506 The Notes to Financial Statements are an integral part of these statements. 8

10 Note 1. Nature of Operations and Significant Accounting Policies Randolph-Macon College (the College ) is a private, undergraduate, coeducational, liberal arts college located in Ashland, Virginia. The College s curriculum emphasizes the liberal arts and sciences and includes 31 major fields of study. Significant sources of revenue include tuition and fees, contributions, and investment returns. The significant accounting policies followed by the College are described below: Basis of financial statement presentation and accounting: The financial statements of the College have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accompanying financial statements present information regarding the College s financial position and activities according to three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. The three classes are differentiated based on the existence or absence of donor-imposed restrictions, as described below: Unrestricted net assets are free of donor-imposed restrictions. Unrestricted net assets may be designated for specific purposes by action of the Board of Trustees or may otherwise be limited by contractual agreements with outside parties. Revenues, gains, and losses that are not temporarily or permanently restricted by donors are included in this classification. Expenses are reported as decreases in this classification. Temporarily restricted net assets are limited in use by donor-imposed stipulations that expire either by the passage of time or that can be fulfilled by action of the College pursuant to those stipulations. Permanently restricted net assets are amounts required by donors to be held in perpetuity; however, generally, the income on these assets is available to meet various restricted and other operating needs. These net assets primarily include permanent endowment funds and funds held in trust by others. Cash and cash equivalents: The College considers all highly liquid investments with a maturity of three months or less when purchased to be cash and cash equivalents. Cash equivalents are stated at cost, which approximates market value. Cash held for long-term investment is classified as investments or funds designated for investment in land, buildings, and equipment. The College follows the common cash management practice of consolidating certain of its operating cash and cash equivalent accounts into one account, which includes various designated and restricted current operating and plant accounts. As a result of this practice, cash and cash equivalents specifically associated with the original gift of certain designated and restricted monies can be spent from the consolidated account. The College has sufficient unrestricted funds not included in the consolidated account to cover the designated or restricted monies spent. (Continued) 9

11 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Receivables: Student, grant, and other receivables are stated at the amount the College expects to collect from outstanding balances. The College provides for probable uncollectible amounts through a provision for bad debt expense and an adjustment to a valuation allowance based on its experience and other circumstances which may affect the ability of students and others to meet their obligations. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Inventories: Inventories are stated at the lower of cost or market, with cost determined primarily on the first-in, first-out method. Investments: Investments in marketable securities with readily determinable fair values and all investments in debt securities are reported at their fair values. The fair values of investments in equities, fixed income, and cash and cash equivalents are determined by reference to quoted market prices and other relevant information generated by market transactions. Net unrealized and realized gains or losses are reflected in the statements of activities. Certain land and other investments which are not readily marketable are carried at cost. Gifts of investments are recorded at their fair value (based upon quotations or appraisals) at the date of gift. Purchases and sales of investments are recorded on the trade date. The estimated fair value of most alternative investments is based on valuations provided by the external investment managers. The College believes the carrying amount of these financial instruments is a reasonable estimate of fair value. Because some alternative investments are not readily marketable, their estimated value is subject to uncertainty and therefore may differ from the value that would have been used had a ready market for such investments existed. Such a difference could be material. Income and realized and unrealized net gains on investments of endowment and similar net asset classes 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, including income earned on donor restricted endowment funds; As increases in unrestricted net assets in all other cases. The College has various investment vehicles that the carrying value fluctuates with the financial markets. As a result, the value of such investments as of the date of this report may be materially different than year end values. (Continued) 10

12 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Split-interest agreements: The College participates in various split-interest agreements that are unconditional and irrevocable. These arrangements are established when a donor makes a gift to the College or a trust in which the College shares benefits with other beneficiaries. Generally, the College accounts for these agreements by recording its share of the related assets at fair market value (which approximates the present value of the estimated future cash receipts). Liabilities are recorded for any portion of the assets held for donors or other beneficiaries equal to the present value of the expected future payments to be made. The liabilities are adjusted annually for changes in the value of the assets, accretion of the discount, and other changes in the estimates of future benefits. Contribution revenues are recognized at the dates the agreements are established for the difference between the assets and the liabilities. If the College holds the assets or is the trustee, the assets are included in investments, and the liabilities are included in trust and annuity obligations. If a third party is the trustee until the termination of the trust and then the remaining assets are transferred to the beneficiaries, the assets less related liabilities are included in contributions receivable. If the donor establishes a perpetual trust with a third party as trustee (the College will never receive the principal of the trust), the assets less related liabilities are included in funds held in trust by others. The fair values of funds held in trust by others are determined by the present value of estimated future cash flows. Deferred loan costs: Deferred loan costs are being amortized on the straight-line basis over the term of the related financing agreement. Land, buildings, and equipment: Land, buildings, and equipment are stated at cost at the date of acquisition, or fair value at the date of gift, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. During 2011, the College changed the estimated useful lives of buildings from 40 years to 50 years. This change was accounted for on a prospective basis. The change resulted in a decrease to depreciation expense, and an increase to unrestricted net assets of approximately $350,000 for the year ended June 30, Equipment is removed from the records and any gain or loss is recognized at the time of disposal. Expenditures for new construction, major renewals and replacements, and equipment exceeding $5,000 are capitalized. The College capitalizes interest costs as part of the construction cost of buildings where it relates to the financing of major projects under development. Accrued compensation: The College accrues for salaries and all other compensation earned but not paid. Student and other deposits: Deposits and student fees applicable to academic sessions subsequent to the current year are deferred and recognized as revenues in subsequent periods. (Continued) 11

13 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Postretirement benefits: The College makes available certain healthcare, dental, and life insurance benefits to employees who meet eligibility requirements. The College s share of the estimated costs of benefits that will be paid after retirement is generally being accrued by charges to expense over the employees active service periods to the dates they are fully eligible for benefits. Notes receivable and U.S. government grants refundable: The College participates in the Federal Perkins Loan Program sponsored by the United States Government. Under this program, funds are loaned to qualified students and may be reloaned after collection. Student loan receivables related to this program are recorded as notes receivable. The portion of those funds contributed by the U.S. Government (that is, exclusive of the College s match funds) is ultimately refundable to the government. The College accounts for its notes receivable at cost and recognizes interest income as it is earned. An allowance for doubtful accounts is based on prior collection history and individual circumstances of the borrower. Notes are considered past due after days and accrue interest until written off when considered uncollectible. Asset Retirement Obligations (AROs): An asset retirement obligation is a legal liability to the College for the cost of retiring a tangible long-lived asset (e.g., a building containing asbestos) that results from the acquisition, construction, or development and/or the normal operation of the long-lived asset. A conditional ARO is a legal obligation in which the timing and/or method of retirement are conditional on a future event that may or may not be within the control of the College. To reasonably estimate these liabilities, the College must be able to determine (1) the settlement date the estimated date or range of dates that disposal is anticipated or legally required, and (2) the settlement method how the disposal will take place. The College follows the policy of recording the fair value of such liabilities when they can be reasonably estimated. Net asset classifications of institutional funds: The College holds institutional funds, principally endowment funds, subject to the Uniform Prudent Management of Institutional Funds Act (UPMIFA). Endowment is a commonly used term to refer to the resources, including trusts and annuities, that have been restricted by the donor or designated by the Board that will be invested to provide future revenue to support the College s activities. The College s endowment consists of individual funds established for a variety of purposes. As titled, UPMIFA provides guidance and applicable regulations relative to the management of applicable funds. (Continued) 12

14 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Net asset classifications of institutional funds: (Continued) In response to UPMIFA, the College adopted the provisions of accounting guidance for net asset classification of donor-restricted endowment funds for an organization that is subject to UPMIFA and also required related financial statement disclosures. Interpretation of UPMIFA The Board of Trustees of the College has interpreted UPMIFA as requiring 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. Accordingly, the College classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations of investment returns to the permanent endowment made in accordance with the direction of the applicable donor gift instrument, when applicable, at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the College in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the College considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) the duration and preservation of the fund, (2) the purposes of the College 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 College, and (7) the investment policies of the College. Return Objectives and Risk Parameters The College has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those of donor-restricted funds that organizations must hold in perpetuity or for a donor-specified period as well as board-designated funds. Under this policy, as approved by the Board of Trustees, the endowment assets are invested in a manner that is intended to produce results that exceed the price and yield results of a benchmark composed of a total return. The College expects its endowment funds to provide an average annual rate of return of 5.0% plus inflation (measured as the consumer price index). Actual returns in any given year may vary from this amount. (Continued) 13

15 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Net asset classifications of institutional funds: (Continued) Strategies Employed for Achieving Objectives To satisfy its long-term rate-of-return objectives, the College relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The College targets a diversified asset allocation that places emphasis on investments to achieve its long-term return objectives within prudent risk constraints as follows: Target Allocation Range Asset class: U.S. equities 25.0% % Foreign equities 25.0% % Fixed income 20.0% % Marketable alternative assets 15.0% % Nonmarketable alternative assets 15.0% % Spending Policy and How the Investment Objectives Relate to Spending Policy On College-held investments, the College employs a total return endowment spending policy that establishes the amount of endowment investment return that is available to support current needs and restricted purposes. This policy is designed to insulate program spending from capital market fluctuations and to increase the amount of return that is reinvested in the corpus of the fund in order to enhance its long-term value. For the years ended and 2011, the Board-approved spending formula for the endowment provided for an annual spending rate of 5.0% of the twelve-quarter trailing average of endowment market values through December of the previous fiscal year. If cash yield (interest and dividends) is less than the spending rate, realized gains can be used to make up the deficiency. Any income in excess of the spending rate is to be reinvested in the endowment. For the years ended and 2011, the Board approved supplemental spending of approximately $1.2 million and $1.25 million, respectively, for capital campaign and marketing activities. Funds with Deficiencies ( Underwater funds) From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or UPMIFA requires the College to retain as a fund of perpetual duration. Deficiencies of this nature are reported in unrestricted net assets and were approximately $212,000 and $257,000 as of and 2011, respectively. These deficiencies resulted from unfavorable market fluctuations that occurred shortly after the investment of new permanently restricted contributions and continued appropriation of certain programs that were deemed prudent by the Board of Trustees. Subsequent gains that restore the fair value of the assets of the endowment fund to the required level are classified as an increase in unrestricted net assets. (Continued) 14

16 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Contributions: Contributions, including unconditional promises to give or contributions receivable, are recognized as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence and/or nature of any donor restrictions, in the period the donor s commitment is received. Unrestricted, unconditional promises to give are recognized as temporarily restricted operating revenues unless the donor explicitly stipulates its use to support current period activities. Conditional promises to give are not recognized until they become unconditional that is, when the conditions on which they depend are substantially met. Contributions of assets other than cash are recorded at their estimated fair value. Contributions to be received after one year are discounted at an appropriate discount rate commensurate with the risks involved. Amortization of the discount is recorded as additional contribution revenue in accordance with donor-imposed restrictions, if any, on the contributions. An allowance for uncollectible contributions receivable is provided based upon management s judgment, including such factors as prior collection history, type of contribution, and nature of the fundraising activity. Contributions received with donor-imposed restrictions that are met in the same year as received are reported as revenues of the temporarily restricted net asset class, and a reclassification to unrestricted net assets is made to reflect the expiration of such restrictions. Contributions of land, buildings, and equipment without donor stipulations concerning the use of such long-lived assets are reported as revenues of the unrestricted net asset class. Contributions of cash or other assets, to be used to acquire land, buildings, and equipment, with such donor stipulations are reported as revenues of the temporarily restricted net asset class; the restrictions are considered to be released at the time of acquisition of such long-lived assets. Operating results: Operating activities in the statements of activities illustrate a measure of how the College is maintaining the resources available for its current operations. Operations reflect all transactions increasing or decreasing unrestricted net assets except those of a capital nature that is, capitalized for long-term investment or as land, buildings, and equipment and the change relating to the postretirement benefit obligation. Temporarily restricted net assets released from restrictions which satisfy an operating purpose are also classified as operating. In accordance with the College s total return policy, only the portion of total investment return available under this policy to meet operating needs is included in operating revenues. Additionally, the portion of total investment return available to support current operations under the College s total return policy is excluded from cash flows from operating activities; only the actual cash yield is included in cash flows from operating activities. Costs related to the operation and maintenance of physical plant, including depreciation of plant assets, are allocated to operating programs and supporting activities based upon periodic inventories of facilities. Interest expense on external debt is allocated to the activities that have most directly benefited from the proceeds of the external debt. Employee and staff benefits are allocated to operating programs and supporting activities based upon salary expenses of these programs and activities. (Continued) 15

17 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Advertising costs: The College follows the policy of charging advertising costs to expenses as incurred. Advertising expense was approximately $121,000 and $383,000 for the years ended and 2011, respectively. Fair Value Measurements: The College carries various assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, a market-based approach is used which establishes that fair value is based on the highest and best use. Additionally, the College categorizes its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as reflected below. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 1 Fair values are based on unadjusted quoted prices in active markets for identical assets or liabilities that management has the ability to access at the measurement date. Level 2 Fair values are based on inputs other than quoted prices in Level 1 that are either for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that were observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 Fair values are based on unobservable inputs for the asset or liability where there is little, if any, market activity for the asset or liability at the measurement date. The estimated fair value for specific groups of financial instruments is presented within the notes applicable to such items. If not specifically presented, fair value is estimated to approximate the related carrying value. It was not considered practical to determine fair value of notes receivable from students under the U.S. government loan programs and related government advances because the notes receivable are non-marketable and can only be assigned to the U.S. government or its designees. These installment notes are due over terms of ten years, with interest at 5% per annum, and are carried at face value. Credit risk concentrations: Financial instruments which potentially subject the College to concentrations of credit risk consist principally of cash and cash equivalents, investments, and student accounts receivable, and notes receivable. The College places its cash and cash equivalents with high-credit, quality financial institutions. A portion of the College s bank deposits are in excess of federally insured limits. Concentration of credit risk for investments is limited by the College s policy of diversification of investments. Concentration of credit risk for student accounts receivable and notes receivable are limited due to a large base and geographic dispersion. (Continued) 16

18 Note 1. Nature of Operations and Significant Accounting Policies (Continued) Income taxes: The College is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code. The federal Forms 990 of the College are subject to examination by the Internal Revenue Service, generally for three years after they are filed. Subsequent events: Subsequent events were considered through October 24, 2012, the date the financial statements were available to be issued. Reclassifications: Certain reclassifications have been made to prior year amounts in order to conform to the current year presentation. Note 2. Contributions Receivable Contributions receivable consist of the following as of June 30: Unconditional promises to give cash $ 6,922,693 $ 15,846,239 Various charitable trusts held by others 144, ,906 $ 7,066,957 $ 16,408,145 Expected to be collected in: Less than one year $ 3,897,260 $ 12,780,570 One to five years 4,274,662 4,141,641 More than five years 380,602 1,216,899 8,552,524 18,139,110 Less: Actuarial present value of future payments (175,714) (534,777) Discount to net present value at 1.0%-5.0% (280,785) (253,706) Allowance for uncollectible contributions (1,029,068) (942,482) $ 7,066,957 $ 16,408,145 (Continued) 17

19 Note 2. Contributions Receivable (Continued) The ownership of contributions receivable for each class of net assets as of June 30 is as follows: Temporarily restricted $ 5,652,227 $ 14,817,642 Permanently restricted 1,414,730 1,590,503 $ 7,066,957 $ 16,408,145 For the year ended, the College recorded contributions from four donors that totaled approximately 30% of contributions. For the year ended June 30, 2011, the College recorded contributions from six donors that totaled approximately 20% of contributions. Note 3. Investments Investments are comprised of the following as of June 30: U.S. equities $ 41,091, % $ 42,263, % Foreign equities 23,755, ,170, Fixed income 23,427, ,467, Marketable alternative assets 16,894, ,196, Nonmarketable alternative assets 7,409, ,946, Real estate and other 4,389, ,694, Cash and cash equivalents 2,965, ,447, $ 119,933, % $ 122,186, % The ownership of investments for each class of net assets as of June 30 is as follows: Unrestricted $ 63,595,288 $ 68,200,292 Temporarily restricted 15,998,536 16,962,771 Permanently restricted 40,339,317 37,023,440 $ 119,933,141 $ 122,186,503 (Continued) 18

20 Note 3. Investments (Continued) The market value of investment asset classifications are as follows as of June 30: Endowment Held by Trustees $ 114,066,740 $ 115,483,651 Held by College 19,019 20,341 Trusts and annuities 3,471,219 3,418,288 Unrestricted current funds 49, ,409 Restricted current funds 74,773 83,785 Loan funds 1,768,176 1,889,889 Plant funds 484, ,140 Investment activity for the years ended June 30 is reflected in the table below: $ 119,933,141 $ 122,186,503 Investments, beginning $ 122,186,503 $ 105,899,952 Funds available for investment 4,150,116 2,126, ,336, ,026,683 Investment returns (net of expenses: 2012 $696,942; 2011 $738,438): Dividends, interest, and other income 1,231,015 1,495,678 Investment return, net of amount available to support current operations per statements of activities (5,443,835) 15,560,700 Add spending in excess of cash yield 5,732,831 5,446,402 Net realized and unrealized gains 288,996 21,007,102 Total return on investments 1,520,011 22,502,780 Amounts appropriated for operations, net transfers to operational accounts, debt payments, and other activity (7,923,489) (8,342,960) Investments, ending $ 119,933,141 $ 122,186,503 (Continued) 19

21 Note 3. Investments (Continued) The following schedule summarizes total investment return and its classification in the statements of activities for the years ended June 30: Operating revenues investment income, endowment, and other amount distributed to support current operations pursuant to the endowment spending policy $ 6,815,590 $ 6,782,391 Operating revenues investment income, temporary investments 111, ,255 Non-operating income investment income 72,442 64,624 Investment return, net of amount available to support current operations (5,443,835) 15,560,700 Less non-investment related activity (35,595) (27,190) $ 1,520,011 $ 22,502,780 The College has diversified its portfolio in order to moderate volatility by investing in certain alternative investments. These investments are comprised of funds with both public and private investment companies. The underlying investments of some of these funds are largely in public equities, but are also invested in financial instruments such as currencies, futures contracts, options, and other vehicles such as real estate. The College is exposed to potential risks through its investments in non-marketable alternative assets. Such potential risks include, but are not limited to, the following: Non-marketable securities: Certain private investment companies hold various types of securities that are not readily marketable. Such securities are valued using various methodologies including estimates of fair value as determined by the management of the private investment companies. Such estimates are subject to change with the passage of time and the occurrence of events and such changes could be material. The College believes the carrying value of these financial instruments is a reasonable estimate of fair value. Broker dealer risk: Certain private investment companies have clearing agreements with brokerage firms to carry accounts as customers. Such brokers have custody of the private investment companies securities and cash balances, which may be due from these brokers. These securities and/or cash positions serve as collateral for any amounts due to brokers as well as collateral for securities in their custody. (Continued) 20

22 Note 3. Investments (Continued) Investments sold, not yet purchased: Certain private investment companies may sell securities that they do not own and, therefore, will be obligated to purchase such securities at a future date. These obligations are recorded on those private investment companies respective financial statements at the market value of the securities. There is an element of risk that, if the securities increase in value, it will be necessary to purchase the securities at a cost in excess of the obligation reflected in these private investment companies respective financial statements. Note 4. Land, Buildings, and Equipment Land, buildings, and equipment consist of the following at June 30: Estimated Useful Life Buildings and leasehold improvements 50 years $ 79,495,240 $ 65,121,423 Vehicles, furniture, and equipment 3-30 years 17,143,804 15,972,924 96,639,044 81,094,347 Less accumulated depreciation (42,955,610) (40,790,233) 53,683,434 40,304,114 Land 4,319,610 4,319,610 Construction in progress 5,478,865 12,858,353 Art collection 1,377,488 1,342,780 $ 64,859,397 $ 58,824,857 At, construction in progress represents work completed to date on the football field, library addition, Brock Commons, and various other projects. At June 30, 2011, construction in progress represents work completed to date on the construction of a new residence hall, baseball field renovations, and various other projects. Estimated costs to complete these projects approximate $21.3 million at. These costs will be financed using a combination of gifts and cash reserves. (Continued) 21

23 Note 5. Postretirement Benefits The College has a plan that makes available postretirement health, dental, and life insurance benefits to eligible employees and dependents who were hired prior to January 1, 2001 and who meet both a minimum age of 55 years and have a minimum service of 10 years of continuous service as an employee, and the sum of the employee s age and years of service is at least 70. Generally, the plan pays a stated percentage of health and life insurance premiums on behalf of retired employees. The College accrues the cost of postretirement health, dental, and life insurance benefits within the employees active service periods. (Continued) 22 Change in benefit obligation: Benefit obligation at beginning of year $ 10,063,903 $ 9,564,259 Service cost 282, ,550 Interest cost 563, ,853 Plan participants contributions 194, ,561 Actuarial (gain) loss 359,880 (19,780) Benefits paid (366,272) (385,540) Benefit obligation at end of year $ 11,097,895 $ 10,063,903 Net periodic benefit costs reported as operating expense included the following components: Service cost $ 282,775 $ 269,550 Interest cost 563, ,853 Amortization of prior service credit (421,214) (421,214) Recognized actuarial loss 178, ,946 Net periodic postretirement benefit cost $ 603,239 $ 512,135 Assumptions used in determination of the costs of postretirement benefits consisted of the following for the years ended June 30: Discount rate used in determining the accumulated postretirement benefit obligation 4.5% 5.7% Assumed healthcare cost trend used in measuring the accumulated postretirement benefit obligation (declining to 5.00% in 2018) 9.0% 10.0% The healthcare cost trend rate assumption can have a significant effect on the amounts reported. For example, if the healthcare cost trend rate assumptions were increased by 1.0%, the APBO would be increased by approximately $1.6 million. The effect of this change on the sum of the service cost and interest cost components of net periodic postretirement benefit cost would be an increase of approximately $112,000.

24 Note 5. Note 6. Postretirement Benefits (Continued) The items recognized in unrestricted net assets not yet recognized as a component of net periodic benefit cost are as follows: Net actuarial loss $ 2,431,761 $ 2,250,355 Prior service credit (1,421,260) (1,842,474) Total $ 1,010,501 $ 407,881 The net loss and the prior service credit that will be amortized into net periodic benefit cost during fiscal year 2013 are $540,394 and $421,214, respectively. Estimated future benefit premiums expected to be paid by the College over the next ten years is as follows: Debt June 30, 2013 $ 405, $ 442, $ 482, $ 519, $ 550, $ 3,202,500 The College s debt consists of the following as of June 30: Unsecured Virginia College Building Authority Educational Facilities Revenue Bonds, payable to a bank, interest payable semi-annually at 4.125%. Principal is payable in During the year, the College secured financing of up to $10 million to refinance this debt when it comes due. The new debt contains a forward swap agreement. $ 9,830,000 $ 9,830,000 Unsecured Industrial Development Authority of the Town of Ashland Education Facilities Revenue Bonds, Series 2002A. Interest on the Series 2002A bonds is due semi-annually at 2.54%, with principal payments due annually in varying amounts ranging up to $470,000 in December ,125,000 6,425,000 (Continued) 23

25 Note 6. Debt (Continued) The College s debt consists of the following as of June 30: (Continued) Unsecured Industrial Revenue Authority of Town of Ashland Educational Facilities Revenue Debt Bonds, Series 2004A Bond. Principal is due annually in varying amounts ranging up to $275,000 in December Interest is due semi-annually at 2.60%. Proceeds used to renovate the north quad of the freshman village. 3,890,000 4,090,000 Unsecured Economic Development Authority of the Town of Ashland Educational Facilities Revenue Note, Series Principal is due annually in varying amounts ranging up to $690,000 in April Interest is due semi-annually at 3.21% through April 2021, at which time it can be reset. 10,000,000 10,000,000 Note payable to a bank. Principal is due annually in varying amounts ranging up to $56,608 through December 15, Interest is due semi-annually at 3.79%. The debt is unsecured. 660, % note payable to a bank, principal and interest of $32,218 payable semi-annually through January Secured by a building ,457 Other 95, ,886 Debt matures as follows: Year ending June 30, 2013 $ 10,389, , , , , and later years 17,503,890 Interest expense for the years ended June 30 is as follows: $ 30,600,793 $ 31,161,343 $ 30,600,793 Expensed $ 1,083,682 $ 826,429 Capitalized 41,123 62,417 $ 1,124,805 $ 888,846 (Continued) 24

26 Note 7. Net Assets Net assets as of June 30 consisted of the following: Unrestricted Funds functioning as endowment: Quasi endowment $ 60,830,483 $ 64,575,909 Accumulated losses resulting in underwater funds (212,000) (257,088) Amounts held for trust and annuity payments 229, ,387 Investment in land, buildings, and equipment, net of debt 35,958,770 32,171,904 College contributions to student loan funds 641, ,206 Other (9,987,516) (8,487,923) 87,460,804 88,825,395 Temporarily restricted Funds functioning as endowment: Accumulated endowment investment return, net of amounts spent 14,760,362 16,086,568 Amounts held for trust and annuity payments 1,643,410 1,693,376 Restricted for future operations 5,579,200 7,239,452 Restricted for buildings and equipment 13,329,701 12,735,082 35,312,673 37,754,478 Permanently restricted Restricted in perpetuity; only the income is expendable: Endowment principal 38,053,896 34,563,504 Trusts and annuities 112, ,728 Funds held in trust by others 1,753,691 1,766,778 Contributions receivable 1,414,730 1,590,503 Student loan funds 3,110,238 3,105,697 44,444,738 41,134,210 Total net assets $ 167,218,215 $ 167,714,083 Temporarily restricted net assets are subject to both purpose and time restrictions. Temporarily restricted accumulated endowment investment return, net of amounts spent, is restricted for future operations, financial aid, and maintenance and acquisition of land, buildings, and equipment. Management determined that renovations to the Estes Dining Hall and related unearned revenue were not recorded in prior years. The 2011 financial statements have been restated to reflect this adjustment. (Continued) 25

27 Note 8. Note 9. Tuition and Fees, Net of Financial Aid Tuition and fees include regular session tuition for the College s undergraduate regular and summer sessions as well as miscellaneous fees, such as application, graduation, automobile, and interest. Revenues received for student tuition and fees, net of financial aid, consist of the following for the years ended June 30: Tuition and fees $ 39,458, % $ 36,688, % Less financial aid: Institutional, non-funded (18,100,399) (45.9) (15,919,773) (43.4) Funded: Endowed and other (1,629,559) (4.1) (1,718,936) (4.6) Grants (91,221) (0.2) (97,670) (0.3) (19,821,179) (50.2) (17,736,379) (48.3) $ 19,637, % $ 18,952, % Financial aid is awarded to students based upon need and merit and is applied to billed tuition and fees, and room and board. Financial aid does not include payments made to students for services rendered to the College. However, the College does participate in work study programs; these expenses, which totaled $359,240 and $311,622 for the years ended and 2011, respectively, are included in institutional support on the statements of activities. Of these amounts, the federal government contributed $122,354 and $150,802, respectively. Net Assets Released from Restrictions and Reclassifications Net assets were released from donor restrictions when expenses were incurred to satisfy the restricted purposes, or by occurrence of other events as specified by donors. Restrictions were satisfied as follows for the years ended June 30: Operating: Financial aid $ 1,400,246 $ 1,552,703 General operations and maintenance 2,662,630 2,722,733 Expiration of time restrictions 369, ,085 Total operating 4,432,835 4,605,521 Non-operating: Buildings and equipment 4,270,896 5,520,977 Recovery of underwater endowments 45,088 2,679,433 Changes in donor designations and other reclassifications - (100,000) Total non-operating 4,315,984 8,100,410 $ 8,748,819 $ 12,705,931 (Continued) 26