Break Even Analysis

Lenoir-Rhyne University and Subsidiary Consolidated Financial and Compliance Report May 31, 2016

Contents Independent auditor’s report 1-2 Financial statements

Consolidated statements of financial position 3 Consolidated statements of activities 4-5 Consolidated statements of cash flows 6-7 Notes to consolidated financial statements 8-30

Schedule of expenditures of federal awards 31

Schedule of expenditures of state awards 32

Notes to schedules of expenditures of federal and state awards 33

Independent auditor’s report on internal control over financial reporting and on

compliance and other matters based on an audit of financial statements performed in accordance with Government Auditing Standards 34-35

Independent auditor’s report on compliance for the major federal program and major state program and on internal control over compliance required by the Uniform Guidance, North Carolina General Statute 143C-6-23, and the North Carolina State Education Assistance Authority 36-37

Schedule of findings and questioned costs 38-40 Corrective action plan 41 Summary schedule of prior audit findings 42-45

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Independent Auditor’s Report To the Board of Trustees Lenoir-Rhyne University and Subsidiary Hickory, North Carolina Report on the Financial Statements We have audited the accompanying consolidated financial statements of Lenoir-Rhyne University and Subsidiary (the University), which comprise the consolidated statements of financial position as of May 31, 2016 and 2015, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the 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 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lenoir-Rhyne University and Subsidiary as of May 31, 2016 and 2015, and the changes in their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements of the University as a whole. The accompanying schedules of expenditures of federal and state awards are presented for purposes of additional analysis as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), North Carolina General Statute 143C-6-23 and North Carolina State Education Assistance Authority, are presented for purposes of additional analysis and are not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our reports dated September 6, 2016 and September 21, 2015, on our consideration of the University’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of these reports is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. These reports are an integral part of an audit performed in accordance with Government Auditing Standards in considering the University’s internal control over financial reporting and compliance.

Raleigh, North Carolina September 6, 2016

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Lenoir-Rhyne University and Subsidiary

Consolidated Statements of Financial Position May 31, 2016 and 2015

2016 2015 Assets (Note 8)

Cash and cash equivalents (Note 8) 3,553,921 $ 3,705,892 $ Accounts receivable, less allowance for doubtful accounts

(2016 – $425,000; 2015 – $600,000) 1,768,618 2,982,617 Contributions receivable, net (Note 2) 1,850,513 3,005,101 Prepaids and other assets (Note 14) 835,075 790,023 Notes receivable, less allowance for doubtful notes

(2016 and 2015 – $150,000) 1,098,926 1,225,274 Cash held for investment and capital improvements 10,711,239 7,482,915 Investments (Notes 3, 4, 8, 12 and 13) 86,474,585 93,789,707 Investments in real estate 378,782 381,063 Split-interest agreements and perpetual trusts (Notes 5 and 12) 4,815,086 5,506,068 Cash surrender value of life insurance policies 699,370 665,762 Property and equipment, net (Notes 6 and 8) 67,602,367 60,958,300

Total assets 179,788,482 $ 180,492,722 $

Liabilities and Net Assets

Liabilities: Accounts payable 1,754,703 $ 1,401,715 $ Accrued expenses and other liabilities (Note 14) 2,988,730 3,125,457 Deposits held in custody for others 142,664 190,387 Deferred revenues 1,927,109 1,943,914 Asset retirement obligations 849,216 852,023 Interest rate swap liability (Notes 7 and 12) 1,377,885 659,710 Debt (Notes 6 and 8) 22,404,071 19,914,295 Advances from federal government for student loans 1,342,468 1,657,389

Total liabilities 32,786,846 29,744,890

Commitments and contingencies (Notes 8, 9, 13, 14 and 15)

Net assets (Note 4): Unrestricted 30,054,197 36,096,867 Temporarily restricted (Note 10) 35,450,423 36,746,977 Permanently restricted (Note 11) 81,497,016 77,903,988

Total net assets 147,001,636 150,747,832

Total liabilities and net assets 179,788,482 $ 180,492,722 $

See notes to consolidated financial statements.

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Lenoir-Rhyne University and Subsidiary

Consolidated Statements of Activities Years Ended May 31, 2016 and 2015

Temporarily Permanently Unrestricted Restricted Restricted Total

Operating revenues and gains:

Tuition and fees 51,729,205 $ -$ -$ 51,729,205 $ Less scholarships (26,508,563) - - (26,508,563)

Net tuition and fees 25,220,642 - - 25,220,642 Government grants 772,789 - - 772,789 Private gifts and grants 1,512,795 4,733,789 3,985,188 10,231,772 Investment return per spending rate

policy (Note 3) 277,957 4,131,968 - 4,409,925 Sales and services of auxiliary enterprises 9,299,933 - - 9,299,933 Other sources 810,870 - - 810,870 Net assets released from restrictions (Note 10) 3,933,602 (3,933,602) - -

Total operating revenues and gains 41,828,588 4,932,155 3,985,188 50,745,931

Operating expenses and losses:

Instruction 18,684,346 - - 18,684,346 Student services 9,564,260 - - 9,564,260 Academic support 2,379,688 - - 2,379,688 Institutional support 10,121,095 - - 10,121,095 Auxiliary enterprises expenditures 5,219,775 - - 5,219,775

Total operating expenses and losses 45,969,164 - - 45,969,164 (Decrease) increase in net assets

from operating activities (4,140,576) 4,932,155 3,985,188 4,776,767 Other changes:

Excess (deficiency) of actual investment return

over (under) spending rate policy and other investment income (loss) (Note 3) (1,183,919) (6,005,024) 7,296 (7,181,647)

Change in value of perpetual trusts and

split-interest agreements (Note 12) - (223,685) (399,456) (623,141) (Loss) gain on interest rate swap (Note 7) (718,175) - - (718,175)

Change in net assets (6,042,670) (1,296,554) 3,593,028 (3,746,196) Net assets:

Beginning 36,096,867 36,746,977 77,903,988 150,747,832

Ending 30,054,197 $ 35,450,423 $ 81,497,016 $ 147,001,636 $

See notes to consolidated financial statements.

2016

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Temporarily Permanently

Unrestricted Restricted Restricted Total

47,109,333 $ -$ -$ 47,109,333 $

(23,314,097) - - (23,314,097)

23,795,236 - - 23,795,236

760,899 - - 760,899

1,153,355 4,211,486 1,030,799 6,395,640

198,644 5,433,202 - 5,631,846

8,003,223 - - 8,003,223

491,691 - - 491,691

10,154,882 (10,154,882) - -

44,557,930 (510,194) 1,030,799 45,078,535

16,844,105 - - 16,844,105

8,990,594 - - 8,990,594

2,252,634 - - 2,252,634

9,838,882 - - 9,838,882

5,260,115 - - 5,260,115

43,186,330 - - 43,186,330

1,371,600 (510,194) 1,030,799 1,892,205

(16,373) (3,551,328) - (3,567,701)

- 64,666 80,132 144,798

50,319 - - 50,319

1,405,546 (3,996,856) 1,110,931 (1,480,379)

34,691,321 40,743,833 76,793,057 152,228,211

36,096,867 $ 36,746,977 $ 77,903,988 $ 150,747,832 $

2015

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Lenoir-Rhyne University and Subsidiary

Consolidated Statements of Cash Flows Years Ended May 31, 2016 and 2015

2016 2015 Cash flows from operating activities:

Change in net assets (3,746,196) $ (1,480,379) $ Adjustments to reconcile change in net assets to

net cash provided by operating activities: Depreciation and amortization and accretion of asset

retirement obligation 5,010,634 4,451,705 Realized and unrealized losses on investments 7,141,883 2,132,335 Change in value of split-interest agreements and

perpetual trusts 623,141 (144,798) Private gifts and grants restricted for long-term investment (5,990,188) (1,030,799) Private gifts and grants restricted for purchases of

property and equipment (632,370) (1,590,269) Private gifts and grants of split-interest agreements and

perpetual trusts (10,091) (433,499) Private gifts and grants of life insurance policies (33,608) (124,010) Net losses on disposal of property and equipment 46,590 14,206 Non-cash gift of property and equipment (2,123) (17,283) Change in value of interest rate swap 718,175 (50,319) Changes in assets and liabilities:

Accounts receivable 1,213,999 (1,370,093) Contributions receivable 273,100 562,745 Prepaids and other assets (45,052) (126,521) Accounts payable (383,999) (545,288) Accrued expenses 873,561 654,924 Deposits held in custody for others (47,723) 32,996 Deferred revenues (331,726) 1,193,636

Net cash provided by operating activities 4,678,007 2,129,289

Cash flows from investing activities: Purchases of property and equipment (12,028,429) (4,825,908) Proceeds from sale of land 69,710 - Purchases of investments (43,609,846) (35,301,772) Proceeds from sales of investments 43,783,085 31,593,960 Net change in notes receivable 126,348 238,697 Increase in cash held for investment and capital improvements (3,228,324) (2,364,272)

Net cash used in investing activities (14,887,456) (10,659,295)

(Continued)

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Lenoir-Rhyne University and Subsidiary

Consolidated Statements of Cash Flows (Continued) Years Ended May 31, 2016 and 2015

2016 2015 Cash flows from financing activities:

Payments on debt (3,422,902) $ (15,617,924) $ Proceeds from debt 6,096,756 14,121,078 Loan costs incurred (198,354) (183,622) Proceeds from private gifts and grants restricted for long-term

investment 6,147,542 1,993,522 Proceeds from private gifts and grants restricted for purchases

of property and equipment 1,434,436 2,137,516 Net cash provided by financing activities 10,057,478 2,450,570

Net decrease in cash and cash equivalents (151,971) (6,079,436)

Cash and cash equivalents: Beginning of year 3,705,892 9,785,328

End of year 3,553,921 $ 3,705,892 $

Supplemental disclosures of cash flow information: Cash payments for interest 769,447 $ 703,998 $

Non-cash gift of property and equipment 2,123 $ 17,283 $

Capital lease incurred for property and equipment -$ 440,324 $

Purchases of property and equipment included in accounts payable or accrued expenses 1,072,441 $ 799,140 $

See notes to consolidated financial statements.

Lenoir-Rhyne University and Subsidiary Notes to Consolidated Financial Statements

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Note 1. Nature of Organization and Significant Accounting Policies

Nature of organization: Lenoir-Rhyne University (the University) is a private, coeducational and nonprofit institution of higher education affiliated with the Evangelical Lutheran Church in America and has three campuses located in Hickory and Asheville, North Carolina and Columbia, South Carolina. The University is accredited by the Southern Association of Colleges and Schools and by the North Carolina Association of Colleges and Schools. Principles of consolidation: Reese Holdings, LLC (the LLC) was established during 2014 with the University as sole member. The LLC was established to receive a contribution from a donor’s estate. The consolidated financial statements include the accounts of the University and the LLC. All significant inter- company accounts and transactions have been eliminated in consolidation. Basis of presentation: The consolidated financial statements of the University are presented in accordance with accounting principles generally accepted in the United States of America (GAAP). A summary of the University’s significant accounting policies follows: Net assets: Net assets and revenues, expenses, gains and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of the University and changes therein are classified and reported as follows: Unrestricted net assets: Net assets that are not subject to donor-imposed stipulations.

Temporarily restricted net assets: Net assets subject to donor-imposed stipulations that may or will be met either by actions of the University and/or the passage of time.

Permanently restricted net assets: Net assets subject to donor-imposed stipulations that they be maintained permanently by the University. Generally, the donors of these assets permit the University to use all of, or part of, the income earned on related investments for general or specific purposes. Unconditional promises to give are recorded as receivables and revenues within the appropriate net asset category. Temporarily restricted donor gifts are recorded as temporarily restricted revenue when received. The University releases temporarily restricted gifts as unrestricted revenue at the time the restricted purpose is met or the related time restriction has expired. Gifts of long-lived assets are reported as unrestricted revenue unless explicit donor stipulations specify how the donated assets must be used. Gifts specified for the acquisition or construction of long-lived assets are generally reported as additions to unrestricted net assets when the assets are placed in service. Expenses are reported as decreases in unrestricted net assets. When a donor restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statements of activities as net assets released from restrictions. When restrictions are met in the year of contribution receipt, donations are shown as temporarily restricted contributions and as net assets released from restrictions.

Lenoir-Rhyne University and Subsidiary Notes to Consolidated Financial Statements

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Note 1. Nature of Organization and Significant Accounting Policies (Continued)

The University follows the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 958-205, Not-for-Profit Entities: Presentation of Financial Statements. This standard increased the disclosures related to endowments of not-for-profit organizations and provided guidance to not-for-profit organizations subjected to an enacted version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). UPMIFA removed the concept of historical dollar value measurement of endowments established by the Uniform Management of Institutional Funds Act and provided for standards of prudence to be utilized by organizations in making determinations to appropriate or accumulate donor-restricted endowment funds. UPMIFA also required that earnings from donor-restricted endowments, unless otherwise instructed by the gift instrument, be classified as donor restricted for legal purposes until they are appropriated for expenditure. This resulted in earnings from donor-restricted endowments being reported as temporarily restricted until appropriated. Cash and cash equivalents: Cash and cash equivalents include interest bearing money market accounts and short-term investments with original maturities of less than three months at time of purchase. At times, the University maintains deposits with financial institutions in amounts that are in excess of federally insured limits. The University believes that such deposits pose no significant credit risk. Cash held for investment and capital improvements: Cash held for investment and capital improvements consists of interest bearing money market accounts that are waiting to be invested as part of the endowment and cash that is designated for capital projects at the University. The amounts held for endowment and capital projects at May 31, 2016 totaled $7,265,002 and $3,446,237, respectively. Accounts receivable and allowance for doubtful accounts: Accounts receivable include student accounts and other miscellaneous receivables and are recognized as services are provided or as income is earned. Accounts receivable are considered past due or delinquent when payment is not received within the credit terms. The University does not charge interest or fees on past due balances. An allowance for loss on accounts receivable is provided based on a review of the accounts along with an analysis of historical losses and recoveries. Receivables are written off when deemed to be uncollectible. Recoveries of receivables previously written off are recognized when received. Contributions receivable: Unconditional promises to give that are expected to be collected within one year are recorded at their net realizable value. Unconditional promises to give that are expected to be collected in future years are recorded at the present value of estimated future cash flows. The discounts on contributions receivable are computed using a market rate commensurate with the risk of the contributions receivable in accordance with the Fair Value Measurement Topic of the FASB ASC. Amortization of the discount is included in contribution revenue. Conditional promises to give are not included as support until such time as the conditions are substantially met. Notes receivable from students and allowance for doubtful accounts: Notes receivable include loans to eligible students under the Federal Perkins Loan program administered by the United States Department of Education. The University relies on a third party to administer the loan program including billings and collections. Late fees are charged on past due payments, up to the maximum allowed by the Department of Education. Past-due loans are turned over to a collection agency when they become 120 days past due. Investments: Investments are generally reported at fair value based upon quoted market prices. Fair value is 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. Investments received by gift are recorded at fair value at the date of donation. In the case of certain less marketable investments, fair value is established by using the net asset value of each investment fund as provided by the investment fund manager.

Lenoir-Rhyne University and Subsidiary Notes to Consolidated Financial Statements

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Note 1. Nature of Organization and Significant Accounting Policies (Continued)

The University’s investments include various types of investment securities which are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment securities, it is possible that changes in risks in the near term could materially affect the University’s investment balance reported in the consolidated statements of financial position. Securities transactions, interest and dividends: Securities transactions are recorded on a trade-date basis. Realized gains and losses on securities transactions, determined on a specific identification basis, and the difference between the cost and fair value of investments are included in the total return on investments and are included in excess (deficiency) of actual investment return over (under) spending rate policy and other investment income (loss) in the accompanying consolidated statements of activities. Interest income is recognized under the accrual basis. Dividend income is recognized on the ex-dividend date. Split-interest agreements and perpetual trusts: The University has certain trust agreements and other arrangements with donors under which the parties derive benefits. The University’s interest in these agreements is reported as contributions received in the year in which the pledge is received or the University is notified of the existence of the trust. Certain of these agreements are referred to as split-interest agreements. The University does not serve as the trustee for the split-interest agreements for which it is a beneficiary. Therefore, the University records an asset and contribution revenue at the present value of the estimated future cash receipts for such agreements. Amortization of the related discount and revaluation of the expected cash flows based on actuarial changes are recognized as changes in the value of perpetual trusts and split-interest agreements in the year in which the change occurs. The University has other agreements referred to as perpetual trust arrangements, which are recorded based upon the fair value of the assets held in trust. Revaluations of the fair value of the assets held in trust are recognized as change in the value of perpetual trusts and split-interest agreements. Under the trust agreements, the assets are held by a trustee in perpetuity, and the University receives investment income as earned by the trust. Property and equipment: Property and equipment are recorded at historical cost at the date of purchase or fair market value at the date of donation. Donations are reported as unrestricted support unless the donor has restricted the donated asset to a specific purpose. Assets donated with explicit restrictions regarding their use and contributions of cash that must be used to acquire property and equipment are reported as restricted support. Absent donor stipulations regarding how long those donated assets must be maintained, the University reports the expiration of donor restrictions when the donated or acquired assets are placed in service as instructed by the donor. Depreciation is computed on a straight-line basis over their estimated useful lives, ranging from 3 to 10 years for furniture and equipment and 10 to 50 years for buildings and improvements. Non-depreciable items represent works of art or antiques and are valued similar to property and equipment. Upon sale or retirement, the costs and related accumulated depreciation are eliminated from the respective accounts and resulting gains or losses are included in the consolidated statements of activities. The University evaluates, on an on-going basis, the carrying value of property and equipment based on estimated future undiscounted cash flows. In the event such cash flows are not expected to be sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values.

Lenoir-Rhyne University and Subsidiary Notes to Consolidated Financial Statements

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Note 1. Nature of Organization and Significant Accounting Policies (Continued)

Bond issuance costs: Costs incurred in issuing the series 2015 and 2014 Educational Facilities Revenue Bonds issued by the North Carolina Facilities Finance Agency and loaned to the University are carried at cost less accumulated amortization. The bond issuance costs are being amortized over the life of the bonds on a method that approximates the effective interest method. Income taxes: The University is a tax-exempt entity under Section 501(c)(3) of the Internal Revenue Code (IRC). Management evaluated the University’s tax positions and concluded that the University had taken no uncertain tax positions that require adjustment to the consolidated financial statements to comply with the provisions of the Income Taxes Topic of the FASB ASC. The University files a Form 990-T in accordance with applicable U.S. federal regulations. Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Asset retirement obligations: Asset retirement obligations are estimated costs and obligations associated with the retirement of long-lived assets. These liabilities were initially recorded at fair value and the related asset retirement costs were recorded as assets. Asset retirement costs are subsequently accreted over the useful lives of the related assets. The estimate of the losses that are probable from environmental remediation liabilities for asbestos removal were calculated using the expected cash flow approach and based on an inventory of the University’s long-lived assets combined with an estimate of the current market prices to remove the asbestos. The University utilized a credit-adjusted, risk-free rate to discount the asset retirement obligation. It is reasonably possible that changes in this estimate could occur and that actual results could differ from this estimate and could have a significant effect on the consolidated financial statements. Derivatives: Under the Derivatives and Hedging Topic of the FASB ASC, as amended and interpreted, the University is required to record all derivative instruments at their respective fair values in the consolidated statements of financial position. All changes in fair value are reflected in the consolidated statements of activities. Operating and nonoperating activities: The consolidated statements of activities report the change in net assets from operating and nonoperating activities. Operating revenues consist of substantially all of the activity of the University except for certain items specifically considered to be of a nonoperating nature. Nonoperating activities include investment return not used in current operations, change in value of split-interest agreements and perpetual trusts, gain (loss) on interest rate swap and significant items of an unusual or nonrecurring nature. Functional expenses: Expenses are primarily reported in the consolidated statements of activities in categories recommended by the National Association of College and University Business Officers. The University’s primary program service is instruction. Expenses reported as academic support, student services, institutional support and auxiliary enterprises are incurred in support of this primary program service. Depreciation of property and equipment, interest expense and maintenance and certain other expenses are allocated to program and supporting activities based on periodic inventories of facilities. Depreciation expense was approximately $5,011,000 and $4,428,000 for the years ended May 31, 2016 and 2015, respectively.

Lenoir-Rhyne University and Subsidiary Notes to Consolidated Financial Statements

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Note 1. Nature of Organization and Significant Accounting Policies (Continued)

Tuition revenue: The University bills students in advance for tuition and records the tuition as deferred revenue. Tuition revenue is recognized during the period in which the education is received by the student. Fundraising expenses: Fundraising expenses totaled approximately $1,603,000 and $1,482,000 for the years ended May 31, 2016 and 2015, respectively. Wills, estates and other revocable arrangements: The University has been named as a beneficiary in certain wills, estates, life insurance agreements and retirement plans. As these items represent revocable arrangements, no amounts have been recognized in the consolidated financial statements. Piedmont Educational Foundation, Inc.: Piedmont Educational Foundation, Inc. (the Foundation) is a nonprofit corporation organized and maintained to aid, assist and promote the University primarily through the funding of scholarships and certain plant facilities at the University. The Foundation and the University are considered financially interrelated organizations. The Foundation contributed approximately $231,000 and $908,000 to the University during the years ended May 31, 2016 and 2015, respectively. Reclassifications: In certain instances, amounts previously reported in the 2015 financial statements have been reclassified to conform to the 2016 presentation. Such reclassifications had no effect on net assets or change in net assets as previously reported. Subsequent events: The University has evaluated its subsequent events (events occurring after May 31, 2016), through September 6, 2016, which represents the date the financial statements were available to be issued. Recent accounting pronouncements: In May 2015, the FASB issued Accounting Standards Update (ASU) 2014-09. The amendments in this Update create Topic 606, Revenue from Contracts with Customers, and supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments supersede the cost guidance in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, and create new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this Update, as amended by ASU 2015-14, Revenue From Contracts with Customers (Topic 606): Deferral of Effective Date, will be effective for the University’s fiscal year 2020 with early adoption permitted with certain restrictions. Management has not evaluated the impact of this ASU on the consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the statement of financial position for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2019. Management is currently evaluating the impact of this ASU on its consolidated financial statements.

Lenoir-Rhyne University and Subsidiary Notes to Consolidated Financial Statements

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Note 1. Nature of Organization and Significant Accounting Policies (Continued)

In August 2016, the FASB issued ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The amendments in this ASU make improvements to the information provided in financial statements and accompanying notes of not-for-profit entities. The amendments set forth the FASB’s improvements to net asset classification requirements and the information presented about a not-for-profit entity’s liquidity, financial performance, and cash flows. The ASU will be effective for fiscal years beginning after December 15, 2017. Earlier applicable is permitted. The changes in this ASU should generally be applied on a retrospective basis in the year that the ASU is first applied. Management has not yet evaluated the impact of this ASU on the consolidated financial statements.

Note 2. Contributions Receivable

Contributions receivable consist of the following at May 31:

2016 2015 Promises to give expected to be collected in:

Less than one year 1,552,998 $ 2,054,250 $ One to five years 349,125 1,129,426

Gross contributions receivable 1,902,123 3,183,676 Less discount on promises to give (51,610) (178,575)

Contributions receivable, net 1,850,513 $ 3,005,101 $

The discount rate used for measuring contributions receivable was 7.5%. Contributions receivable from the University’s Board of Trustees totaled approximately $247,000 and $400,000 as of May 31, 2016 and 2015, respectively. As of May 31, 2016, contributions receivable from two donors totaled approximately $700,000 and $508,000, respectively.

Note 3. Investments

Investments consisted of the following at May 31:

2016 2015

Money market funds 1,492,792 $ 751,678 $ Exchange traded funds 7,991,349 15,714,315 Equity securities 39,068,444 37,750,387 Fixed income 10,786,766 8,669,481 Annuity contracts 2,309,360 2,391,778 Other investments 24,825,874 28,512,068

86,474,585 $ 93,789,707 $

Lenoir-Rhyne University and Subsidiary Notes to Consolidated Financial Statements

14

Note 3. Investments (Continued)

The following summarizes the composition of other investments at May 31:

2016 2015 Values based on quoted market prices or alternative

structures with underlying investments whose values are based on quoted market prices:

Equity funds 4,679,333 $ 5,193,288 $ Bond funds - 2,406,474

4,679,333 7,599,762 Values based on estimates provided by fund managers

or general partners: Hedge funds 9,140,630 9,952,261 Limited partnerships 11,005,911 10,960,045

20,146,541 20,912,306 Total other investments 24,825,874 $ 28,512,068 $

Through the University’s investments in funds of hedge funds, the University is indirectly involved in investment activities such as securities lending, trading in futures and forward contracts and other derivative products. Derivatives are used to adjust portfolio risk exposure or enhance returns. While these instruments may contain varying degrees of risk, the University’s risk with respect to such transactions is limited to its capital balance in each investment. The following summarizes the investment return for the years ended May 31:

2016 2015

Interest and dividends 4,159,087 $ 4,300,231 $ Net realized and unrealized depreciation (6,880,227) (2,132,335) Investment fees (50,582) (103,751)

Investment (loss) income (2,771,722) 2,064,145 Investment return under spending rate policy (4,409,925) (5,631,846)

Deficiency of actual investment return under spending rate policy (7,181,647) $ (3,567,701) $

Note 4. Endowment

The University’s endowment consists of approximately 800 individual funds established for a variety of purposes. Its endowment includes both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. As required by GAAP, 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.

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Note 4. Endowment (Continued)

Interpretation of relevant law: The Board of Trustees of the University has interpreted the North Carolina enacted version of the UPMIFA (NC 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. As a result of this interpretation, the University 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 the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulations are added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the University in a manner consistent with the standard of prudence prescribed by NC UPMIFA. In accordance with NC UPMIFA, the University considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: 1. The duration and preservation of the fund.

2. The purposes of the University 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 University.

7. The investment policies of the University.

Endowment net asset composition by type of fund is as follows as of May 31, 2016:

Temporarily Permanently Unrestricted Restricted Restricted Total

Donor-restricted endowment funds (3,002,155) $ 15,097,020 $ 77,438,009 $ 89,532,874 $ Board-designated endowment

funds 4,627,689 - - 4,627,689

1,625,534 $ 15,097,020 $ 77,438,009 $ 94,160,563 $

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Note 4. Endowment (Continued)

Changes in endowment net assets for the fiscal year ended May 31, 2016 are as follows:

Temporarily Permanently Unrestricted Restricted Restricted Total

Endowment net assets, June 1, 2015 2,993,120 $ 17,505,903 $ 73,373,399 $ 93,872,422 $

Investment return Net realized and unrealized

depreciation (1,317,502) (5,838,224) - (7,155,726) Net investment income 213,546 3,938,245 7,296 4,159,087

Total investment (loss) return (1,103,956) (1,899,979) 7,296 (2,996,639) Contributions 500 2,005,000 4,057,314 6,062,814 Transfers 1,631,891 - - 1,631,891 Appropriation of endowment

assets for expenditure (277,957) (4,131,968) - (4,409,925) Other changes:

Increase in underwater funds due to spending (1,618,064) 1,618,064 - -

Endowment net assets, May 31, 2016 1,625,534 $ 15,097,020 $ 77,438,009 $ 94,160,563 $

Endowment net asset composition by type of fund is as follows as of May 31, 2015:

Temporarily Permanently Unrestricted Restricted Restricted Total

Donor-restricted endowment funds (424,079) $ 17,505,903 $ 73,373,399 $ 90,455,223 $ Board-designated endowment

funds 3,417,199 - - 3,417,199

2,993,120 $ 17,505,903 $ 73,373,399 $ 93,872,422 $

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Note 4. Endowment (Continued)

Changes in endowment net assets for the fiscal year ended May 31, 2015 are as follows:

Temporarily Permanently Unrestricted Restricted Restricted Total

Endowment net assets, June 1, 2014 3,269,079 $ 20,915,561 $ 72,152,557 $ 96,337,197 $

Investment return Net realized and unrealized

appreciation (415,442) (2,085,227) - (2,500,669) Net investment income 148,990 4,103,771 - 4,252,761

Total investment (loss) return (266,452) 2,018,544 - 1,752,092 Contributions 189,137 5,000 1,220,842 1,414,979 Appropriation of endowment

assets for expenditure (198,644) (5,433,202) - (5,631,846) Endowment net assets,

May 31, 2015 2,993,120 $ 17,505,903 $ 73,373,399 $ 93,872,422 $

Funds with deficiencies: 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 NC UPMIFA requires the University to retain as a fund of perpetual duration. In accordance with GAAP, deficiencies of this nature that are reported in unrestricted net assets at May 31, 2016 and 2015, were $3,002,155 and $424,079, respectively. The deficiencies in the donor-restricted endowment funds at May 31, 2016 and 2015, resulted primarily from unfavorable market fluctuations and continued spending on underwater endowments which was deemed prudent by the University. Return objectives and risk parameters: The University 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 assets of donor-restricted funds that the University must hold in perpetuity or for a donor-specified period(s) as well as board-designated funds. Under this policy, as approved by the Board of Trustees, the endowment assets are invested in a manner outlined in the investment policy adopted by the Board of Trustees. This investment policy’s purpose is to provide guidance to the Investment Managers regarding the University’s objectives and goals with regard to the endowment investing. Specifically, it outlines the risk tolerance areas of the University as well as defining the limitations in the portfolio of investments. The University expects its endowment funds, over time, to provide an average rate of return equivalent to or greater than the endowment’s financial requirements. The endowment’s financial requirements, as defined by the University’s investment policy, are the sum of the spending rate, the long-term inflation rate, the aggregate costs of the portfolio management, and any growth factor, which the University may, from time to time, determine appropriate.

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Note 4. Endowment (Continued)

Strategies employed for achieving objectives: To satisfy its long-term rate-of-return objectives, the University 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 University targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. Spending policy and how the investment objectives relate to spending policy: For the year ended May 31, 2016, the University decreased its spending policy from 7% to 5% of the average market value of the University endowment fund’s average fair value, for the previous three fiscal years. In establishing this policy, the University considered the long-term expected return on its endowment. Accordingly, over the long term, the University expects the current spending policy to allow its endowment to grow at an average of 2.5% annually. This is consistent with the University’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.

Note 5. Split-Interest Agreements and Perpetual Trusts

The fair value of investments related to split-interest agreements and perpetual trusts are summarized below at May 31:

2016 2015

Split-interest agreements 1,613,248 $ 2,006,469 $ Perpetual trusts 3,201,838 3,499,599

4,815,086 $ 5,506,068 $

Note 6. Property and Equipment

Property and equipment consist of the following at May 31:

2016 2015

Land 2,399,190 $ 2,318,838 $ Buildings and improvements 90,279,581 84,827,758 Equipment and software 12,350,270 11,453,432 Library collection 4,608,978 4,563,642 Construction in progress 7,883,560 2,786,298

117,521,579 105,949,968 Less accumulated depreciation (49,919,212) (44,991,668)

67,602,367 $ 60,958,300 $

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Note 7. Derivatives

In December 2015, the University entered into two interest rate swap arrangements for a notional amounts of $6,050,711 and $9,596,251, respectively, which effectively fixed the interest rate on a portion of bonds payable at 3.25% and 3.93%, respectively, through December 2025. The University receives interest at a variable rate and makes payments at 3.25% and 3.93%, respectively, and settles with the counterparty on a monthly basis. A previous interest rate swap arrangement having a notional amount of $10,194,000, effective October 21, 2014, was novated in connection with the new interest rate swap agreement and bond issuance. The University entered into the swap agreements to reduce the variability of cash flows related to changes in interest rates on borrowings from the variable rate bonds. The change in the net settlement amount on the swaps is included in interest expense (see Note 1). At May 31, 2016 and 2015, the fair value of the interest rate swaps was a liability of $1,377,885 and $659,710, respectively, which is recorded in the consolidated statements of financial position. The change in fair value of the interest rate swap for the years ended May 31, 2016 and 2015, is a loss of $(718,175) and a gain of $50,319, respectively, and is recorded in (loss) gain on interest rate swap in the consolidated statements of activities. The University is exposed to credit loss in the event of nonperformance by the counterparty to the interest rate swap agreement. The University, however, does not anticipate nonperformance by the counterparty.

Note 8. Debt

Debt at May 31, 2016 and 2015, is summarized as follows:

2016 2015 North Carolina Capital Facilities Finance Agency Variable Rate

Educational Facilities Revenue Bonds, Series 2015 Less unamortized debt issuance costs of $193,742 at May 31, 2016 5,903,014 $ -$

North Carolina Capital Facilities Finance Agency Variable Rate Educational Facilities Revenue Bonds, Series 2014 Less unamortized debt issuance costs of $167,514 and $177,179 at May 31, 2016 and 2015 12,627,485 13,414,821

Lines of credit (see terms on following page) 529,078 529,078 Long-term notes payable:

Term note dated March 12, 2010, repaid during 2016 - 164,586 Term note dated April 26, 2011, repaid during 2016 - 166,029 Term note dated March 2, 2012, repaid during 2016 - 1,406,842 Term note dated March 2, 2012, repaid during 2016 - 333,169 Term note dated June 4, 2012, repaid during 2016 - 325,000 Term note dated July 1, 2012, matures on July 1, 2027,

monthly payments of $33,148 including interest at a fixed rate of 4.75%. The note is collateralized by certain real property held by the University. 3,344,494 3,574,770

22,404,071 $ 19,914,295 $

At May 31, 2016, the one-month LIBOR rate was .44%.

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Note 8. Debt (Continued)

The North Carolina Capital Facilities Finance Agency (the Agency) Variable Rate Educational Facilities Revenue Bonds, Series 2015 (Series 2015) totaling up to $17,000,000 were issued in December 2015 to provide funds to (1) finance the cost of capital improvements on the University’s campus including the science building, Price Village renovation, Cromer Center renovations, and the Physician Assistant building renovation, (2) refinance three loans, the proceeds of which were used to acquire, improve equip and furnish the Asheville campus building and the Searcy House on the Hickory campus and (3) pay certain expense incurred in connection with the issuance of the Bond. The Series 2015, which were issued on behalf of the University, were purchased by a bank with the proceeds loaned to the University by the Agency through a promissory note which was assigned to the bank. The Series 2015 bonds are subject to annual principal payments on March 1, 2016 through 2037, in amounts varying from $85,000 to $1,030,000 plus accrued interest. The Series 2015 bonds are required to be repaid by the University in full at the earlier of a conversion date, which is defined in the agreement as the business day selected by the University in which the LIBOR rate applicate to the bonds is converted to a new adjusted LIBOR rate by converting the spread used in calculating such rate to a new spread, or December 1, 2025, upon written notice by the University within 180 days of such date. The interest rate as of May 31, 2016, was 2.91%. The University has provided a guaranty of the payment of principal and interest due under the Series 2015 bonds. As of May 31, 2016, $10,903,244 of project funds had yet to be drawn from the bond proceeds held by the bank. The Agency Variable Rate Educational Facilities Revenue Bonds, Series 2014 (Series 2014) totaling $13,592,000 were issued in October 2014 to provide funds to finance the cost of (1) refunding in advance of maturity the Agency’s $12,865,000 Variable Rate Educational Facilities Revenue Bonds, Series 2008, which were used to finance capital improvements on the University’s campus, (2) refinancing a portion of an outstanding line of credit with a bank, the proceeds of which were used for the renovation and rehabilitation of Isenhour Residence Hall on campus and (3) paying certain expenses incurred in connection with the issuance of the bonds. The Series 2014, which were issued on behalf of the University, were purchased by a bank with the proceeds loaned to the University by the Agency through a promissory note, which was assigned to the bank. In December 2015, the bonds were amended by the issuance of the Series 2015 bonds converting the interest rate on the Series 2014 Bonds as of December 17, 2015 and changing the minimum holding period for the new bank bond period to end on the earlier of December 1, 2025, or a conversion date. The Series 2014 bonds are subject to annual principal payments on May 31, 2016 through 2034, in amounts varying from $411,000 to $1,147,000 plus accrued interest. The interest rate as of May 31, 2016, was 1.78%. The University has provided a guaranty of the payment of principal and interest due under the Series 2014 bonds. The University must comply with a negative pledge agreement that it will not create, incur, assume or suffer to exist any lien on any of its assets or property currently owned or acquired in the future except as specifically permitted by the bonds without prior written consent of the bank. The University has a line of credit for operating purposes with a bank through December 31, 2016. As of May 31, 2015, the maximum availability on the line of credit was $3,000,000. The line of credit is secured by deposit accounts and investments. Interest on the line of credit is at the bank’s reference rate (.44% at May 31, 2016), plus 1.25% and is due monthly. There were amounts outstanding under this line of credit of $529,078 at May 31, 2016 and 2015. The various debt agreements, described above and included in the debt table, require the University to comply with certain financial and other covenants which are typical of such agreements. Interest expense for the years ended May 31, 2016 and 2015, was approximately $788,000 and $678,000, respectively.

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Note 8. Debt (Continued)

Principal maturities anticipated by the University, assuming any tendered bonds are remarketed and the letter of credit is renewed over the original term of the bonds, are as follows:

Amount Fiscal year:

2017 1,692,078 $ 2018 1,743,000 2019 1,813,000 2020 1,895,000 2021 1,979,000 Thereafter 13,643,249 Less unamortized bond issuance costs (361,256)

22,404,071 $

Note 9. Employee Benefit Plan

The University provides a defined contribution employee benefit plan for faculty, administrative and other staff in conjunction with the Teachers Insurance and Annuity Association and College Retirement Equities Fund. Eligible faculty and administrative staff are required to contribute a minimum of 3% of their annual salary, and other staff are not required to contribute a portion of their salary. The University contributes 6% of annual salary for all employees contributing the minimum of 3% of their annual salary. The University contributed approximately $860,000 and $795,000 to the plan for the years ended May 31, 2016 and 2015, respectively.

Note 10. Temporarily Restricted Net Assets

Temporarily restricted net assets are available for the following purposes at May 31:

2016 2015 Scholarships and costs of educational programs,

academic programs and operating uses 24,253,725 $ 25,352,371 $ Capital expenditures 10,359,440 10,235,103 Time restricted 837,258 1,159,503

35,450,423 $ 36,746,977 $

During 2016 and 2015, net assets of $3,933,602 and $10,154,882, respectively, were released from donor restrictions by incurring expenses satisfying the restricted purposes or by the passage of time.

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Note 11. Permanently Restricted Net Assets

Permanently restricted net assets consist of the following at May 31:

2016 2015

Scholarships and educational programs 80,954,006 $ 77,368,936 $ Operation and maintenance of property and equipment 543,010 535,052

81,497,016 $ 77,903,988 $

Note 12. Fair Value of Financial Instruments

The University follows the provisions of the Fair Value Measurement Topic of the FASB ASC for financial assets and liabilities. This Topic applies to all financial assets and liabilities that are being measured and reported on a fair value basis, establishes a framework for measuring fair value of assets and liabilities and expands disclosures about fair value measurements. The Fair Value Measurement Topic requires that fair value measurements be classified and disclosed in one of the following three categories: Level 1: Financial instruments with unadjusted, quoted prices listed on active market exchanges. Level 2: Financial instruments determined using prices for recently traded financial instruments with

similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3: Financial instruments that are not actively traded on a market exchange. This category includes

situations where there is little, if any, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuation techniques.

In determining the appropriate levels, the University performs a detailed analysis of the assets and liabilities that are subject to the Fair Value Measurement Topic. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The University’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Valuation techniques used must maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The inputs or methodology used for valuing financial instruments are not necessarily an indication of the risks associated with investing in those instruments.

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Note 12. Fair Value of Financial Instruments (Continued)

The University has established valuation processes and procedures for Level 3 investments to ensure proper reporting within the fair value hierarchy and in accordance with GAAP. The University’s management is responsible for the valuation processes and procedures of the Level 3 investments, including the development of written valuation policies and procedures, conducting periodic reviews of the valuation policies and determining the proper and consistent application of the valuation policies. Management’s involvement with the valuation process consists of individuals who report to the University’s Finance and Investment Committee. A description of the valuation techniques applied to the University’s major categories of assets and liabilities measured at fair value on a recurring basis follows. Money market funds, equity securities, equity funds, bond funds and exchange traded funds: Securities traded on a national securities exchange (or reported on the NASDAQ national market) are stated at the last reported sales price on the day of valuation. To the extent these securities are actively traded and valuation adjustments are not applied, they are categorized in Level 1 of the fair value hierarchy. Certain foreign securities may be measured at fair value using a pricing service that considers the correlation of the trading patterns of the foreign security to the intraday trading in the U.S. markets for investments, such as American depository receipts, financial futures, exchange traded funds and the movement of certain indices of securities based on a statistical analysis of the historical relationship and are categorized in Level 2. Preferred stock and other equities traded in active markets or valued by reference to similar instruments are also categorized in Level 2. Annuity contracts: The University’s annuity contracts contain both fixed and variable annuities. The University’s annuities are valued at contract value, which approximates fair value and are categorized in Level 3. Split-interest agreements and perpetual trusts: The University has been named as a beneficiary in various types of split-interest agreements and perpetual trusts for which the University is not the trustee. Amounts reported approximate fair value. Under the guidelines set forth in the Fair Value Measurement Topic, the University’s assets are classified as Level 3 due to the nature of the discounts and actuarial information used to determine the present value of estimated future cash flows for split-interest agreements and the nature of the estimated value of the University’s interest in the assets held in trust for perpetual trusts. Interest rate swap: The University’s interest rate swaps are receive-variable, pay-fixed interest rate swaps based on a London Interbank Offered Rate (LIBOR) swap rate. The LIBOR swap rate is observable at commonly quoted intervals for the full term of the swap and, therefore, is considered a Level 2 financial instrument. The Fair Value Measurement Topic states that the fair value measurement of a liability must reflect the nonperformance risk of the entity. Therefore, the effect of the University’s creditworthiness has also been factored into the fair value measurement of the interest rate swaps in a liability position.

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Note 12. Fair Value of Financial Instruments (Continued)

Level 1 instruments carried at fair value, and Level 2 and Level 3 instruments carried at estimated fair value, are comprised of the following at May 31, 2016:

Quoted Prices in Significant Significant Active Markets for Other Unobservable

Identical Assets Observable Inputs (Level 1) Inputs (Level 2) (Level 3) Total

Financial assets: Investments:

Money market funds 1,492,792 $ -$ -$ 1,492,792 $ Exchange traded funds 7,991,349 - - 7,991,349 Equity funds 39,068,444 - - 39,068,444 Bond funds 10,786,766 - - 10,786,766 Annuity contracts - - 2,309,360 2,309,360 Measured at NAV:

International small stock funds 2,050,130 International emerging stock funds 2,629,203 Hedge funds 9,140,630 Real assets 1,836,013 Private equity 9,169,898

59,339,351 $ -$ 2,309,360 $ 86,474,585 $

Beneficial interests in perpetual trusts -$ -$ 3,201,838 $ 3,201,838 $

Split-interest agreements -$ -$ 1,613,248 $ 1,613,248 $

Financial liabilities: Interest rate swap -$ 1,377,885 $ -$ 1,377,885 $

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Note 12. Fair Value of Financial Instruments (Continued)

Level 1 instruments carried at fair value, and Level 2 and Level 3 instruments carried at estimated fair value, are comprised of the following at May 31, 2015:

Quoted Prices in Significant Significant Active Markets for Other Unobservable

Identical Assets Observable Inputs (Level 1) Inputs (Level 2) (Level 3) Total

Financial assets: Investments:

Money market funds 751,678 $ -$ -$ 751,678 $ Exchange traded funds 15,714,315 - - 15,714,315 Equity funds 37,750,387 - - 37,750,387 Bond funds 8,669,481 - - 8,669,481 Annuity contracts - - 2,391,778 2,391,778 Measured at NAV:

International small stock funds 2,168,064 International emerging stock funds 3,025,224 Global bond funds 2,406,474 Hedge funds 9,952,261 Real assets 2,364,755 Private equity 8,595,290

62,885,861 $ -$ 2,391,778 $ 93,789,707 $

Beneficial interests in perpetual trusts -$ -$ 3,499,599 $ 3,499,599 $

Split-interest agreements -$ -$ 2,006,469 $ 2,006,469 $

Financial liabilities: Interest rate swap -$ 659,710 $ -$ 659,710 $

In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value (NAV) per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated statements of financial position.

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Note 12. Fair Value of Financial Instruments (Continued)

For the years ended May 31, 2016 and 2015, the changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows:

Realized Unrealized

Balance as of Gains Gains Balance as of May 31, 2015 (Losses) (Losses) Contributions Withdrawals Dividends May 31, 2016

Annuities 2,391,778 $ -$ (82,418) $ -$ (120,000) $ 120,000 $ 2,309,360 $

Beneficial interest in perpetual trusts 3,499,599 $ -$ (307,852) $ 10,091 $ -$ -$ 3,201,838 $

Split-interest agreements 2,006,469 $ -$ (315,289) $ -$ (77,932) $ -$ 1,613,248 $

Realized Unrealized

Balance as of Gains Gains Balance as of May 31, 2014 (Losses) (Losses) Contributions Withdrawals Dividends May 31, 2015

Annuities 2,452,268 $ -$ (60,490) $ -$ (120,000) $ 120,000 $ 2,391,778 $

Beneficial interest in perpetual trusts 3,320,541 $ -$ (21,855) $ 200,913 $ -$ -$ 3,499,599 $

Split-interest agreements 2,379,910 $ -$ 166,653 $ 232,586 $ (772,680) $ -$ 2,006,469 $

The University assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer in accordance with the University’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. There were no significant transfers among Levels 1, 2 and 3 during 2016 and 2015.

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Note 13. Net Asset Value

The following table sets forth a summary of the University’s investments with a reported NAV or equivalent:

May 31, 2016 Redemption Other May 31, 2016 May 31, 2015 Unfunded Frequency Redemption

Investment Fair Value Fair Value Commitment and Notice Period Restrictions

International small stocks (a) 2,050,130 $ 2,168,064 $ -$ Daily n/a

3 days notice

International emerging stocks (b) 2,629,203 3,025,224 - Monthly n/a

Notice by 15th

business day

Global bonds (c) - 2,406,474 - Monthly n/a 10 business days notice

Hedge funds:

Pinehurst Institutional Ltd. (d) 4,553,868 4,810,398 - Annual May be limited to 25%

100 days notice of assets on given

redemption date

Silver Creek Low Vol 721,287 1,022,747 - Liquidating Based on distribution

Strategies II, Ltd. (e) schedule

Forester Diversified Ltd. (f) 3,806,485 4,022,935 - 95 days notice 3-year lockup with

annual redemptions at

calendar quarter

anniversary

Meridian Diversified Fund, Ltd. (q) 58,990 96,181 - Liquidating n/a

Real assets:

BlackRock Diamond Property

Fund, Inc. (g) 40,700 235,923 - Quarterly Locked up until Board

60 days notice allows redemptions

Commonfund Capital Natural 1,974 - 990,000 n/a Distributions made as

Resources Partners X, L.P. (h) underlying investments

mature

Park Street Capital Natural 465,280 590,897 3,750 n/a Distributions made as

Resource Fund III, L.P. (h) underlying investments

mature

Park Street Capital Natural 651,102 739,474 30,250 n/a Distributions made as

Resource Fund IV, L.P. (h) underlying investments

mature

Park Street Capital Natural 631,338 571,713 157,500 n/a Distributions made as

Resource Fund V, L.P. (h) underlying investments

mature

RREEF America REIT III, Inc. (i) 45,619 226,748 - Liquidating n/a

(Continued)

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Note 13. Net Asset Value (Continued)

May 31, 2016 Redemption Other May 31, 2016 May 31, 2015 Unfunded Frequency Redemption

Investment Fair Value Fair Value Commitment and Notice Period Restrictions Private equity:

Goldman Sachs Distressed 601,039 $ 689,544 $ 432,959 $ n/a Distributions made as

Opportunities Fund IV (j) underlying investments

mature

Newbury Secondary Fund (k) 485,645 783,859 7,500 n/a Distributions made as

underlying investments

mature

Park Street Capital Private Equity 1,934,579 1,846,144 110,000 n/a Distributions made as

Fund IX, L.P. (l) underlying investments

mature

Park Street Capital Private Equity 865,481 645,429 255,000 n/a Distributions made as

Fund X, L.P. (l) underlying investments

mature

Park Street Capital Private Equity 337,620 195,321 1,660,000 n/a Distributions made as

Fund XI, L.P. (l) underlying investments

mature

Portfolio Advisors (Offshore) 352,006 496,065 144,000 n/a Distributions made as

Private Equity Fund III, L.P. (l) underlying investments

mature

Portfolio Advisors Private Equity 943,210 801,509 713,171 n/a Distributions made as

Fund VII (Offshore), L.P. (m) underlying investments

mature

TIFF Private Equity 348,806 459,763 204,000 n/a Distributions made as

Partners 2006, LLC (m) underlying investments

mature

Crown Global Secondaries II plc (n) 295,452 478,243 178,000 n/a Distributions made as

underlying investments

mature

Montauk TriGuard Fund V LP (o) 505,270 375,531 360,000 n/a Distributions made as

underlying investments

mature

NB Secondary Opportunities 631,083 453,818 959,684 n/a Distributions made as

Offshore Fund III, L.P. (p) underlying investments

mature

NB Crossroads Fund XX (r) 636,421 393,399 892,500 n/a Distributions made as

underlying investments

mature

Portfolio Advisors Private Equity 607,349 685,236 1,921,660 n/a Distributions made as

Fund VIII (Offshore), L.P. (s) underlying investments

mature

Montauk Triguard Fund VI LP (t) 625,937 291,429 1,380,000 n/a Distributions made as

underlying investments

mature Total 24,825,874 $ 28,512,068 $ 10,399,974 $

Lenoir-Rhyne University and Subsidiary Notes to Consolidated Financial Statements

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Note 13. Net Asset Value (Continued)

As of May 31, 2015, unfunded commitments for the University’s investments with a reported NAV or equivalent was $10,399,974.

(a) Seeks long-term capital appreciation by investing primarily in common and preferred equity securities of non-U.S. companies with market capitalizations of less than $3 billion.

(b) Seeks long-term total return by investing in equity securities of non-U.S. issuers.

(c) Seeks favorable income-oriented returns from globally diversified portfolio of primarily debt or debt- like securities while preserving and enhancing the principal by investing in debt or debt-like securities that, in its opinion, possess fundamental value.

(d) Seeks investment objective by allocating its capital among various portfolio managers through individually managed accounts and investments in collective investment vehicles which may engage in the trading of equity and debt securities of U.S. and non-U.S. corporations, U.S. government securities, non-U.S. government securities, futures contracts, options, options on futures, other derivatives including swaps, forward contracts, currencies and physical commodities, partnership interests, money market instruments and derivatives on securities.

(e) Seeks to provide investors with access to a diversified multi-strategy investment portfolio designed to achieve stable, long-term, nonmarket directional positive returns with low relative volatility.

(f) Seeks to provide investors with maximum appreciation of capital while incurring reasonable risk with a diversified group of hedge funds. Seeks to maintain portfolios that will participate in up markets, protect capital in down markets and produce a high return in the context of reasonable volatility.

(g) Seeks income or capital appreciation or both by investing in real estate.

(h) Seeks targeted returns through investment in the natural resource sector, with an emphasis on crude oil, natural gas production and timberland.

(i) Seeks to maximize total return to shareholders through cash dividends and appreciation in the value of shares by investing in a real estate portfolio consisting of undeveloped land, multi-family, industrial, retail and office properties.

(j) Seeks to invest directly and indirectly in privately and publicly issued debt securities and privately issued equity securities of companies that are currently experiencing financial or operational distress and pursue strategies that take advantage of dislocations or opportunities in the market.

(k) Seeks to realize long-term returns in excess of those available through conventional investments primarily by investing in a diversified group of close-end private funds focused on investment partnerships.

(l) Seeks targeted returns through investment in select groups of private equity funds in the venture capital, buyout, and capital restructuring sectors.

(m) Seeks long-term returns through investments in a diversified portfolio of private equity investment partnerships.

Lenoir-Rhyne University and Subsidiary Notes to Consolidated Financial Statements

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Note 13. Net Asset Value (Continued)

(n) Seeks to assist members in maintaining endowment purchasing power by generating returns greater than those provided by global stock markets. Fund is reported based on the International Financial Reporting Standards (IFRS).

(o) Seeks to provide shareholders with an attractive long-term capital appreciation by investing in a diversified portfolio of secondary private equity instruments in professionally managed private equity funds.

(p) Seeks to achieve superior risk-adjusted returns through the purchase of seasoned private equity investments at attractive valuations from investors desiring liquidity.

(q) Seeks diversified investment strategy utilizing a multi-manager approach to invest in primarily equity securities of non-U.S. issuers.

(r) Seeks to acquire, hold, sell and exchange interests in limited partnerships or other pooled investment vehicles that are organized to make investments in large-cap buyout, mid-cap buy-out, special situations, and venture/growth capital investment funds, as well as securities, including co-investments. Seeks to achieve long-term returns through investments in diversified portfolio of private equity partners.

(s) Seeks to acquire, hold and realize investments in secondary interests in private equity funds and other private investment funds.

(t) Seeks to provide a favorable long-term rate of return through capital appreciation from a diversified portfolio.

Note 14. Deferred Compensation Agreement

The University has a deferred compensation plan with discretionary contributions made by the University on behalf of the President. During the years ended May 31, 2016 and 2015, the Board approved and disbursed $0 and $76,829, respectively, to the plan. The assets totaling $275,645 as of May 31, 2016 and 2015 are recorded in prepaids and other assets and the liabilities totaling $275,645 as of May 31, 2016 and 2015, are recorded in accrued expenses in the consolidated statements of financial position. Subsequent to year end, the University made a disbursement of approximately $118,000 to the President in accordance with this agreement.

Note 15. Contract Commitments

The University has multiple construction contracts outstanding for projects relating to the Cromer Center, Minges Science Building, and Hickory House. Contract commitments outstanding at May 31, 2016, totaled approximately $17,232,000, of which approximately $3,864,000 was completed, leaving an outstanding commitment of approximately $13,368,000.

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Lenoir-Rhyne University and Subsidiary

Schedule of Expenditures of Federal Awards Year Ended May 31, 2016

Catalog of Federal Grantor/Pass-Through Federal Domestic Grantor/Program Title Assistance Number Expenditures Major programs:

U.S. Department of Education: Direct programs:

Student financial assistance cluster: Direct loan program 84.268 20,916,832 $ Pell grant program 84.063 2,909,357 Federal Perkins Loan Program (Note 4) 84.038 136,691 Federal Work Study (Note 1) 84.033 189,004 Supplemental Educational Opportunity Grant (Note 1) 84.007 116,561

Total federal programs 24,268,445 $

See notes to schedules of expenditures of federal and state awards.

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Lenoir-Rhyne University and Subsidiary

Schedule of Expenditures of State Awards Year Ended May 31, 2016

State Grantor/Program Title Expenditures State programs:

University of North Carolina, General Administration: Direct programs:

Student financial assistance: North Carolina Need-Based Scholarship Program (Note 3) 3,355,120 $ North Carolina Forgivable Education Loans for Service Program 403,000

Total state programs 3,758,120 $

See notes to schedules of expenditures of federal and state awards.

Lenoir-Rhyne University and Subsidiary Notes to Schedules of Expenditures of Federal and State Awards

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Note 1. Basis of Presentation

The accompanying schedules of expenditures of federal and state awards (the Schedules) include the federal and state grant activity of Lenoir-Rhyne University (the University) under programs of the federal and state governments for the year ended May 31, 2016. The information in these Schedules are presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), North Carolina General Statute 143C-6-23 and the North Carolina State Education Assistance Authority. Because these Schedules present only a selected portion of the operations of the University, it is not intended to and does not present the financial position, changes in net assets or cash flows of the University. For the Federal Supplemental Educational Opportunity Grant (FSEOG) and Federal Work Study (FWS), the expenditures listed are only the federal share. The University’s 25% match was $38,854 and $139,517 for FSEOG and FWS, respectively. Also, the grants reflect transactions for the year ended May 31, 2016, irrespective of the year of grant award and, accordingly, the Schedules do not include a full year’s activity for grants awarded or terminated on dates not coinciding with the aforementioned fiscal year.

Note 2. Summary of Significant Accounting Policies for Federal and State Award Expenditures

Expenditures reported on the Schedules are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. The University has not elected to use the 10% de minimis indirect cost rate as allowed under the Uniform Guidance. Expenditures for student financial aid programs are recognized as incurred and include the federal share of students’ FSEOG program and FWS program earnings, Federal Pell grants, certain other federal financial aid grants for students, loan disbursements and administrative cost allowances, where applicable.

Note 3. State Awards

The North Carolina Need-Based Scholarship Program is a state program having compliance requirements identified as having a direct and material effect on the consolidated financial statements.

Note 4. Loan Activity

At May 31, 2016, the University had the following loan balances outstanding. Loans made during the year are included in the federal expenditures presented in the schedule. Program Title Amount

Perkins loan program (CFDA 84.038) 1,248,926 $

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Independent Auditor’s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of

Financial Statements Performed in Accordance With Government Auditing Standards

To the Board of Trustees Lenoir-Rhyne University and Subsidiary Hickory, North Carolina We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the consolidated financial statements of Lenoir- Rhyne University and Subsidiary (the University), which comprise the consolidated statement of financial position as of May 31, 2016, and the related consolidated statements of activities and cash flows for the year then ended and the related notes to the consolidated financial statements, and have issued our report thereon dated September 6, 2016. Internal Control Over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered the University's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of the University’s internal control. Accordingly, we do not express an opinion on the effectiveness of the University’s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s consolidated financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. As described in the accompanying schedule of findings and questions costs, we did identify a deficiency in internal control over financial reporting that we consider to be a significant deficiency (Item 2016-001).

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Compliance and Other Matters As part of obtaining reasonable assurance about whether the University's consolidated financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of consolidated financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. University’s Response to Finding The University’s response to the finding identified in our audit is described in the accompanying schedule of findings and questioned costs. The University’s response was not subjected to the auditing procedures applied in the audit of the consolidated financial statements and, accordingly, we express no opinion on it. Purpose of This Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity’s internal control and compliance. Accordingly, this communication is not suitable for any other purpose.

Raleigh, North Carolina September 6, 2016

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Independent Auditor’s Report on Compliance for the Major Federal Program and

Major State Program and on Internal Control over Compliance Required by the Uniform Guidance, North Carolina General Statute 143C-6-23

and the North Carolina State Education Assistance Authority To the Board of Trustees Lenoir-Rhyne University and Subsidiary Hickory, North Carolina Report on Compliance for the Major Federal Program and Major State Program We have audited Lenoir-Rhyne University and Subsidiary’s (the University) compliance with the types of compliance requirements described in the OMB Compliance Supplement, and the requirements described in North Carolina General Statute 143C-6-23 and the North Carolina State Education Assistance Authority (NCSEAA), that could have a direct and material effect on the University’s major federal program and major state program for the year ended May 31, 2016. The University’s major federal program and major state program are identified in the summary of auditor’s results section of the accompanying schedule of findings and questioned costs. Management’s Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal and state awards applicable to its federal and state programs. Auditor’s Responsibility Our responsibility is to express an opinion on compliance for the University’s major federal program and major state program based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance); North Carolina General Statute 143C-6-23 and the NCSEAA. Those standards, Uniform Guidance, North Carolina General Statute 143C-6-23 and the NCSEAA require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program or major state program occurred. An audit includes examining, on a test basis, evidence about the University’s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program and major state program. However, our audit does not provide a legal determination of the University’s compliance. Opinion on the Major Federal Program and Major State Program In our opinion, the University complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on its major federal program and its major state program for the year ended May 31, 2016.

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Other Matters The results of our auditing procedures disclosed an instance of noncompliance, which are required to be reported in accordance with the Uniform Guidance and which are described in the accompanying Schedule of Findings and Questioned Costs as item 2016-002. Our opinion on the University’s major federal program and major state program is not modified with respect to these matters. The University’s response to the noncompliance findings identified in our audit are described in the accompanying Schedule of Findings and Questioned Costs. The University’s responses were not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the responses. Report on Internal Control Over Compliance Management of the University is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the University’s internal control over compliance with the types of requirements that could have a direct and material effect on its major federal program and major state program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal and state program and to test and report on internal control over compliance in accordance with the Uniform Guidance, North Carolina General Statute 143C-6-23 and the NCSEAA, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the University’s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal or a state program on a timely basis. A material weakness in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal or state program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal or state program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Purpose of This Report The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance, North Carolina General Statute 143C-6-23, and the NCSEAA. Accordingly, this report is not suitable for any other purpose.

Raleigh, North Carolina September 6, 2016

Lenoir-Rhyne University and Subsidiary Schedule of Findings and Questioned Costs

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Section I. Summary of Auditor’s Results

Financial Statements

Type of report the auditor issued on whether the financial statements

audited were prepared in accordance with GAAP: Unmodified

Internal control over financial reporting:

• Material weakness(es) identified? Yes X No

• Significant deficiency(ies) identified? X Yes None Reported

Noncompliance material to financial statements noted? Yes X No

Federal Awards

Internal control over major programs:

• Material weakness(es) identified? Yes X No

• Significant deficiency(ies) identified? Yes X None Reported

Type of auditor's report issued on compliance for Major Federal programs: Unmodified

Any audit findings disclosed that are required to be reported in accordance with section 2 CFR 200.516(a)? X Yes No See item: 2016-002

State Awards

Internal control over major programs:

• Material weakness(es) identified? Yes X No

• Significant deficiency(ies) identified? Yes X None Reported Type of auditor's report issued on compliance for

major programs: Unmodified

Any audit findings disclosed that are required to be reported in accordance with North Carolina General Statute 143C-6-23 and the NCSEAA? Yes X No

(Continued)

Lenoir-Rhyne University and Subsidiary Schedule of Findings and Questioned Costs (Continued)

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Section I. Summary of Auditor’s Results (Continued) Identification of major federal and state programs:

CFDA Number(s) Name of Federal or State Program or Cluster

Various Student Financial Assistance Cluster

N/A North Carolina Need-Based Scholarship

Program

Dollar threshold used to distinguish between type A and type B programs $750,000

Auditee qualified as low-risk auditee? X Yes No

Section II. Financial Statement Findings 2016-001: Year-end Journal Entry Review (Significant Deficiency) Criteria: The financial statements are to be prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) as promulgated by the Financial Accounting Standards Board (FASB).

Condition: In order to present GAAP financial statements for the year ended May 31, 2016, several adjustments were recorded to the original trial balance provided to begin the audit, which resulted in significant changes in assets, liabilities, and changes in net assets.

Context: During 2016, an appropriate level of review was not performed for year-end closing entries to detect improper adjustments posted to the general ledger which resulted in significant audit adjustments.

Effect: The University’s assets were overstated by $224,521, liabilities were overstated by $1,614,882 and expenses were overstated by $1,839,403.

Cause: The University did not accurately review reconciliations and schedules to ensure they agreed with the recorded trial balance. As a result, the University improperly recorded various yearend adjustments and did not detect these errors.

Recommendation: We recommend management implement formal year-end financial close procedures to ensure (1) transactions are properly recorded and (2) reconciliations and schedules are available to support recorded balances. The preparation and approval of all manual adjustments to the general ledger should be segregated to prevent and detect improper adjustments recorded to the general ledger. Views of responsible officials and planned corrective action: Refer to the University’s Corrective Action Plan.

(Continued)

Lenoir-Rhyne University and Subsidiary Schedule of Findings and Questioned Costs (Continued) Year Ended May 31, 2016

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Section III. Findings and Questioned Costs for Federal Awards Audit Finding: 2016-002: Student Status Change Criteria: Federal regulations require that an institution report a change in student status (i.e., change in attendance levels, withdrawals, graduation or leave of absence) within 60 days of such change. The institution must update the student roster for changes in status, report the date the enrollment status was effective and submit electronically through the batch method through the NSLDS website.

Condition: During 2016, there was one instance of a student withdrawal status change that was submitted more than 60 days after the effective date.

Known questioned cost: None

Context: Out of a sample of 45 withdrawal student status changes, one withdrawal record was submitted more than 60 days after the student’s withdrawal became effective.

Effect: Student status change was not reported within the required timeframe noted above.

Cause: Administrative oversight.

Recommendation: We recommend that the University review the rosters for student withdrawals and other changes that occur throughout the semester to ensure that student status changes, particularly those occurring periodically, are detected and submitted within the required timeframes.

Views of responsible officials and planned corrective action: Refer to the University’s Corrective Action Plan.

Section IV. Findings and Questioned Costs for State Awards

None Reported.

Lenoir-Rhyne University and Subsidiary Corrective Action Plan Year Ended May 31, 2016

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Section II. Findings Relating to the Financial Statement Audit as Required to be Reported in Accordance With Generally Accepted Government Auditing Standards 2016-001: Year-end Journal Entry Review (Significant Deficiency) Finding: In order to present GAAP financial statements for the year ended May 31, 2016, several adjustments were recorded to the original trial balance provided to begin the audit, which resulted in significant changes in assets, liabilities and changes in net assets. Corrective Action Taken or Planned: Normal review of journal entries was negatively impacted by the loss of a key employee in the spring semester. Training the replacement and researching issues took much time away from standard reviews and allowed errors that would normally be caught to slip through. More scrutiny of all journal entries throughout the year will help eliminate this problem. University Official Responsible for Corrective Action: Paul S. Shumaker, Controller Anticipated Completion Date: Completed with ongoing monitoring Section III. Findings and Questioned Costs for Federal Awards 2016-002: Student Status Change Finding: During 2016, there was one instance of a student withdrawal status change that was submitted more than 60 days after the effective date. Out of a sample of 5 withdrawal student status changes (also tested 40 graduate changes, no deviations), one withdrawal record was submitted more than 60 days after the student’s withdrawal became effective. Corrective Action Taken or Planned: The student in question was a late-term withdrawal. In reviewing our processes related to this finding, we see that there is an opportunity for us to add an end-of-term status change report to our existing schedule. This will help ensure that students who change statuses late in the term are reported appropriately. This has been added to our scheduled list of reporting dates, and will be reported at or shortly after the end of each term. University Official Responsible for Corrective Action: Nick Jenkins, Director of Student Financial Aid Anticipated Completion Date: Completed with ongoing monitoring

Lenoir-Rhyne University and Subsidiary Summary Schedule of Prior Audit Findings

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Item 2015-001: Investment Reconciliation (Material Weakness) Criteria: Detail investment statements should agree to the general ledger at May 31, 2015.

Condition: The summary information provided by the third party investment manager to the University contained an investment that was no longer held by the University. The error in the summary was not identified by management and the summary was used to record investment and investment income as of May 31, 2015.

Context: The University engaged an independent third party investment manager to perform certain recordkeeping duties and act as an investment advisor and consultant relating to its investment portfolio. The investment manager provided the University with a year-to-date summary of all investment activity at year end. The University used the summary to record investment activity at year end as part of the year- end close process.

Effect: The error in the summary information and the University’s year-end adjustment overstated investment assets and investment earnings by $3,243,604. Cause: The University used the erroneous summary information to record the year-end investment entry without reconciling the summary information to detailed investment portfolio of assets held.

Recommendation: We recommend the University compare all investment summary activity to the investment detail activity prior to recording any adjustments to ensure the accuracy of the information provided. Views of responsible officials and planned corrective action: This error was the result of an erroneous report from our endowment manager, who has put checks and balances into place to prevent this from happening again. The summary report has been used to book the endowment values for the past 11 years without incident, so this is highly unusual. The delivery to the University of the summary report and the detailed report were more than a month apart, which contributed to the error not being caught by University personnel in a timely fashion. In addition to the manager’s scrutiny, University personnel will compare the summary report and all detailed information more closely to verify the accuracy of the endowment values. Status: Corrective action was taken. 2015-002: Reporting of Pell Payment Data Criteria: Federal regulations require that an institution provide a disbursement record no more than 30 days before a disbursement is to be paid. Additionally, an institution must report student payment data within 30 calendar days after the institution makes a payment. The disbursement record reports the actual disbursement date and the amount of the disbursement. Condition: During 2015, there were Pell disbursement records that were submitted more than 30 days before the disbursement was paid and disbursement records that were reported that did not match the actual disbursement date.

Lenoir-Rhyne University and Subsidiary Summary Schedule of Prior Audit Findings (Continued)

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2015-002: Reporting of Pell Payment Data (Continued) Context: Out of a sample of 45 Pell disbursements tested, we noted one disbursement record that was submitted more than 30 days before the disbursement was paid and the disbursement date reported did not agree to the actual disbursement date. Additionally, we noted one disbursement that was reported within the 30-day requirement but the disbursement date reported did not agree to the actual disbursement date. Effect: Inaccurate disbursement dates were reported to the Common Origination and Disbursement (COD). Cause: Administrative oversight. Questioned costs: None Recommendation: We recommend that the University review the Pell reporting requirements and strengthen its policies and procedures to ensure that Pell data is submitted within the required timeframes and disbursement records reported reflect the actual disbursement date to the student’s account. Views of responsible officials and planned corrective action: In both cases noted, the Student Financial Aid office delayed disbursement due to lack of required documentation to ensure the disbursement’s accuracy. Upon receipt of the required documentation, the disbursements were improperly reported via the COD due to a manual process required in PowerFAIDS. For the 2015-16 award year, PowerFAIDS has implemented a process that date matches the action and disbursement dates to ensure the potential for human error is reduced or eliminated. We will be employing this feature to ensure the disbursement dates are properly reported. Status: Corrective action was taken. 2015-003: Reporting of Direct Loan Payment Data Criteria: Institutions must report all loan disbursements and submit required records to the Direct Loan Servicing System (DLSS) via the COD within 30 days of disbursement. The disbursement record reports the actual disbursement date and the amount of the disbursement. Condition: During 2015, there were Direct Loan disbursement records that were submitted more than 30 days before the disbursement was paid and disbursement records that were reported that did not match the actual disbursement date. Context: Out of a sample of 175 Direct Loan disbursements tested, we noted one disbursement record that was submitted more than 30 days before the disbursement was paid and the disbursement date reported did not agree to the actual disbursement date. Additionally, we noted seven disbursements that were reported within the 30-day requirement but the disbursement date reported did not agree to the actual disbursement date. Effect: Inaccurate disbursement dates were reported to COD. Cause: Administrative oversight. Questioned costs: None

Lenoir-Rhyne University and Subsidiary Summary Schedule of Prior Audit Findings (Continued)

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2015-003: Reporting of Direct Loan Payment Data (Continued) Recommendation: We recommend that the University review the Direct Loan reporting requirements and strengthen its policies and procedures to ensure that Direct Loan data is submitted within the required timeframes and disbursement records reported reflect the actual disbursement date to the student’s account. Views of responsible officials and planned corrective action: In all cases noted, Student Financial Aid office encountered errors in processing the Direct Loans, causing delays to the actual disbursements. Upon resolution of the errors, the disbursements were improperly reported via the COD due to a manual process required in PowerFAIDS. For the 2015-16 award year, PowerFAIDS has implemented a process that date matches the action and disbursement to ensure the potential for human error is reduced or eliminated. We will be employing this feature to ensure the disbursement dates are properly reported. Status: Corrective action was taken. 2015-004: Refunding Unearned Student Financial Aid Criteria: Federal regulations require that if a student withdraws from classes prior to the completion of 60% of a semester, the balance of unearned student financial aid should be refunded within 45 days of the student’s withdrawal date. The unearned amount of Title IV assistance to be returned is calculated by subtracting the amount of Title IV assistance earned by the student from the amount of Title IV aid that was disbursed to the student as of the date of the institution’s determination that the student withdrew. The total number of calendar days in a payment or enrollment period includes all days within the period, except for institutionally scheduled breaks of at least five consecutive calendar days. Condition: During 2015, the University did not correctly calculate refund calculations for a certain term. Institutionally scheduled break of five consecutive days was not excluded from the total number of calendar days in the enrollment period. Cause: Administrative oversight. Questioned costs: Total likely questioned costs and total known questioned costs are $3,019. Recommendation: We recommend that the University review and implement procedures to ensure that refunds are calculated correctly. Views of responsible officials and planned corrective action: The University uses the Return of Title IV Funds on the Web worksheet through Financial Aid Administrator (FAA) access to the Central Processing System (CPS). In setting up the calendar for fall of 2014, the break-in question was omitted and not discovered in our preparation for the award year. We have added a secondary staff member review, to ensure this does not occur in the future. In addition, students affected by this omission were given institutional grants to make up for the amount of the loans that were returned in error. Status: Corrective action was taken.

Lenoir-Rhyne University and Subsidiary Summary Schedule of Prior Audit Findings (Continued)

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State Awards Finding: 2015-005: State Award Eligibility – Disbursement Date Within Requirements (Repeat) Criteria: State regulations require that the institution credit each student’s account within ten days after receipt of funds from the state or within ten days after the beginning date of the term, whichever is later. Condition: During 2015, there was a student who did not receive funds credited to the student’s account timely. Context: Out of a sample of 25 students selected for test work, we noted one student whose funds were not credited to the student’s account within the required timeframe after the receipt of state funds. The delay in posting was due to student’s account being placed in a hold status. As such, the student was ineligible for awards at the time funds were received; however, the funds were not returned to the state agency. Cause: Administrative oversight. Questioned costs: None Recommendation: We recommend that the University strengthen its policies and procedures regarding posting of funds to student accounts. Views of responsible officials and planned corrective action: In the case noted, the Student Financial Aid office delayed disbursement due to lack of required documentation to ensure the disbursement’s accuracy. Upon receipt of the required documentation, the disbursement was made to the student’s account. However, we failed to put a hold on the disbursement via the state grants system prior to its release. We will continue to strengthen our review of students who need to turn in documentation and ensure the state funds are held before being sent to the University. Status: Corrective action was taken.