Organization and Purpose | Reporting Entity | Reporting Basis | Basis of Accounting
Cash and Cash Equivalents | Inventories | Investments | Fixed Assets and Depreciation
Deferred Revenue | Deposits Held in Custody for Others | Accrued Compensated Absences
Revenue Recognition | Medical Center Sales and Services | Operating Activities
Restatement of Beginning Net Assets

Notes 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 |14

As of June 30, 2002

Summary of Significant Accounting Policies

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 that 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.

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 nineteen 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 Foundation and Subsidiaries, which includes the University of Virginia Real Estate Foundation, established to promote, support, and aid the University in matters pertaining to real estate, as well as to use and administer gifts, grants, and bequests for the benefit of the University.

Reporting Basis
The accompanying financial statements are presented in accordance with generally accepted accounting principles applicable to governmental colleges and universities as promulgated by the Governmental Accounting Standards Board (GASB) and, for pronouncements issued prior to November 30, 1989, the Financial Accounting Standards Board (FASB). It is the University's policy not to follow FASB standards issued after that date.

In accordance with GASB Statement No. 35, Basic Financial Statements -- and Management's Discussion and Analysis -- for Public Colleges and Universities, as amended by GASB Statement Nos. 37 and 38, the University has elected to report as an entity engaged in business-type activities. Entities engaged in business-type activities are financed in whole or in part by fees charged to external parties for goods and services.

GASB Statement No. 35 establishes standards for external financial reporting for public colleges and universities and requires that resources be classified for accounting and reporting purposes into the following net asset categories:

Invested in capital assets, net of related debt: Capital assets, net of accumulated depreciation and long-term debt attributable to the acquisition, construction, or improvement of these assets.

Restricted: Net assets, either expendable or non-expendable, subject to donor-imposed restrictions stipulating how the resources may be used. Expendable net assets are those that can be satisfied by actions of the University. Non-expendable net assets, consisting of endowments, must be maintained in perpetuity.

Unrestricted: Net assets are those net assets that are not properly classified either as capital assets, net of related debt, or restricted net assets. Unrestricted net assets may be designated for specific purposes by management or may otherwise be limited by contractual agreements with outside parties.

When an expense is incurred that can be paid using either restricted or unrestricted resources, the University's policy is first to apply the expense toward restricted resources, and then toward unrestricted. Restricted funds remain classified as such until restrictions have been satisfied.

Basis of Accounting
The financial statements have been prepared on the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when incurred and measurable, regardless of when the related cash flows take place. Non-exchange transactions, in which the University receives value without directly giving equal value in exchange, include grants, state appropriations, and private donations. On an accrual basis, revenues from these transactions are recognized in the fiscal year in which all eligibility requirements (resource provider conditions) have been satisfied, if measurable and probable of collection. The University does not capitalize works of art or historical treasures that are held for exhibition, education, research, or public service. These collections are neither disposed of for financial gain nor encumbered in any means. Accordingly, such collections are not recognized or capitalized for financial statement purposes.

Cash and Cash Equivalents
In addition to cash on deposit with private bank accounts, petty cash, and undeposited receipts, this classification includes cash on deposit with fiscal agents and short-term investments with the State Treasurer's Cash and Investment Pool (a governmental external investment pool). All other short-term investments are reported as investments.

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

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.

Fixed Assets and Depreciation
Fixed assets are stated at cost at date of acquisition or fair market value at date of donation in the case of gifts. In the case of buildings, the University capitalizes fixed assets that have a value or cost in excess of $50,000 at the date of acquisition and an expected useful life of one or more years. Both the Academic and Medical Center Divisions capitalize moveable equipment at a value or cost of $2,000 or greater and an expected useful life of one or more years. 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.

Depreciation of buildings, of improvements other than buildings, and of infrastructure is provided on a straight-line basis over estimated useful lives ranging from ten to fifty years.

Depreciation of equipment and capitalized software is provided on a straight-line basis over estimated useful lives ranging from three to twenty years.

Depreciation of library books is calculated on a straight-line basis over ten years.

Fixed assets financed with debt proceeds are reported when expenditures are incurred. Projects that have not been completed as of the date of the statement of net assets are classified as Construction in Process. Construction period interest cost in excess of earnings associated with the debt proceeds is capitalized as a component of the fixed asset.

Fixed assets, such as roads, parking lots, sidewalks, and other non-building structures and improvements are capitalized as infrastructure and depreciated accordingly.

In accordance with AICPA Statement of Position 98-1, the University capitalizes computer software developed or obtained for internal use. Capitalization begins at the application development stage, which consists of the design, coding, installation, and testing of the software and interfaces.

Deferred Revenue
Deferred revenue represents revenues collected but not earned as of June 30. This is primarily composed of revenue for student tuition accrued in advance of the semester.

Deposits Held in Custody for Others
The University allows its affiliated foundations to participate in the University's endowment, such that the University invests funds on behalf of the foundations. As such, these funds are liabilities of the University to the foundations, and are reported on the Statement of Net Assets in deposits held in custody for others. At June 30, 2002, these liabilities amounted to $92.7 million of the $133.7 million total of deposits held in custody for others.

Accrued Compensated Absences
The amount of leave earned but not taken by non-faculty salaried employees is recorded as a liability on the statement of net assets. The amount reflects, as of June 30, 2002, all unused vacation leave, sabbatical leave, and the amount payable upon termination under the Commonwealth of Virginia's sick leave payout policy. The applicable share of employer-related taxes payable on the eventual termination payments is also included.

Revenue Recognition
Revenues, as reflected on the Statement of Revenues, Expenses, and Changes in Net Assets, include all exchange and non-exchange transactions earned and in which all eligibility requirements (resource provider conditions) have been satisfied, if measurable and probable of collection.

Student tuition and student auxiliary fees are presented net of scholarships and fellowships applied to student accounts.

Certain auxiliary operations provide goods and services to internal customers. These auxiliary operations include activities such as central stores, the print shop, and other auxiliaries with interdepartmental activities. The net effect of these internal transactions has been eliminated in the Statement of Revenues, Expenses, and Changes in Net Assets to avoid inflating revenues and expenses.

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 that are subject to audit and retroactive adjustment by the third parties. Provisions for possible adjustments of cost reports have been estimated and reflected in the accompanying basic 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.

Operating Activities
The University's policy for defining operating activities is based primarily on an activity's character as an exchange event. Exchange events generally involve payments or receipts for providing or receiving goods and services. With the exception of interest expense, all expense transactions are classified as operating, while some revenue transactions (i.e., state appropriations, gifts, and investment income) are classified as non-operating in accordance with GASB Statement No. 35.

Restatement of Beginning Net Assets
As a result of the implementation of GASB Statement No. 35, the following adjustments have been made to reflect the cumulative effect of this accounting change (in millions):

Fund balances reported at June 30, 2001 $ 3,975 Adjustments:     Accumulated depreciation on capital assets at June 30, 2001, not previously recorded   (868) Infrastructure assets not previously recorded   109 Federal loan program contributions previously recorded as fund balance in loan funds, now recorded as liabilities   (13) Restatement of sponsored programs receivables   (12) Restatement of library assets   (3) Other   1 Beginning net assests at July 1, 2001, as adjusted $ 3,189

Notes

NOTE 1: ENDOWMENT

The major portion of the University's endowment is maintained in a single investment pool named the University Pooled Endowment Fund. The University has adopted and met an investment objective of top-quartile performance, measured by a peer group of thirty-five other endowment funds, over rolling three-year periods. The annual return for the Pooled Endowment Fund was -0.1 percent. This percentage has been computed using realized and unrealized gains and losses and investment income. The rate of inflation plus the average level of spending from endowment income was 5.7 percent.

Virginia statutes prescribe that the Board of Visitors may prudently appropriate for expenditure, for the uses and purposes for which an endowment fund is established, the net realized and unrealized appreciation in the fair value of the assets of an endowment fund over the historic dollar value of the aggregate fund. The University's policy is to retain the endowment realized and unrealized appreciation with the endowment after the spending rule distributions. Exceptions to the retention policy require executive management approval within prescribed annual limits and Board of Visitors approval for amounts in excess of prescribed annual limits. At June 30, 2002, the pooled endowment fund includes restricted nonexpendable net assets of $282 million, restricted expendable net assets of $902 million, unrestricted net assets of $502 million, and life income funds of $33 million.

The Pooled Endowment Fund is pooled using a market value basis, with each individual fund subscribing to or disposing of units (permanent shares) on the basis of the market value per unit at the beginning of the calendar month within which the transaction takes place. A summary of endowment and similar funds at market value follows:

ENDOWMENT AND SIMILAR FUNDS AS OF JUNE 30, 2002 (in thousands) POOLED ENDOWMENT ASSETS* SEPARATELY INVESTED ASSETS TOTAL Mutual and Money Market Funds $ 548,410 $ 3,308 $ 551,718 U.S. Government Securities 243,460 496 243,956 Corporate and Municipal Bonds 5,030 451 5,481 Corporate Notes - - - Common and Preferred Stock 411,489 4,848 416,337 Advances to Foundations (Note 3d) 8,612 30,723 39,335 Real Estate and Other Tangible Property - 330 330 Mortgages 3,297 - 3,297 Private Placement Investments 540,612 - 540,612 Total Assets *Includes $32.5 million of trust assets $ 1,760,910 $ 40,156 $ 1,801,066 Investment Income $ 22,122 $ 6,934 $ 29,056 Realized Net Gain 51,506 1,967 53,473 Unrealized Net Gain/(Loss) (82,970) (347) (83,317)         POOLED ENDOWMENT FUNDS Number of Permanent Shares 707,928     Number of Participating Shares 697,340     Market Value Per Share $ 2,445.67     Earnings Per Share $ 33.77     Distribution Per Share —Class A $ 95.36     Distribution Per Share —Class B $ 134.33

NOTE 2: INVESTMENT RISK

The relative risk associated with the University's financial assets is detailed below.

Cash: All cash of the University is maintained in accounts that are collateralized in accordance with the Virginia Security for Public Deposits Act, Section 2.1-359, et seq., of the Code of Virginia.

Investments: The investment policy goals, objectives, and guidelines are established by the Finance Committee of the Board. The University's cash equivalents and investments are categorized by levels of credit risk as described below:

Category 1--Insured or registered securities or securities held by the University of Virginia or its agent in the University's name.

Category 2--Uninsured and unregistered, with securities held by the counterparty's trust department or agent in the University of Virginia's name. None of the University's investments are classified as category 2 investments.

Category 3--Uninsured and unregistered, with securities held by the counterparty, or by its trust department or agent but not in the University of Virginia's name. None of the University's investments are classified as category 3 investments.

Security Lending: Under authorization of the board of the University of Virginia Investment Management Company, the University of Virginia, through its agent, Deutsche Bank AG New York, lends U.S. government and equity securities to various broker-dealers on a temporary basis for collateral. All security loan agreements are collateralized by readily marketable and liquid securities, loans, or other obligations secured by a lien or similar interest on an asset, thereof totaling at least 102 percent of the market value of the loaned securities. The University of Virginia retains the right to pledge or sell these securities held as collateral at its discretion. All security loans can be terminated on demand by either the University or the borrower, and the average term of the security loans as well as collateral held is less than one week. No securities were on loan as of June 30, 2002. Collateral held for securities lending transactions represents the University's allocated share of cash collateral received and reinvested and securities received for the State Treasury's securities lending program. Information related to the credit risk of these investments and the State Treasury's securities lending program is available on a statewide level in the Commonwealth of Virginia's Comprehensive Annual Financial Report (CAFR).

CATEGORIZATION OF INVESTMENT RISK FOR ASSETS HELD AS OF JUNE 30, 2002 (in thousands)   CATEGORY 1 NON- CATEGORIZED FAIR VALUE COST U.S. Government Securities $ 581,037 - $ 581,037 $ 572,532 Corporate Bonds 33,256 - 33,256 32,987 Corporate Notes - - - - Common and Preferred Stocks 416,337 - 416,337 318,140 Municipal Securities 225 - 225 25 Mutual and Money Market Funds - 589,222 589,222 555,870 Real Estate and Other Tangible Property - 39,665 39,665 39,665 Mortgages - 32,818 32,818 33,091 Private Placement Investments - 540,611 540,611 602,860 Other Intangible Property - 2,374 2,374 2,374 Total $ 1,030,855 $ 1,204,690 $ 2,235,545 $ 2,157,544

Derivative Financial Instruments: Derivative instruments are financial contracts whose values depend on the values of one or more underlying assets, reference rates, or financial indexes. A derivative instrument generally has one or more underlying investment, requires little or no initial net investment, and requires or permits a net settlement. In addition, some traditional securities can have derivative-like characteristics. Examples of common derivatives include, but are not limited to, futures, forwards, options, or swap contracts. Although the contract or notional amount of the derivative is not recorded on the financial statements, all derivative instruments are recognized as either an asset or a liability depending on the rights or obligations of the contract measured at fair value.

The University has indirect exposure to various derivative financial instruments that are used in the normal course of business to enhance returns on investments and manage risk exposure to changes in value due to fluctuations in market conditions. These investments may involve, to varying degrees, elements of credit and market risk in excess of amounts recognized on the financial statements. Credit risk is the possibility that losses may occur from the failure of a counterparty to perform according to the terms of the agreement. The University minimizes the credit (or repayment) risk in its direct derivative instrument by entering into transactions with high-quality counterparties and a legally enforceable master netting agreement. The "net" mark to market exposure represents the netting of the positive and negative exposures with the same counterparty. Market risk arises due to adverse changes in market price, interest rate, and foreign exchange rate fluctuations that may result in a decrease in the market value of a financial investment and/or increases in its funding cost. The University manages market risk by establishing and monitoring limits as to the type and degree of risk that may be undertaken.

Summary of the University's outstanding derivatives at June 30, 2002 (in thousands):

Indirect Derivative Exposure NOTIONAL FAIR VALUE Fair Value Hedge $ 10,159 $ 9,130 Cash Flow Hedge 51,487 (2,185) Foreign Currency Hedge 24,646 (3,668) Not Used for Hedging 2,522 1,932 Total Indirect Derivative Exposure $ 88,814 $ 5,209

NOTE 3: STATEMENT OF NET ASSET DETAILS

a. Accounts receivable
Accounts receivable include the following (in thousands):

Patient Care $ 153,533 Estimated Amounts Due from Third-Party Payors 13,815 Grants and Contracts 20,712 Pledges 16,455 Related Foundation 5,824 Other 22,716 Less Allowance for Doubtful Accounts (77,116) Total $ 155,939

b. Notes receivable
Notes receivable are reported net of the allowance for uncollectible student loans, which amounted to $2.8 million.

c. Pledges
The University recorded $33.9 million in pledges receivable, of which $3.8 million relates to plant construction. These are reported net of the allowance for uncollectible pledges, which amounts to $3.4 million.

d. Advances to foundations
The University advances funds to affiliated foundations to enable the foundations to acquire real property in areas near the University and to enhance foundation operations. Foundations are expected to make principal repayments as funds become available. The Board of Visitors has authorized up to $48 million for advances to the University of Virginia Real Estate Foundation. At June 30, 2002, advances to foundations totaled $39.3 million.

e. Capital assets
Capital assets activity for the year ended June 30, 2002, is summarized as follows (in thousands):

INVESTMENT IN PLANT-CAPITAL ASSETS (in thousands) Beginning Balance Additions Retirements Ending Balance Land $ 31,934 $ 2,642 $ - $ 34,576 Improvements Other Than Buildings 132,603 19,856 - 152,459 Infrastructure 145,390 4,332 - 149,722 Buildings 965,957 115,852 1,972 1,079,837 Equipment 484,699 58,010 40,145 502,564 Software Capitalization 14,366 11,053 - 25,419 Library Books 76,654 4,993 - 81,647 Construction in Process 135,374 116,670 140,557 111,487 Less Accumulated Depreciation 1,986,977 (867,984) 333,408 (98,415) 182,674 (26,760) 2,137,711 (939,639) Total $ 1,118,993 $ 234,993 $ 155,914 $ 1,198,072

Construction in Process additions, in the above table, represent expenditures for new projects net of the amount of capital assets placed in service.

f. Goodwill
On October 1, 1997, the Medical Center acquired from the University of Virginia Health Services Foundation the Medicine Clinical Laboratories in a transaction accounted for as a purchase. Accordingly, $1.8 million was recorded as goodwill and is being amortized over five years.

On May 12, 2000, the Medical Center acquired from Augusta Health Care, Inc., the Kidney Dialysis Assets in a transaction accounted for as a purchase. Accordingly, $987,188 was recorded as goodwill for the purchase of the assets and is being amortized over five years. An additional $800,000 was recorded as goodwill for a Non-Competition Agreement and is being amortized over its ten-year life.

On December 15, 2000, the Medical Center acquired from the University of Virginia Health Services Foundation (HSF) its interest in the Hyperbaric Oxygen Unit. In July 1994, the Medical Center and HSF entered into a Memorandum of Agreement for the purpose of joint purchase and operation of a Hyperbaric Oxygen Unit. The memorandum provided that HSF would own 67 percent interest and the Medical Center would own 33 percent. Accordingly, $1,166,615 was recorded as goodwill for the purchase of the assets and is being amortized over five years.