NOTES TO FINANCIAL STATEMENTS

As of June 30, 1999

Organization and Purpose

The University of Virginia is an agency of the Commonwealth of Virginia and is governed by the University's Board of Visitors. A separate report is prepared for the Commonwealth of Virginia which includes all agencies, boards, commissions, and authorities over which the Commonwealth exercises or has the ability to exercise oversight authority. The University is a component unit of the Commonwealth of Virginia and is included in the general purpose financial statements of the Commonwealth. The University consists of three divisions. The Academic Division and University of Virginia's College at Wise generate and disseminate knowledge in the humanities, arts, scientific, and professional disciplines through instruction, research, and public service. The Medical Center Division provides routine and ancillary patient services through a full service hospital and clinics.

Summary of Significant Accounting Policies

The financial statements of the University have been prepared in accordance with the accounting guidance and reporting practices applicable to colleges and universities, as outlined in the American Institute of Certified Public Accountants ' Industry Audit Guide, Audits of Colleges and Universities. In compliance with the aforementioned literature, the statement of current funds revenues, expenditures, and other changes is a statement of financial activities of current funds related to the respective reporting period. It does not purport to represent the results of operations or net income or loss for the period as would a statement of income or a statement of revenues and expenses. The significant accounting policies followed by the University are summarized below to enhance the usefulness of the financial statements.

Reporting Entity

The financial statements and the accompanying notes of the University include all funds and organizations for which the Board of Visitors has oversight responsibility. There are currently 16 affiliated foundations created and operated in support of the interests of the University. Affiliated foundations are not-for-profit corporations controlled by separate boards of directors and are not included in the basic financial statements of the University.

Condensed financial statements for the following foundations, whose boards include officers of the University, are disclosed in Note 6.

University of Virginia Health Services Foundation, an educational, scientific, and charitable organization established to assist the University in providing hospital and medical care services, medical education programs, medical research, and programs of public charity at the University.

University of Virginia Real Estate Foundation, established to promote, support, and aid the University in matters pertaining to real estate.

Accrual Basis

The financial statements have been prepared on the accrual basis of accounting except for depreciation. The University records gifts and pledges when collected. No value is assigned to art, rare books, and other collections received as gifts.

Fund Accounting

In order to ensure observance of limitations and restrictions placed on the use of resources, the accounts of the University are maintained in accordance with the principles of fund accounting. The accounts relating to specified activities or objectives have been classified into separate funds. Similar funds have been combined into fund groups for financial reporting purposes. Within each fund group, fund balances restricted by outside sources are so indicated and are distinguished from designated funds allocated to specific purposes by action of the Board of Visitors. Externally restricted funds may only be utilized in accordance with the purposes established by the source of such funds and are in contrast with unrestricted funds over which the board retains full control to use in achieving its institutional purposes.

Restricted gifts, grants, contracts, appropriations, endowment

income, and other restricted resources are accounted for in the appropriate restricted funds. Revenues from current restricted funds are recognized when expenditures are incurred for current operating purposes. The excess of restricted receipts over amounts expended for restricted purposes is recognized as a fund balance addition to current restricted funds.

Endowment funds are subject to the restrictions of gift instruments requiring that the principal be invested in perpetuity and that only the resulting income may be utilized. Term endowment funds are similar to endowment funds, except that, upon passage of a stated period of time or the occurrence of a particular event, all or part of the principal may be expended. Quasi-endowment funds have been established by the board for the same purposes as endowment funds, except that any portion of quasi-endowment funds may be expended at the board's discretion.

Medical Center Sales and Services

A significant portion of the Medical Center services is rendered to patients covered by Medicare, Medicaid, or Trigon Blue Cross Blue Shield of Virginia. The Medical Center has entered into contractual agreements with these third parties to accept payment for services in amounts less than scheduled charges. In accordance with these agreements, the difference between the contractual payments due and the Medical Center scheduled billing rates results in contractual adjustments. Contractual adjustments are recorded as deductions from Medical Center revenues in the period in which the related services are rendered.

Certain annual settlements of amounts due for Medical Center services covered by third parties are determined through cost reports which are subject to audit and retroactive adjustment by the third parties. Provisions for possible adjustments of cost reports have been estimated and reæected in the accompanying financial statements. Since the determination of settlements in prior years has been based on reasonable estimation, the difference in any year between the originally estimated amount and the final determination is reported in the year of determination as an adjustment to Medical Center revenues.

Investments

Investments in corporate stocks and marketable bonds are recorded at market value. Certain less marketable investments, principally real estate and private equity investments, are generally carried at estimated values as determined by management. Because of the inherent uncertainty in the use of estimates, values that are based on estimates may differ from the values that would have been used had a ready market existed for the investments. Mortgages held for investment by the endowment fund are recorded at book value representing principal amounts due.

Inventories

Inventories are valued at the lower of cost (generally determined on the weighted average method) or market value.

Plant

Property, plant, equipment, and books (other than rare books) and materials that are part of a catalogued library are stated principally at cost at the date of acquisition, or fair market value at the date of donation in the case of gifts. Maintenance or renovation expenditures of $50,000 or more are capitalized only to the extent that such expenditures prolong the life of the asset, or otherwise enhance its capacity to render service. Consistent with current generally accepted accounting principles for public colleges and universities, depreciation on plant assets is not recorded. The Academic Division capitalizes all equipment with an original cost of $2,000 or more, and with a useful life of at least two years. The Medical Center Division capitalizes all equipment with an original cost of $500 or more and with a useful life of at least two years.

Reclassifications

Certain 1998 activities and balances were reclassified to conform to classifications currently in use.


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