23 Chapter 3: Financial Audit The school uses the specific identification method to record its allowance for doubtful accounts. Prepaid Expenses Prepaid expenses are amounts paid to vendors or suppliers as of the fiscal year-end prior to receipt of the associated goods or services. Investments Investments of the school consist primarily of endowment investments that are stated at fair value, as determined by quoted market prices, or amounts determined by management if quoted market prices are not available. The net change in the fair value of investments is recognized as a component of investment income or loss. Investments of the school’s endowment funds are combined in investment pools with the university and foundation, unless required by the donor to be separately invested. Individual endowments subscribe to or dispose of units in the pools on the basis of a per unit valuation of the pool fair value. Gains or losses on sales of investments are retained or absorbed by the endowment principal. Cost of securities sold is determined using the first-in, first-out method. The Board of Regents of the university and the Board of Directors of the foundation (collectively, the “boards”) are responsible for management of the school’s endowment investments. The boards establish investment goals and comprehensive guidelines to ensure the preservation of capital and adequate growth and income. The boards and appointed investment managers perform regular monitoring of investment performance. Title to investment securities is vested in the name of the Securities and Exchange Commission registered brokerage firms in New York representing the various investment managers of the university and the foundation. The university’s and foundation’s policies provide for the distribution to the school of up to 5 percent of the preceding year’s endowment fair value. If a donor has not provided specific instructions, state law permits the boards to authorize for expenditure the net appreciation of the investments of the endowment funds. Any net appreciation spent is required to be used for the purposes for which the endowment was established. Capital Assets Capital assets are recorded at cost on the date of acquisition, or if donated, at appraised value on the date of donation. The school’s policy is to capitalize tangible, non-expendable personal property having an This is trial version www.adultpdf.com 24 Chapter 3: Financial Audit estimated useful life of more than one year and an acquisition cost of $5,000 or more per item. Items with acquisition costs under $5,000 are reflected as equipment expenses on the statement of revenues, expenses, and changes in net assets. Depreciation on the school’s capital assets is computed using the straight-line method over the estimated useful lives of the assets. The school’s capital assets are mainly comprised of furniture, fixtures, and equipment with useful lives ranging from three to ten years. Capital assets retired or otherwise disposed of are removed from the appropriate asset and related accumulated depreciation accounts. Gains and losses on disposals are reflected as non-operating income or expense. Certain capital assets held under capital lease are amortized using the straight-line method over the lease term, and the related obligations are reported as liabilities in the statement of net assets. Lease amortization is included in depreciation expense. Land and buildings on which school facilities are located and related infrastructure assets are not reflected in the financial statements of the school, but are reported in the university’s financial statements. Accounts Payable Accounts payable represent the cost of goods or services received that have not been paid for as of year-end. Deferred Revenues Deferred revenues are reported as liabilities on the statement of net assets and include amounts primarily received for grants and contracts that have not yet been earned as of year-end. Due to University of Hawaii Amounts due to the university are comprised of advances made by the university to finance the cost of the school’s extramurally sponsored projects for which funds are received from sponsoring agencies on a cost reimbursement basis. Pay down of this balance is generally recorded simultaneously with the receipt of the school’s outstanding accounts receivable from sponsoring agencies. Net Assets The school’s net assets are classified as follows: Invested in Capital Assets, Net of Related Debt This component of net assets represents the school’s total investment in capital assets, net of accumulated depreciation and outstanding debt obligations related to those capital assets. This is trial version www.adultpdf.com 25 Chapter 3: Financial Audit Restricted Net Assets – Nonexpendable Nonexpendable restricted net assets include endowments and similar type assets that are subject to externally imposed constraints and required to be maintained in perpetuity. Restricted Net Assets – Expendable Expendable restricted net assets include resources whose use is legally or contractually subject to externally imposed constraints. Unrestricted Net Assets Unrestricted net assets represent all other net assets not classified as restricted or invested in capital assets. These resources are derived primarily from student tuition and fees, state appropriations, and gifts. When an expense is incurred for purposes for which both restricted and unrestricted net assets are available, resources are generally applied proportionate to the benefit realized. For instances in which such a determination is not feasible or if there are cost compliance issues, unrestricted resources are applied first. Internal Activities All amounts and account balances resulting from activities occurring among the school, RCUH, foundation, and university have been eliminated from the accompanying financial statements. Management’s Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. All school cash and cash equivalents are held either by the State Treasury or pooled with other university, foundation, or RCUH cash balances. At June 30, 2002, information related to the insurance and collateral of funds deposited with the State Treasury was not available, since such information is determined on a statewide basis and not for individual departments. Cash deposits with the State Treasury are either federally insured or collateralized with obligations of the state or U.S. government. All securities pledged as collateral are held either by the State Treasury or by the State’s fiscal agents in the name of the State. Note 2 - Cash and Cash Equivalents This is trial version www.adultpdf.com 26 Chapter 3: Financial Audit School cash balances held by the university are pooled with other university funds and are either federally insured or covered by collateral held by the state director of finance in the name of the university. School cash balances held by the foundation and RCUH are also pooled with their other cash balances and amounts in excess of federally insured limits are uncollateralized. The school’s cash and cash equivalents at June 30, 2002 are held as follows: At June 30, 2002, the school held cash amounts of $7,270,179 that were subject to externally imposed purpose restrictions and are reported on the statement of net assets as restricted cash and cash equivalents. The composition of accounts receivable at June 30, 2002 is summarized as follows: The school operates the state’s Hyperbaric Treatment Center out of a local hospital. At June 30, 2002, $770,554 of outstanding Hyperbaric Treatment Center receivables due from patients and third party insurance providers were included in nongovernmental accounts receivable; $556,687 of this balance has been outstanding for more than 180 days and is also included in the allowance for doubtful accounts. The school’s total bad debt expense for FY2001-02 of $159,974 was due to the increase in the balance of the allowance for doubtful Hyperbaric Treatment Center accounts receivable from the prior year. Student loans receivable is reported separately on the statement of net assets in the amount of $55,110, net of an allowance for doubtful accounts of $1,050 as of June 30, 2002. The school’s student loan receivable accounts are administered under the foundation. University of Hawaii $ 9,322,927 University of Hawaii Foundation 2,738,880 State Treasury 554,966 Research Corporation of the University of Hawaii 135,486 $ 12,752,259 Note 3 - Receivables Federal government $ 2,622,636 State and local governments 3,413,974 Nongovernmental 2,283,674 $ 8,320,284 Less allowance for doubtful accounts (729,426) Accounts receivable, net $ 7,590,858 This is trial version www.adultpdf.com 27 Chapter 3: Financial Audit Contributions receivable is also reported separately in the statement of net assets in the amount of $251,034 as of June 30, 2002. There was no allowance for doubtful accounts associated with this balance. At June 30, 2002, school endowment investments with fair values of $4,112,174 and $6,371,539 were held in investment pools in the university and the foundation, respectively. Therefore, specific information about the type of investments that comprise the school’s endowment investment balance was not available. The university and foundation’s endowment investment pools at June 30, 2002 were comprised of the following investment types: The cumulative appreciation in fair value of donor-restricted endowments that are available for expenditure amounted to $306,487 at June 30, 2002 and is reflected in restricted expendable net assets at year- end. At June 30, 2002, the school had $235,038 of short-term endowment investments that were held by the foundation outside of the investment pool to comply with donor restrictions. This balance was comprised mainly of investments in domestic equities. During FY2001-02, the school’s endowment investments (including investments bought, sold, and held during the year) depreciated in value by $1,483,114. Capital asset activity for the year ended June 30, 2002 was as follows: Note 4 - Investments Note 5 - Capital Assets University of Hawaii University of Hawaii Foundation Corporate stocks 71% 51% Bonds 13 14 U.S. government obligations 16 9 Other 0 26 100% 100% Beginning Balance Additions Retirements Ending Balance Furniture, fixtures, and equipment $ 4,900,512 $ 833,638 $ (225,918) $ 5,508,232 Less accumulated depreciation (3,517,473) (399,498) 217,887 (3,699,084) Capital assets, net $ 1,383,039 $ 434,140 $ (8,031) $ 1,809,148 This is trial version www.adultpdf.com 28 Chapter 3: Financial Audit Depreciation expense amounted to $381,858 in FY2001-02. The difference of $17,640 between depreciation reported and total additions to accumulated depreciation reflected above is due to the transfer of a fully depreciated asset from another university unit in FY2001-02. The loss on retirement of capital assets amounted to $8,031 in FY2001- 02 and is reflected in the statement of revenues, expenses, and changes in net assets as a non-operating expense. The net capital asset balance at June 30, 2002 includes capital assets held under capital leases with a total net book value of $61,660. Payroll fringe benefit costs related to employee salaries funded from state appropriated general funds are paid directly by the State and not imposed on the school. In FY2001-02, this cost amounted to approximately $2,335,600 and is reflected as fringe benefit expense and included in state appropriation revenue in the statement of revenues, expenses, and changes in net assets. Pension Benefits Substantially all eligible employees of the school are members of the Employees’ Retirement System of the State of Hawaii (ERS), a cost- sharing, multiple-employer, public employee retirement plan. The ERS provides retirement benefits as well as death and disability benefits. Section 88, Hawaii Revised Statutes, establishes and amends benefit provisions. Prior to June 30, 1984, the plan consisted of only a contributory option. In 1984, legislation was enacted to add a new, noncontributory option for members of the ERS who are also covered under social security. Persons employed in positions not covered by Social Security are precluded from the noncontributory option. The noncontributory option provides for reduced benefits and covers most eligible employees hired after June 30, 1984. Employees hired before that date were allowed to continue under the contributory option or to elect the noncontributory option and receive a refund of employee contributions. All benefits vest after five and ten years of credited service under the contributory and noncontributory options, respectively. Most members of the contributory plan are required to contribute 7.8 percent of their salary. The ERS provides basic pension benefits to individuals receiving pensions. Employer contributions to the ERS are comprised of normal cost plus level annual payments required to liquidate the unfunded accrued liability of the ERS. Note 6 - Payroll Fringe Benefit Costs Note 7 - Employee Benefits This is trial version www.adultpdf.com 29 Chapter 3: Financial Audit For the year ended June 30, 2002, total salaries for school employees covered by the ERS and total salaries for all school employees were approximately $27,977,600 and $33,843,300, respectively. The university and school are periodically required to contribute an actuarially determined amount to the ERS. The university and school were not required to contribute to the ERS in FY2001-02. The ERS issues a Comprehensive Annual Financial Report that includes financial statements and required supplementary information, which may be obtained by writing to the Employees’ Retirement System of the State of Hawaii, 210 Merchant Street, Suite 1400, Honolulu, Hawaii, 96813. The following data was obtained from the disclosures contained in the Comprehensive Annual Financial Report for the year ended June 30, 2001: Number of employers as of March 31, 2001: Basis of Accounting The financial statements of the ERS are prepared using the accrual basis of accounting. Employer and member contributions are recognized in the period in which the contributions are due. Benefits and refunds are recognized when due and payable in accordance with the plan’s terms. Method Used to Value Investments Plan investments are reported at fair value. Where appropriate, the fair value includes disposition costs. Short-term investments are reported at cost, which approximates fair value. Securities traded on a national or international exchange are valued at the last reported sales price at current exchange rates. Mortgages are valued on the basis of future principal and interest payments, and are discounted at prevailing interest rates for similar instruments. The fair value of real estate investments and real estate owned are based on independent appraisals and estimated values. Other Benefits All regular employees, with certain exceptions, earn vacation leave at the rate of one and three-quarters working days for each month of service. Employees who are entitled to annual vacation may accumulate for the State 1 Counties 4 Total employers 5 This is trial version www.adultpdf.com 30 Chapter 3: Financial Audit succeeding year or years up to 15 working days of their annual vacation allowance, provided that the total accumulation shall not exceed 90 working days at the end of the calendar year. Accumulated vacation leave, earned but not taken, is reflected as an accrual in the statement of net assets and classified as current or noncurrent based on the estimated payment date. When termination of services takes place, employees are paid for their vacation allowance in a lump sum. Sick leave accumulates at the rate of one and three-quarters working days for each full month of service without limit, but can be taken only in the event of an illness and is not convertible to pay upon termination of employment. Accordingly, accumulated sick leave, earned but not taken, is not reflected as an accrual in the accompanying financial statements. Employees who retire with 60 days of unused sick leave are entitled to three months of service credit in the system. For each additional 20 days or major fraction thereof of unused sick leave they have in excess of 60 days, their service period is increased by one month. The school’s regular employees may enter into deferred compensation arrangements directly with authorized insurance companies or agencies through a payroll deduction plan. Accordingly, the school has no deferred compensation or withholding payable. In addition to providing pension benefits, the state provides certain health care and life insurance benefits to all eligible employees who retire from the school on or after age 62 with at least ten years of service or age 55 with at least 30 years of service under the noncontributory option, and on or after age 55 with at least five years of service under the contributory option. Retirees credited with at least ten years of service, excluding sick leave credit, qualify for free medical insurance premiums; however, retirees with less than ten years must assume a portion of the monthly premiums. All disability retirees who retired after June 30, 1984 with less than ten years of service also qualify for free medical insurance premiums. Free life insurance coverage and dental coverage for dependents under age 19 are also available. Retirees covered by the medical portion of Medicare are eligible to receive a reimbursement of basic medical coverage premiums. Contributions are based upon negotiated collective bargaining agreements, and are funded by the state as accrued. The school’s share of post-retirement health care and life insurance benefits expenses for the year ended June 30, 2002 was approximately $541,150. Capital Leases Capital leases of equipment are recorded at the lower of the present value of the minimum lease payments or the fair market value of the asset at Note 8 - Post- Retirement Health Care and Life Insurance Benefits Note 9 - Lease Obligations This is trial version www.adultpdf.com 31 Chapter 3: Financial Audit acquisition. Interest rates on capitalized leases vary from 10.5 percent to 12.3 percent. Future minimum lease payments as of June 30, 2002 are as follows: Operating Leases The school leases space for certain research and training activities, including a hyperbaric treatment center and a geriatric teaching center. These non-cancelable operating leases expire at various dates through FY2003-04. Future minimum lease payments under these operating leases are as follows: Long-term liability activity for the year ended June 30, 2002 was as follows: By statutory provision, the university prepares a biennium budget for its programs. Budgeted expenditures are derived primarily from Act 259, Session Laws of Hawaii (SLH) 2001, as amended, and from other specific appropriations acts in various Session Laws of Hawaii. Year ending June 30, 2003 $ 21,615 2004 18,205 2005 13,863 2006 10,710 2007 2,741 Total minimum lease payments $ 67,134 Less amount representing interest (12,565) Present value of future lease payments $ 54,569 Year ending June 30, 2003 $ 241,260 2004 90,920 Total minimum lease payments $ 332,180 Note 10 - Long-Term Liabilities Note 11 - State Appropriation Revenue Beginning Balance Additions Reductions Ending Balance Current Portion Accrued vacation $ 1,134,279 $ 516,276 $ (326,372) $ 1,324,183 $ 699,698 Capital lease obligations 21,322 41,522 (8,275) 54,569 15,393 Total long-term liabilities $ 1,155,601 $ 557,798 $ (334,647) $ 1,378,752 $ 715,091 This is trial version www.adultpdf.com 32 Chapter 3: Financial Audit The school’s share of state appropriations amounted to $15,612,246 in FY2001-02, including $1,346,893 allocated by the university specifically for the Office of Public Health Studies. This amount is combined with non-imposed fringe benefits of approximately $2,335,600 and reported as non-operating state appropriation revenue on the statement of revenues, expenses, and changes in net assets. The school purchases commercial insurance directly from an insurance agent for professional medical malpractice coverage. In addition, the school administers the Medical Malpractice Self-Insurance Reserve Fund to fund costs arising from the defense and settlement of malpractice claims. The reserve was established in 1977 by the Hawaii State Legislature as a special fund account. The net assets related to this reserve amounted to $431,768 at June 30, 2002. No expenditures were made out of this reserve in FY2001-02. The state risk pool and university-purchased commercial insurance policies cover school exposure to various risk of loss related to general tort, education-related tort, theft, damage, errors and omissions, injuries to employees, and natural disasters. The school participates in the university’s self-insurance program for unemployment and workers’ compensation claims. In FY2001-02, the school was assessed a premium based on a percentage (1.45 percent and .2 percent for workers’ compensation and unemployment insurance, respectively) of the salaries of covered employees that are compensated for at least 50 percent time. In return, the university assumes the risk of loss for all current and future claims by school employees. In accordance with GASB Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, as the school does not retain the risk of loss, no liability for unpaid claims has been recorded in the accompanying financial statements. Liabilities related to losses are reported when it is probable that the losses have occurred, the amount of those losses can be reasonably estimated, and the risk of loss is retained with the school. No such liabilities have been reported for the school as of June 30, 2002. There have been no reductions in insurance coverage from coverage in prior years or settlements in the past three fiscal years that were in excess of the school’s insurance coverages. An encumbrance system is used by the school to record outstanding purchase orders and other commitments. This system is used for budget control purposes and no expenses or liabilities are recorded in the school’s financial statements until the related goods or services have Note 12 - Commitments and Contingencies This is trial version www.adultpdf.com . days of their annual vacation allowance, provided that the total accumulation shall not exceed 90 working days at the end of the calendar year. Accumulated vacation leave, earned but not taken,. either by the State Treasury or by the State’s fiscal agents in the name of the State. Note 2 - Cash and Cash Equivalents This is trial version www.adultpdf.com 26 Chapter 3: Financial Audit School. yet been earned as of year-end. Due to University of Hawaii Amounts due to the university are comprised of advances made by the university to finance the cost of the school s extramurally sponsored projects