STATE OF GEORGIA DEPARTMENT OF AUDITS AND ACCOUNTS I GEORGIA SOUTHERN UNIVERSITY STATESBORO, GEORGIA REPORT ON AUDIT OF THE FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JUNE 30, 2007 Russell W. Hinton State Auditor GEORGIA SOUTHERN UNIVERSITY - TABLE OF CONTENTS - SECTION I FINANCIAL INDEPENDENT AUDITOR'S COMBINED REPORT ON BASIC FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION REQUIRED SUPPLEMENTARY INFORMATION MANAGEMENT'S DISCUSSION AND ANALYSIS BASIC FINANCIAL STATEMENTS EXHIBITS A STATEMENTOFNETASSETS 2 B STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS 3 C STATEMENT OF CASH FLOWS 4 D NOTES TO THE FINANCIAL STATEMENTS 6 SUPPLEMENTARY INFORMATION SCHEDULES 1 BALANCE SHEET (NON-GAAP BASIS) BUDGET FUND 28 2 BUDGET COMPARISON AND SURPLUS ANALYSIS REPORT (NON-GAAP BASIS) BUDGET FUND 29 3 RECONCILIATION OF SALARIES AND TRAVEL 31 SECTION II CURRENT YEAR FINDINGS AND QUESTIONED COSTS SCHEDULE OF FINDINGS AND QUESTIONED COSTS SECTION I FINANCIAL Russell W. Hinton STATE AUDITOR (404) 858-2174 DEPARTMENT OF AUDITS AND ACCOUNTS 270 Washington Street, S.W., Suite 1-156 Atlanta, Georgia 30334-8400 November 8, 2007 Honorable Sonny Perdue, Governor Members ofthe General Assembly of Georgia Members ofthe Board of Regents of the University System of Georgia and Honorable Bruce F. Grube, President Georgia Southern University INDEPENDENT AUDITOR'S COMBINED REPORT ON BASIC FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION Ladies and Gentlemen: We have audited the accompanying basic financial statements (Exhibits A through D) of Georgia Southern University, an organizational unit of the State of Georgia, as of and for the year ended June 30, 2007. These financial statements are the responsibility of the University's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States ofAmerica. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed in Note 1, the financial statements of Georgia Southern University are intended to present the financial position and changes in financial position and cash flows ofonly that portion of the business-type activities ofthe State of Georgia that is attributable to the transactions ofGeorgia Southern University. They do not purport to, and do not, present fairly the financial position and changes in financial position and cash flows ofthe State ofGeorgia, in conformity with accounting principles generally accepted in the United States of America. 07ARL-62 In our opinion, the basic financial statements referred to above present fairly, in all material respects, the financial position of Georgia Southern University as of June 30, 2007, and its changes in financial position and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Management's Discussion and Analysis is not a required part ofthe basic financial statements but is required supplementary information required by accounting principles generally accepted in the United States ofAmerica. We have applied certain limited procedures, which consisted principally ofinquiries ofmanagement regarding the methods ofmeasurement and presentation ofthis required supplementary information. However, we did not audit this information and express no opinion on it. Our audit was conducted for the purpose offorming an opinion on the basic financial statements of Georgia Southern University taken as a whole. The accompanying supplementary information (Schedules 1 through 3) is presented for purposes ofadditional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. Respectfully submitted, RWH:as 07ARL-62 R ssell W. Hinton, CPA, CGFM State Auditor REQUIRED SUPPLEMENTARY INFORMATION GEORGIA SOUTHERN UNIVERSITY Management's Discussion and Analysis Introduction Georgia Southern University is the largest and most comprehensive center of higher education in the southern half of Georgia. A residential campus of more than 16,500 students, Georgia Southern University is one of the top universities of choice in Georgia for new freshman; every state and 86 nations are represented in the student body. The University's hallmark is a superior undergraduate experience emphasizing academic distinction, excellent teaching, and student success in its eight Colleges: Liberal Arts and Social Sciences, Business Administration, Education, Health and Human Sciences, Jack N. Averitt College of Graduate Studies, Allen E. Paulson College of Science and Technology, College of Information Technology and Jiann-Ping Hsu College of Public Health. Students Faculty {Headcount) Students {FTE) FY2007 FY2006 FY2005 720 16,425 709 16,646 663 16,100 14,962 15,183 14,715 Overview ofthe Financial Statements and Financial Analysis Georgia Southern University is proud to present its financial statements for fiscal year 2007. The emphasis of discussions about these statements will be on current year data. There are three financial statements presented: the Statement of Net Assets; the Statement of Revenues, Expenses and Changes in Net Assets; and the Statement of Cash Flows. This discussion and analysis of the University's financial statements provides an overview of its financial activities for the year. Comparative data is provided for fiscal year 2007 and fiscal year 2006. Statement ofNet Assets The Statement of Net Assets presents the assets, liabilities, and net assets of the University as of the end of the fiscal year. The Statement of Net Assets is a point of time financial statement. The purpose of the Statement of Net Assets is to present to the readers of the financial statements a fiscal snapshot of Georgia Southern University. The Statement of Net Assets presents end-ofyear data concerning Assets (current and noncurrent), Liabilities (current and noncurrent), and Net Assets (assets minus liabilities). The difference between current and noncurrent assets will be discussed in the Notes to the Financial Statements. From the data presented, readers of the Statement of Net Assets are able to determine the assets available to continue the operations of the institution. They are also able to determine how much the institution owes vendors. - 1- Finally, the Statement of Net Assets provides a picture of the net assets (assets minus liabilities) and their availability for expenditure by the institution. Net assets are divided into three major categories. The first category, invested in capital assets, net of debt, provides the institution's equity in property, plant and equipment owned by the institution. The next asset category is restricted net assets, which is divided into two categories, nonexpendable and expendable. The corpus of nonexpendable restricted resources is only available for investment purposes. Expendable restricted net assets are available for expenditure by the institution but must be spent for purposes as determined by donors and/or external entities that have placed time or purpose restrictions on the use of the assets. The final category is unrestricted net assets. Unrestricted net assets are available to the institution for any lawful purpose of the institution. Statement of Net Assets, Condensed June 30, 2007 June 30, 2006 Assets Current Assets Capital Assets, Net Other Assets $ 49,327,838 329,451,662 5,426,013 $ 48,863,255 280,495,747 5,370,814 Total Assets $ 384,205,513 $ 334,729,816 Liabilities Current Liabilities Noncurrent Liabilities $ 19,508,628 115,685,896 $ 17,168,985 76,771,398 Total Liabilities $ 135,194,524 $ 93,940,383 Net Assets Invested in Capital Assets, Net of Debt Restricted - Nonexpendable Restricted - Expendable Unrestricted $ 212,925,169 2,464,884 3,329,191 30,291,745 $ 203,618,389 2,465,814 3,286,534 31,418,696 Total Net Assets $ 249!010!989 $ 240)89A33 The total assets of the institution increased by $49,475,697. A review of the Statement of Net Assets will reveal that the increase was primarily due to an increase of $48,955,915 in the category of Capital Assets, Net. The balance of the increase is mainly in cash and inventories. The total liabilities for the year increased by $41,254,141. The combination of the increase in total assets of$49,475,697 and the increase in total liabilities of $41,254,141 yields an increase in total net assets of $8,221,556. The increase in total net assets is primarily in the category of Invested in Capital Assets, Net of Debt, in the amount of $9,306,780. - ii - Statement ofRevenues, Expenses and Changes in Net Assets Changes in total net assets as presented on the Statement of Net Assets are based on the activity presented in the Statement of Revenues, Expenses and Changes in Net Assets. The purpose of the statement is to present the revenues received by the institution, both operating and nonoperating, and the expenses paid by the institution, operating and nonoperating, and any other revenues, expenses, gains and losses received or spent by the institution. Generally speaking operating revenues are received for providing goods and services to the various customers and constituencies of the institution. Operating expenses are those expenses paid to acquire or produce the goods and services provided in return for the operating revenues, and to carry out the mission of the institution. Nonoperating revenues are revenues received for which goods and services are not provided. For example state appropriations are nonoperating because they are provided by the Legislature to the institution without the Legislature directly receiving commensurate goods and services for those revenues. Statement ofRevenues, Expenses and Changes in Net Assets, Condensed June 30. 2007 June 30, 2006 Operating Revenues Operating Expenses $ 114,822,248 198,378,275 $ 107,604,325 181,147,932 Operating Loss $ -83,556,027 $ -73,543,607 Nonoperating Revenues and Expenses 85,256,447 77,840,958 Income (Loss) Before Other Revenues, Expenses, Gains or Losses $ 1,700,420 $ 4,297,351 Other Revenues, Expenses, Gains or Losses 6,521,136 3,761,934 Increase (Decrease) in Net Assets $ 8,221,556 $ 8,059,285 Net Assets at Beginning of Year 240,789,433 232,730,148 Net Assets at End of Year $ 24210101989 $ 2401789A33 The Statement of Revenues, Expenses and Changes in Net Assets reflects a positive year with an increase in the net assets at the end of the year. Some highlights of the information presented on the Statement of Revenues, Expenses and Changes in Net Assets are as follows: - 111 - Revenue By Source For The Years Ended June 30, 2007 and June 30, 2006 Operating Revenue Tuition and Fees Grants and Contracts Sales and Services of Educational Departments Auxiliary Other Total Operating Revenue Nonoperating Revenue State Appropriations Gifts Investment Income Other Total Nonoperating Revenue Capital Grants and Gifts State Other Total Capital Grants and Gifts Total Revenues June 30, 2007 $ 46,491,392 19,899,194 2,421,972 44,572,971 1,436.719 $ 114,822,248 $ 85,881,056 1,305,679 2,759,922 838,715 $ 90,785,372 $ 5,082,680 1,438.456 $ 6,521,136 $ 212,128,756 June 30. 2006 $ 43,869,787 18,343,148 2,471,413 42,016,302 903,675 $ 107,604,325 $ 79,089,553 1,078,505 1,611,060 $ 81,779,118 $ 2,898,224 863.710 $ 3,761,934 $ 193,145,377 - lV - Expenses (By Functional Classification) For The Years Ended June 30, 2007 and June 30, 2006 June 30, 2007 June 30, 2006 Operating Expenses Instruction Research Public Service Academic Support Student Services Institutional Support Plant Operations and Maintenance Scholarships and Fellowships Auxiliary Enterprises $ 67,691,281 3,556,807 2,848,445 14,844,183 16,973,346 21,409,218 23,696,530 5,797,572 41,560,893 $ 63,814,417 3,627,484 2,836,827 13,443,674 13,555,180 19,394,484 21,337,622 4,364,795 38,773,449 Total Operating Expenses $ 198,378,275 $ 181,147,932 Nonoperating Expenses Interest Expense (Capital Assets) Other Nonoperating Expenses 5,528,925 3,732,211 205,949 Total Expenses $ 203,907,200 $ 185,086.092 Operating revenues increased by $7,217,923 in fiscal year 2007. Tuition and Fees included a 6% increase, with additional revenue increase in Grants and Contracts, Auxiliary and Other categories. The Auxiliary revenue increase of $2,556,669 is a result of the changing environment of residential and general student life on the University's campus. Analysis indicates that students who live on campus and/or become involved in the campus community perform better academically. Institution wide focus on enrollment management has resulted in more students living on campus as well as off-campus students spending more of their out of classroom time on campus. A direct result of these efforts has been increases in student retention rates. Additionally, a by-product of increased activity has resulted in increase sales at campus shops and food service facilities. Housing revenues increased due to opening of a new 776 bed livinglearning housing complex in the fall of 2006. The facility was constructed by the GSU Housing Foundation and is operated by the University under a capital lease agreement. Nonoperating revenues increased by $9,006,254 for the year primarily due to an increase of $6,791,503 in State Appropriations. The compensation and employee benefits category increased by $9,299,229 and primarily affected the Instruction, Academic Support and Student Services categories. The increase reflects merit increases and an increased cost of health insurance for the employees of the institution. -v- Utilities increased by $873,062 during the past year. The increase was primarily associated with utility company rate increases due to increases in fuel costs. Utility cost increases affected the Plant Operations and Maintenance category. Statement ofCash Flows The final statement presented by the Georgia Southern University is the Statement of Cash Flows. The Statement of Cash Flows presents detailed information about the cash activity of the institution during the year. The statement is divided into five parts. The first part deals with operating cash flows and shows the net cash used by the operating activities of the institution. The second section reflects cash flows from noncapital financing activities. This section reflects the cash received and spent for nonoperating, noninvesting, and noncapital financing purposes. The third section deals with cash flows from capital and related financing activities. This section deals with the cash used for the acquisition and construction of capital and related items. The fourth section reflects the cash flows from investing activities and shows the purchases, proceeds, and interest received from investing activities. The fifth section reconciles the net cash used to the operating income or loss reflected on the Statement of Revenues, Expenses and Changes in Net Assets. Cash Flows for the Years Ended June 30, 2007 and June 30, 2006, Condensed June 30, 2007 June 30, 2006 Cash Provided (Used) By: Operating Activities Noncapital Financing Activities Capital and Related Financing Activities Investing Activities $ -66,450,881 87,038,270 -19,315,095 2,181.840 $ -68,764,178 80,179,421 -12,552,226 521.417 Net Change in Cash Cash, Beginning of Year $ 3,454,134 28.440.406 $ -615,566 29,055.972 Cash, End of Year $ 31,894.540 $ 28,440,406 Capital Assets The University had a significant capital asset lease addition in fiscal year 2007. The GSU Housing Foundation, Inc. renovated the RAC (Recreation Activities Complex) and leased the facility to Georgia Southern University beginning August, 2006. Georgia Southern University had two major construction-in-progress capital additions for renovation of two former student residence halls. The residence halls are being converted to office space for new faculty members and to allow for conversion of space in academic buildings to student classroom and lab space. For additional information concerning Capital Assets, see Notes 1, 6, 8, and 10 in the Notes to the Financial Statements. - Vl - Long-Term Liabilities Georgia Southern University had Long-Term Liabilities of $121,149,280 of which $5,463,384 was reflected as current liability at June 30, 2007. For additional information concerning Long-Term Liabilities, see Notes 1 and 8 in the Notes to the Financial Statements. Economic Outlook The University is not aware of any currently known facts, decisions, or conditions that are expected to have a significant effect on the financial position or results of operations during this fiscal year beyond those unknown variations having a global effect on virtually all types of business operations. The University's overall financial position is strong. Even with a minimal increase in funding this year, the University was able to generate an increase in Net Assets. The University anticipates the current fiscal year will be much like last and will maintain a close watch over resources to maintain the University's ability to react to unknown internal and external issues. Dr. Bruce Grube, President Georgia Southern University - Vll - BASIC FINANCIAL STATEMENTS - 1- GEORGIA SOUTHERN UNIVERSITY STATEMENT OF NET ASSETS JUNE 30, 2007 ASSETS Current Assets Cash and Cash Equivalents Short-Term Investments Accounts Receivable, Net (Note 3) Federal Financial Assistance Other Inventories (Note 4) Prepaid Items Total Current Assets Noncurrent Assets Short-Term Investments Investments Notes Receivable Capital Assets, Net (Note 6) Total Noncurrent Assets Total Assets LIABILITIES Current Liabilities Accounts Payable Salaries Payable Contracts Payable Deposits Deferred Revenue (Note 7) Funds Held for Others Lease Purchase Obligations Compensated Absences Other Liabilities Notes and Loans Payable Total Current Liabilities Noncurrent Liabilities Lease Purchase Obligations Compensated Absences Notes and Loans Payable Total Noncurrent Liabilities Total Liabilities NET ASSETS Invested in Capital Assets, Net of Related Debt Restricted for: Nonexpendable Expendable Unrestricted Total Net Assets The notes to the financial statements are an integral part of this statement. -2- EXHIBIT"A" $ 31,894,540 3,353,692 786,029 7,642,840 2,033,315 3,617,422 $ 49,327,838 $ 2,543,589 8,657 2,873,767 329,451,662 $ 334,877,675 $ 384,205,513 $ 1,190,025 584,912 1,576,318 555,300 9,356,878 756,630 2,754,792 2,628,054 25,181 80,538 $ 19,508,628 $ 111,483,065 1,994,733 2,208,098 $ 115,685,896 $ 135,194,524 $ 212,925,169 2,464,884 3,329,191 30,291,745 $ =====2=49='=01=0=,9=89= GEORGIA SOUTHERN UNIVERSITY STATEMENT OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS YEAR ENDED JUNE 30, 2007 OPERATING REVENUES Student Tuition and Fees Less: Scholarship Allowances Grants and Contracts Federal State Other Sales and Services of Educational Departments Rents and Royalties Auxiliary Enterprises Residence Halls Bookstore Food Services Parking/Transportation Health Services Intercollegiate Athletics Other Organizations Other Operating Revenues Total Operating Revenues OPERATING EXPENSES Salaries Faculty Staff Employee Benefits Other Personal Services Travel Scholarships and Fellowships Utilities Supplies and Other Services Depreciation Total Operating Expenses Operating Income (Loss) NONOPERATING REVENUES /EXPENSES) State Appropriations Gifts Interest and Other Investment Income Interest Expense Other Nonoperating Revenues Net Nonoperating Revenues Income (Loss) Before Other Revenues, Expenses, Gains, or Losses Capital Grants and Gifts State Other Total Other Revenues, Expenses, Gains, or Losses Increase (Decrease) in Net Assets Net Assets - Beginning of Year Net Assets - End of Year The notes to the financial statements are an integral part of this statement. -3- EXHIBIT"B" $ 56,540,611 -10,049,219 18,140,149 354,574 1,404,471 2,421,972 43,404 14,644,832 9,820,550 8,647,410 2,239,400 2,589,811 5,919,784 711,184 1393315 $ 114,822,248 $ 42,153,609 55,099,469 26,687,945 463,118 1,956,136 8,225,368 7,726,849 43,213,730 12,852,051 $ 198,378,275 $ -83,556,027 $ 85,881,056 1,305,679 2,759,922 -5,528,925 838 715 $ 85,256,447 $ 1700420 $ 5,082,680 1438456 $ 6 521 136 $ 8,221,556 240,789,433 $ =====2=4=9==,0=10;,;;,9=8=9 GEORGIA SOUTHERN UNIVERSITY STATEMENT OF CASH FLOWS YEAR ENDED JUNE 30, 2007 CASH FLOWS FROM OPERATING ACTIVITIES Tuition and Fees Grants and Contracts Sales and Services of Educational Departments Payments to Suppliers Payments to Employees Payments for Scholarships and Fellowships Loans Issued to Students and Employees Collection of Loans to Students and Employees Auxiliary Enterprise Charges: Residence Halls Bookstore Food Services Parking/Transportation Health Services Intercollegiate Athletics Other Organizations Other Receipts (Payments) Net Cash Provided (Used) by Operating Activities CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES State Appropriations Agency Funds Transactions Gifts and Grants Received for Other than Capital Purposes Other Nonoperating Receipts (Disbursements) Net Cash Flows Provided (Used) by Noncapital Financing Activities CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Capital Grants and Gifts Received Purchases of Capital Assets Principal Paid on Capital Debt and Leases Interest Paid on Capital Debt and Leases Net Cash Provided (Used) by Capital and Related Financing Activities CASH FLOWS FROM INVESTING ACTIVITIES Interest on Investments Purchase of Investments Net Cash Provided (Used) by Investing Activities Net Increase (Decrease) in Cash Cash and Cash Equivalents - Beginning of Year Cash and Cash Equivalents - End of Year EXHIBIT"C" $ 47,532,855 20,037,483 2,421,972 -79,013, 166 -96,751,044 -8,225,368 -645,974 668,858 13,946,365 9,902,143 8,644,801 2,346,145 2,616,737 6,006,389 639,513 3 421 410 $ -66,450,881 $ 85,881,056 -168,647 1,328,410 -2 549 $ 87,038,270 $ 6,510,136 -19,571,450 -1,811,915 -4 441 866 $ -19,315,095 $ 2,759,922 -578,082 $ 2,181,840 $ 3,454,134 28,440,406 $ ===3=-1,.,.89=4=,5=4=0 -4- GEORGIA SOUTHERN UNIVERSITY STATEMENT OF CASH FLOWS YEAR ENDED JUNE 30, 2007 RECONCILIATION OF OPERATING LOSS TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: Operating Income (Loss) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operating Activities Depreciation Change in Assets and Liabilities: Accounts Receivable, Net Inventories Prepaid Items Notes Receivable, Net Accounts Payable Deferred Revenue Other Liabilities Compensated Absences Net Cash Provided (Used) by Operating Activities NONCASH ACTIVITY Fixed Assets Acquired by Incurring Capital Lease Obligations Capitalized Interest Associated with Building (RAC) Gift of Capital Assets Reducing Proceeds of Capital Grants and Gifts EXHIBIT"C" $ -83,556,027 12,852,051 2,288,516 -158,157 -474,969 22,884 878,569 1,158,461 58,184 479 607 $ ==-.6.6.=.4=5=0=,8=8=1 $ ===40='=37=3=,9=9=1 $ ===1,=08=7=,0=5===9 $ ====-=11=0=0=0 The notes to the financial statements are an integral part of this statement. -5- GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT"D" NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Georgia Southern University serves the state and national communities by providing its students with academic instruction that advances fundamental knowledge, and by disseminating knowledge to the people of Georgia and throughout the country. REPORTING ENTITY Georgia Southern University is one of thirty-five (35) State supported member institutions of higher education in Georgia which comprise the University System of Georgia, an organizational unit of the State of Georgia. The accompanying financial statements reflect the operations of Georgia Southern University as a separate reporting entity. The Board of Regents has constitutional authority to govern, control and manage the University System of Georgia. This authority includes but is not limited to the power to designate management, the ability to significantly influence operations, the authority to control institutions' budgets, the power to determine allotments of State funds to member institutions and the authority to prescribe accounting systems and administrative policies for member institutions. Georgia Southern University does not have authority to retain unexpended State appropriations (surplus) for any given fiscal year. Accordingly, Georgia Southern University is considered an organizational unit of the Board of Regents of the University System of Georgia reporting entity for financial reporting purposes because of the significance of its legal, operational, and financial relationships with the Board of Regents as defined in Section 2100 of the Governmental Accounting Standards Board (GASB) Codification of Governmental Accounting and Financial Reporting Standards. Legally separate, tax exempt organizations whose activities primarily support units of the University System of Georgia, which are organizational units of the State of Georgia, are considered potential component units of the State. See Note 16 for additional information. FINANCIAL STATEMENT PRESENTATION In June 1999, the GASB issued Statement No. 34, Basic Financial Statements and Management Discussion and Analysis/or State and Local Governments. This was followed in November 1999 by GASB Statement No. 35, Basic Financial Statements and Management's Discussion and Analysis for Public Colleges and Universities. The State of Georgia implemented GASB Statement No. 34 as of and for the year ended June 30, 2002. As an organizational unit of the State of Georgia, the University was also required to adopt GASB Statements No. 34 and No. 35 as amended by GASB Statements No. 37 and No. 38. The financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) as prescribed by the GASB and are presented as required by these standards to provide a comprehensive, entitywide perspective of the University's assets, liabilities, net assets, revenues, expenses, changes in net assets, cash flows, and replaces the fund group perspective previously required. -6- GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT "D" NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FINANCIAL STATEMENT PRESENTATION Generally Accepted Accounting Principles (GAAP) requires that the reporting of summer school revenues and expenses be between fiscal years rather than in one fiscal year. Due to the lack of materiality, Institutions of the University System of Georgia will continue to report summer revenues and expenses in the year in which the predominant activity takes place. BASIS OF ACCOUNTING For financial reporting purposes, the University is considered a special-purpose government engaged only in business-type activities. Accordingly, the University's financial statements have been presented using the economic resources measurement focus and the accrual basis of accounting, except as noted in the preceding paragraph. Under the accrual basis, revenues are recognized when earned, and expenses are recorded when an obligation has been incurred. All significant intra-University transactions have been eliminated. The University has the option to apply all Financial Accounting Standards Board (FASB) pronouncements issued after November 30, 1989, unless FASB conflicts with GASB. The University has elected to not apply FASB pronouncements issued after the applicable date. CASH AND CASH EQUIVALENTS Cash and Cash Equivalents consist of petty cash, demand deposits and time deposits in authorized financial institutions, and cash management pools that have the general characteristics of demand deposit accounts. SHORT-TERM INVESTMENTS Short-Term Investments consist of investments of 90 days - 13 months. This would include certificates of deposits or other time restricted investments with original maturities of six months or more when purchased. Funds are not readily available and there is a penalty for early withdrawal. INVESTMENTS The University accounts for its investments at fair value in accordance with GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools. Changes in unrealized gain (loss) on the carrying value of investments are reported as a component of investment income in the Statement of Revenues, Expenses and Changes in Net Assets. ACCOUNTS RECEIVABLE Accounts receivable consists of tuition and fees charged to students and auxiliary enterprise services provided to students, faculty and staff, the majority of each residing in the State of Georgia. Accounts receivable also includes amounts due from the Federal government, state and local governments, or private sources, in connection with reimbursement of allowable expenditures made pursuant to the University's grant and contracts. Accounts receivable are recorded net of estimated uncollectible amounts. -7- GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT "D" NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INVENTORIES Consumable supplies are carried at the lower of cost or market on the first-in, first-out ("FIFO") basis. Resale Inventories for Food Services are valued at cost using the average-cost basis. Resale Inventories for Bookstore and other services are valued at cost using the first-in, first-out ("FIFO") basis. NONCURRENTINVESTMENTS Investments that are externally restricted and cannot be used to pay current liabilities are classified as noncurrent assets in the Statement of Net Assets. PREPAID ITEMS Payments made to vendors and local government organizations for services that will benefit periods beyond June 30, 2007, are recorded as prepaid items. CAPITAL ASSETS Capital assets are recorded at cost at the date of acquisition, or fair market value at the date of donation in the case of gifts. For equipment, the University's capitalization policy includes all items with a unit cost of $5,000 or more, and an estimated useful life of greater than one year. Renovations to buildings, infrastructure, and land improvements that exceed $100,000 and significantly increase the value or extend the useful life of the structure are capitalized. Routine repairs and maintenance are charged to operating expense in the year in which the expense was incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 40 to 60 years for buildings, 20 to 25 years for infrastructure and land improvements, 10 years for library books, and 3 to 20 years for equipment. Residual values will generally be 10% of historical costs for infrastructure, buildings and building improvements, and facilities and other improvements. To obtain the total picture of plant additions in the University System, it is necessary to look at the activities of the Georgia State Financing and Investment Commission (GSFIC) - an organization that is external to the System. GSFIC issues bonds for and on behalf of the State of Georgia, pursuant to powers granted to it in the Constitution of the State of Georgia and the Act creating the GSFIC. The bonds so issued constitute direct and general obligations of the State of Georgia, to the payment of which the full faith, credit and taxing power of the State are pledged. For projects managed by GSFIC, the GSFIC retains construction in progress on its books throughout the construction period and transfers the entire project to the University when complete. For projects managed by the University, the University retains construction in progress on its books and is reimbursed by GSFIC. For the year ended June 30, 2007, GSFIC transferred capital additions valued at $11,000 to Georgia Southern University. DEPOSITS Deposits represent good faith deposits from students to reserve housing assignments in a University residence hall. -8- GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT "D" NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DEFERRED REVENUES Deferred revenues include amounts received for tuition and fees and certain auxiliary activities prior to the end of the fiscal year but related to the subsequent accounting period. Deferred revenues also include amounts received from grant and contract sponsors that have not yet been earned. COMPENSATED ABSENCES Employee vacation pay is accrued at year-end for financial statement purposes. The liability and expense incurred are recorded at year-end as compensated absences in the Statement of Net Assets, and as a component of compensation and benefit expense in the Statements of Revenues, Expenses and Changes in Net Assets. Georgia Southern University had accrued liability for compensated absences in the amount of $4,143,180 as of July 1, 2006. For fiscal year 2007, $3,337,691 was earned in compensated absences and employees were paid $2,858,084, for a net increase of $479,607. The ending balance as of June 30, 2007, in accrued liability for compensated absences was $4,622,787. NONCURRENT LIABILITIES Noncurrent liabilities include (1) liabilities that will not be paid within the next fiscal year; (2) capital lease obligations with contractual maturities greater than one year; and (3) other liabilities that, although payable within one year, are to be paid from funds that are classified as noncurrent assets. NET ASSETS The University's net assets are classified as follows: Invested in capital assets, net ofrelated debt: This represents the University's total investment in capital assets, net of outstanding debt obligations related to those capital assets. To the extent debt has been incurred but not yet expended for capital assets, such amounts are not included as a component of invested in capital assets, net of related debt. The term "debt obligations" as used in this definition does not include debt of the GSFIC as discussed previously in Note 1 - Capital Assets section. Restricted net assets - nonexpendable: Nonexpendable restricted net assets consist of endowment and similar type funds in which donors or other outside sources have stipulated, as a condition of the gift instrument, that the principal is to be maintained inviolate and in perpetuity, and invested for the purpose of producing present and future income, which may either be expended or added to principal. The University may accumulate as much of the annual net income of an institutional fund as is prudent under the standard established by Code Section 44-15-7 of Annotated Code of Georgia. Restricted net assets - expendable: Restricted expendable net assets include resources in which the University is legally or contractually obligated to spend resources in accordance with restrictions imposed by external third parties. -9- GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT "D" NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NET ASSETS Expendable Restricted Net Assets include the following: Restricted - E & G and Other Organized Activities Federal Loans Institutional Loans $ 194,731 3,081,207 53,253 Total Restricted Expendable $ 3,329.191 Unrestricted net assets: Unrestricted net assets represent resources derived from student tuition and fees, state appropriations, and sales and services of educational departments and auxiliary enterprises. These resources are used for transactions relating to the educational and general operations of the University, and may be used at the discretion of the governing board to meet current expenses for those purposes, except for unexpended state appropriations (surplus) of $36,797.23. Unexpended state appropriations must be refunded to the Board of Regents of the University System of Georgia, University System Office for remittance to the Office of Treasury and Fiscal Services. These resources also include auxiliary enterprises, which are substantially self-supporting activities that provide services for students, faculty and staff. Unrestricted Net Assets includes the following items which are quasi-restricted by management. R&RReserve Reserve for Encumbrances Reserve for Inventory Other Unrestricted $ 1,724,101 17,389,690 100,000 11,077,954 Total Unrestricted Net Assets $ 30.291.745 When an expense is incurred that can be paid using either restricted or unrestricted resources, the University's policy is to first apply the expense towards unrestricted resources, and then towards restricted resources. INCOME TAXES Georgia Southern University, as a political subdivision of the State of Georgia, is excluded from Federal income taxes under Section 115(1) of the Internal Revenue Code, as amended. CLASSIFICATION OF REVENUES The University has classified its revenues as either operating or nonoperating revenues in the Statement of Revenues, Expenses and Changes in Net Assets according to the following criteria: - 10 - GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT"D" NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CLASSIFICATION OF REVENUES Operating revenues: Operating revenues include activities that have the characteristics of exchange transactions, such as (1) student tuition and fees, net of scholarship allowances, (2) sales and services of auxiliary enterprises, net of scholarship allowances, (3) most Federal, state and local grants and contracts, and (4) interest on institutional student loans. Nonoperating revenues: Nonoperating revenues include activities that have the characteristics of nonexchange transactions, such as gifts and contributions, and other revenue sources that are defined as nonoperating revenues by GASB No. 9, Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting, and GASB No. 34, such as state appropriations and investment income. SCHOLARSHIP ALLOWANCES Student tuition and fee revenues, and certain other revenues from students, are reported at gross with a contra revenue account of scholarship allowances in the Statement of Revenues, Expenses and Changes in Net Assets. Scholarship allowances are the difference between the stated charge for goods and services provided by the University, and the amount that is paid by students and/or third parties making payments on the students' behalf. Certain governmental grants, such as Pell grants, and other Federal, state or nongovernmental programs are recorded as either operating or nonoperating revenues in the University's financial statements. To the extent that revenues from such programs are used to satisfy tuition and fees and other student charges, the University has recorded contra revenue for scholarship allowances. NOTE 2: DEPOSITS AND INVESTMENTS DEPOSITS The custodial credit risk for deposits is the risk that in the event of a bank failure, the University's deposits may not be recovered. Funds belonging to the State of Georgia (and thus the University) cannot be placed in a depository paying interest longer than ten days without the depository providing a surety bond to the State. In lieu of a surety bond, the depository may pledge as collateral any one or more of the following securities as enumerated in the Official Code of Georgia Annotated Section 50-17-59: 1. Bonds, bills, notes, certificates of indebtedness, or other direct obligations of the United States or of the State of Georgia. 2. Bonds, bills, notes, certificates of indebtedness or other obligations of the counties or municipalities of the State of Georgia. 3. Bonds of any public authority created by the laws of the State of Georgia, providing that the statute that created the authority authorized the use of the bonds for this purpose. - 11 - GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT "D" NOTE 2: DEPOSITS AND INVESTMENTS DEPOSITS 4. Industrial revenue bonds and bonds of development authorities created by the laws of the State of Georgia. 5. Bonds, bills, certificates of indebtedness, notes or other obligations of a subsidiary corporation of the United States government, which are fully guaranteed by the United States government both as to principal and interest and debt obligations issued by the Federal Land Bank, the Federal Home Loan Bank, the Federal Intermediate Credit Bank, the Central Bank for Cooperatives, the Farm Credit Banks, the Federal Home Loan Mortgage Association and the Federal National Mortgage Association. 6. Guarantee or insurance of accounts provided by the Federal Deposit Insurance Corporation. The Treasurer of the Board of Regents is responsible for all details relative to furnishing the required depository protection for all units of the University System of Georgia. At June 30, 2007, the carrying value of deposits was $37,440,387 and the bank balance was $40,072,958. Of the University's deposits, $39,472,958 were uninsured. Of these uninsured deposits, $4,997,281 were collateralized with securities held by the financial institution's trust department or agent in the University's name, $34,475,677 were collateralized with securities held by the financial institution, by its trust department or agency, but not in the University's name. INVESTMENTS Georgia Southern University maintains an investment policy which fosters sound and prudent judgment in the management of assets to ensure safety of capital consistent with the fiduciary responsibility each institution has to the citizens of Georgia and which conforms to Board of Regents investment policy. All investments are consistent with donor intent, Board of Regents policy, and applicable Federal and state laws. The University's investments as of June 30, 2007 are presented below. The University held an investment in a life insurance policy as noted below. All other funds are held in either demand or time deposits as described in the Deposit section of Note 2 above. All investments are presented by investment type. Other Investments Life Insurance Policy - Cash Surrender Value $====8'='=6'="'5==7 - 12 - GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT"D" NOTE 3: ACCOUNTS RECEIVABLE Accounts receivable consisted of the following at June 30, 2007: Student Tuition and Fees Auxiliary Enterprises and Other Operating Activities Federal Financial Assistance Other $ 285,723 1,547,925 786,029 5,921,298 Less Allowance for Doubtful Accounts $ 8,540,975 112.106 Net Accounts Receivable $ 8,428.869 NOTE 4: INVENTORIES Inventories consisted of the following at June 30, 2007: Bookstore Food Services Campus Fuel Other $ 1,552,752 361,909 10,043 108,611 Total $ 2,033,315 NOTE 5: NOTES/LOANS RECEIVABLE The Federal Perkins Loan Program (the Program) comprises substantially all of the loans receivable at June 30, 2007. The Program provides for cancellation of a loan at rates of 10% to 30% per year up to a maximum of 100% if the participant complies with certain provisions. The Federal government reimburses the University for amounts cancelled under these provisions. As the University determines that loans are uncollectible and not eligible for reimbursement by the Federal government, the loans are written off and assigned to the U.S. Department of Education. - 13 - GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT "D" NOTE 6: CAPITAL ASSETS Following are the changes in capital assets for the year ended June 30, 2007: Beginning Balance Julx 1, 2006 Additions Reductions Ending Balance June 30, 2007 Capital Assets, Not Being Depreciated: Land Construction Work-In-Progress $ 4,243,945 $ 493,371 $ 4,737,316 4,764,329 16,290,445 $ 5,282,283 15,772,491 Total Capital Assets Not Being Depreciated $ 9,008,274 $ 16,783,816 $ 5,282,283 $ 20,509,807 Capital Assets, Being Depreciated: Infrastructure Building and Building Improvements Facilities and Other Improvements Equipment Capital Leases Library Collections $ 14,063,303 $ 14,063,303 256,615,572 $ 4,788,911 $ 297,000 261,107,483 1,726,693 1,726,693 17,996,401 2,862,747 1,189,128 19,670,020 78,018,313 41,461,050 75,735 119,403,628 33,999,596 1,462,252 34 599 35,427,249 Total Assets Being Depreciated $ 402,419,878 $ 50,574,960 $ 1,596,462 $ 451,398,376 Less: Accumulated Depreciation: Infrastructure Building and Building Improvements Facilities and Other Improvements Equipment Capital Leases Library Collections $ 10,820,138 $ 222,335 $ 11,042,473 72,873,139 5,685,028 $ 113,850 78,444,317 213,305 168,765 382,070 14,259,896 1,494,479 1,130,229 14,624,146 4,848,020 4,058,429 49,257 8,857,192 27,917,907 1,223,015 34,599 29,106,323 Total Accumulated Depreciation $ 130,932,405 $ 12,852,051 $ 1,327,935 $ 142,456,521 Total Capital Assets, Being Depreciated, Net $ 271,487,473 $ 37,722,909 $ 268,527 $ 308,941,855 Capital Assets, Net $ 280.495.747 $ 54.506 725 $ 5.550.8)0 $ 329,45 I 662 NOTE 7: DEFERRED REVENUE Deferred revenue consisted of the following at June 30, 2007: Prepaid Tuition and Fees Other Deferred Revenue $ 8,538,711 818,167 Total $ 9,356,878 - 14 - GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT"D" NOTE 8: LONG-TERM LIABILITIES Long-term liability activity for the year ended June 30, 2007 was as follows: Beginning Balance July 1. 2006 Additions Reductions Ending Balance June 30, 2007 Current Portion Leases Lease Obligations $ 74,512,439 $ 41,461,050 $ 1,735,632 $ 114,237,857 $ 2,754,792 Other Liabilities Compensated Absences Notes and Loans Total Total Long-Term Obligations $ 4,143,180 2,364,919 $ 6,508,099 $ 81.020.538 $ 3,337,691 $ 3,337,691 $ 44.798.741 $ 2,858,084 76,283 $ 2,934,367 $ 4 669 999 $ 4,622,787 2,288,636 $ 6,911,423 $ I21.149.280 $ 2,628,054 80,538 $ 2,708,592 $ 5.463.384 NOTES AND LOANS PAYABLE Included in the total long-term liabilities is a $3,000,000 note payable with the Georgia Education Authority issued in October 1991 for the purpose of financing construction of a student residence hall through the U. S. Department of Education Academic Housing Facility Loan Program. Payments are rendered to GSFIC (Georgia State Financing and Investment Commission) acting as paying agent for the Authority. The note carries an interest rate of 5.50% and is due semi-annually through the year 2025. The outstanding balance at June 30, 2007 is $2,288,636. Annual maturities are as follows: Year Ending June 30: 2008 2009 2010 2011 2012 2013 through 2017 2019 through 2022 2023 through 2025 . PrinciQal $ 80,538 85,028 89,769 94,774 100,058 590,462 774,479 473,528 Interest Total $ 124,783 $ 205,321 120,292 205,320 115,551 205,320 110,546 205,320 105,262 205,320 436,139 1,026,601 252,121 1,026,600 39.772 513,300 $ 2,288.636 $ 1,304.466 $ 3,593.102 NOTE 9: SIGNIFICANT COMMITMENTS The University had significant unearned, outstanding, construction or renovation contracts executed in the amount of $13,245,257 as of June 30, 2007. This amount is not reflected in the accompanying basic financial statements. - 15 - GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT "D" NOTE 10: LEASE OBLIGATIONS Georgia Southern University is obligated under various operating leases for the use of real property (buildings and office facilities) and equipment, and also is obligated under capital leases for the acquisition of real property. CAPITAL LEASES Capital leases are generally payable in installments ranging from monthly to annually and have terms expiring in various years between 2008 and 2031. Expenditures for fiscal year 2007 were $7,135,521 of which $4,312,830 represented interest payments and $1,087,059 capitalized interest. Total principal paid on capital leases was $1,735,632 for the fiscal year ended June 30, 2007. Interest rates range from 4.89 percent to 7.84 percent. The following is a summary of the carrying values of assets held under capital lease at June 30, 2007: Buildings Equipment $ 110,253,156 317,538 Total Assets Held Under Capital Lease $ 110.570.694 Certain capital leases provide for renewal and/or purchase options. Generally purchase options at bargain prices of one dollar are exercisable at the expiration of the lease terms. Georgia Southern University had a capital lease with related entities in the current fiscal year. In October 2002, Georgia Southern University entered into a capital lease of $42,668,051 at 4.89 percent with the Georgia Southern University Housing Foundation, Inc., an affiliated organization, whereby the University leases Buildings (Southern Courtyard and Southern Pines) for a twenty-seven year period that began September 2003 and expires October 2031. The outstanding liability at June 30, 2007, for this capital lease was $39,298,099. Georgia Southern University had a capital lease with related entities in the current fiscal year. In July 2005, Georgia Southern University entered into a capital lease of $2,230,350 at 4.94 percent with the Georgia Southern University Housing Foundation, Inc., an affiliated organization whereby the University leases a Facility (Clements Baseball Stadium) for a twenty-four year period that began August 2005 and expires July 2029. The outstanding liability at June 30, 2007, for this capital lease was $2,132,577. Georgia Southern University had a capital lease with related entities in the current fiscal year. In July 2005, Georgia Southern University entered into a capital lease of $694,056 at 4.94 percent with the Georgia Southern University Housing Foundation, Inc., an affiliated organization whereby the University leases a facility (Athletic Training Center) for a twenty-four year period that began August 2005 and expires July 2029. The outstanding liability at June 30, 2007, for this capital lease was $663,592. - 16 - GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT "D" NOTE 10: LEASE OBLIGATIONS CAPITAL LEASES Georgia Southern University had a capital lease with related entities in the current fiscal year. In July 2005, Georgia Southern University entered into a capital lease of $1,677,441 at 4.94 percent with the Georgia Southern University Housing Foundation, Inc., an affiliated organization whereby the University leases a facility (Soccer Stadium) for a twenty-four year period that began August 2005 and expires July 2029. The outstanding liability at June 30, 2007 for this capital lease was $1,603,463. Georgia Southern University had a capital lease with related entities in the current fiscal year. In July 2005, Georgia Southern University entered into a capital lease of $30,179,998 at 4.94 percent with the Georgia Southern University Housing Foundation, Inc., an affiliated organization whereby the University leases Buildings (Eagle Village) for a twenty-five year period that began August 2005 and expires July 2030. The outstanding liability at June 30, 2007, for this capital lease was $28,938,674. Georgia Southern University had a capital lease with related entities in the current fiscal year. In August 2006, Georgia Southern University entered into a capital lease of $40,264,056 at 4. 73 percent with th(? Georgia Southern University Housing Foundation, Inc., an affiliated organization whereby the University leases Buildings (Recreational Activities Complex-RAC) for a twenty-five year period that began August 2006 and expires July 2031. The outstanding liability at June 30, 2007, for this capital lease was $41,351,115. This lease includes $1,087,059 of capitalized interest. Georgia Southern University also has various capital leases for equipment with an outstanding balance at June 30, 2007 in the amount of $250,337. OPERATING LEASES Georgia Southern University has certain operating leases which provide for renewal options of one year at their fair rental value at the time of renewal. All agreements are cancellable if the State of Georgia does not provide adequate funding, but that is considered a remote possibility. In the normal course of business, operating leases are generally renewed or replaced by other leases. Operating leases are generally payable on a monthly basis. The property under operating leases is for office space, copiers and other small business equipment. In 2007, Georgia Southern University entered into a real property operating lease with an unrelated party, for office space for monthly rentals of $9,232. The agreement contains a renewal option on a year-to-year basis. Under this agreement, the University paid $110,784 in the current year. In 2007, Georgia Southern University entered into a real property operating lease with an unrelated party, for office space for monthly rentals of $767. The agreement contains a renewal option on a year-to-year basis. Under this agreement, the University paid $9,200 in the current year. - 17 - GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT"D" NOTE 10: LEASE OBLIGATIONS OPERATING LEASES In 2007, Georgia Southern University entered into a real property operating lease with an unrelated party, for office space for monthly rentals of $2,500. The agreement contains a renewal option on a year-to-year basis. Under this agreement, the University paid $30,000 in the current year. In 2007, Georgia Southern University entered into a real property operating lease with an unrelated party, for office space for monthly rentals of $875. The agreement contains a renewal option on a year-to-year basis. Under this agreement, the University paid $7,683 in the current year. In 2006, Georgia Southern University entered into a real property operating lease with an unrelated party, for office space for monthly rentals of $19,400. The agreement contains a renewal option on a year-to-year basis. Under this agreement, the University paid $232,800 in the current year. FUTURE COMMITMENTS Future commitments for capital leases (which here and on the Statement of Net Assets include other installment purchase agreements) and for noncancellable operating leases having remaining terms in excess of one year as of June 30, 2007, were as follows: Real Property Capital Operating Leases Leases Year Ending June 30: 2008 2009 2010 2011 2012 2013 through 2017 2018 through 2022 2023 through 2027 2028 through 2031 $ 8,238,067 $ 8,304,731 8,241,369 8,197,905 8,187,878 40,819,371 41,032,381 40,548,690 27,750,914 393,284 Total Minimum Lease Payments $ 191,321,306 $ 393.284 Less: Interest 77,083,449 Principal Outstanding $ 114,237,857 Georgia Southern University's fiscal year 2007 expense for rental of real property and equipment under operating leases was $528,751. - 18 - GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT"D" NOTE 11: RETIREMENT PLANS TEACHERS RETIREMENT SYSTEM OF GEORGIA Plan Description Georgia Southern University participates in the Teachers Retirement System of Georgia (TRS), a cost-sharing multiple-employer defined benefit pension plan established by the Georgia General Assembly. TRS provides retirement allowances and other benefits for plan participants. TRS provides service retirement, disability retirement, and survivor's benefits for its members in accordance with State statute. The Teachers Retirement System of Georgia issues a separate stand alone financial audit report and a copy can be obtained from the TRS offices or from the Georgia Department of Audits and Accounts. Funding Policy Employees of Georgia Southern University who are covered by TRS are required by State statute to contribute 5% of their gross earnings to TRS. Georgia Southern University makes monthly employer contributions to TRS at rates adopted by the TRS Board of Trustees in accordance with State statute and as advised by their independent actuary. For fiscal year 2007, the employer contribution rate was 9.28% for covered employees. Employer contributions for the current fiscal year and the preceding two fiscal years are as follows: Fiscal Year Percentage Contributed Required Contribution 2007 2006 2005 100% 100% 100% $ 4,074,725 $ 3,867,088 $ 3,797,350 EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA Plan Description Georgia Southern University participates in the Employees' Retirement System of Georgia (ERS), a cost-sharing multiple-employer defined benefit pension plan established by the General Assembly of Georgia for the purpose of providing retirement allowances for employees of the State of Georgia. The benefit structure of ERS is defined by State statute and was significantly modified on July 1, 1982. Unless elected otherwise, an employee who currently maintains membership with ERS based upon State employment that started prior to July 1, 1982, is an "old plan" member subject to the plan provisions in effect prior to July 1, 1982. All other members are "new plan" members subject to the modified plan provisions. - 19 - GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT "D" NOTE 11: RETIREMENT PLANS EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA Plan Description Under both the old plan and new plan, members become vested after 10 years of creditable service. A member may retire and receive normal retirement benefits after completion of 10 years of creditable service and attainment of age 60. Additionally, there are certain provisions allowing for retirement after 25 years of service regardless of age. Retirement benefits paid to members are based upon a formula which considers the monthly average of the member's highest twenty-four consecutive calendar months of salary, the number of years of creditable service, and the member's age at retirement. Postretirement cost-of-living adjustments are also made to member's benefits. The normal retirement pension is payable monthly for life; however, options are available for distribution of the member's monthly pension at reduced rates to a designated beneficiary upon the member's death. Death and disability benefits are also available through ERS. In addition, the ERS Board of Trustees created the Supplemental Retirement Benefit Plan (SRBP) effective January 1, 1998. The SRBP was established as a qualified governmental excess benefit plan in accordance with Section 415 of the Internal Revenue Code (IRC) as a portion ofERS. The purpose of SRBP is to provide retirement benefits to employees covered by ERS whose benefits are otherwise limited by IRC 415. The ERS issues a financial report each fiscal year, which may be obtained through ERS. Funding Policy As established by State statute, all full-time employees of the State of Georgia and its political subdivisions, who are not members of other state retirement systems, are eligible to participate in the ERS. Both employer and employee contributions are established by State statute. The University's payroll for the year ended June 30, 2007, for employees covered by ERS was $245,721. The University's total payroll for all employees was $97,253,078. For the year ended June 30, 2007 under the old plan, member contributions consist of 6.5% of annual compensation minus $7.00. Of these member contributions, the employee pays the first 1.5% and the University pays the remainder on behalf of the employee. Under the new plan, member contributions consist solely of 1.5% of annual compensation paid by employee. The University also is required to contribute at a specified percentage of active member payroll determined annually by actuarial valuation for both old and new plans. For the year ended June 30, 2007, the ERS employer contribution rate for the University amounted to 10.41% of covered payroll and included the amounts contributed on behalf of the employees under the old plan referred to above. Employer contributions are also made on amounts paid for accumulated leave to retiring employees. -20- GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT "D" NOTE 11: RETIREMENT PLANS EMPLOYEES' RETIREMENT SYSTEM OF GEORGIA Funding Policy Total contributions to the plan made during fiscal year 2007 amounted to $29,301, of which $25,615 was made by the University and $3,686 was made by employees. These contributions met the requirements of the plan. Actuarial and Trend Information Actuarial and historical trend information is presented in the ERS June 30, 2007 financial report, which may be obtained through ERS. REGENTS RETIREMENT PLAN Plan Description The Regents Retirement Plan, a single-employer defined contribution plan, is an optional retirement plan that was created/established by the Georgia General Assembly in O.C.G.A. 4721-1 et.seq. and is administered by the Board of Regents of the University System of Georgia. O.C.G.A. 47-3-68(a) defines who may participate in the Regents Retirement Plan. An "eligible university system employee" is a faculty member or a principal administrator, as designated by the regulations of the Board of Regents. Under the Regents Retirement Plan, a plan participant may purchase annuity contracts from four approved vendors (AIG-VALIC, American Century, Fidelity, and TIAA-CREF) for the purpose of receiving retirement and death benefits. Benefits depend solely on amounts contributed to the plan plus investment earnings. Benefits are payable to participating employees or their beneficiaries in accordance with the terms of the annuity contracts. Funding Policy Georgia Southern University makes monthly employer contributions for the Regents Retirement Plan at rates adopted by the Teachers Retirement System of Georgia Board of Trustees in accordance with State statute and as advised by their independent actuary. For fiscal year 2007, the employer contribution was 9.66% for the first six months and 8.13% for the last six months of the participating employee's earnable compensation. Employees contribute 5% of their eamable compensation. Amounts attributable to all plan contributions are fully vested and nonforfeitable at all times. Georgia Southern University and the covered employees made the required contributions of $3,518,691 (9.66% or 8.13%) and $1,980,091 (5%), respectively. AIG-VALIC, American Century, Fidelity, and TIAA-CREF have separately issued financial reports which may be obtained through their respective corporate offices. - 21 - GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT "D" NOTE 11: RETIREMENT PLANS GEORGIA DEFINED CONTRIBUTION PLAN Plan Description Georgia Southern University participates in the Georgia Defined Contribution Plan (GDCP) which is a single-employer defined contribution plan established by the General Assembly of Georgia for the purpose of providing retirement coverage for State employees who are temporary, seasonal, and part-time and are not members of a public retirement or pension system. GDCP is administered by the Board of Trustees of the Employees' Retirement System of Georgia. Benefits A member may retire and elect to receive periodic payments after attainment of age 65. The payment will be based upon mortality tables and interest assumptions to be adopted by the Board of Trustees. If a member has less than $3,500 credited to his/her account, the Board of Trustees has the option of requiring a lump sum distribution to the member in lieu of making periodic payments. Upon the death of a member, a lump sum distribution equaling the amount credited to his/her account will be paid to the member's designated beneficiary. Benefit provisions are established by State statute. Contributions Member contributions are seven and one-half percent (7.5%) of gross salary. There are no employer contributions. Contribution rates are established by State statute. Earnings are credited to each member's account in a manner established by the Board of Trustees. Upon termination of employment, the amount of the member's account is refundable upon request by the member. Total contributions made by employees during fiscal year 2007 amounted to $346,641 which represents 7.5% of covered payroll. These contributions met the requirements of the plan. The Georgia Defined Contribution Plan issues a financial report each fiscal year, which may be obtained from the ERS offices. NOTE 12: RISK MANAGEMENT The University System of Georgia offers its employees and retirees access to two different selfinsured healthcare plan options - a PPO/PPO Consumer healthcare plan, and an indemnity healthcare plan. Georgia Southern University and participating employees and retirees pay premiums to either of the self-insured healthcare plan options to access benefits coverage. The respective self-insured healthcare plan options are included in the financial statements of the Board of Regents of the University System of Georgia - University System Office. All units of the University System of Georgia share the risk of loss for claims associated with these plans. The reserves for these two plans are considered to be a self-sustaining risk fund. Both self- - 22 - GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT"D" NOTE 12: RISK MANAGEMENT insured healthcare plan options provide a maximum lifetime benefit of $2,000,000 per person. The Board of Regents has contracted with Blue Cross Blue Shield of Georgia, a wholly owned subsidiary of WellPoint, to serve as the claims administrator for the two self-insured healthcare plan products. In addition to the two different self-insured healthcare plan options offered to the employees of the University System of Georgia, two fully insured HMO healthcare plan options are also offered to System employees. The Department of Administrative Services (DOAS) has the responsibility for the State of Georgia of making and carrying out decisions that will minimize the adverse effects of accidental losses that involve State government assets. The State believes it is more economical to manage its risks internally and set aside assets for claim settlement. Accordingly, DOAS processes claims for risk of loss to which the State is exposed, including general liability, property and casualty, workers' compensation, unemployment compensation, and law enforcement officers' indemnification. Limited amounts of commercial insurance are purchased applicable to property, employee and automobile liability, fidelity and certain other risks. Georgia Southern University, as an organizational unit of the Board of Regents of the University System of Georgia, is part of the State of Georgia reporting entity, and as such, is covered by the State of Georgia risk management program administered by DOAS. Premiums for the risk management program are charged to the various state organizations by DOAS to provide claims servicing and claims payment. A self-insured program of professional liability for its employees was established by the Board of Regents of the University System of Georgia under powers authorized by the Official Code of Georgia Annotated Section 45-9-1. The program insures the employees to the extent that they are not immune from liability against personal liability for damages arising out of the performance of their duties or in any way connected therewith. The program is administered by DOAS as a Self-Insurance Fund. NOTE 13: CONTINGENCIES Amounts received or receivable from grantor agencies are subject to audit and adjustment by grantor agencies. This could result in refunds to the grantor agency for any expenditures that are disallowed under grant terms. The amount of expenditures which may be disallowed by the grantor cannot be determined at this time although Georgia Southern University expects such amounts, if any, to be immaterial to its overall financial position. Litigation, claims and assessments filed against Georgia Southern University (an organizational unit of the Board of Regents of the University System of Georgia), if any, are generally considered to be actions against the State of Georgia. Accordingly, significant litigation, claims and assessments pending against the State of Georgia are disclosed in the State of Georgia Comprehensive Annual Financial Report for the fiscal year ended June 30, 2007. - 23 - GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT "D" NOTE 14: POST-EMPLOYMENT BENEFITS OTHER THAN PENSION BENEFITS Pursuant to the general powers conferred by the Official Code of Georgia Annotated Section 203-31, the Board of Regents of the University System of Georgia has established group health and life insurance programs for regular employees of the University System of Georgia. It is the policy of the Board of Regents to permit employees of the University System of Georgia eligible for retirement or that become permanently and totally disabled to continue as members of the group health and life insurance programs. The policies of the Board of Regents of the University System of Georgia define and delineate who is eligible for these post-employment health and life insurance benefits. Organizational units of the Board of Regents of the University System of Georgia pay the employer portion for group insurance for affected individuals. With regard to life insurance, the employer covers the total cost for $25,000 of basic life insurance. If an individual elects to have supplemental, and/or, dependent life insurance coverage, such costs are borne entirely by the employee. As of June 30, 2007, there were 642 employees who had retired or were disabled that were receiving these post-employment health and life insurance benefits. For the year ended June 30, 2007, Georgia Southern University recognized as incurred $2,702,395 of expenditures, which was net of $1,034,101 of participant contributions. NOTE 15: NATURAL CLASSIFICATIONS WITH FUNCTIONAL CLASSIFICATIONS The University's operating expenses by functional classification for fiscal year 2007 are shown below: -24- GEORGIA SOUTHERN UNIVERSITY NOTES TO THE FINANCIAL STATEMENTS JUNE 30, 2007 EXHIBIT"D" NOTE 15: NATURAL CLASSIFICATIONS WITH FUNCTIONAL CLASSIFICATIONS Natural Classification Salaries Faculty Staff Employee Benefits Other Personal Services Travel Scholarships and Fellowships Utilities Supplies and Other Services Depreciation Total Operating Expenses Instruction Functional Classification Research Public Service Academic Su1mort Student Services $ 40,208,387 8,910,910 11,885,153 1,596 651,516 162,713 365,603 4,917,022 588,381 $ 67691 281 $ 751,773 762,995 155,338 164,548 29,034 6,873 1,650,664 35,582 $ 3 556 807 $ 150,946 1,194,566 258,831 66,112 135,680 19,290 994,599 28,421 $ 2 848 445 $ 1,037,464 7,982,424 2,159,926 794 324,913 92,800 105,030 1,816,314 1,324,518 $ 14 844 183 $ 5,039 9,029,225 2,189,557 4,027 216,241 3,000 216,334 5,184,339 125,584 $ 16 973 346 Natural Classification Salaries Faculty Staff Employee Benefits Other Personal Services Travel Scholarships and Fellowships Utilities Supplies and Other Services Depreciation Total Operating Expenses Institutional Su1mort Functional Classification Plant Operations and Scholarships Auxiliary Maintenance and Fellowshi11s Entemrises Total Operating Ex11enses $ 10,098,571 5,809,410 463,146 178,257 214,210 4,412,168 233,456 $ 21 409 218 $ 6,850,277 2,248,629 -338,875 36,584 4,743,012 3,898,552 6,258,351 $ 23.696.530 $ 5,797,572 $ 5 797 572 $ 10,270,501 1,981,101 332,430 317,965 2,004,569 2,056,497 20,340,072 4,257,758 $ 41 560 893 $ 42,153,609 55,099,469 26,687,945 463,118 1,956,136 8,225,368 7,726,849 43,213,730 12,852,051 $ 198 378 275 NOTE 16: AFFILIATED ORGANIZATIONS In accordance with GASB Statement No. 39, Determining Whether Certain Organizations are Component Units, the Georgia Southern University Foundation, Inc., Georgia Southern University Housing Foundation, Inc., Southern Boosters, Inc. and Georgia Southern University Research and Service Foundation, Inc. are legally separate, tax exempt organizations whose activities primarily support Georgia Southern University. The State Accounting Office has determined component units of the State of Georgia, as required by GASB Statement No. 39, should be assessed in relation to their significance to the State of Georgia. Therefore, the financial statements of these affiliated organizations are not included in these financial statements. Copies of the financial statement for the affiliated organizations may be obtained from Georgia Southern University. Georgia Southern University Housing Foundation, Inc., has been determined significant to the State of Georgia for the year ended June 30, 2007, and as such, is reported as a discretely presented component unit in the Comprehensive Annual Financial Report of the State of Georgia (CAFR). The significant discretely presented component unit issues separate audited financial statements that can be obtained from the Board of Regents of the University System of Georgia. - 25 - (This page left intentionally blank) SUPPLEMENTARY INFORMATION - 27 - GEORGIA SOUTHERN UNIVERSITY BALANCE SHEET - (NON-GMP BASIS) BUDGET FUND YEAR ENDED JUNE 30, 2007 ASSETS Cash and Cash Equivalents Investments Accounts Receivable Federal Other Prepaid Items Inventories Total Assets LIABILITIES AND FUND EQUITY Liabilities Accrued Payroll Accounts Payable Deferred Revenue Total Liabilities Fund Balances Reserved Department Sales and Services Indirect Cost Recoveries Technology Fees Sponsored Funds Uncollectible Accounts Receivable Inventories Unreserved Surplus Total Fund Balances Total Liabilities and Fund Balances SCHEDULE "1" $ 14,174,758.37 1,541,348.94 1,884,797.19 6,946,973.46 3,410,526.75 57,851.73 $ 28,016,256.44 $ 497,890.09 17,866,346.31 7,325,751.58 $ 25,689,987.98 $ 482,637.25 919,367.50 530,784.27 173,362.00 83,320.21 100,000.00 36,797.23 $ 2,326,268.46 $ 28,016,256.44 Actual amounts were prepared on a prescribed basis of accounting that demonstrates compliance with budgetary statutes and regulations of the State of Georgia, which is a comprehensive basis of accounting other than generally accepted accounting principles. - 28- GEORGIA SOUTHERN UNIVERSITY BUDGET COMPARISON AND SURPLUS ANALYSIS REPORT (NON-GAAP BASIS) BUDGET FUND YEAR ENDED JUNE 30, 2007 SCHEDULE "2" REVENUES State Appropriations State General Funds Federal Funds Other Funds Total Revenues EXPENDITURES Research Consortium Public Service/Special Funding Initiatives Teaching Total Expenditures Excess of Funds Available over Expenditures FUND BALANCE JULY 1 Reserved Unreserved ADJUSTMENTS Prior Year Payable/Expenditures Unreserved Fund Balance (Surplus) Returned to Office of Treasury and Fiscal Services Year Ended June 30, 2006 Nonmandatory Transfers FUND BALANCE JUNE 30 BUDGET ACTUAL VARIANCEFAVORABLE {UNFAVORABLE} $ 85,956,889.00 $ 85,956,889.00 $ 21,000,000.00 19,576,035.06 65,424,976.00 61,861,328.87 $ 172,381,865.00 $ 167,394,252.93 $ 0.00 -1,423,964.94 -3,563,647.13 -4,987,612.07 $ 401,197.00 $ 401,197.00 $ 827,825.00 827,825.00 171,152,643.00 166,918,823.11 $ 172,381,865.00 $ 168,147,845.11 $ $ 0.00 $ -753,592.18 $ 0.00 0.00 4,234,019.89 4,234,019.89 -753,592.18 2,043,472.08 75,832.69 21,579.56 -75,832.69 1,014,809.00 $ 2,326,268.46 SUMMARY OF FUND BALANCE Reserved Departmental Sales and Services Indirect Cost Recoveries Technology Fees Sponsored Funds Uncollectible Accounts Receivable Inventories Total Reserved Unreserved Surplus $ 482,637.25 919,367.50 530,784.27 173,362.00 83,320.21 100,000.00 $ 2,289,471.23 36,797.23 Total Fund Balance Actual amounts were prepared on a prescribed basis of accounting that demonstrates compliance with budgetary statutes and regulations of the State of Georgia, which is a comprehensive basis of accounting other than generally accepted accounting principles. -29- $ ==2=,3=26,..,=26.,.8=.4=6= (This page left intentionally blank) GEORGIA SOUTHERN UNIVERSITY RECONCILIATION OF SALARIES AND TRAVEL YEAR ENDED JUNE 30, 2007 SCHEDULE "3" Totals per Annual Supplement Prepaids June 30, 2007 June 30, 2006 Accruals June 30, 2007 June 30, 2006 Compensated Absences June 30, 2007 June 30, 2006 RUX Legal Settlement Adjustments Shared Services on Jointly Staffed Personnel Coastal Georgia Community College Barber, Henry Brock, Cathy Taylor, Brenda Student Assistants East Georgia College Goodman, Timothy Skidaway Institute of Oceanography Alexander, Clark University of Georgia Davidson, Bernard Kadish, Doris SALARIES $ 96,826,345 $ TRAVEL 1,956,136 -2,226,205 2,042,761 584,912 -537,143 4,294,275 -3,848,751 62 33,193 10,216 11,670 5,000 2,691 52,877 500 675 $ 97,253,078 $ ===1,=95=6:!:,1=3=6 - 31 - SECTION II CURRENT YEAR FINDINGS AND QUESTIONED COSTS GEORGIA SOUTHERN UNIVERSITY SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2007 FINANCIAL STATEMENT FINDINGS AND QUESTIONED COSTS No findings were reported. FEDERAL AWARD FINDINGS AND QUESTIONED COSTS CASH MANAGEMENT Excessive Cash Balances Nonmaterial Noncompliance Federal PELL Grant (CFDA 84.063) Federal Direct Loans (CFDA 84.268) Finding Control Number: FA-539-07-01 Condition: The University made a cash draw in advance of immediate needs for the PELL, Direct Loan and Direct PLUS loan programs. The cash on hand exceeded the "excess cash tolerances" established by the U. S. Department of Education resulting in interest earned on excess funds of more than the allowable $250. Criteria: Provisions in 0MB Circular A-110 require institutions to minimize the time elapsing between cash draws ofFederal funds from the Federal government and their disbursement for Federal program purposes. The entity must limit the amount of funds drawn down to the minimum required to meet its immediate needs. Additionally, advances, cash draws, and other receipts of Student Financial Aid funds should be disbursed within three business days. Federal funds not disbursed within three business days are indicative of excess cash. Questioned Cost: $41,481 Information: A review ofcash management for the University disclosed that a draw in July was in advance ofimmediate need resulting in an accumulation ofexcessive cash. Cash draws of Student Financial Aid funds were not disbursed within three business days as required. The University's failure to draw down Federal funds on an as-needed basis resulted in an interest liability being incurred. Cause: The excess cash balance was caused by the University requesting more funds than were immediately needed for the programs. Effect: Interest of $41,481 was earned on these funds. - 1- GEORGIA SOUTHERN UNIVERSITY SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2007 FEDERAL AWARD FINDINGS AND QUESTIONED COSTS CASH MANAGEMENT Excessive Cash Balances Failure to Refund Interest Nonmaterial Noncompliance Federal PELL Grant (CFDA 84.063) Federal Direct Loans (CFDA 84.268) Finding Control Number: FA-539-07-01 Recommendation: The University should review their policies and procedures concerning the timing ofrequesting Federal funds, specifically Student Financial Aid Cluster funds, to ensure that they are adequate to meet cash management objectives. The University should establish appropriate controls to ensure that requests for cash do not exceed the immediate need and that Student Financial Aid is draw down based on the appropriate awards and funds to be disbursed in accordance with the U. S. Department of Education's requirements. The University should contact the U.S. Department of Education regarding the resolution of this finding. -2 -