Messenger - Vol. 1, No. 3, Page 6 Spring 1992 University of Delaware Annual Report Summary of Significant Accounting Policies UNIVERSITY OF DELAWARE Summary of Significant Accounting Policies June 30, 1991 The significant accounting principles and practices followed by the University of Delaware are presented below to assist the reader in analyzing the financial statements and accompanying notes. Certain amounts have been reclassified in the prior year to conform to correct year classifications. Fund Accounting The accounts of the University are maintained in accordance with the principles of "fund accounting". This is the procedure by which resources for various purposes are classified for accounting and reporting purposes into funds that are in accordance with activities or objectives specified. Separate accounts are maintained for each fund; however, in the accompanying financial statements, funds that have similar characteristics have been combined into the following four fund groups: Current Funds Loan Funds Endowment and Similar Funds Plant Funds All fund groups are separated into those that are restricted by donors or grantors and those that are unrestricted. Restricted funds may only be expended for the purpose indicated by the donor/grantor, whereas unrestricted funds are under the control of the Trustees of the University to use in accordance with its Charter and Bylaws. There are three financial statements presented under the principles of fund accounting: Balance Sheet is a listing of the assets, liabilities and fund balances as of the end of a fiscal year. Statement of Current Funds Revenues, Expenditures, Transfers and Changes in Fund Balances is a summary of the financial activity of the current funds during a fiscal year. It does not represent the entire operations of the period (there is financial activity recorded in the other funds), nor does it reflect the net income or loss for a fiscal year. Statement of Changes in Fund Balances is a summary of all the additions to and deductions from each of the major fund groups and subgroups during a fiscal year. This statement provides an overview of the University's financial activity during a fiscal year. All unrestricted funds and funds restricted for current operations are reported as revenues in the Statement of Current Funds Revenues, Expenditures, Transfers and Changes in Fund Balances during the year received or accrued with the exception of gains on sales of investments of the endowment and similar funds. All other restricted funds are recorded as additions to the appropriate fund balance in the Statement of Changes in Fund Balances when received or accrued. Explanation of Transfers and Allocations Mandatory transfers to other funds - transfers made in accordance with contractual agreements relative to debt service and Federal loan programs. Other transfers to other funds - all other financial transactions between fund groups. Allocations - represent the setting aside of current funds for specific purposes for expenditure in a subsequent year. Auxiliary Operations The operation of auxiliaries is supplementary to the primary educational function of the University. Accordingly, the University annually provides from auxiliary enterprises revenues, provisions for debt service and renewal and replacement of equipment. Auxiliary operations primarily include the residence and dining halls, the bookstore, and student health service. Investments Investments in stocks, bonds, notes, mortgages and plant assets are stated substantially at cost. Endowment and Similar Funds The endowment and similar funds are subdivided into appropriate classifications. Endowment funds have been received from benefactors who, by the terms of their conveying instruments, have stipulated that the principal of their gifts may never be expended. Expenditures from the principal of funds functioning as endowment are not similarly prohibited; however, in certain cases the principal is restricted to purposes specified by the donor. Realized gains on sales of investments of the endowment and similar funds are recorded as additions to principal funds. Funds Held in Trust by Others The University is the beneficiary of irrevocable trust funds held by others with an approximate market value of $36,663,000 ($35,407,000 - 1990). There are also other trust funds, the principal and market value of which are not ascertainable, that benefit the University. Since the University does not have possession of these trusts, the principal is not reflected in the accompanying balance sheets. Taxes The Internal Revenue Service has ruled that the University is a tax exempt institution; accordingly, no provision for taxes has been made in the financial statements. Pensions Substantially all faculty and professional members are provided pension benefits under the University's Retirement Annuity Program administered principally by the Teachers Insurance and Annuity Association. The policy of the University is to pay its share of the annual premium accrued in connection with the University Retirement Annuity Program; there are no unfunded benefits. Pension plan expense for the University Retirement Annuity Program was $8,566,000 in 1991 and $7,730,000 in 1990. All other employees are provided pension benefits under the State of Delaware Pension Plan. Pension expense applicable to University employees covered by the State of Delaware Pension Plan was $3,129,000 in 1991 and $3,187,000 in 1990. Plant Funds Land is recorded at cost, or appraised value at time of receipt if contributed, including land deeded by the Board of Trustees of Delaware College to the State of Delaware in the early 1900's and thereafter used by the College and University, as successor, for the purposes of the College and University. Buildings are recorded at cost of initial construction, including buildings on land deeded to the State and thereafter used for the purposes of the College and University. Costs of major renovations to buildings are capitalized. Costs of equipment in excess of $1,000 and $500 as of June 30, 1991 and 1990, respectively, with a useful life expectancy of two or more years are also capitalized. As further described in note (5), the University adopted the provisions of Financial Accounting Standards Board Statement No. 93, "Recognition of Depreciation by Not-For-Profit Organizations". The University uses the straight-line method of depreciation based upon the following estimated useful lives: Estimated lives (years) Land improvements 15 Buildings 40 Equipment and furnishings 5 - 20 (1) Investments Market value of investments, exclusive of plant, on June 30: 1991 1990 (000's) (000's) ------- ------- Current unrestricted and University allocated funds $ 53,029 50,202 Current restricted funds 14,529 15,901 Loan funds 3,240 5,055 Endowment and similar funds 356,213 326,271 Unexpended plant funds 26,674 29,299 Renewal and replacement funds 12,409 11,001 Retirement of indebtedness funds 433 894 ------- ------- $466,527 438,623 ======= ======= Consisting of: United States government obligations $107,823 105,492 Commercial paper 40,764 64,847 Certificates of deposit 1,219 881 Corporate bonds and notes 97,474 75,674 Stocks and convertible securities 193,726 169,143 Mortgages 12,246 12,358 Cash value of life insurance policy 386 381 Money market and other liquid funds 8,308 6,857 Investment in limited partnership 2,583 2,879 International mutual funds 1,895 - Other 103 111 ------- ------- $466,527 438,623 ======= ======= These investments are carried on the balance sheet at a cost of $348,501,000 ($335,783,000 in 1990). The dividends and interest from such investments during the periods were as follows: 1991 1990 (000's) (000's) ------- ------- Unrestricted(a) $ 23,573 23,083 Restricted 6,308 6,562 ------- ------- $ 29,881 29,645 ======= ======= Earnings of funds held in trust by others distributed to the University: 1991 1990 (000's) (000's) ------- ------- Unrestricted $ 1,576 1,712 Restricted 354 368 ------- ------- $ 1,930 2,080 ======= ======= At June 30, 1991, the excess of market value over cost for those equity securities having such excess was $113,955,989 and the excess of cost over market value for those equity securities having such excess was $1,044,319. (a) Includes interest from Auxiliary Operations and Activities of Educational Departments of $1,137,266 in 1991 ($1,130,000 in 1990). (2) Loan Funds' Notes and Accounts Receivable Loan funds' notes and accounts receivable consisted of the following: June 30 (000's) 1991 1990 ------- ------- Student loan programs $ 9,599 9,194 University Mortgage Program 2,119 2,372 Other 122 123 ------- ------- $ 11,840 11,689 ======= ======= The student loan programs consist primarily of the National Direct Student Loan/Perkins and Nursing Student Loan Programs. The United States Government provides 90% of the funds and the University provides 10% of the funds to support these programs. The University Mortgage Program provides home mortgages for faculty and professional members. On March 1, 1978, the University issued its $10,000,000 general obligation bonds (Series of 1978). These bonds provided funds for the mortgage program. Additional mortgages are provided by University endowment resources. (3) Capital Program Estimated capital cost of fourteen approved construction projects that have budgets in excess of $500,000 amounts to approximately $70,837,000 (unaudited) at June 30, 1991. Costs incurred to date on such projects total approximately $28,222,000. (4) Indebtedness In October 1989, the University issued $41,195,000 of Series 1989 Revenue Bonds and $9,985,000 of Series 1989 Special Obligation Bonds. A portion of the Series 1989 Revenue Bond Proceeds and all of the Series 1989 Special Obligation Net Bond Proceeds together with the accounts associated with the Refunded Bonds were placed in an irrevocable trust and used to purchase government securities to provide for the principal and interest on the Housing and Dining System Revenue Bonds at their respective maturities. Additionally, the investment earnings on the government securities will also be used to pay the principal and interest on the series 1989 Special Obligation Bonds when due. The defeasance resulted in a gain of $2,139,885 and is reflected as an addition in the "Investment in Plant" Fund for the year ended June 30, 1990. In accordance with generally accepted accounting principles, the Housing and Dining System revenue and the Special Obligation Bonds payable (amounting to $26,861,000 and $29,219,000 at June 30, 1991 and 1990, respectively) and the assets of the Trust are not included in the accompanying Balance Sheet. The remaining portion of the Series 1989 Revenue Bond proceeds will be used to renovate, construct and equip certain of the University's housing, dining, and student health services facilities and to prepay an existing loan for the Ice Arena. The Series 1989 Revenue Bonds bear interest rates ranging from 6% to 7% and mature at various dates through November, 2014. The aggregate amount of principal payments required through June 30, 1996 is as follows: 1992-$1,040,000; 1993-$1,100,000; 1994-$1,170,000; 1995-$1,245,000; and 1996-$1,325,000. The bonds are secured by a pledge of gross revenues received by the University from the operation of all project facilities including housing, dining, student health services, and the ice arena. A general obligation bond indenture with a principal balance of $10,000,000 was issued in March 1978 to fund the University's Mortgage Program. The bonds carry annual interest rates of 3.70% to 5.65% and mature annually through 2000. The bonds are secured by: (a) a pledge of all revenues and receipts derived from the mortgage programs, (b) a pledge and assignment to the trustee of program mortgages and (c) a pledge of the University's full faith and credit for the payment of the principal and interest payments. The aggregate amount of principal payments required through June 30, 1996, is as follows: 1992-$415,000; 1993-$405,000; 1994-$375,000; 1995-$350,000; and 1996-$325,000. Notes payable by the University total $7,791,000 at June 30, 1991($7,115,000-1990). The notes bear an average interest rate of 5.9% at June 30, 1991 (7.9% at June 30, 1990). The aggregate amount of principal payments required through June 30, 1996, is estimated as follows: 1992-$1,953,000; 1993-$1,940,000; 1994-$1,366,000; 1995-$220,000; and 1996-$220,000. (5) Investment in Plant In 1991, the University adopted the provisions of Financial Accounting Standards Board Statement No. 93, "Recognition of Depreciation by Not-for-Profit Organizations". Statement No. 93 requires organizations to restate their long-lived tangible assets at cost less accumulated depreciation in the year of adoption and for all years presented. Accordingly, the net investment in plant balance as of July 1, 1989, has been restated as follows: Net investment in plant as previously reported $ 381,416 Adjustment to record accumulated depreciation related to prior years (197,456) To record plant asset inventory adjustments 397 ------- Net investment in plant as restated $ 184,357 =======