STATE OF ILLINOIS SOUTHERN ILLINOIS UNIVERSITY FINANCIAL AUDIT FOR THE YEAR ENDED JUNE 30, 2004 Performed as Special Assistant Auditors for the Auditor General, State of Illinois _part2 potx

13 Southern Illinois University Notes to Financial Statements June 30, 2004 Note 1 - The financial reporting entity and component unit disclosures Southern Illinois University the "U

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Capital Asset and Debt Administration

Long-term debt activity included the issuance of Series 2004A Certificates of Participation (COPS) on June 17, 2004,

in the par amount of $32,740,000 The COPS were issued to finance, in combination with University funds, the renovation of Morris Library, the construction of a library storage facility, the construction of a Research Park, the replacement of campus signage, the purchase of computer and research equipment, and energy conservation measures, all at Carbondale; the construction of a Pharmacy building and the renovation of the Dental School building, both at Edwardsville; and energy performance measures at the School of Medicine in Springfield

For additional information concerning the University’s Capital Assets and Debt Administration, see Note 5 in the Notes to Financial Statements

Economic Outlook

Fiscal year 2005 appropriations for higher education operations were approved at the same funding level as the fiscal year 2004 original appropriations The Governor and legislative leadership signed a memorandum of understanding stating that there would be no reserve or other spending restrictions imposed by the State on the amounts appropriated

to the Illinois public universities for fiscal year 2005 The State continues to request that public universities contribute toward the cost of group health insurance premiums, a cost previously paid in full by the State on behalf of the universities Southern Illinois University’s portion of the payment for health insurance is approximately $7 million per year

Effective for fiscal year 2005, all public universities in the state of Illinois were required to implement a “guaranteed tuition program” in which charges to enrolling undergraduate resident freshmen students remain constant for four continuous academic years following the initial enrollment The implementation of this program required a hard look

at the budget process to assure that tuition levels approved balanced both operational needs with student affordability Southern Illinois University approved tuition increases for first time resident freshmen of 7.9% at Carbondale and 7.4% at Edwardsville for fall 2005

As state funding has declined, Southern Illinois University will continue to develop and expand its resource base to seek more funding from tuition and fees, grants, contracts, and fund raising activities This is demonstrated in the fiscal year 2005 budget in which, despite level funding levels from the state, there is a projected increase in revenues

of 2.4% As part of the university’s normal budgetary process, 2% of state appropriated funds and tuition income are held as a contingency reserve During fiscal year 2004, Southern Illinois University successfully reduced administrative costs by 27.3% or $19.67 million from the 2002 budget level and will continue to streamline operations, reallocate funds, review priorities, and utilize other efficiency measures into fiscal year 2005

Facts, Decisions or Conditions Significantly Affecting Net Assets

There are no facts, decisions, or conditions significantly affecting net assets other than those items explained in the previous section of this discussion and analysis Please see the notes to the financial statements for additional details and further explanations of the data presented in the other sections of this discussion and analysis The notes are an integral part of the financial statements and should be included as part of any review or analysis

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Southern Illinois University

Statement of Net Assets

June 30, 2004 (with comparative totals for 2003)

2004 2003 (Restated) 2004 2003 ASSETS

Current Assets:

Cash and cash equivalents (Note 3) $ 32,559,288 $ 42,379,832 $ 594,712 $ 1,309,378 Short-term investments (Note 3) 60,470,238 36,831,293 29,082,979 26,763,892 Deposits with University - - 9,895,974 6,690,484

Appropriations receivable from State of Illinois General Revenue 193,411 534,575 -

Appropriations receivable from State of Illinois Capital Development 2,901 429,701 -

Reimbursement due from State Treasurer 2,232,337 10,042,819 -

Accounts receivable, net (Note 6) 27,471,903 32,248,499 11,967,680 10,354,523 Notes receivable, net (Note 6) 5,115,493 4,509,277 678,876

Accrued interest receivable 1,467,335 1,500,971 108,712 102,639 Due from related organizations 2,380,522 1,504,748 508,322 208,551 Inventories 6,159,935 6,600,554 -

Prepaid expenses and other assets 1,250,171 858,835 629,783 815,156 Total Current Assets 139,303,534 137,441,104 53,467,038 46,244,623 Noncurrent Assets: Cash and cash equivalents (Note 3) 3,179,552 1,105,181 48,542 48,570 Long-term investments (Note 3) 100,795,663 90,352,407 76,682,583 61,835,127 Notes receivable, net (Note 6) 14,521,247 14,028,104 29,791 27,040 Prepaid expenses and other assets 4,838,308 2,910,771 13,630,688 7,669,625 Due from related organizations - - 572,914 757,490 Capital assets, net (Note 7) 449,902,411 432,434,427 3,360,759 2,766,819 Total Noncurrent Assets 573,237,181 540,830,890 94,325,277 73,104,671 TOTAL ASSETS 712,540,715 678,271,994 147,792,315 119,349,294 LIABILITIES Current Liabilities: Accounts payable 20,508,322 17,751,983 746,817 913,006 Notes payable (Note 5) 313,939 624,397 308,239 147,670 Accrued interest payable 1,042,741 1,073,497 34,444 22,275 Accrued payroll 7,270,663 6,379,593 2,859,893 2,717,332 Accrued compensated absences (Note 5) 4,224,198 4,604,437 -

Revenue bonds payable (Note 5) 8,142,996 7,347,066 -

Certificates of participation (Note 5) 1,593,513 359,512 -

Liabilities under capitalized leases (Note 5) 1,244,336 1,597,098 -

Annuities payable (Note 5) - - 367,886 361,971 Accrued liability for self-insurance (Notes 4 and 5) 4,214,627 4,504,533 -

Deposits held for University related organizations 9,895,974 6,690,484 -

Deposits held in custody for others (Note 5) 1,197,490 1,078,502 53,341 37,539 Deferred revenue 47,460,922 51,092,228 434,116 362,412 Housing deposits (Note 5) 112,787 111,139 -

Due to related organizations (Note 5) 508,322 206,228 2,380,522 1,507,071 Total Current Liabilities 107,730,830 103,420,697 7,185,258 6,069,276 Noncurrent Liabilities: Notes payable (Note 5) 669,247 983,186 1,204,264 725,075 Accrued compensated absences (Note 5) 40,205,928 42,105,257 -

Revenue bonds payable (Note 5) 139,190,892 143,354,747 1,650,000 1,650,000 Certificates of participation (Note 5) 34,881,856 3,823,317 -

Liabilities under capitalized leases (Note 5) 2,320,329 3,617,796 -

Annuities payable (Note 5) - - 3,629,144 3,480,361 Accrued liability for self-insurance (Notes 4 and 5) 14,565,994 17,287,026 -

Federal loan program contributions refundable (Note 5) 16,642,668 16,301,803 -

Due to related organizations (Note 5) 572,914 757,490 -

Housing deposits (Note 5) 137,850 135,836 -

Other accrued liabilities (Note 5) 191,645 201,677 1,233,026 1,361,784 Deposits held in custody for others (Note 5) - - 1,740,087 67,826 Total Noncurrent Liabilities 249,379,323 228,568,135 9,456,521 7,285,046 TOTAL LIABILITIES 357,110,153 331,988,832 16,641,779 13,354,322 NET ASSETS Invested in capital assets, net of related debt 303,479,541 284,455,612 1,316,952 1,116,819 Restricted for: Nonexpendable 3,780,020 3,009,559 57,610,111 50,129,307 Expendable Quasi-endowment 213,711 251,121 - Scholarships, research, instruction and other 8,693,709 6,805,080 43,272,936 30,268,830 Loans 3,880,665 5,533,816 202,163 127,970 Capital projects and debt service 24,168,223 28,531,472 2,329,006 2,483,168 Unrestricted 11,214,693 17,696,502 26,419,368 21,868,878 TOTAL NET ASSETS $ 355,430,562 $ 346,283,162 $ 131,150,536 $ 105,994,972 The accompanying notes are an integral part of this statement.

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UNIVERSITY UNIVERSITY RELATED ORGANIZATIONS

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Southern Illinois University

Statement of Revenues, Expenses and Changes in Net Assets

For the Year Ended June 30, 2004 (with comparative totals for 2003)

2004 2003 (Restated) 2004 2003 REVENUES

Operating Revenues:

Student Tuition and Fees (net of scholarship allowances of $20,992,469) $ 128,651,935 $ 114,958,280 $ - $

-Federal grants and contracts 37,459,244 33,162,133 -

-State of Illinois grants and contracts 23,713,814 30,086,737 -

-Other government grants and contracts 6,241,787 5,128,571 -

-Private grants and contracts 20,595,461 13,616,055 -

-Sales and services of educational departments 72,907,124 69,202,526 -

-Auxiliary enterprises: Funded debt enterprises (net of scholarship allowances of $4,397,968) 64,090,248 55,176,630 -

-Other auxiliary enterprises (net of scholarship allowances of $939,645) 6,588,766 9,738,334 -

-Loan interest income 325,567 257,961 -

-Other operating revenues 142,519 106,337 64,729,267 54,643,971 Total Operating Revenues 360,716,465 331,433,564 64,729,267 54,643,971 EXPENSES Operating Expenses: Instruction 225,548,481 215,399,317 -

-Research 48,493,944 45,042,557 -

-Public service 52,498,428 53,751,664 -

-Academic support 92,270,967 80,617,219 -

-Student services 47,787,416 42,418,011 -

-Institutional support 58,298,105 57,209,271 74,048,122 67,039,659 Operation and maintenance of plant 59,610,827 59,180,579 -

-Scholarships and fellowships 18,501,136 18,032,631 -

-Depreciation (Note 7) 29,140,624 28,585,677 199,817 180,491 Auxiliary enterprises: Funded debt enterprises 62,597,481 49,676,540 -

-Other auxiliary enterprises 8,040,135 11,370,054 -

-Additional on behalf SURS allocation for unfunded liability (Note 2) 141,111,746

-Provision for doubtful notes receivable (183,894) (233,883) -

-Loan cancellations 77,535 66,435 -

-Loan administrative expenses 196,687 101,981 -

-Total Operating Expenses 843,989,618 661,218,053 74,247,939 67,220,150 Operating Loss (483,273,153) (329,784,489) (9,518,672) (12,576,179) NONOPERATING REVENUES (EXPENSES) State appropriations - General Revenue Fund 213,458,064 195,609,913 -

-State appropriations - Education Assistance Fund - 31,796,200 -

-Gifts and contributions 7,840,550 7,179,972 9,046,021 13,126,155 Investment income (Note 3) 569,096 10,230,629 10,199,109 3,902,223 Grants and contracts 25,512,441 26,884,002 -

-Interest on capital asset-related debt (4,417,034) (4,165,370) (112,043) (125,755) Accretion on bonds payable (3,979,140) (3,884,204) -

-University related organizations (2,291,754) 737,778 -

-Payments on behalf of the university (Note 2) 92,928,477 75,905,748 -

-Additional on behalf SURS allocation for unfunded liability (Note 2) 141,111,746

-Other nonoperating revenues 968,349 1,339,777 6,140,359 2,155,002 Net Nonoperating Revenues 471,700,795 341,634,445 25,273,446 19,057,625 Income (Loss) Before Other Revenues (11,572,358) 11,849,956 15,754,774 6,481,446 Other Revenues: Capital state appropriations 17,072,430 32,796,342 - -Additions to permanent endowments - 555,034 3,587,322 1,246,642 Capital grants and gifts 3,647,328 12,168,173 5,813,468 664,081 Total Other Revenues 20,719,758 45,519,549 9,400,790 1,910,723 Increase in Net Assets 9,147,400 57,369,505 25,155,564 8,392,169 NET ASSETS

Net assets at beginning of year, as previously reported 332,207,010 273,680,561 105,994,972 98,449,682 Restatement of net assets (Note 2) 14,076,152 15,233,096 - (929,179) Activity from inception through June 30, 2002 - - - 82,300 Net assets at beginning of year, as restated 346,283,162 288,913,657 105,994,972 97,602,803 Net Assets at End of Year $ 355,430,562 $ 346,283,162 $ 131,150,536 $ 105,994,972

The accompanying notes are an integral part of this statement.

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UNIVERSITY UNIVERSITY RELATED ORGANIZATIONS

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Southern Illinois University

Statement of Cash Flows

For the Year Ended June 30, 2004 (with comparative totals for 2003)

2004 2003 (Restated) 2004 2003 Cash Flows from Operating Activities

Tuition and fees $ 142,649,900 $ 126,936,367 $ - $

-Grants and contracts 83,132,389 78,825,849 -

-Sales and services of educational activities 71,317,328 61,645,267 -

-Auxiliary enterprise revenues: Funded debt 67,725,505 59,186,295 -

-Other auxiliary 7,582,185 9,925,290 -

-Payments to employees for salaries and benefits (390,034,765) (387,396,443) (20,485,310) (18,006,299) Payments to suppliers (212,749,366) (196,194,950) (41,800,545) (37,378,214) Payments for scholarships and fellowships (44,582,700) (35,843,453) (4,903,564) (3,814,705) Loans issued to students (6,335,126) (1,625,994) -

-Interest earned on loans to students 309,456 254,289 -

-Collection of loans from students 5,406,218 1,249,492 -

-Patient service revenue - - 52,280,282 47,265,381 Other operating receipts 64,139,280 56,773,380 2,504,427 3,037,384 Net cash used by operating activities (211,439,696) (226,264,611) (12,404,710) (8,896,453) Cash Flows from Noncapital Financing Activities State appropriations 213,799,227 229,711,438 -

-Direct lending receipts 120,708,468 99,130,495 -

-Direct lending payments (120,470,794) (99,189,107) -

-Grants and contracts 25,512,441 27,769,412 -

-Government advances for federal loan funds 401,396 293,434 -

-Payments to annuitants - - (317,778) (312,883) Other (3,395,639) (486,874) 2,017,173 273,945 Gifts for other than capital purposes 10,866,902 7,289,902 15,447,218 13,619,835 Net cash provided by noncapital financing activities 247,422,001 264,518,700 17,146,613 13,580,897 Cash Flows from Capital and Related Financing Activities Capital appropriations 18,004,647 21,189,475 -

-Capital gifts received - - 827,768 664,081 Capital grants - 11,220,111 -

-Payments received on capital financing leases - - 232,940 218,415 Retained bond proceeds - 17,020,000 400,000

-Deposit to bond escrow account - (8,391,544) -

-Sale of capital assets 18,000 24,000 -

-Purchases of capital assets (48,622,675) (71,380,888) (281,955) (147,417) Proceeds from long-term debt - - -

-Proceeds from 2004A Certificates of Participation 32,648,520 - -

-Issuance costs paid on new debt issue (434,733) - - -Principal paid on capital debt (7,820,000) (7,160,000) (153,863) (493,311) Interest paid on capital debt (4,189,211) (4,399,182) (96,938) (151,897) Net cash provided (used) by capital and related financing activities (10,395,452) (41,878,028) 927,952 89,871 Cash Flows from Investing Activities

Purchases of investments (104,245,825) (57,060,900) (10,783,125) (9,114,670) Proceeds from sales of investments and maturities 65,610,138 63,376,255 2,155,044 2,127,558 Investment income 5,302,661 8,613,156 2,243,532 2,107,030 Net cash provided (used) by investing activities (33,333,026) 14,928,511 (6,384,549) (4,880,082) Net increase (decrease) in cash (7,746,173) 11,304,572 (714,694) (105,767) Cash and cash equivalents, beginning of the year 43,485,013 32,180,441 1,357,948 1,463,715 Cash and cash equivalents, end of the year $ 35,738,840 $ 43,485,013 $ 643,254 $ 1,357,948

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UNIVERSITY RELATED ORGANIZATIONS

UNIVERSITY

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Southern Illinois University

Statement of Cash Flows (Continued)

For the Year Ended June 30, 2004 (with comparative totals for 2003)

2004 2003 (Restated) 2004 2003 Reconciliation of Operating Loss

to Net Cash Used in Operating Activities

Operating loss $ (483,273,153) $ (329,784,489) $ (9,518,672) $ (12,576,179) Adjustments to reconcile operating loss to net cash

used in operating activities:

Depreciation expense 29,140,624 28,585,677 199,817 180,491 Impairment loss 3,787,837 - - -Amortization expense - - 193,443 -Noncash grants to University - - 1,181,247 1,911,540 Noncash expenditures for the benefit of the University - - 1,301 775,016 Budget expended at University (170,150) (155,801) - -Payments on behalf of the university 234,040,223 75,905,748 - -Change in assets and liabilities:

Accounts receivable (net) 979,183 161,422 (1,205,561) 901,905 Deposits with University - - (177,663) (177,408) Reimbursement due from State Treasurer 7,810,483 810,843 - -Inventories 440,619 (23,853) - -Prepaid expenses (362,677) 535,920 7,604 (7,691) Other assets 111,531 (190,095) (3,667,629) (1,150,996) Accounts payable 3,661,329 (2,243,510) 700,797 1,185,578 Accrued payroll 891,070 452,267 - -Deferred revenue (3,076,212) 1,158,795 (42,634) (11,117) Compensated absences (2,279,568) (2,088,888) - -Deposits held for others (19,195) (247,617) (2,900) 115 Other liabilities (3,007,277) 689,134 16,202 2,737 Due to/from related organizations (114,363) 169,836 (90,062) 69,556 Net cash used in operating activities $ (211,439,696) $ (226,264,611) $ (12,404,710) $ (8,896,453) The accompanying notes are an integral part of this statement.

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UNIVERSITY RELATED ORGANIZATIONS

UNIVERSITY

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Southern Illinois University

Notes to Financial Statements

June 30, 2004

Note 1 - The financial reporting entity and component unit disclosures

Southern Illinois University (the "University"), a component unit of the State of Illinois (the "State"), conducts education, research, public service, and related activities principally at its two campuses One is in Carbondale and includes the School of Medicine in Springfield The other is in Edwardsville and includes the School of Dental Medicine

in Alton and the East St Louis Center The governing body of the University is the Board of Trustees of Southern Illinois University (the "Board") As required by accounting principles generally accepted in the United States of America, these financial statements present the financial position and financial activities of the University (the primary unit) and its component units as well as certain activities and expenditures funded by other State agencies on behalf of the University or its employees The component units discussed below are included in the University's financial reporting entity because of the significance of their financial relationship with the University

The University Related Organizations’ column in the financial statements includes the financial data of the University’s component units which consist of the following seven entities: the Southern Illinois University Foundation (at Carbondale) and the Southern Illinois University at Edwardsville Foundation (the “Foundations”), The Association of Alumni, Former Students and Friends of Southern Illinois University, Incorporated, and The Alumni Association of Southern Illinois University at Edwardsville (the “Alumni Associations”), University Park, Southern Illinois University

at Edwardsville, Inc (“University Park”), Southern Illinois Research Park, Inc., Carbondale, and SIU Physicians & Surgeons, Inc The University’s related organizations are reported in a separate column to emphasize that they are Illinois non-profit organizations legally separate from the University These entities are University Related Organizations as defined under University Guidelines adopted by the State of Illinois Legislative Audit Commission in

1982 and amended in 1997

The Foundations were formed for the purpose of providing fund raising and other assistance to the University in order to attract private gifts to support the University's education, research, and public service goals In this capacity, the Foundations solicit, receive, hold, and administer gifts for the benefit of the University Complete financial statements for the Foundations may be obtained by writing: Southern Illinois University Foundation (at Carbondale), MC 6805,

1235 Douglas, Carbondale, IL 62901-6805 and Southern Illinois University at Edwardsville Foundation, Edwardsville,

IL 62026-1082

The Alumni Associations were formed to promote the general welfare of the University and to encourage and stimulate interest among students, former students, and others in the University's programs In this capacity, the Alumni Associations offer memberships to former students, conduct various activities for students and alumni, and publish periodicals for the benefit of the alumni Complete financial statements for the Alumni Associations may be obtained by writing: The Association of Alumni, Former Students and Friends of Southern Illinois University, Incorporated, MC

6809, Colyer Hall, Carbondale, IL 62901-6809 and The Alumni Association of Southern Illinois University at Edwardsville, Southern Illinois University, Edwardsville, IL 62026-1031

University Park, Southern Illinois University at Edwardsville, Inc was formed for the purpose of providing such management, administrative, and other services as deemed essential to the operation and development of the University Park facility Complete financial statements for the University Park may be obtained by writing: University Park, Southern Illinois University at Edwardsville, Inc., Southern Illinois University, Edwardsville, IL 62026-1333

Southern Illinois Research Park, Inc.was formed to promote high technology and knowledge-based enterprise development within Carbondale and southern Illinois Complete financial statements for the Research Park may be obtained by writing: Southern Illinois Research Park, 150 East Pleasant Hill Road, Carbondale, IL 62901-6891

SIU Physicians & Surgeons, Inc was formed to aid in the education and training of medical students, residents, fellows, and physicians for the delivery of cost-effective, high-quality patient care and the conduct of medical and other scientific investigations Complete financial statements for SIU Physicians & Surgeons, Inc may be obtained by writing: SIU Physicians & Surgeons, Inc., SIU School of Medicine, P.O Box 19606, Springfield, IL 62794-9606

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Note 1 - The financial reporting entity and component unit disclosures – Continued

The University is a component unit of the State of Illinois for financial reporting purposes The financial balances and activities included in these financial statements are, therefore, also included in the State's comprehensive annual financial report

Note 2 - Summary of significant accounting policies

Basis of presentation

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America as prescribed by the Governmental Accounting Standards Board (GASB), including Statement No 35, Basic Financial Statements – and Management’s Discussion and Analysis – for Public Colleges and Universities The University now follows the business-type activity reporting requirements of GASB Statement No 35 that provides a comprehensive, entity-wide perspective of the University’s financial activities and replaces the fund group presentation previously required

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 applicable to public colleges and universities Under the accrual basis, revenues are recognized when earned, and expenses are recorded when an obligation to pay has been incurred All significant intra-agency 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

The accounts of the University's financial reporting entity are still maintained internally in accordance with the principles

of fund accounting Under fund accounting, resources are classified for accounting and reporting purposes into funds according to specified activities or objectives

The preparation of financial statements in conformity with accounting principles generally accepted in the United States

of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities; the disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reporting period Actual results could differ from those estimates

Accounting Change and Restatement of Net Assets

Cougar Village, Edwardsville: The financial statements for fiscal year 2003 have been restated to correct an error in the recording of a major renovation project at the Cougar Village apartment complex at the Edwardsville campus in 2001; the project was expensed rather than capitalized The effect of the restatement was to increase the beginning net assets for 2003 by $15,233,096 Additional depreciation expense totaled $1,156,944 for fiscal year 2003 and has resulted in an increase to the ending net assets invested in capital assets at June 30, 2003, of $14,076,152

Allowance for uncollectibles

The University provides allowances for uncollectible accounts and notes receivable based upon management's best estimate of uncollectible accounts and notes at the statement of net assets date, considering type, age, collection history

of receivables, and any other factors as considered appropriate The University’s accounts receivable and notes receivable are reported net of allowances of $7,790,487 and $2,371,818, respectively, at June 30, 2004

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market with the exception of the Textbook Rental Service at the Edwardsville campus The rental books are recorded at depreciated cost with the related expense reported

as depreciation expense

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Note 2 - Summary of significant accounting policies – Continued

Student Financial Assistance

In fiscal year 1996, the University was accepted to participate in the United States Department of Education Direct Student Loan Program at both campuses For fiscal year 2004, loans under the program amounted to $70,504,454 at the Carbondale campus and $41,181,672 at the Edwardsville campus The University has classified this loan program as Noncash Federal Awards in the Office of Management and Budget (OMB) Circular A-133, Schedule of Expenditures of Federal Awards, Note C in the Compliance Audit Report Accordingly, no revenue or expenditures are included in the financial statements of the University

Capital assets

Capital assets are recorded at cost at the date of acquisition or at the fair market value at the date of donation in the case

of gifts In accordance with accounting principles generally accepted in the United States of America for public colleges and universities, depreciation is computed using the straight-line method over the estimated useful lives of the assets The following month prorate convention is being used, in which no depreciation is recorded in the month of acquisition and an entire month of depreciation is recorded in the month of disposition Capitalization thresholds and useful lives are as follows:

Category Capitalization Threshold Useful Life Land $ - not depreciated Improvements 25,000 15 years Infrastructure 1,000,000 20 years Buildings 100,000 40 years Building improvements 25,000 15 years Equipment and library books 5,000 5-10 years Works of art, historical treasures 5,000 not depreciated

Vehicles and electronic data processing equipment are depreciated over five years Other equipment and books are depreciated over seven years

Revenue and expense recognition

In accordance with GASB Statement No 24, Accounting and Financial Reporting for Certain Grants and Other Financial Assistance, the University reported on-behalf payments of $92,928,477 for fiscal year 2004 for health care and retirement costs These costs are reflected in the Statement of Revenues, Expenses and Changes in Net Assets as nonoperating revenues entitled “Payments on behalf of the University” and as operating expenses under the appropriate functional classifications

Substantially all employees participate in group health insurance plans administered by the State of Illinois The employer contributions to these plans for University employees paid from State appropriations and auxiliary enterprises are paid by the State on behalf of the University On-behalf payments for health care costs totaled $62,208,957 for the year ended June 30, 2004 The employer contributions to these plans for employees paid from other University held funds are paid by the University

On-behalf payments of $30,719,520 for the year ended June 30, 2004, were made for retirement costs In addition, the State Universities Retirement System received a proportionate share of the proceeds from House Bill 3759 (PA 93-002), allocating an additional $1.432 billion to be applied against the unfunded liability This payment was in addition to the regular state appropriation received each year The University’s share of this allocation was $141,111,746 and has been reflected in the Statement of Revenues, Expenses and Changes in Net Assets as nonoperating revenues and as operating expenses entitled “Additional on behalf SURS allocation for unfunded liability.” This allocation is only for the year ended June 30, 2004 No such allocation was made for fiscal year 2003

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Note 2 - Summary of significant accounting policies – Continued

Revenues

The University has classified its revenues as either operating or nonoperating revenues as follows:

Operating Revenues: Operating revenues include activities that have the characteristics of exchange transactions, such as student tuition and fees, sales and services of educational departments, sales and services of auxiliary enterprises, and most grants and contracts Tuition and fees are generally recognized as operating revenues as they are assessed The summer session tuition and fees are allocated between the two fiscal years

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 Statement No 9, Reporting Cash Flows of Proprietary and Nonexpendable Trust Funds and Government Entities that Use Proprietary Fund Accounting, and GASB Statement No 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments, such as state appropriations, investment income, and federal student aid programs Appropriations made to the University from the State of Illinois General Revenue Fund are recognized as nonoperating revenues in the year appropriated to the extent expended Other nonoperating revenues include transactions relating to capital and financing activities, noncapital financing activities, and investing activities

Restricted grant revenues from external sources are recognized to the extent of related expenditures on the accrual basis Expenses

Accrued compensated absences for University personnel are charged to current funds based on earned but unused vacation and sick leave days including the University's share of Social Security and Medicare taxes At June 30, 2004, the University estimates $35,672,206 will be paid from state appropriated accounts funded by the State of Illinois General Revenue Fund and the Income Fund, and $8,757,920 from local funds in subsequent years for a combined total

of $44,430,126

Adoption of New Government Accounting Standards (GASB Statement Nos 40, 41, and 42)

GASB Statement No 40, Deposit and Investment Risk Disclosures, an amendment of GASB Statement No 3, is effective for periods beginning after June 15, 2004 This statement addresses common deposit and investment risks related to credit risk, interest rate risk, and foreign currency risk The University will be required to disclose investments that have fair values that are highly sensitive to changes in interest rates and its deposit and investment policies related to these risks

GASB Statement No 41, Budgetary Comparison Schedules-Perspective Differences-an amendment of GASB Statement

No 34, clarifies the budgetary presentation requirements for governments It is not applicable to the University

GASB Statement No 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries, was established to recognize a reduction in the value of impaired capital assets whenever service utility has declined significantly and unexpectedly and is effective for periods beginning after December 15, 2004 The University has elected earlier application and has reported an impairment loss of $3,787,837 due to mold contamination at the Edwardsville residence halls and $1,860,500 in mold remediation costs reported in maintenance and repairs in fiscal year

2004

Note 3 – Cash and Investments

It is University policy to invest funds in a manner which will provide investment returns and security consistent with good business practices, while meeting the daily cash flow demands of the University and conforming to all statutes governing the investments of funds Illinois Compiled Statutes, specifically the Public Funds Investment Act; the policies of the Board; and covenants provided from the University’s bond issuance activities authorize the University to invest in obligations of the U S Treasury, agencies, and instrumentalities; bank and savings and loan time deposits; corporate bonds, stocks, and commercial paper; repurchase agreements; and money market mutual funds

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