Franklin & Marshall College...October 30, 2015 (in thousands) 2014 2015 Restated Assets Cash and...

2012.06.0087 6/19/12 9:36 AM Page 1

Franklin & Marshall College

Consolidated Financial Statements

June 30, 2015 and 2014

Franklin & Marshall CollegeTable of ContentsJune 30, 2015 and 2014

Page

Independent Auditors’ Report 1

Financial Statements

Consolidated Statement of Financial Position 3

Consolidated Statement of Activities 4

Consolidated Statement of Cash Flows 6

Notes to Financial Statements 7

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Independent Auditors’ Report

The Board of TrusteesFranklin & Marshall College

We have audited the accompanying consolidated financial statements of Franklin & Marshall College and its subsidiaries, which comprise the consolidated statement of financial position as of June 30, 2015, and the related consolidated statements of activities and cash flows for the year then ended, and the related notes to the 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 U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

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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 Franklin & Marshall College and its subsidiaries as of June 30, 2015, and the changes in their net assets and their cash flows for the year then ended inaccordance with U.S. generally accepted accounting principles.

Other Matters

The consolidated financial statements of Franklin & Marshall College for the year ended June 30, 2014 were audited by another auditor who expressed an unmodified opinion on those statements on October 20, 2014.

As part of our audit of the 2015 consolidated financial statements, we also audited the adjustments described in Note 17 that were applied to restate the 2014 consolidated financial statements. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review or apply any procedures to the 2014 consolidated financial statements of the College other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2014 consolidated financial statements as a whole.

Wyomissing, PennsylvaniaOctober 30, 2015

(in thousands)2014

2015 Restated

AssetsCash and cash equivalents 4,123$ 2,158$

Accounts and other receivable 8,363 6,565

Contributions receivable, net 22,565 18,496

Inventories and prepaid expenses 1,642 1,171

Student loans receivable, net 2,456 2,625

Funds held by bond trustee - 431

Investments 393,571 408,117

Land, buildings and equipment, net 233,235 227,590

Other assets 7,149 8,078

Total assets 673,104$ 675,231$

LiabilitiesAccounts payable and accrued expenses 11,885$ 5,008$

Deferred income and deposits 3,905 5,604

Funds held in custody for others 3,565 3,591

Annuity obligations 17,583 14,630

Postretirement benefits obligation 22,880 21,479

Bonds payable 79,781 81,574

Long-term debt payable by Advanced Studies in England Ltd. 287 339

Other liabilities 8,196 7,904

Total liabilities 148,082 140,129

Net AssetsUnrestricted 268,037 280,616

Temporarily restricted 139,138 142,960

Permanently restricted 117,847 111,526

Total net assets 525,022 535,102

Total liabilities and net assets 673,104$ 675,231$

June 30, 2015 and 2014

Franklin & Marshall CollegeConsolidated Statement of Financial Position

See notes to consolidated financial statements

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(with Restated Comparative Totals for 2014)(in thousands)

2014

Temporarily Permanently

Unrestricted Restricted Restricted Total Total

Operating RevenuesTuition and fees 113,126$ -$ -$ 113,126$ 110,559$

Student financial aid (43,245) - - (43,245) (38,939)

Net tuition and fees 69,881 - - 69,881 71,620

Summer school and other fees 1,383 - - 1,383 1,511

Interest and dividend income 7,661 9,664 568 17,893 12,693

Private contributions 3,844 7,691 8,326 19,861 15,358

Government grants and other contracts 1,454 520 - 1,974 1,609

Other sources 2,423 7 - 2,430 1,726

Auxiliary operations 23,184 - - 23,184 22,444

Net assets released from restrictions 12,637 (12,624) (13) - -

Total operating revenues 122,467 5,258 8,881 136,606 126,961

Operating ExpensesInstruction 49,745 - - 49,745 49,075

Research 4,118 - - 4,118 4,071

Public service 1,171 - - 1,171 1,134

Academic support 7,635 - - 7,635 7,760

Student services 20,233 - - 20,233 19,479

Institutional support 21,825 - - 21,825 20,661

Fund-raising 7,483 - - 7,483 6,904

Auxiliary operations 14,239 - - 14,239 13,836

Total operating expenses 126,449 - - 126,449 122,920

Change in net assets from operating activities (3,982) 5,258 8,881 10,157 4,041

Non-Operating ActivitiesNet realized and unrealized (losses) gains

on investments (5,833) (7,296) (428) (13,557) 36,580

Investment management fees (333) (552) - (885) (682)

Postretirement benefit changesother than net periodic costs (1,401) - - (1,401) 2,736

Changes in annuity obligations (2,636) (1,232) (2,132) (6,000) (2,535)

Economic development expense (705) - - (705) (78)

Other losses 2,311 - - 2,311 748

Change in net assets from nonoperating activities (8,597) (9,080) (2,560) (20,237) 36,769

Change in net assets (12,579) (3,822) 6,321 (10,080) 40,810

Net Assets, Beginning of Year 280,616 142,960 111,526 535,102 494,292

Net Assets, End of Year 268,037$ 139,138$ 117,847$ 525,022$ 535,102$

For the Year Ended June 30, 2015Consolidated Statement of Activities

2015


See notes to consolidated financial statements

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(in thousands)Temporarily Permanently

Unrestricted Restricted Restricted Total

Operating RevenuesTuition and fees 110,559$ -$ -$ 110,559$

Student financial aid (38,939) - - (38,939)

Net tuition and fees 71,620 - - 71,620

Summer school and other fees 1,511 - - 1,511

Interest and dividend income 5,437 6,949 307 12,693

Private contributions 2,613 8,494 4,251 15,358

Government grants and other contracts 1,247 362 - 1,609

Other sources 1,726 - - 1,726

Auxiliary operations 22,444 - - 22,444

Net assets released from restrictions 17,820 (17,820) - -

Total operating revenues 124,418 (2,015) 4,558 126,961

Operating ExpensesInstruction 49,075 - - 49,075

Research 4,071 - - 4,071

Public service 1,134 - - 1,134

Academic support 7,760 - - 7,760

Student services 19,479 - - 19,479

Institutional support 20,661 - - 20,661

Fund-raising 6,904 - - 6,904

Auxiliary operations 13,836 - - 13,836

Total operating expenses 122,920 - - 122,920

Change in net assets from operating activities 1,498 (2,015) 4,558 4,041

Non-Operating ActivitiesNet realized and unrealized gains on

investments 14,804 18,515 3,261 36,580

Investment management fees (279) (400) (3) (682)

Postretirement benefit changesother than net periodic costs 2,736 - - 2,736

Changes in annuity obligations (702) (968) (865) (2,535)

Economic development expense (78) - - (78)

Other losses 748 - - 748

Change in net assets from nonoperating activities 17,229 17,147 2,393 36,769

Change in net assets 18,727 15,132 6,951 40,810

Net Assets, Beginning of Year 261,889 127,828 104,575 494,292

Net Assets, End of Year 280,616$ 142,960$ 111,526$ 535,102$


For the Year Ended June 30, 2014 (Restated)Consolidated Statement of Activities

See notes to consolidated financial statements5

(in thousands)2014

2015 Restated

Cash Flows from Operating ActivitiesChange in net assets (10,080)$ 40,810$

Adjustments to reconcile change in net assets tonet cash provided by (used in) operating activities:

Depreciation expense 8,123 8,036

Net realized and unrealized losses (gains) on investments 13,557 (36,580)

Other changes in annuity obligations 5,398 4,193

Loss on disposition of fixed assets 8 19

Contributions restricted for long-term purposes (11,076) (7,188)

Contributions of securities and fixed assets (978) (6,391)

Proceeds from sales of donated securities 236 143

Changes in operating assets and liabilities:Accounts and other receivables (1,798) (307)

Contributions receivable (1,444) 2,132

Inventories and prepaid expenses (471) 357

Other assets 929 (712)

Accounts payable and accrued expenses 6,877 159

Deferred income and deposits (1,699) (5,961)

Funds held in custody for others (26) 100

Postretirement benefits obligations 1,401 (2,566)

Other liabilities 292 150

Net cash provided by (used in) operating activities 9,249 (3,606)

Cash Flows from Investing ActivitiesPurchases of investments (45,449) (45,783)

Proceeds from sales of investments 46,438 45,459

Student loans disbursed (52) (451)

Student loans collected 221 552

Purchases of land, buildings and equipment (12,798) (5,221)

Decrease in funds held by bond trustee 431 -

Net cash used in investing activities (11,209) (5,444)

Cash Flows from Financing ActivitiesContributions restricted for long-term purposes 7,473 7,188

Proceeds from sales of donated securities 742 6,248

Payments on long-term debt (1,845) (1,663)

Payments of annuity obligations (2,445) (2,894)

Net cash provided by financing activities 3,925 8,879

Net increase (decrease) in cash and cash equivalents 1,965 (171)

Cash and Cash Equivalents, Beginning 2,158 2,329

Cash and Cash Equivalents, Ending 4,123$ 2,158$

Supplemental Disclosure of Noncash Financing Activities

Interest paid 4,023$ 4,130$

Gifts of securities, land, buildings and equipment -$ 4,885$


For the Years Ended June 30, 2015 and 2014Consolidated Statement of Cash Flows

See notes to consolidated financial statements6

Franklin & Marshall CollegeNotes to Consolidated Financial StatementsJune 30, 2015 and 2014

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1. Summary of Significant Accounting Policies

Basis of Presentation

Franklin & Marshall College (the “College”) in Lancaster, Pennsylvania, is a private, four-year residential college dedicated to excellence in undergraduate liberal arts education. The College’s consolidated financial statements include Advanced Studies in England Ltd. (“ASE”), a wholly owned subsidiary in Bath, England, which conducts study abroad programs. ASE’s financial statements are based on the twelve month fiscal year ending May 31. Also included in the consolidated financial statements is the Millport Conservancy, a controlled entity that is a nature preserve used for educational purposes. The College maintains its accounts in accordance with U.S. generally accepted accounting principles (“GAAP”) on the accrual basis.

The College’s total assets, liabilities, and net assets are presented in the consolidated statement of financial position; the changes in the College’s net assets are presented in the consolidated statement of activities; and the changes in the College’s cash and cash equivalents are presented in the consolidated statement of cash flows. The classification of the College’s net assets and its revenues, expenses, gains, and losses is based on the existence or absence of donor-imposed restrictions as follows:

Unrestricted - Net assets that are not subject to donor-imposed stipulations. 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.

Temporarily restricted - Net assets whose use by the College is subject to donor-imposed stipulations that can be fulfilled by actions of the College pursuant to those stipulations or that expire by the passage of time.

Permanently restricted - Net assets subject to donor-imposed stipulations that they be maintained permanently by the College. Generally, the donors of these assets permit the College to use all or part of the income earned on these assets. Such assets primarily include the College’s donor endowment funds.

Operating Activities

The consolidated statement of activities includes a performance measure of operations labeled as “change in net assets from operating activities.” In addition to revenues and expenses generated from the College’s operations, this measure also includes contributions restricted for long-term purposes and net assets released from restrictions. Excluded from this measure are net realized and unrealized gains and losses on investments, investment management fees, postretirement benefit changes other than net periodic costs, changes in annuity obligations, economic development activity related to the Northwest Gateway Project (see Note 15), and other gains and losses.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount 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.


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Cash and Cash Equivalents

The College considers highly liquid investments with an original maturity of three months or less when purchased, and cash management accounts functioning as cash equivalents, to be cash equivalents. Cash and cash equivalents that are components of the College’s long-term investment funds are not classified as cash equivalents.

Contributions

Contributions, including unconditional pledges, are reported as revenue in the net asset class (unrestricted, temporarily restricted, or permanently restricted) appropriate to any donor restrictions on the gift at the time of receipt thereof. Revocable trusts for which the College is the trustee are reported as investments with an offsetting deposit liability. Revenue is recognized when the trusts become irrevocable. Allowances for uncollectible amounts are recorded based on management’s estimate of realizability of the underlying pledges.

The College reports gifts of cash and other assets as restricted support if they are received with donor stipulations that limit the use of the donated assets. When a stipulated time restriction expires or purpose restriction is fulfilled, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statement of activities as net assets released from restrictions.

The College reports gifts of land, buildings, and equipment as unrestricted support unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long- lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long- lived assets must be maintained, the College reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service.

Student Loans Receivable

Student loans are made with funds advanced to the College by the federal government under the Perkins Student Loan Program (the “Program”). The College may re-loan such funds after collection, but in the event that the College no longer participates in the Program,the amounts are refundable to the federal government. The potential refundable portion of these funds was $3,565,384 in 2015 and $3,590,533 in 2014. The College’s matching contribution to the Program is one-third of the amount advanced by the federal government.

The prescribed practices for the Program do not provide for accrual of interest on student loans receivable or for a provision of allowance for doubtful loans. Accordingly, interest on loans is recorded as received; and uncollectible loans are not recognized until the loans are canceled or written off in conformity with Program requirements. The impact of recording interest income on a cash basis is not considered significant. In addition, the credit quality of the student is not evaluated after the initial approval and calculation of the loans. Delinquent loans and the allowance for losses on loans receivable are reviewed by management, but are not material to the overall financial statements.


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Concentration of Market Risk

Investments consist of a wide variety of financial instruments with no single investment individually material. The College’s investments are exposed to various risks such as interest rate, market, and credit risks. Such risks, and the resulting investment security values, may be influenced by changes in economic conditions and market perceptions and expectations. Accordingly, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the consolidated statement of financial position.

Land, Buildings, and Equipment

Land, buildings, and equipment are recorded at cost as of the date of acquisition or fair value as of the date of receipt in the case of gifts. Interest costs for the construction of certain long-term assets are capitalized during the construction or installation period and amortized over the related assets’ useful lives.

Depreciation of buildings and equipment is provided over the estimated useful lives of the respective assets on a straight-line basis. The College estimates useful lives as follows: buildings, 50 years (buildings acquired before 1995, 100 years); additions and renovations to existing buildings, 25 or 50 years, depending on the type of project; and equipment, 10 years.

The cost and accumulated depreciation of property sold or retired is removed from the respective accounts, and any resultant gain or loss is recognized in income in the period of disposal.

Capitalized Costs for Software Obtained for Internal Use

Costs for obtaining and installing software are capitalized if significant and amortized over the estimated useful life of the software, presently 3 years. All other software costs are expensed as incurred.

Deferred Income and Deposits

Deferred income and deposits consist of payments of student fees and tuition and summer program revenues that are deferred until the period in which they are earned. Also included is the liability for those revocable trusts for which the College is the trustee.

Fair Value

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The College measures its contributions receivable at inception, funds held by bond trustee, investments, split-interest agreements, and certain annuity obligations at fair value. Additionally, the College discloses the fair value of the College’s outstanding debt. The College’s valuation methodologies for each of these items are described below.


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Three levels of inputs may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities that are traded in an active exchange market.

Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose primary values are observable.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The carrying amount of student accounts receivable, accounts payable and accrued expenses approximate fair value due to the short maturity of these financial instruments.

The fair value of student loans receivable under federal programs cannot be determined because these loans can only be assigned to the federal government or its designee.

Contributions Receivable

The College values contributions receivable at fair value on the date the gift is received using level 3 inputs to calculate present value of future cash flows as described in Note 4.Contributions receivable are not measured at fair value subsequent to this initial measurement, because the discount rate selected remains constant over time.

Funds Held by Bond Trustee

The fair value of the College’s funds held by bond trustee are invested in short term, highly liquid securities for which fair value is based on Level 1 inputs.

Investments

Fair value of investments, with the exception of private equity and certain commingledfunds, has been determined from observable market quotations, when available. The College’s investment managers use a variety of pricing sources to determine market valuations.

Estimated fair value of private equity investments and certain commingled funds that are not readily marketable are generally recorded at net asset value (“NAV”) as provided by external investment managers as a practical expedient for fair value. The College reviews and evaluates the values provided by external investment managers and the valuation methods and assumptions used in determining the NAV of those investments, and makes adjustments to NAV if it is determined that it is inappropriate to use NAV as a practical expedient.

All realized gains and losses arising from the sale of investments and ordinary income from investments are reported as changes in unrestricted net assets unless their use is temporarily or permanently restricted by explicit donor imposed stipulations.


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Split-interest Agreements and Annuity Obligations

Depending on the type of agreement, the College measures fair value for split-interest agreements either at inception or on a recurring basis. Fair value of the residual gift is generally based on the present value of expected future cash flows including payments to beneficiaries and investment return, and level 3 inputs include the life expectancy of the donor and other beneficiaries as well as financial assumptions. The College uses a discount rate for the annuity obligation at the time the gift is received based on several factors including the risks involved.

Beneficial Interests in Trusts

Beneficial interests in trusts held by others are recognized at the estimated fair value of the underlying assets of the trust or the fair value of the future cash flows when the College is notified of the trust's existence. Because the trusts will not be distributed to the College, the inputs to fair value are considered level 3.

Debt

The College’s disclosure of the fair value of its debt in Note 9 is based on Level 2 inputs including observable interest rates and maturity schedules.

Title IV Requirements

The College participates in student financial assistance (“Title IV”) programs administered by the United States Department of Education for the payment of student tuitions. Substantial portions of the revenue are dependent upon the College’s continued participation in the Title IV programs.

Institutions participating in Title IV programs are required to demonstrate financial responsibility. Financial responsibility is determined through the calculation of a composite score based upon certain financial ratios as defined in regulations. Institutions receiving a composite score of 1.5 or greater are considered fully financially responsible. Institutions receiving a composite score between 1.0 and 1.4 are subject to additional monitoring and institutions receiving a score below 1.0 are required to submit financial guarantees in order to continue participation. The College’s composite score exceeded 1.5 in 2015 and 2014.

Reclassification

Certain 2014 amounts have been reclassified to conform to the 2015 reporting format.


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New Accounting Standards

In May 2015, FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities the Calculate Net Asset Value per Share (or Its Equivalent). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value (“NAV”) per share practical expedient. It also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. It is effective for fiscal years beginning after December 15, 2015. The College has elected to early adopt this guidance. The guidance is retrospective, and the adoption of this ASU impacted disclosures related to investments.

In April 2015, FASB issued ASU 2015-03, Interest - Imputation of Interest (Topic 835-30): Simplifying the Presentation of Debt Issuance Costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. It is effective for fiscal years beginning July 1, 2016. The adoption is not expected to have an impact on the College's financial position or results of operations.

2. Temporarily Restricted Net Assets

Temporarily restricted net assets result from contributions and other inflows of assets whose use by the College is limited by donor-imposed stipulations that expire by the passage of time or can be fulfilled and removed by actions of the College pursuant to those stipulations.

Temporarily restricted net assets consist of the following at June 30:

2015 2014

(In Thousands)

Accumulated gains on donor endowments $ 92,938 $ 100,699

Contributions receivable and split-interest agreements subject to time and / or purpose restrictions 26,530 23,428

Unexpended donor restricted funds:Scholarship and financial aid 4,521 4,984Instruction 1,968 1,567

Capital projects 4,762 3,699

Other 8,419 8,583

Total $ 139,138 $ 142,960

Accumulated endowment gains are temporarily restricted by the donor’s original endowment gift designation or by time restrictions under Pennsylvania endowment law (Note 6).

Net assets released relating to capital expenditures are approximately $340,000 in 2015 and approximately $365,000 in 2014.


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3. Permanently Restricted Net Assets

Permanently restricted net assets result from contributions and other inflows of assets whose use by the College is limited by donor-imposed stipulations that they be maintained permanently by the College. They are designated for the following purposes:

2015 2014

(In Thousands)

Donor-contributed principal invested to support:Scholarship and financial aid $ 39,743 $ 39,740Educational and general programs 44,978 40,290

Subtotal 84,721 80,030

Donor contributions receivable, split-interest agreements, and other assets for endowments 33,126 31,496

$ 117,847 $ 111,526

4. Contributions Receivable

Unconditional promises to give that are expected to be collected within one year are recorded at estimated amounts to be realized. Unconditional promises to give that are expected to be collected in future years are recorded at the present value of their estimated future cash flows. The net present value of contributions receivable is calculated using a discount rate of 5%. Amortization of the discounts is included in contribution revenue. Conditional promises to give are not included as revenue until the conditions are substantially met.

Included in contributions receivable are the following unconditional promises to give:

2015 2014

(In Thousands)

Pledges due in less than one year $ 7,027 $ 4,473

Pledges due in one to five years 16,715 8,120

Pledges due in more than five years 3,940 9,951

27,682 22,544

Less: Unamortized discount (3,765) (2,921)Allowance for uncollectable (1,352) (1,127)

Net contributions receivable $ 22,565 $ 18,496


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5. Fair Value Measurements, Investments, and Other Financial Instruments

The following tables present the financial instruments measured at fair value as of June 30, 2015 and 2014 by caption on the statement of financial position by the valuation hierarchy defined above (in thousands):

2015

Level 1 Level 2 Level 3Total

Fair Value

Assets Reported at Fair ValueLong-term investments:

Global equity:Mutual funds: International equity $ 58,618 $ - $ - $ 58,618

Emerging equity markets 27,258 - - 27,258

Public equity: Large cap 12,166 - - 12,166

Small cap 3,451 - - 3,451

101,493 - - 101,493

Global fixed income mutual funds:

Cash 11,034 - - 11,034

Fixed income 27,688 - - 27,688

38,722 - - 38,722

Mutual funds, commodities 18,650 - - 18,650

Total long-term investments 158,865 - - 158,865

Trusts and split interest investments:Beneficial interest in perpetual

and externally managed trusts - - 17,935 17,935

Cash and cash equivalents 1,556 - - 1,556

Global equity,Public equity, large cap 25,100 - - 25,100

Global fixed income,High quality/rate sensitive 11,917 - - 11,917

Total trusts and split interest investments 38,573 - 17,935 56,508


15

2015


Fair Value

Investments:Cash and cash equivalents $ 343 $ - $ - $ 343

Global equity,Public equity 586 - - 586


Total investments 34,476 - - 34,476

Total investments by valuation hierarchy $ 231,914 $ - $ 17,935 249,849

Alternative investments (measured at net asset value) 143,722

Total investments $ 393,571

Assets Disclosed at Fair Valueand Carrying ValueCash and cash equivalents $ 4,123 $ - $ - $ 4,123

Contributions receivable, net - - 22,565 22,565Student loans receivable, net - 2,456 - 2,456

Liabilities Disclosed at Fair Valueand Carrying ValueBonds payable (carrying value

of $79,781) $ - $ 82,505 $ - $ 82,505

Long-term debt payable by ASE - 287 - 287

Annuity obligations - - 17,583 17,583

Asset retirement obligation - - 7,989 7,989


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2014


Fair Value

Assets Reported at Fair ValueLong-term investments:

Global equity,Hedged equity $ 73,053 $ - $ - $ 73,053


Total long-term investments 93,875 - - 93,875

Trusts and split interest investments:Beneficial interest in perpetual

trusts - - 18,207 18,207

Cash and cash equivalents 2,750 - - 2,750Global equity,

Public equity 23,373 - - 23,373


Total trusts and split interest investments 36,956 - 18,207 55,163

Investments:Cash and cash equivalents $ 128 $ - $ - $ 128

Global equity,Public equity 380 - - 380


Total investments 38,071 - - 38,071

Total investments by valuation hierarchy $ 168,902 $ - $ 18,207 187,109

Alternative investments (measured at net asset value) 221,008

Total investments $ 408,117


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2014


Fair Value

Assets Disclosed at Fair Valueand Carrying ValueCash and cash equivalents $ 2,158 $ - $ - $ 2,158

Contributions receivable, net - - 18,496 18,496Student loans receivable, net - 2,625 - 2,625

Funds held by bond trustee - 431 - 431

Liabilities Disclosed at Fair Valueand Carrying ValueBonds payable (carrying value

of $81,574) $ - $ 86,608 $ - $ 86,608

Long-term debt payable by ASE - 339 - 339

Annuity obligations - - 14,630 14,630

Asset retirement obligation - - 7,647 7,647

Long-term investments include board designated and donor restricted endowment funds.

The following table provides additional information on those investments reported at NAV as of June 30, 2015 (in thousands):

Liquidity (in days)Redemptions Upon Fund Terminations (in years) (unless earlier distributions) Unfunded

Major CategoryFair Value Using NAV <30 31-90 91-180 181-365 >365 <2 2-5 >5

Commit-ments

(In Thousands)

Global equity $ 72,347 $ - $ - $ 35,242 $ - $ 515 $ 2,821 $ 16,501 $ 17,268 $ -

Diversifying strategies 53,943 - 14,379 12,004 8,118 19,108 334 - - -

Real estate 17,432 - - - - - 430 8,389 8,613 -

$ 143,722 $ - $ 14,379 $ 47,246 $ 8,118 $ 19,623 $ 3,585 $ 24,890 $ 25,881 $ -

The following table provides additional information on those investments reported at NAV as of June 30, 2014:

Liquidity (in days)Redemptions Upon Fund Terminations (in years) (unless earlier distributions) Unfunded

Major CategoryFair Value Using NAV <30 31-90 91-180 181-365 >365 <2 2-5 >5

Commit-ments

(In Thousands)

Global equity $ 119,653 $ - $ 57,881 $ 35,928 $ - $ - $ 3,684 $ 13,083 $ 9,077 $ 5,121

Global fixed income 26,329 - 11,999 8,702 - - - - 5,628 (450)

Diversifying strategies 36,337 - 15,371 15,656 167 5,143 - - - -

Real estate 38,689 - 15,557 6,681 - - 326 10,170 5,955 4,787

$ 221,008 $ - $ 100,808 $ 66,967 $ 167 $ 5,143 $ 4,010 $ 23,253 $ 20,660 $ 9,458


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The alternative investments represent investments in global equity, diversifying strategies and real estate funds. The purpose of the global equity funds is to invest a greater portion of assets in securities of individual issuers than a diversified fund; thus, changes in the market of a single investment could cause greater fluctuations in share price than would occur in a more diversified fund. The purpose of the diversifying strategies funds is to realize long-term returns by investing in a diversified group of pooled income vehicles. The purpose of the real estate fund is to generate income and appreciation on real estate investments. The fair value of the alternative investments has been estimated using the net asset value per share of the investment. The College may redeem shares in the alternative investments, in whole or in part, on 90 days’ prior to written notice as of the last business day of each quarter. The College does not have any remaining unfunded commitments related to these investments.

The following tables provide a reconciliation of the beginning and ending balances of investments classified within the fair value hierarchy Level 3:

Beneficial Interest in

Perpetual & Externally Managed

Trusts

Balance at June 30, 2104 $ 18,207Net realized and unrealized losses (272)

Balance at June 30, 2015 $ 17,935

Net losses in Level 3 attributable to changes in net unrealized gains relating to those investments still held at June 30, 2015 $ (272)

Balance at June 30, 2013 $ 13,190

Net realized and unrealized gains 1,308

Effect of restatement (Note 17) 3,709

Balance at June 30, 2014 $ 18,207

Net gains in Level 3 attributable to changes in net unrealized gains relating to those investments still held at June 30, 2014 $ 1,308

The College recognizes transfers in and out of fair value levels at fiscal year end wheninvestments are reevaluated for proper fair value level disclosure. During the fiscal years ending June 30, 2015 and 2014, $-0- and $13,155,000, respectively, of investments, moved from Level 3 to Level 2 due to the redemption of the investments, at their June 30 net asset value, subsequent to year-end.

Expenses related to the investment portfolio are reported separately in the consolidated statement of activities with the exception of brokers’ commissions and other investment fees, which are reported as a reduction of interest and dividend income.


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The following summarizes the composition of investment return for the years ended June 30:

2015

UnrestrictedTemporarily Restricted

Permanently Restricted Total

Investment income:Interest and dividend income $ 7,661 $ 9,664 $ 568 $ 17,893

Net realized and unrealized (losses) gains on investments (5,833) (7,296) (428) (13,557)

Total $ 1,828 $ 2,368 $ 140 $ 4,336

2014

Investment income:Interest and dividend income $ 5,437 $ 6,949 $ 307 $ 12,693

Net realized and unrealized (losses) gains on investments 14,804 18,515 3,261 36,580

Total $ 20,241 $ 25,464 $ 3,568 $ 49,273

Some donors have entered into trust or other arrangements under which the College receives benefits that are shared with other beneficiaries (split-interest agreements). The College currently has charitable remainder trusts, perpetual income trusts, gift annuities, deferred gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. Split-interest agreements are included in investments except for externally - managed charitable remainder trusts, which are included in contributions receivable (Note 4). During the year ended June 30, 2014, the $5,500,000 revocable trust was liquidated as requested by the donor. The funds were used to establish a charitable gift annuity with the College and to satisfy contributions receivable.

Included in the investment summary above are certain split-interest agreements requiring the College to pay a certain sum to the donors or beneficiaries during their lifetimes as defined in the respective agreements. A unisex mortality table was used to calculate the obligations. Discount rates ranging from 5.4% to 7.0% were used to calculate the present value of the obligations for 2015 and 2014.


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A summary of the fair value of the investments supporting the agreements along with their corresponding liability is shown below:

June 30, 2015 June 30, 2014

Investment Liability Investment Liability

(In Thousands)

Gift annuities $ 23,232 $ 11,827 $ 25,031 $ 9,735

Deferred gift annuities 752 314 730 248

Charitable remainder unitrusts 14,005 5,368 10,585 4,558

Charitable remainder annuity trusts 584 74 610 89

Total $ 38,573 $ 17,583 $ 36,956 $ 14,630

6. Endowment

The College's endowment consists of approximately 630 individual funds established for a variety of purposes. It includes both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. Net assets associated with endowment funds, including funds designated by the Board of Trustees to function as endowments, are classified and reported based on the existence or absence of donor- imposed restrictions.

Interpretation of Relevant Law

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 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 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 relevant law. Pennsylvania law permits the Board of Trustees to make an election to annually appropriate for expenditure a selected percentage between 2% and 7% of the fair value of the assets related to donor-restricted endowment funds averaged over a period of three or more preceding years, provided the Board has determined that such percentage is consistent with the long-term preservation of the real value of such assets.


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Return Objectives and Risk Parameters

The endowment investments are managed by an external investment advisor, who may utilize commingled pools (common trust funds or mutual funds), exchange traded funds, and other investment vehicles to provide access to specialist managers and to achieve proper diversification. Intergenerational equity is the cornerstone of the endowment’s long-term investment objective. The primary long-term goal is to generate returns sufficient to cover annual spending, investment management fees, and inflation. The shorter-term objective is to create a portfolio of investments that generates competitive returns, while managing principal risk and volatility. To monitor performance relative to objectives, consistency of investment philosophy, and investment risk, results are measured on a rolling five-year basis to determine whether a positive real return has been achieved after the draw. Results are also evaluated against established benchmark indices, the mean return of comparable endowment funds, and internal custom benchmarks.

Strategies Employed for Achieving Objectives

The Prudent Investor Rule of the Commonwealth of Pennsylvania is applied to the total portfolio. Therefore, any reasonable investment may be considered for the endowment pool as long as the risk and return tradeoff of the entire portfolio is prudent. The College’s portfolio is diversified across geographic regions, asset classes, investment strategies, and industries. Investment guidelines recognize that the College is an entity with a perpetual lifespan, so the strategy is designed for a long-term investment horizon. Liquidity levels are carefully monitored to ensure access to funds to meet liabilities when needed. The risk profile of investments is monitored using analytical metrics including standard deviation, correlation matrices, and leverage levels.

Spending Policy and How the Investment Objectives Relate to Spending Policy

The College’s spending policy is designed to maximize sustainable spending from year to year while ensuring intergenerational equity. This is consistent with the College’s objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term, as well as to provide additional real growth through new gifts and investment return. The College uses a total-return spending policy, which means that a percentage ofthe fair value is spent as opposed to spending only interest and dividends. The Finance Committee of the Board of Trustees selects the payout policy each year, and approved a 5.25% payout for fiscal years 2015 and 2014. This payout is applied against the seven-year average of the December 31 fair value of each named fund, with an increase or decrease no greater than 5% of the prior year’s spending. The draw is shown in the consolidated financial statements as a component of net assets released from restrictions.

Funds with Deficiencies

From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the original gift amount maintained as permanently restricted net assets. Deficiencies of this nature were approximately $987,000 and $592,000 as of June 30, 2015 and 2014, respectively. Such deficiencies are recorded in unrestricted net assets. These deficiencies resulted from unfavorable market fluctuations that occurred shortly after the investment of new permanently restricted contributions.


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Net Asset Classifications of Endowment Funds

Net asset classification by type of endowment as of June 30, 2015:



(In Thousands)

Donor-restricted endowment funds $ (987) $ 92,938 $ 84,721 $ 176,672

Board-designated endowment funds 115,205 - - 115,205

Total funds $ 114,218 $ 92,938 $ 84,721 $ 291,877

Endowment net assets, beginning of year $ 119,929 $ 100,699 $ 80,030 $ 300,658

Investment return:Investment income 5,891 8,893 - 14,784

Net depreciation (realized and unrealized gains) (5,580) (7,095) - (12,675)

Total investment return 311 1,798 - 2,109

Contributions - - 4,541 4,541

Appropriation of endowment assets for expenditure (6,022) (9,559) - (15,581)

Other changes:Transfers to create board-

designated endowment funds - - - -

Liquidated gift annuities, trusts, etc. - - 36 36

Return income to principal - - 114 114

Endowment net assets, end of year $ 114,218 $ 92,938 $ 84,721 $ 291,877


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Net asset classification by type of endowment as of June 30, 2014:



(In Thousands)

Donor-restricted endowment funds $ (592) $ 100,699 $ 80,030 $ 180,137

Board-designated endowment funds 120,521 - - 120,521

Total funds $ 119,929 $ 100,699 $ 80,030 $ 300,658

Endowment net assets, beginning of year $ 108,003 $ 87,531 $ 75,025 $ 270,559

Investment return:Investment income 4,082 6,042 - 10,124

Net depreciation (realized and unrealized gains) 12,789 16,330 - 29,119

Total investment return 16,871 22,372 - 39,243

Contributions - - 4,260 4,260

Appropriation of endowment assets for expenditure (5,945) (9,204) - (15,149)

Other changes:Transfers to create board-

designated endowment funds 1,000 - - 1,000

Liquidated gift annuities, trusts, etc. - - 722 722

Return income to principal - - 23 23

Endowment net assets, end of year $ 119,929 $ 100,699 $ 80,030 $ 300,658


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7. Land, Buildings, and Equipment

Land, buildings, and equipment values are composed of the following at June 30, 2015 and 2014:

2015 2014

(In Thousands)

Land and buildings $ 264,471 $ 260,118

Equipment 54,145 52,883

Construction in progress 13,591 7,051

332,207 320,052

Less: Accumulated depreciation (98,972) (92,462)

$ 233,235 $ 227,590

Depreciation expense for buildings and equipment was recorded in the amount of $8,123,000and $8,036,000 for the years ended June 30, 2015 and 2014, respectively.

The College has recorded all known asset retirement obligations for which the fair value, based on estimated cash flows, of the liability could be reasonably estimated relating to the regulatory remediation of asbestos in certain campus buildings. A liability of $7,989,000 and $7,647,000 at June 30, 2015 and 2014, respectively, is included in other liabilities. The related asset value in buildings is $1,586,000, less accumulated depreciation of $1,261,000, and $1,586,000, lessaccumulated depreciation of $1,218,000, at June 30, 2015 and 2014, respectively. Following is a reconciliation of the aggregate retirement liability associated with the College’s obligation of asbestos remediation:

2015 2014

(In Thousands)

Balance, beginning of year $ 7,647 $ 7,318Increase in the present value of the obligation 345 330

Liabilities settled (3) (1)

Balance, end of year $ 7,989 $ 7,647

8. Collection Items

Collection items consist of artworks, rare books, and other objects that have come to the College and Millport Conservancy principally through gifts, although some were purchased and certain of the collections were received in trust. The collection is held for public exhibition and education and is protected, kept unencumbered, cared for, and preserved. Each of the items is cataloged, and activities verifying their existence and assessing their condition are performed continuously. The collection’s insurance-appraised value is approximately $7,486,000.


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The collections are not recognized as assets in the consolidated statement of financial position as permitted by GAAP. Purchases of collection items are recorded as decreases in unrestricted net assets in the year in which the items are acquired, or as reductions in temporarily or permanently restricted net assets if the assets used to purchase the items are restricted by donors. Proceeds from deaccessions are reflected as increases in the appropriate net asset classes.

No collection items were deaccessioned in 2015 or 2014.

9. Bonds Payable

Bonds payable at June 30, 2015 and 2014, consist of the following:

2015 2014

(In Thousands)

College Revenue Bonds, Series of 2006, 3.65% - 5.00%, maturing in varying amounts to 2025 $ 49,230 $ 50,900

College Revenue Bonds, Series of 2008, 5.00%, maturing in varying amounts in 2025, 2029, and 2037 30,000 30,000

79,230 80,900

Unamortized net premium 551 674

$ 79,781 $ 81,574

The fair value of the College’s bonds payable was approximately $82,505,000 and $86,608,000 at June 30, 2015 and 2014, respectively. Interest expense was $4,023,000 and $3,802,000 for the years ended June 30, 2015 and 2014, respectively, net of interest cost capitalized on the construction of buildings of $395,748 and $222,000 for the years ended June 30, 2015 and 2014, respectively.

College Revenue Bonds, Series of 2006 and 2008

On June 19, 2008, the College borrowed $30,000,000 through the issuance of tax-exempt fixed rate bonds by the Lancaster Higher Education Authority, City of Lancaster, Pennsylvania. When marketed upon issuance, the bonds had a discount of $108,000. The proceeds of the bonds were used for the construction of a new residence hall, the financing of other projects, and to pay the costs of issuing the 2008 bonds.

On May 1, 2006, the College borrowed $54,470,000 through the issuance of tax-exempt fixed rate bonds by the Lancaster Higher Education Authority, City of Lancaster, Pennsylvania. When marketed upon issuance, the College received a premium of $1,894,000. The proceeds of the bonds were used to refund the balance of the variable rate College Revenue Bonds, Series 1997, in the outstanding principal amount of $33,765,000 and to pay the costs of issuing the 2006 bonds. The remainder of the proceeds was used for the construction of the College’s Life Sciences and Philosophy Building and for the financing of other projects.


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The College has entered into a guaranty with the bond trustee to secure the full and prompt payment of the principal and interest on the bonds and any additional bonds issued under the indenture. The obligation of the College to make payments under the guaranty is a general obligation of the College collateralized by the full faith and credit of the College. The College has collateralized its obligation under the guaranty by granting a security interest in unrestricted College revenues.

The bond indentures include several general and financial covenants, such as completing the projects and maintaining not-for-profit status. For the year ended June 30, 2015, the College was in compliance with its bond financial covenants. Bond proceeds were held by a trustee until expended on the projects described in the indentures.

Bond issuance costs and unamortized bond premium and discount are being amortized over the lives of the respective bonds on the straight-line method, which approximates the interest method.

A summary of scheduled bond payments subsequent to June 30, 2015, follows:

Fiscal Year Ended 2006 Bonds 2008 Bonds Total

(In Thousands)

2016 $ 1,755 $ - $ 1,755

2017 1,840 - 1,840

2018 5,045 - 5,045

2019 5,300 - 5,3002020 5,565 - 5,565

Thereafter 29,725 30,000 59,725

$ 49,230 $ 30,000 $ 79,230

The College has an unsecured line of credit of $10,000,000 that may be used to support general operating expenses, if needed, at a variable prime or money market interest rate. There were no borrowings under the line during 2015 and 2014.

10. Retirement Benefits

Retirement benefits are provided for eligible employees through a defined contribution plan. College contributions to the plan are based on a percentage of employees’ salaries. Participants’ interests are fully vested upon the date they become eligible for the plan. The College contributed $5,313,000 and $5,056,000 to the retirement plan during the fiscal years ended June 30, 2015 and 2014, respectively.

The College currently provides defined benefit postretirement medical and life insurance plans for eligible employees who retire from active employment after completing 10 years of service subsequent to age 50. Payments by the College for postretirement medical coverage do not begin until age 65, except for employees who elected retirement under a special early retirement program.


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On May 12, 2011, the Board voted to adopt a defined contribution postretirement health plan effective January 1, 2013, for those employees retiring on or after January 1, 2013, who are less than age 55 on December 31, 2012. Under the new plan, the College makes contributions on behalf of each eligible employee through a voluntary employee beneficiary association (VEBA) trust.

Under the College’s current defined benefit postretirement medical and life insurance plans, during 2015, $1,238,000 in benefits were paid, $961,000 contributed by the College and $277,000 contributed by participants. For the year 2014, $1,320,000 in benefits were paid, $1,035,000 contributed by the College and $285,000 contributed by participants.

Net postretirement benefit costs, for the years ended June 30, 2015 and 2014, include:

2015 2014

(In Thousands)

Service cost $ 607 $ 705

Interest cost 812 868

Amortization of actuarial loss from earlier periods - (1)

Amortization of prior service credit (351) (351)

Net periodic postretirement benefit cost $ 1,068 $ 1,221

The following table sets forth the postretirement benefit changes other than net periodic benefit cost recognized in the consolidated statements of activities apart from expenses for the years ended June 30, 2015 and 2014:

2015 2014

(In Thousands)

Amounts arising during the period:Actuarial net gain $ 946 $ (3,088)

Amounts arising during the period:Actuarial net (gain)/loss - 1

Prior service credit 351 351

Postretirement benefit changes other than net periodic benefit cost $ 1,297 $ (2,736)

The following amounts are expected to be recognized in net periodic benefit cost for the year ending June 30, 2016:

2016

(In Thousands)

Prior service credit $ 351


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The following table sets forth the status of the plan with the components of the accumulated postretirement benefit obligation recognized in the consolidated statements of financial position at June 30, 2015 and 2014, respectively:

2015 2014

(In Thousands)

Accumulated postretirement benefit obligation at beginning of year $ 21,479 $ 24,045

Service cost 607 705Interest cost 812 868

Actual contributions during the year, net of employee contributions (964) (1,051)

Actuarial gain 946 (3,088)

Accumulated postretirement benefit obligation $ 22,880 $ 21,479

The actuarial calculation uses a measurement date of June 30 for each fiscal year and incorporates the following assumptions:

2015 2014

Discount rates:Net periodic benefit cost for the

year ended June 30 4.05% 4.55%Benefit obligation at June 30 4.20% 4.05%

Rate of compensation increase 4.5% 4.50%

Healthcare cost trend rate Pre 65 and Post 65, 7.4% and 3.6% in 2015, decreasing 2.1% and increasing 1.5% through 2024, decreasing 0.1% though 2039 and fluctuating to an ultimate rate of 5.9% and 5.4% over the next 50 years

4.8% in 2015, increasing 0.8% through 2025, decreasing 0.4% through 2039, and fluctuating to an ultimate rate of 6.0% over the next 50 years

The effects of a 1% point increase or decrease in the assumed healthcare cost trend rates for 2015 are as follows:

One percentage point increase in healthcare cost trend:

Service cost and interest cost $ 1,307,730

Accumulated postretirement benefit obligation $ 22,557,237

One percentage point decrease in healthcare cost trend:

Service cost and interest cost $ 968,092

Accumulated postretirement benefit obligation $ 17,225,992


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Estimates of future benefits to be paid by the College, net of participant contributions and Medicare Part D subsidies, are as follows:

Fiscal Year EndedEstimated Net

Payment

(In Thousands)

2016 $ 974

2017 9762018 1,006

2019 1,059

2020 1,123

2021 through 2025 6,561

The effect of federal subsidies enacted by the Medicare Prescription Drug Improvement and Modernization Act of 2003 have been reflected in the measurement of the accumulated postretirement benefit obligation and net periodic postretirement benefit cost. The College’s plan has been determined to qualify as being actuarially equivalent with the Medicare Part D plan and, as such, was eligible for reimbursement starting with calendar year 2006. Reimbursements have been estimated at 17% of the expected costs under the plan.

11. Lease Commitments

The College leases student housing under operating leases expiring in July 2024, which arerenewable for two consecutive five-year terms. Minimum future lease payments under non-cancelable operating leases as of June 30, 2015, are as follows:

Fiscal Year Ended (In Thousands)

2016 $ 2,016

2017 2,046

2018 2,076

2019 2,108

Thereafter 11,021

$ 19,267

Total rental expense for student housing leases was $1,820,000 and $1,957,000 for the years ended June 30, 2015 and 2014, respectively.

12. Related Party Transactions

During the normal course of business, the College purchases various supplies and services from companies associated with Board members. Although not material, management believes that these transactions are executed on terms comparable to those available from unrelated parties.

The College records revenue for contributions from many individuals and organizations. Included among the contributors are Board members and employees.


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13. Income Taxes

Under provisions of Internal Revenue Code Section 501(c)(3) and the applicable income tax regulations of Pennsylvania, the College is exempt from taxes on income other than unrelated business income. Since the College had no material net unrelated business income during the years ended June 30, 2015 and 2014, no provision for income taxes has been made. The College does not believe that there are any material unrecognized tax benefits or costs that should be recorded. The College's federal tax returns have not been examined for the last seven fiscal years.

Under provisions of its incorporation, ASE is exempt from U.K. value added tax and cannot make any distributions to shareholders.

Millport Conservancy is exempt from federal income taxes under Internal Revenue Code section 501(a) as an organization described in section 501(c)(3) and is classified as a private foundation under 509(a).

14. Commitments and Contingencies

The College is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the College’s financial position.

Under the terms of an agreement dated October 17, 2007, the College shares 50% of any annual operating losses or surpluses generated by an unaffiliated early childhood education center that serves the childcare needs of the College and the community. This agreement is for a term of ten years, with an option to renew twice for a period of five years each. Management believes any reimbursements under this agreement will not have a material adverse effect on the College. The College was responsible for $9,100 and $5,000 for the years ended June 30, 2015 and 2014, respectively.

Guarantees

In May 2010, the College guaranteed the promissory note of an alumni association affiliated with an on-campus fraternity. The College would be obligated in the event that the association would fail to make any payment due under the note within ten days after the same is due. As of June 30, 2015, the maximum amount payable under the guarantee is $232,000. As of June 30, 2015, a liability in the amount of $7,500 is included in the accompanying consolidated statement of financial position; that amount represents the College’s estimate of the fair value of the outstanding guarantee. Should the College be required to pay any portion of the total amount of the loan it has guaranteed, the College could attempt to recover some or all of that amount from the association. The College holds no collateral in respect of the guarantee.


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15. Northwest Gateway Project

The College and Lancaster General Health (“LGH”) are lead participants in a two-phase economic development project called the Northwest Gateway Project.

Phase I involved 47 acres of the former Armstrong World Industries - Liberty Street manufacturing plant. The scope of work was completed in fiscal year 2010 and included:

- demolition and disposal of existing structures

- characterization and remediation of existing environmental conditions

- installation of infrastructure and site utilities

- preparation of the site for development

The actual work was coordinated through a local industrial development authority. The College took ownership of approximately 27 acres and LGH approximately 20 acres of the property subsequent to these activities being completed.

Phase II is currently underway and involves approximately 30 acres of Norfolk Southern’s Dillerville Railyard. The College is participating in a similar fashion ultimately taking ownership of approximately 20 acres situated between the College’s existing property and the 27 acres of the former Armstrong property. LGH will receive 10 acres of the former Norfolk Southern property. The College and LGH are operating as a Master Developer through an agreement with Norfolk Southern whereby they are directing and managing similar activities as in Phase I.

Phase II is estimated to cost $43 million. The College and LGH each contributed $6 million and Norfolk Southern contributed $2 million. The remaining funds will come from local, state, and federal grants. To date, $29.2 million has been approved by grant sources through June 30, 2015. The remaining amounts are to be funded by additional grants and/or project savings.

The following amounts are reflected in the College’s consolidated financial statements related to Phase II of the project at June 30:

2015 2014

(In Thousands)

Other assets (escrow account) $ 234 $ 1,150

Construction in progress 6,351 4,712

Economic development expense 705 78

In the event the outstanding funding is not secured within the timeframe of Phase II, the College along with LGH could equally contribute the additional funds to complete the project or delay the final work items until additional grants are secured. As of June 30, 2015, the College had no reason to believe the anticipated grants would not be available within the anticipated timeframe.


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16. Subsequent Events

In connection with the preparation of the consolidated financial statements, the College evaluated subsequent events after the consolidated statement of financial position date of June 30, 2015, through October 30, 2015, which was the date the consolidated financial statements were issued.

In October 2015, the College signed a letter of intent for up to $70,000,000 in tax exempt bonds issued by the Lancaster Higher Education Authority to refinance existing bonds. The bonds will have a fixed rate with repayment over 30 years from the date of issuance.

17. Restatement

In conjunction with the audit of the June 30, 2015 consolidated financial statements, the College determined that errors had been made in the prior year financial statements related to the recording of perpetual trusts. The errors related to the incorrect presentation of a charitable remainder trust as contributions receivable and the incorrect recording of a conditional beneficial interest in a charitable trust. The errors were the result of oversight. The impact of this error on the June 30, 2014 consolidated financial statements are as follows:

As Previously Reported Restatement As Restated

Statement of financial position:Contributions receivable $ 23,452 $ (4,956) $ 18,496

Investments 404,408 3,709 408,117

Permanently restricted net assets 112,773 (1,247) 111,526

Statement of activities:Private contributions $ 5,498 $ (1,247) $ 4,251

Change in permanently restricted net assets 42,057 (1,247) 40,810

Statement of cash flows:Change in net assets $ 42,057 $ (1,247) $ 40,810

Investment management fees 682 (682) -

Other gains (753) 753 -

Contributions receivable 2,127 5 2,132

Purchases of investments (46,954) 1,171 (45,783)

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