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Report of Independent Auditors andConsolidated Financial Statements

The Corporation ofGonzaga University

May 31, 2012 and 2011

CONTENTS

PAGE

REPORTOFINDEPENDENTAUDITORS 1‐2

CONSOLIDATEDFINANCIALSTATEMENTS

Consolidatedstatementsoffinancialposition 3

Consolidatedstatementsofactivities 4‐5

Consolidatedstatementsofcashflows 6‐7

Notestoconsolidatedfinancialstatements 8‐37

SUPPLEMENTARYINFORMATION

Unrestrictedoperatingexpensescombinedbynaturalexpenditure 38

1

REPORTOFINDEPENDENTAUDITORS

PresidentandBoardofTrusteesTheCorporationofGonzagaUniversityWehaveauditedtheaccompanyingconsolidatedstatementsoffinancialpositionofTheCorporationofGonzaga University (aWashington nonprofit corporation) (University) as ofMay31, 2012 and 2011,and the related consolidated statementsof activities and cash flows for the years then ended. Theseconsolidated financial statements are the responsibility of the University’s management. Ourresponsibilityistoexpressanopinionontheseconsolidatedfinancialstatementsbasedonouraudits.WeconductedourauditsinaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica.Thosestandardsrequirethatweplanandperformtheauditstoobtainreasonableassuranceabout whether the consolidated financial statements are free of material misstatement. An auditincludes consideration of internal control over financial reporting as a basis for designing auditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheUniversity’sinternalcontroloverfinancialreporting.Accordingly,weexpressnosuchopinion.Anauditalsoincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosures in the consolidated financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall consolidated financialstatementspresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.In our opinion, the consolidated financial statements referred to above present fairly, in allmaterialrespects,thefinancialpositionoftheUniversityasofMay31,2012and2011,andthechangesinitsnetassets and its cash flows for theyears thenended in conformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.

2

REPORTOFINDEPENDENTAUDITORS(continued)

Our audits were conducted for the purpose of forming an opinion on the consolidated financialstatements as a whole. The accompanying supplementary information on page 38 is presented forpurposesofadditionalanalysisandisnotarequiredpartofthebasicconsolidatedfinancialstatements.Such information is the responsibility ofmanagement and is derived fromand relates directly to theunderlying accounting and other records used to prepare the consolidated financial statements. Theinformation has been subjected to the auditing procedures applied in the audit of the consolidatedfinancial statements and certain additional procedures, including comparing and reconciling suchinformation directly to the underlying accounts and the other records used to prepare the financialstatementsorto theconsolidatedfinancialstatementsthemselves,andotheradditionalprocedures inaccordancewithauditingstandardsgenerallyacceptedintheUnitedStatesofAmerica.

Spokane,WashingtonAugust31,2012

3 Seeaccompanyingnotes.

THECORPORATIONOFGONZAGAUNIVERSITYCONSOLIDATEDSTATEMENTSOFFINANCIALPOSITION

2012 2011

Cashandcashequivalents 59,160$ 43,096$Accountsandinterestreceivable,net 11,022 10,845Inventoriesandprepaidexpenses 4,631 6,034Contributionsreceivable,net 10,567 12,555Notesreceivable,net 15,344 15,437Depositswithbondtrustees 13,391 14,068Investments 149,861 153,836Property,plant,andequipment,net 218,114 220,873

Totalassets 482,090$ 476,744$

LIABILITIESAccountsandotherpayables 12,096$ 11,037$Accruedsalaries,taxes,andbenefits 14,912 11,667Deferredrevenues 12,784 15,388Annuityandlifeincomeobligations 3,337 3,339Federalstudentloanprogram 11,074 11,099Obligationunderinterestrateswaps 7,820 3,317Notesandbondspayable 132,101 136,764

Totalliabilities 194,124 192,611

NETASSETSUnrestrictedAvailableforoperations 37,539 28,567Investedinordesignatedforcampusfacilities 84,039 87,767Long‐terminvestment 10,901 12,163

Totalunrestricted 132,479 128,497Temporarilyrestricted 73,333 80,405Permanentlyrestricted 82,154 75,231

Totalnetassets 287,966 284,133

Totalliabilitiesandnetassets 482,090$ 476,744$

LIABILITIESANDNETASSETS

ASSETS

May31,

(inthousands)

4

THECORPORATIONOFGONZAGAUNIVERSITYCONSOLIDATEDSTATEMENTSOFACTIVITIES

UnrestrictedTemporarilyRestricted

PermanentlyRestricted Total

OperatingRevenuesStudenttuitionandfees,net 205,490$ ‐$ ‐$ 205,490$Lessinstitutionalfinancialaid (65,860) ‐ ‐ (65,860)

139,630 ‐ ‐ 139,630

Contributions 3,411 3,846 ‐ 7,257Governmentgrantsandcontracts 2,466 ‐ ‐ 2,466Investmentgainusedforoperations 95 4,119 ‐ 4,214Investmentincomeusedforoperations 232 245 ‐ 477Auxiliaryenterprises 27,420 ‐ ‐ 27,420Organizedactivities 3,417 ‐ ‐ 3,417Othersources 6,073 92 ‐ 6,165

182,744 8,302 ‐ 191,046

Netassetsreleasedfromrestrictions 8,210 (8,210) ‐ ‐

Totaloperatingrevenues 190,954 92 ‐ 191,046

OperatingExpensesInstruction 73,340 ‐ ‐ 73,340Libraries 5,848 ‐ ‐ 5,848Studentservices 10,100 ‐ ‐ 10,100Organizedactivities 18,584 ‐ ‐ 18,584Generaladministrativeandinstitutional 27,675 ‐ ‐ 27,675Operationandmaintenanceofplant 10,305 ‐ ‐ 10,305Scholarshipsandstudentaid 9,564 ‐ ‐ 9,564Auxiliaryenterprises 25,731 ‐ ‐ 25,731

Totaloperatingexpenses 181,147 ‐ ‐ 181,147

Increaseinnetassetsfromoperations 9,807 92 ‐ 9,899

NonoperatingActivitiesContributionsforacquisitionofcapitalassets ‐ 660 ‐ 660Contributionstoendowmentfunds ‐ 50 6,425 6,475Lossondisposalofequipment (13) ‐ ‐ (13)Investment(loss)gain,netofamountsusedforoperations (1,768) (9,499) 137 (11,130)Investmentincome,netofamountsusedforoperations 292 2,065 39 2,396Changeinvalueofinterestrateswap (4,503) ‐ ‐ (4,503)Changeinvalueofsplitinterestagreements ‐ 269 (220) 49Netassetsreleasedfromrestrictions 1,092 (1,092) ‐ ‐Transfers (925) 383 542 ‐

Totalnonoperatingactivities (5,825) (7,164) 6,923 (6,066)

Increase(decrease)innetassets 3,982 (7,072) 6,923 3,833

Netassetsatbeginningofyear 128,497 80,405 75,231 284,133

Netassetsatendofyear 132,479$ 73,333$ 82,154$ 287,966$

(inthousands)YearEndedMay31,2012


THECORPORATIONOFGONZAGAUNIVERSITYCONSOLIDATEDSTATEMENTSOFACTIVITIES



OperatingRevenuesStudenttuitionandfees,net 191,257$ ‐$ ‐$ 191,257$Lessinstitutionalfinancialaid (60,009) ‐ ‐ (60,009)

131,248 ‐ ‐ 131,248

Contributions 2,958 4,733 ‐ 7,691Governmentgrantsandcontracts 2,464 ‐ ‐ 2,464Investmentgainusedforoperations 186 6,061 ‐ 6,247Investmentincomeusedforoperations 518 204 ‐ 722Auxiliaryenterprises 27,557 ‐ ‐ 27,557Organizedactivities 3,064 ‐ ‐ 3,064Othersources 7,007 ‐ ‐ 7,007

175,002 10,998 ‐ 186,000

Netassetsreleasedfromrestrictions 9,730 (9,730) ‐ ‐

Totaloperatingrevenues 184,732 1,268 ‐ 186,000

OperatingExpensesInstruction 68,876 ‐ ‐ 68,876Libraries 5,860 ‐ ‐ 5,860Studentservices 9,627 ‐ ‐ 9,627Organizedactivities 17,166 ‐ ‐ 17,166Generaladministrativeandinstitutional 25,714 ‐ ‐ 25,714Operationandmaintenanceofplant 10,360 ‐ ‐ 10,360Scholarshipsandstudentaid 9,950 ‐ ‐ 9,950Auxiliaryenterprises 25,321 ‐ ‐ 25,321

Totaloperatingexpenses 172,874 ‐ ‐ 172,874

Increaseinnetassetsfromoperations 11,858 1,268 ‐ 13,126

NonoperatingActivitiesContributionsforacquisitionofcapitalassets ‐ 667 ‐ 667Contributionstoendowmentfunds ‐ 63 3,588 3,651Gainondisposalofequipment 9 ‐ ‐ 9Investmentgain,netofamountsusedforoperations 3,580 13,321 230 17,131Investmentincome,netofamountsusedforoperations 257 1,816 52 2,125Changeinvalueofinterestrateswap (587) ‐ ‐ (587)Changeinvalueofsplitinterestagreements ‐ 508 232 740Netassetsreleasedfromrestrictions 2,990 (2,990) ‐ ‐Transfers (533) 1,048 (515) ‐

Totalnonoperatingactivities 5,716 14,433 3,587 23,736

Increaseinnetassets 17,574 15,701 3,587 36,862

Netassetsatbeginningofyear 110,923 64,704 71,644 247,271

Netassetsatendofyear 128,497$ 80,405$ 75,231$ 284,133$

(inthousands)YearEndedMay31,2011

6

THECORPORATIONOFGONZAGAUNIVERSITYCONSOLIDATEDSTATEMENTSOFCASHFLOWS

2012 2011

CASHFLOWSFROMOPERATINGACTIVITIESIncreaseinnetassets 3,833$ 36,862$AdjustmentstoreconcileincreaseinnetassetstonetcashfromoperatingactivitiesDepreciation 8,769 8,870Amortizationofbondissuecosts 176 195Forgivenessandwrite‐offsofnotesreceivable 175 270Recoveryofuncollectiblereceivables (83) (141)Loss(gain)ondisposaloffixedassets 13 (9)Contributionsrestrictedforlong‐terminvestments (6,475) (3,651)Giftsofequipmentandart (49) (122)Giftsofinvestments (1,948) (207)Interestanddividendsrestrictedforlong‐terminvestment (2,873) (2,847)Netrealizedandunrealizedloss(gain)onlong‐terminvestments 6,916 (23,378)Changeinunrealizedgainonforeignexchangecontracts ‐ (310)Changeinunrealizedlossoninterestrateswaps 4,503 587Changeinvalueofsplitinterestagreements 497 (1,228)Changeinvalueofpaid‐upinsuranceatcashsurrendervalue (6) (13)Changeinpresentvalueofcontributionsreceivable (264) (304)ChangeinassetsandliabilitiesReceivables 2,021 1,085Inventoriesandprepaidexpenses 1,227 (531)Accountspayableandotherobligations 922 727Accruedsalaries,taxes,andbenefits 3,245 1,520Deferredrevenues (2,604) (1,255)

Netcashfromoperatingactivities 17,995 16,120

CASHFLOWSFROMINVESTINGACTIVITIESAcquisitionofproperty,plant,andequipment (5,851) (5,346)Proceedsfromsaleofpropertyandequipment 12 ‐Proceedsfromsaleofinvestments 21,344 17,032Purchaseofinvestments (22,828) (19,662)Issuanceofnotesreceivable (1,807) (1,667)Repaymentofnotesreceivable 1,862 1,823Reductionindepositswithbondtrustees 677 991

Netcashusedbyinvestingactivities (6,591) (6,829)

YearsEndedMay31,(inthousands)


THECORPORATIONOFGONZAGAUNIVERSITYCONSOLIDATEDSTATEMENTSOFCASHFLOWS

2012 2011

CASHFLOWSFROMFINANCINGACTIVITIESProceedsfromcontributionsrestrictedforlong‐terminvestments 6,475$ 3,651$Paymentsonnotesandbonds (4,663) (4,381)Interestanddividendsrestrictedforlong‐terminvestment 2,873 2,847Netchangeinstudentloanliability (25) (33)

Netcashfromfinancingactivities 4,660 2,084

NETCHANGEINCASHANDCASHEQUIVALENTS 16,064 11,375

CASHANDCASHEQUIVALENTS,beginningofyear 43,096 31,721

CASHANDCASHEQUIVALENTS,endofyear 59,160$ 43,096$

SUPPLEMENTALDISCLOSURES

Interestpaid(netof$‐0‐and$36for2012and2011,respectively,ofcapitalizedinterest) 6,674$ 6,752$

Noncashacquisitionofproperty,plant,andequipment 135$ 556$

YearsEndedMay31,(inthousands)

THECORPORATIONOFGONZAGAUNIVERSITYNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS

(INTHOUSANDS)

8

Note1–OrganizationGonzagaUniversity(University)isanindependent,coeducationalhighereducationinstitutionfoundedin1887bytheSocietyofJesus.TheUniversitywasincorporatedinthestateofWashingtonin1894asatax‐exemptcharitableorganization located inSpokane,Washington.Theprimarysourceofrevenue isgenerated from tuition from the undergraduate, graduate (including online programs), and lawprogramsthroughtheschoolsofArts&Sciences,Business,Engineering,Education,ProfessionalStudies,and Law. Other sources of revenue include room and board, gifts, investment earnings, fees, andbookstoresales.Note2–SummaryofSignificantAccountingPoliciesThe accounting policies of the University reflect practices common to universities and colleges andconformtoaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica(GAAP).Themoresignificantpoliciesaresummarizedbelow.Basisofpresentation–The accompanying consolidated financial statements havebeenprepared inaccordance with GAAP with net assets, revenues, expenses, gains, and losses classified into threecategoriesbasedontheexistenceorabsenceofexternally(donor)imposedrestrictions.ThenetassetsoftheUniversityareclassifiedanddefinedasfollows:

Unrestrictednetassets–Netassetsarenotsubjecttodonor‐imposedrestrictions.UnrestrictednetassetsmaybedesignatedforspecificpurposesbyactionoftheBoard.Allrevenues,expenses,gains,andlossesthatarenotchangesintemporarilyorpermanentlyrestrictednetassetsareconsideredunrestricted.Temporarilyrestrictednetassets–Netassetsaresubjecttodonor‐imposedrestrictionsthatwillbemetbyactionsoftheUniversityorthepassageoftime.Thisincludesgiftsaswellasincomeandnetgainsandlossesaccruingonthosegifts,whoseusebytheUniversityissubjecttodonorimposedstipulations.Permanentlyrestrictednetassets–Netassetsaresubjecttodonor‐imposedrestrictionsthatarepermanently maintained by the University. Generally, the donors of these assets permit theUniversity to use all or part of the income earned on related investments for general or specificpurposes.Thisincludesgifts,trusts,andcontributionsthatbydonorrestrictionrequirethecorpusbeinvestedinperpetuity.

THECORPORATIONOFGONZAGAUNIVERSITYNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS(INTHOUSANDS)

9

Note2–SummaryofSignificantAccountingPolicies(continued)Consolidation–TheconsolidatedfinancialstatementsincludetheaccountsofGonzagaUniversity,theLawSchoolFoundation(Foundation),andImmobiliareGonzagaSrl.ThepurposeoftheFoundationistoprovideadditionalrevenue,endowment,andrelatedincometotheUniversity’sLawSchool.ImmobiliareGonzaga Srl. is an Italian corporation formed to purchase and remodel a classroom/administrationbuilding used in theUniversity’s Florence, Italy, program.All significant inter‐entity transactions andbalanceshavebeeneliminated. Thesummarizedstatementsoffinancialpositionfortheseentitiesareasfollows:

Gonzaga LawSchool Immobiliare Inter‐entity ConsolidatedUniversity Foundation GonzagaSrl. Elimination Total

Assets 465,457$ 15,237$ 5,908$ (4,512)$ 482,090$

Liabilities 193,622$ 4$ 5,010$ (4,512)$ 194,124$

NETASSETSUnrestricted 128,741 2,840 898 ‐ 132,479Temporarilyrestricted 67,562 5,771 ‐ ‐ 73,333Permanentlyrestricted 75,532 6,622 ‐ ‐ 82,154

Totalnetassets 271,835 15,233 898 ‐ 287,966

Totalliabilitiesandnetassets 465,457$ 15,237$ 5,908$ (4,512)$ 482,090$

FortheYearendedMay31,2012

Gonzaga LawSchool Immobiliare Inter‐entity ConsolidatedUniversity Foundation GonzagaSrl. Elimination Total

Assets 459,993$ 16,000$ 5,483$ (4,732)$ 476,744$

Liabilities 192,607$ 232$ 4,504$ (4,732)$ 192,611$

NETASSETSUnrestricted 124,555 2,963 979 ‐ 128,497Temporarilyrestricted 73,755 6,650 ‐ ‐ 80,405Permanentlyrestricted 69,076 6,155 ‐ ‐ 75,231

Totalnetassets 267,386 15,768 979 ‐ 284,133

Totalliabilitiesandnetassets 459,993$ 16,000$ 5,483$ (4,732)$ 476,744$

FortheYearendedMay31,2011


(INTHOUSANDS)

10

Note2–SummaryofSignificantAccountingPolicies(continued)Cashandcashequivalents–Cash and cash equivalents consist of all cashbalances and short‐term,highly liquid investmentswithoriginalmaturitiesat thedateofpurchaseof90daysor less.Amountsalsoincludemoneymarketmutualfunds,allofwhichcomplywithRule2a‐7oftheInvestmentCompanyActof1940,whichseekstolimittheriskofmoneymarketfunds. TheUniversityholdscashandcashequivalentsatseveralmajorfinancialinstitutions,whichduringthecourseoftheyearmayexceedtheamountsinsuredbytheFederalDepositoryInsuranceCorporation.Cashandcashequivalentsamountsrelatedtodonor‐restrictedfundsarereportedasinvestments.DepositswithBondTrustees–Amountsconsistofdebtserviceanddebtservicereservefundsheldininvestments as permitted under the Washington Higher Education Facilities Authority (WHEFA)documents. The funds are restricted to the purpose designated in the bond documents. Theseinvestmentsecuritiesareexposedtovariousinterestrate,market,andcreditrisks,andchangesinriskscouldpossiblymateriallyaffecttheconsolidatedfinancialstatements.Investments–TheUniversitymanagesitsinvestmentsbyusingexternalinvestmentmanagers.TheseinvestmentmanagersinvesttheUniversity’sfundsinvariousfinancialinstrumentsinaccordancewiththeBoardapprovedinvestmentpolicy.The University’s investments are recorded in the consolidated financial statements at fair value. Netappreciation (depreciation) in investments, including realized gains or losses and unrealizedappreciation or depreciation on investments, aswell as all dividends, interest, and other investmentincome, is shown in the consolidated statements of activities. Investment income is reported as anincrease in unrestricted, temporarily restricted, or permanently restricted net assets, depending ondonor‐imposedrestrictionsontheuseoftheincome.InvestmentsgiftedtotheUniversityarerecordedatthefairvalueatthedateofgift.Investmentsareexposedtovariousrisks,suchasinterestrate,market,andcreditandregulatoryrisk.Due to the level of risk associated with certain investments, it is at least reasonably possible thatchangesinthevaluesofinvestmentswilloccurintheneartermandthatsuchchangescouldmateriallyaffecttotalnetassetsandtheamountsreportedintheconsolidatedstatementoffinancialposition.Split‐interestagreements–TheUniversityhassplit‐interestagreementsconsistingofcharitablegiftannuities and irrevocable charitable remainder trusts.Assets are investedandpaymentsaremade todonorsand/orotherbeneficiariesinaccordancewithrespectiveagreements.ForthoseagreementsinwhichtheUniversityisatrustee,contributionrevenueisrecognizedatthedatetheagreement isestablished,netof the liabilityrecordedat thepresentvalueof theestimated futurepaymentstobemadetotherespectivedonorsand/orotherbeneficiaries.Theliabilityforcharitablegiftannuities issued by the Corporation of GonzagaUniversitywas $1,250 and $994 for the years endedMay31,2012and2011,respectively.


11

Note2–SummaryofSignificantAccountingPolicies(continued)Split‐interestagreements(continued)–ForthoseagreementsinwhichtheUniversitydoesnotserveas trustee, restricted contributions receivable and the related revenue are recognized for thepresentvalueoftheestimatedfuturebenefitstobereceivedwhenthetrustisdistributed.The present value of payments to beneficiaries of charitable gift annuities and charitable remaindertrusts iscalculatedusingdiscountratesranging from4%to6%.Thesediscountratesrepresentratescommensuratewith therisks involved,whichwere inexistenceat thedateof thegift.Gainsor lossesresultingfromchangesinactuarialassumptionsandaccretionoftheapplicablediscountsarerecordedaschangesintherespectivenetassetclassintheconsolidatedstatementsofactivitiesasincurred.Inventories–Studentbookstoreandsupplyinventoriesarestatedatthelowerofcost,usingthefirst‐infirst‐outmethod,ormarket.Accountsandcontributionsreceivable–Accountsreceivablefromstudentsincludedinaccountsandinterest receivable, net, in the consolidated statement of financial position are reported net of anallowancefordoubtfulaccounts,whichwas$100and$350fortheyearsendedMay31,2012and2011,respectively. Accounts receivable are written off only when they are deemed to be permanentlyuncollectible.Contributions, includingunconditional promises to give, are recognized as revenuewhen thedonor’scommitment is made. Unconditional promises are recognized at the estimated present value of thefuturecashflowsusingdiscountrates,netofallowancesforuncollectibles.Thediscountsarecomputedusing a rate that is commensurate with the risks involved and applicable to the years in which thepromises are received. Based upon historical pledge payments, history, and current information, anallowanceforuncollectibleaccountsisincluded.Accountbalancesarechargedoffagainsttheallowanceafterallmeansofcollectionhavebeenexhaustedandpotentialrecoveryisconsideredremote.Promisesmadethataredesignatedforfutureperiodsorrestrictedbythedonorforspecificpurposesarereportedastemporarilyrestrictedorpermanentlyrestrictedrevenue.Notes receivable – Notes receivable primarily consist of amounts due from students under theUniversity’srepayablefinancialaidprogramsandarestatednetofallowancefordoubtfulaccounts.Theallowance was $306 and $446 for the years endedMay 31, 2012 and 2011, respectively. The notesreceivablebear interest ranging from5% to6%andaregenerally repayable to theUniversityoveraperiodnottoexceed10years.


(INTHOUSANDS)

12

Note2–SummaryofSignificantAccountingPolicies(continued)Property,plant, and equipment –Property, plant, and equipment are stated at cost at the date ofacquisitionorfairvalueatthedateofdonation.Thecostofmajorimprovementsinexcessof$100andpurchasesofdepreciableitemsinexcessof$5arecapitalized.Normalrepairandmaintenanceexpensesand minor equipment costs are expensed as incurred. Depreciation, except for land and artwork, isprovidedforonastraight‐linebasisovertheestimatedusefullivesoftherespectiveassetsasfollows:Buildingandimprovements 25‐ 50yearsEquipmentandfurniture 3‐ 7yearsLibrarybooks 10yearsRevenuerecognition–Studenttuition,fees,androomandboardarerecognizedintheperiodinwhichtheservicesareprovided.Grantrevenueisrecognizedeitherwhentheservicesareprovidedorwhenthefundsareexpended.Interestincomeonstudentloansisrecognizedwhencharged.Studenttuitionandfeesarereflectednetofstudentmarketingandrecruitingcostsof$5,444and$5,282for the years ended May 31, 2012 and 2011, respectively, which represent the amount paid to anunrelatedthirdpartyforcertainoftheUniversity’sgraduatedistancelearningprogramswhere,fromarevenuerecognitionstandpoint,theUniversityisconsideredanagentinthetransaction.Deferredrevenuesincludeamountsreceivedfortuition,fees,andcertainauxiliaryactivities,whichhavenot yet been earned, and student deposits. Deferred revenues also include amounts received fromgrantsandcontractsthathavenotyetbeenearned.Foreignoperations–TheUniversityhasanumberofbothgraduateandundergraduateprograms inforeigncountries,primarilyCanadaand Italy. Grossrevenuesandexpensesof theseprogramsareasfollows:

2012 2011

CanadianprogramGrossrevenue 2,607$ 2,987$Grossexpenses 680 784FlorenceandotherEuropeanprogramsGrossrevenue 9,121 7,464Grossexpenses 7,093 6,282

Advertising – Costs expensed for the years ended May 31, 2012 and 2011, were $584 and $563,respectively.


13

Note2–SummaryofSignificantAccountingPolicies(continued)Fund‐raisingexpenses–Costsrelatedtodevelopmentandfund‐raisingareexpensedasincurredforyearsendedMay31,2012and2011,andwere$4,646and$4,613,respectively.Derivative financial instruments – GAAP establishes accounting and reporting standards forderivative instruments, includingcertainderivative instrumentsembedded inothercontracts,and forhedgingactivities.Allderivatives,whetherdesignatedinhedgingrelationshipsornot,arereflectedontheconsolidatedstatementoffinancialpositionatestimatedfairvalue.Taxes – The Internal Revenue Service has recognized the University as exempt from tax under theprovisionsofSection501(c)(3)oftheInternalRevenueCodeexcepttotheextentofunrelatedbusinessincome under Sections 511 through 515. Unrelated business income tax, if any, is immaterial and,therefore, theconsolidatedfinancialstatementsdonot includeaprovisionfor federal incometax.TheUniversityadherestoFinancialAccountingStandardsBoard(FASB)AccountingStandardsCodification(ASC)740‐10, relating to accounting foruncertain taxpositions.ASC740‐10prescribesa recognitionthreshold and measurement process for accounting for uncertain tax positions and also providesguidance on various related matters such as derecognition, interest, penalties, and disclosurerequirements. As ofMay31, 2012 and 2011, the University had no uncertain tax positions requiringaccrual. In addition, the University presently is exempt from Washington State real and personalproperty taxes pursuant to WAC 458‐16‐270 on the majority of its educational and othernoncommercialpropertiesoftheUniversity.Operatingandnonoperatingactivities–TheUniversity’smeasureofoperatingactivities,presentedintheconsolidatedstatementsofactivities, includesalltransactionsthatareincurredinthecourseofthe normal business operations of the University. Operating expenses are reported by functionalcategories,afterallocatingcostsforinterestonlongtermindebtednessanddepreciation.Nonoperatingactivitiespresentedintheconsolidatedstatementsofactivitiesincludetransactionsthatresultfromsomethingotherthantheon‐goingday‐to‐dayactivityoftheUniversity.Useofestimates–Thepreparation of financial statements in conformitywith accountingprinciplesgenerally accepted in the United States of America requires management to make estimates andassumptionsthataffectthereportedamountsofassets,liabilities,revenues,andexpensesaswellasthedisclosureofcontingentassetsandliabilities.Actualresultscoulddifferfromthoseestimates.Reclassifications–Certainreclassificationsweremadetothe2011consolidatedfinancialstatementstoconformtothe2012presentation.Thereclassificationshavenoeffectonthechangeinnetassetsornetassetbalancesaspreviouslyreported.Subsequentevents–TheUniversityhasevaluatedsubsequenteventsthroughAugust31,2012,whichisthedatetheconsolidatedfinancialstatementswereavailabletobeissued.


(INTHOUSANDS)

14

Note2–SummaryofSignificantAccountingPolicies(continued)Adoption of new accounting pronouncements – In July 2010, the FASB issued an accountingstandards update that provides for new and enhanced disclosure requirements related to the creditquality of financing receivables and the allowance for credit losses. The requirements, which theUniversityadoptedeffectiveJune1,2011, includedisclosuresaboutthenatureofthecreditrisk inanentity’s financing receivables, how risk is incorporated into the allowance for credit losses, and thereasonsforanychangesintheallowance.Theguidanceimpactsdisclosuresonly.Note3–AccountsandInterestReceivableAccountsandinterestreceivableconsistedofthefollowingasofMay31:

2012 2011

Studentreceivables 1,207$ 1,289$Governmentgrants 6,351 5,674Accruedinterestreceivable 76 117Short‐termreceivables 1,046 1,561Otherreceivables 2,442 2,554

11,122 11,195Lessallowancefordoubtfulaccounts (100) (350)

11,022$ 10,845$

Note4–ContributionsReceivable,NetContributionsreceivable,netatMay31areexpectedtoberealizedinthefollowingperiods:

2012 2011

Inoneyearorless 7,858$ 8,385$Betweenoneyearandfiveyears 7,274 9,202Morethanfiveyears 1,869 1,612Lesspresentvaluediscounts (703) (967)

16,298 18,232Lessallowanceforuncollectibles (5,731) (5,677)

10,567$ 12,555$


15

Note4–ContributionsReceivable,Net(continued)Contributionsreceivable,net,atMay31aredesignatedasfollows:

2012 2011

Unrestricted 41$ 50$Temporarilyrestrictedscholarships/other 3,117 3,657Endowmentforscholarshipsandendowedchairs 2,614 2,310Construction/debtserviceonbuildingprojects 4,795 6,538

10,567$ 12,555$

TheUniversityreceivedapledgefromacharitablefoundationtomakeannualfuturedistributionstotheUniversity. The net present value of these future distributions is $4,558 at May31, 2012 and 2011.Because there are conditions associated with these future payments, this pledge of future annualpaymentsisnotrecognizedasrevenueorasarelatedpledgereceivable.Note5–NotesReceivableStudent loans – The University makes uncollateralized loans to students based on financial need.Student loans are funded through federal government loan programs and institutional resources. AtMay31,2012and2011,studentloansrepresented3.18%and3.24%oftotalassets,respectively.AtMay31,studentloansconsistedofthefollowing:

2012 2011

Federalgovernmentprograms 14,618$ 14,882$Institutionalprograms 1,032 1,001

15,650 15,883Lessallowancefordoubtfulaccounts (306) (446)

Studentloansreceivable,net 15,344$ 15,437$

TheUniversityparticipatesinthePerkinsandNursingfederalrevolvingloanprograms.Theavailabilityoffundsforloansundertheprogramsisdependentonreimbursementstothepoolfromrepaymentsonoutstandingloans.Fundsadvancedbythefederalgovernmentof$12,716atMay31,2012and2011,areultimatelyrefundable to thegovernment,andareclassifiedas liabilities in thestatementsof financialposition.Outstandingloanscancelledundertheprogramsresultinareductionofthefundsavailableforloansandadecreaseintheliabilitytothegovernment.


(INTHOUSANDS)

16

Note5–NotesReceivable(continued)AtMay31,2012and2011,thefollowingamountswerepastdueunderallstudentloanprograms:

May31,60‐89DaysPastDue

90‐119DaysPastDue

120‐179DaysPastDue

180‐729DaysPastDue

730+DaysPastDue

TotalPastDue

2012 228$ 42$ 90$ 327$ 459$ 1,146$2011 164 73 43 318 413 1,011

Allowances for doubtful accounts are established based on prior collection experience and currenteconomic factors, which in management’s judgment could influence the ability of loan recipients torepay the amountsper the loan terms. Institutional loanbalances arewrittenoff onlywhen they aredeemedtobepermanentlyuncollectible.AccountsdueunderthePerkinsloanprogramareguaranteedby the federalgovernment,and therefore,noreservesareplacedonanypastduebalancesunder theprogram.Note6–InvestmentsInvestmentsatMay31areasfollows:

2012 2011AtmarketCashandcashequivalents 11,990$ 471$Certificatesofdeposit ‐ 387Equitysecurities 58,731 71,365Fixedincomesecurities 22,005 20,188Balancedfundsecurities 1,279 11,159Alternatives 39,568 35,522Split‐interestagreements 15,072 13,089Realproperty 741 754Lifeinsurancecashsurrendervalue 367 509Other 108 392

149,861$ 153,836$

Withincashandcashequivalentsreportedas investmentsasofMay31,2012,approximately$10,700represents Law School Foundation endowment amounts held temporarily as cash until long terminvestment opportunities were identified. Shortly after May 31, 2012, this amount was invested asfollows:33%domestic equitymutual funds, 37%domestic and internationalpublically tradedequitysecurities,and30%incorporateandUSgovernmentbonds.


17

Note6–Investments(continued)FortheyearsendedMay31theUniversity’stotalreturnoninvestmentsandcashandcashequivalentsincludes:

2012 2011

Netunrealizedandrealized(loss)gainoninvestmentsheldatmarket (6,916)$ 23,378$Interestincomeanddividends 2,873 2,847

Totalreturnoninvestmentsandcashandcashequivalents (4,043)$ 26,225$

Amountswithdrawnunderspendingpolicy 4,398$ 5,023$

SeeNote14forunfundedcashcommitmentsassociatedwithalternativeinvestments.Note7–EndowmentTheUniversity’sendowmentconsistsofapproximately690individualfundsestablishedforavarietyofpurposes. Theendowment includesbothdonor‐restrictedendowmentfundsandfundsdesignatedbythe Board to function as endowments. As required by GAAP, net assets associatedwith endowmentfunds,includingfundsdesignatedbytheBoardtofunctionasendowments,areclassifiedandreportedbasedontheexistenceorabsenceofdonor‐imposedrestrictions.Endowmentnetassetcompositionbytypeoffundissummarizedasfollows:



Donor‐restricted

endowmentfunds (1,159)$ 50,080$ 82,154$ 131,075$

Board‐designatedfunds 12,060 ‐ ‐ 12,060

10,901$ 50,080$ 82,154$ 143,135$

AsofMay31,2012


(INTHOUSANDS)

18

Note7–Endowment(continued)



Donor‐restricted

endowmentfunds (526)$ 57,384$ 75,231$ 132,089$

Board‐designatedfunds 12,689 ‐ ‐ 12,689

12,163$ 57,384$ 75,231$ 144,778$

AsofMay31,2011

Interpretationofrelevantlaw–UndertheWashingtonUniformPrudentManagementofInstitutionalFunds Act (WUPMIFA), the Board has adopted as policy for donor‐restricted endowment funds therequirement to preserve the original fair value of the initial gift and any subsequent gifts (as of therespectivegiftdate),alongwithanyaccumulationstothepermanentendowmentmadeatthedirectionof thedonor, absent explicit donor stipulations to the contrary. Together, these amounts become thepermanentlyrestrictedvalueofthefunds.InaccordancewithWUPMIFA,theUniversityconsidersthefollowingfactorsinmakingadeterminationtoappropriateoraccumulateincomefromdonor‐restrictedendowmentfunds:

Thedurationandpreservationofthefund

ThepurposesoftheUniversityandthedonor‐restrictedendowmentfund

Generaleconomicconditions

Thepossibleeffectofinflationanddeflation

Theexpectedtotalreturnfromincomeandtheappreciationofinvestments

OtherresourcesoftheUniversity

TheinvestmentpoliciesoftheUniversity


19

Note7–Endowment(continued)Returnobjectivesand riskparameters –TheUniversity has adopted an investment and spendingpolicy for endowment assets that attempts to provide a predictable stream of funding to programssupportedbyitsendowmentwhileseekingtomaintainthepurchasingpoweroftheendowmentassets.Endowmentassetsincludethoseassetsofdonor‐restrictedfundstheUniversitymustholdinperpetuityorforadonor‐specifiedperiod(s)aswellasBoard‐designatedfunds.Underthispolicy,asapprovedbytheBoard, theendowmentassetsare invested inamanner that is intended toproduceanacceptablelevel of return while assuming a moderate level of investment risk on a total portfolio basis. TheUniversity’s goal for its endowment funds, over time, is to provide an average annualized return ofapproximately5%inexcessofinflation,asmeasuredbytheHigherEducationPriceIndex(HEPI)overamarketcycleofthreetofiveyears.Tosatisfyitslong‐termrateofreturn,theUniversityreliesonatotalreturn strategy inwhich investment returns are achieved throughboth capital appreciation (realizedandunrealized)andcurrentyield(interestanddividends),andmaintainsadiversifiedassetallocationthat places a greater emphasis on equity‐based and alternative investments to achieve its long‐termreturnobjectiveswithinprudentriskconstraints.Spendingpolicy–Thespendingpolicyandhowtheinvestmentobjectivesrelatetothespendingpolicyareasfollows:TheUniversityhasapolicyofappropriatingfordistributioneachyearbaseduponahybridratethatisthesumoftwocomponents:a) 70%basedupontheHEPI for thePacificRegionappliedtotheprioryearendowmentspending

amount.

b) 30%based upon a rate of 4% to 5%of a three‐year rolling average of the fund’s totalmarketvalue,measuredquarterly.

Absentdonorstipulationstothecontrary, theUniversitywillnotappropriatefordistributionfromanendowment fund if such expenditure will result in the fair value of the fund falling below thepermanentlyrestrictedvalueofthefund,measuredasofMay31ofthefiscalyearofappropriation.Fundswithdeficiencies–Fromtimetotime,thefairvalueofassetsassociatedwithindividualdonor‐restrictedendowment fundsmay fall below the level theUniversity is required to retainas a fundofperpetualduration.Deficienciesofthisnaturereportedinunrestrictednetassetswere$1,159and$526as of May31, 2012 and 2011, respectively. These deficiencies resulted from unfavorable marketfluctuations that occurred as a result of the investment of permanently restricted contributions andamountsappropriatedforspending.


(INTHOUSANDS)

20

Note7–Endowment(continued)Changesinendowmentnetassetsaresummarizedasfollows:



Netassets,beginningofyear 12,163$ 57,384$ 75,231$ 144,778$

InvestmentreturnInvestmentincome 292 2,065 39 2,396Netloss(realizedandunrealized) (1,388) (5,213) (83) (6,684)

Totalinvestmentreturn (1,096) (3,148) (44) (4,288)

Contributions ‐ 50 6,425 6,475

Amountdistributedforoperatingactivities (4,398) ‐ ‐ (4,398)

Transfers 214 (188) 542 568

Releasedfromrestriction 4,018 (4,018) ‐ ‐

Netassets,endofyear 10,901$ 50,080$ 82,154$ 143,135$

FortheYearEndedMay31,2012



Netassets,beginningofyear 6,460$ 40,561$ 71,644$ 118,665$

InvestmentreturnInvestmentincome 257 1,816 52 2,125Netgain(realizedandunrealized) 5,082 18,452 462 23,996

Totalinvestmentreturn 5,339 20,268 514 26,121

Contributions ‐ 63 3,588 3,651

Amountdistributedforoperatingactivities (5,023) ‐ ‐ (5,023)

Transfers 814 1,065 (515) 1,364

Releasedfromrestriction 4,573 (4,573) ‐ ‐

Netassets,endofyear 12,163$ 57,384$ 75,231$ 144,778$

FortheYearEndedMay31,2011


21

Note8–Property,Plant,andEquipment,NetComponentsofproperty,plant,andequipment,net,atMay31areasfollows:

2012 2011

Land 6,827$ 6,827$

Buildingsandimprovements 265,661 263,096

Equipmentandfurniture 24,471 24,363

Artwork 2,986 2,971

Librarybooks 4,807 4,689

Constructioninprogress 2,009 1,117

306,761 303,063

Lessaccumulateddepreciation (88,647) (82,190)

218,114$ 220,873$

Note9–BondsandNotesPayableAsofMay31,notesandbondspayableconsistedofthefollowing:

2012 2011

TaxExemptBondspayabletotheWashingtonHigherEducationFacilitiesAuthority(AuthorityorWHEFA)Series2010A,originalissuanceof$42,420,interestatfixedratesrangingfrom2.500%to5.000%,maturing2029 36,590$ 39,515$Series2009B,originalissuanceof$53,460,interestatfixedratesrangingfrom3.000%to5.000%,maturing2029 53,210 53,460Series2009A,originalissuanceof$39,845,interestatfixedratesrangingfrom4.000%to6.250%,maturing2029 37,845 38,520Otherunsecurednotesdueinvariousinstallmentsthrough2015.Interestratesrangefrom1.39%to7.75% 1,613 2,258

129,258 133,753Unamortizedpremium 2,843 3,011

132,101$ 136,764$


(INTHOUSANDS)

22

Note9–BondsandNotesPayable(continued)TheWHEFAbondsaresecuredonaparitybasisbyapledgeof,andlienon,allunrestrictedcurrentfundrevenues, as defined in the loan agreement, by a deed of trust on substantially all property andequipmentoftheUniversity,andtheUniversity’sinterestincertainfundsandreservesheldbytheBondTrustee.InrelationtotheWHEFAbonds,theUniversityhasagreedtocertaincovenants,includingcovenantstomaintainitsaccreditedstatus, limititsabilitytoincuradditional indebtedness, limitencumbrancesonpartsofitscampus,andmaintaincertainfinancialratiosasdefinedintherelatedagreements.TheWHEFAbondsrequireadebtservicereservefund,whichisfundedandincludedintheUniversity’sdepositwiththebondtrustee.Asaresultofthebondofferings,theUniversityheld$13,391and$14,068indepositswithbondtrusteesat May31, 2012 and 2011, respectively. These funds are held in investments and consist of thefollowing:

2012 2011

Debtservicereservefunds 13,303$ 13,419$Projectfunds ‐ 59Rebateholdbackfunds ‐ 500Debtservicefunds 88 90

13,391$ 14,068$


23

Note9–BondsandNotesPayable(continued)Principalpaymentsonnotesandbondspayableareasfollows:YearsEndingMay31, Principal

2013 5,108$2014 5,7402015 5,6542016 5,7452017 6,020

Thereafter 100,991

129,258

Premium 2,843

132,101$

TheUniversityalsohasa$10,000revolving lineofcreditagreementwithBankofAmerica thatbearsinterestequaltoaprimerateestablishedbyBankofAmerica,whichwas3.25%asofMay31,2012.TherevolvinglineofcreditissecuredbyaparitylienonunrestrictedgrossrevenuesandcertaindepositandsecurityaccountswithBankofAmericaandU.S.Bank.TherewerenooutstandingadvancesagainstthelineofcreditasofMay31,2012and2011.ThelineofcreditagreementmaturesonJanuary31,2013,andmaybeextendedifagreedtobybothparties.Note10–DerivativeInstrumentsandHedgingActivitiesInconnectionwithpreviouslyrefundedWHEFAbonds,theUniversityenteredinthefollowinginterestrateswapagreements:

NotionalAmountonEffectiveDate

EffectiveDate Term

GonzagaPays GonzagaReceives

35,550$ 10/1/2014 4/1/2034 4.1195% 67%ofonemonthLIBORifLIBORis3.5%orgreateror77%ofonemonthLIBORifLIBORislessthan3.5%

7,325 10/1/2012 4/1/2022 4.1680% 70%ofonemonthLIBOR


(INTHOUSANDS)

24

Note10–DerivativeInstrumentsandHedgingActivities(continued)In prior years, the University used variable‐rate debt to finance the construction and acquisition ofproperty,plant,andequipment. TheUniversityenteredinto interestrateswap(swap)agreements inordertoobtainasyntheticfixedrateandtohedgetheriskofchangesininterestpaymentsonthebondscausedbychangesinthemarketrates.TheswapsaresecuredonaparitybasiswiththeWHEFAbonds.All of the University’s variable‐rate WHEFA bonds have been refunded with proceeds of fixed rateWHEFAbonds.Theaboveswapscanbeterminatedatmarketratesatanytimeduringthetermoftheswap.TheUniversitydoesnotenterintoderivativeinstrumentsforanypurposeotherthancashflowhedgingpurposes and does not speculate for investment purposes using derivative instruments. Thetransactions involvebothcreditandmarketrisk.Thenotionalamountsdonotrepresentdirectcreditexposure.Directcreditexposureislimitedtothenetdifferencebetweenthecalculatedamountstobereceivedandpaid.IftheUniversity’sbondratingfallsbelowBBB+byS&PorBaa1byMoody’s,theswapcounterpartyhastheabilitytorequiretheUniversitytopostcollateral.TheUniversity’scurrentcreditrating,asprovidedbyMoody’sInvestorsService,isA3withastableoutlook.ThisratingwasaffirmedonMay31,2012.Theswapswereissuedatmarkettermssotheyhadnofairvalueatinception.Thecarryingamountoftheswapshasbeenadjustedtothefairvalueattheendofthefiscalyear.Aderivativeliabilityof$7,820and$3,317fortheyearsendedMay31,2012and2011,respectively,areshownasanobligationunderinterest rate swaps on the consolidated statements of financial position. Accordingly, all of theadjustmentsof the swaps’ carryingamountsare reportedas an increaseordecrease innonoperatingactivities.The effect of derivative instruments on the consolidated statements of activities for the years endedMay31,2012and2011:

DerivativesinFairValueHedgingRelationships

LocationofLossRecognizedinIncomeonDerivative

2012 2011

Interestrateswapagreements Changeinvalueofinterestrateswap (4,503)$ (587)$

AmountofLossRecognizedinIncomeon

Derivatives


25

Note11–RetirementPlansRetirementbenefitsareprovidedtoallemployeesworkingaminimumof1,000hoursperyearundera403(b) defined contribution plan (Plans). Beginning the first day of themonth following one year ofservice,eligibleemployeesarerequiredtocontribute5%oftheirsalaryandtheUniversitycontributes8.5%.Investmentchoicesareofferedthroughtwoproviders:TIAA‐CREFandFidelityInvestments.ThePlans provide individually‐owned retirement accounts, which are 100% vested immediately. TheUniversity’sexpenseforthesePlanswas$5,509and$5,192fortheyearsendedMay31,2012and2011,respectively.Includedinaccountsandinterestreceivableandaccruedbenefitspayableisanaccrualfor$1,289and$1,301fortheyearsendedMay31,2012and2011,respectively,whichrepresentsvoluntaryemployeecontributions to the 457(b) plan. By IRS regulations, these funds are considered to be assets of theUniversityuntildistributedtoparticipants.Note12–NetAssetsTheUniversity’snetassetswereavailableforthefollowingpurposesatMay31:

2012 2011

Board‐Designated,includedinUnrestrictedNetAssetsDebtservice 1,234$ 560$Operatingreserves 6,605 6,605Arenareserves 7,188 5,773RemodelingofUniversityfacilities 2,905 2,560Technologyprojects 242 1,455LawSchoolinitiatives 1,612 1,595Academicenhancements 3,587 2,251Medicalclaimsreservefund 2,612 2,376Quasi‐endowmentfund 12,060 12,689Allother 836 298

TotalBoard‐designated,includedinunrestrictednetassets 38,881$ 36,162$


(INTHOUSANDS)

26

Note12–NetAssets(continued)

2012 2011

TemporarilyRestrictedScholarships 31,685$ 35,515$Plantfacilities 2,961 3,382CharitableRemainderTrust 2,983 2,852Endowedchairs 9,140 10,008Allother 26,564 28,648

Totaltemporarilyrestricted 73,333$ 80,405$

PermanentlyRestrictedGeneralpurposeendowments 10,166$ 8,913$Libraryendowments 728 720Scholarshipendowments 54,383 50,519Academicchairendowments 12,510 12,420Annuityandlifeincomeendowments 3,326 1,629Studentloanprogram 1,041 1,030

Totalpermanentlyrestricted 82,154$ 75,231$

Note13–CommitmentsandContingenciesCommitments–

Operating leases – The University leases certain educational facilities under noncancelableoperatingleases.Futureminimumleasepaymentsareasfollows:YearsEndingMay31,2013 196$2014 642015 632016 632017 63Thereafter 914

1,363$

Rentalexpenseforthefacilitiesoperatingleasesamountedto$196fortheyearsendedMay31,2012and2011.


27

Note13–CommitmentsandContingencies(continued)Contingencies –TheUniversity is subject to legal proceedings and claims that arise in the ordinarycourse of its business. In the opinion of management, the results of these matters will not have asignificantimpactontheconsolidatedfinancialstatements.TheUniversityreceivesandexpendsmoniesunderfederalgrantprogramsandissubjecttoauditsbygovernmentalagencies.TheUniversitybelievesthatanyliabilitiesresultingfromsuchauditswouldnothaveamaterialimpactontheconsolidatedfinancialstatementsoftheUniversity.Note14–FairValueofFinancialInstrumentsFair value measurements – The University has determined the fair value of certain assets andliabilities in accordancewith the provisions of the FairValueMeasurements andDisclosuresTopic ofFASBASC,whichprovidesaframeworkformeasuringfairvalueunderGAAP.FASBASC820‐10‐30‐2definesfairvalueastheexchangepricethatwouldbereceivedforanassetorpaidtotransferaliability(anexitprice)intheprincipalormostadvantageousmarketfortheassetorliability inanorderly transactionbetweenmarketparticipantson themeasurementdate. It requiresthatvaluationtechniquesmaximizetheuseofobservableinputsandminimizetheuseofunobservableinputs. Observableinputsaredevelopedbasedonmarketdataobtainedfromsourcesindependentofthe University. Unobservable inputs reflect the University’s own assumptions about market inputsbasedonitsowndata.AfairvaluehierarchyhasalsobeenestablishedbytheFairValueMeasurementsandDisclosuresTopicofFASBASC,whichprioritizesthevaluationinputsintothreebroadlevels.Level1inputsconsistofquotedmarketpricesinactivemarketsforidenticalassetsorliabilitiestheUniversityhastheabilitytoaccessatthemeasurementdate.Level2inputsconsistofvaluationsotherthanquotedpricesincludedinLevel1that are observable by the University for the related asset or liability. Level 3 inputs consist ofunobservablevaluationsrelatedtotheassetorliability.Transfersbetweenthelevelsarerecognizedontheactualdateoftheeventorcircumstancethatcausedthetransfer.


(INTHOUSANDS)

28

Note14–FairValueofFinancialInstruments(continued)ThefollowingtablespresentassetsandliabilitiesthataremeasuredatfairvalueonarecurringbasisatMay31,2012and2011.

FairValue Level1(9) Level2 Level3

Cashandcashequivalents 71,150$ 71,150$ ‐$ ‐$EquitysecuritiesManagedmutualfundsDomesticlargecap 12,534 12,534 ‐ ‐Domesticsmall/midcap 5,642 2,844 2,798 ‐Internationaldevelopedmarkets 12,393 12,393 ‐ ‐Internationalemergingmarkets 7,338 7,338 ‐ ‐Internationalsmall/midcap 2,756 2,756 ‐ ‐ExchangetradedfundsS&P500Index 6,803 6,803 ‐ ‐Russell1000GrowthIndex 3,920 3,920 ‐ ‐MSCIEAFA(Europe,Asia,Australia,FarEast)Index 2,591 2,591 ‐ ‐DirectownershipPublicallytraded 2,950 2,950 ‐ ‐

Privatelyheldstock(2) 1,804 876 928Fixedincomesecurities

Manageddomesticmutualfunds(3) 12,555 12,555 ‐ ‐Managedhighyieldmutualfund 4,297 4,297 ‐Managedinternationalmutualfund 4,813 4,813 ‐Corporatebonds 340 340 ‐ ‐Balancedfundsecurities

Managedmutualfunds(4) 1,279 1,279 ‐ ‐

Alternatives(10)

Manageddiversifiedglobalmulti‐assetpartnership(5) 14,811 ‐ ‐ 14,811PrivateequitylimitedpartnershipinvestmentsLeveragedbuy‐outanddistressedfunds 3,682 ‐ ‐ 3,682Venturecapitalfund 1,635 ‐ ‐ 1,635Diversifiedfundsoffunds 6,899 ‐ ‐ 6,899Directinvestmentfund 290 ‐ ‐ 290Realestatefunds 10,563 ‐ ‐ 10,563Healthcarefund 565 ‐ ‐ 565Mezzaninedebtfund 1,123 ‐ ‐ 1,123Splitinterestagreements

Equity/fixedincome(6) 15,072 8,345 ‐ 6,727DepositswithbondtrusteesMoneymarket 227 227 ‐ ‐U.S.governmentagencyobligations 13,164 13,164 ‐ ‐

Realproperty(7) 741 ‐ 741 ‐Lifeinsurancecashsurrendervalue 367 367 ‐ ‐Other 108 43 65 ‐

Totalassets 222,412$ 170,709$ 4,480$ 47,223$

Obligationunderinterestrateswaps(8) (7,820)$ ‐$ (7,820)$ ‐$

Totalliabilities (7,820)$ ‐$ (7,820)$ ‐$

May31,2012


29

Note14–FairValueofFinancialInstruments(continued)

Fair Value Level 1 (9) Level 2 Level 3

Cash and cash equivalents 43,567$ 43,567$ -$ -$ Certificatesofdeposit 387 387 - - EquitysecuritiesManagedmutualfundsDomesticlargecap 10,032 10,032 - -

Domesticsmall/midcap(1) 6,293 3,072 3,221 - Internationaldevelopedmarkets 15,589 15,589 - - Internationalemergingmarkets 10,236 10,236 - - Internationalsmall/midcap 5,196 5,196 - -

ExchangetradedfundsS&P500Index 8,389 8,389 - - Russell1000GrowthIndex 11,016 11,016 - - Russell2000ValueIndex 1,974 1,974 - -

DirectownershipPublicallytraded 976 976 - -

Privatelyheldstock(2) 1,664 - 714 950 Fixedincomesecurities

Manageddomesticmutualfunds(3) 19,791 19,791 - - Corporatebonds 397 397 - -

Balancedfundsecurities

Managedmutualfunds(4) 11,159 11,159 - -

Alternatives(10)

Manageddiversifiedglobalmulti‐assetpartnership(5) 15,180 - - 15,180 PrivateequitylimitedpartnershipinvestmentsLeveragedbuy‐outfund 2,339 - - 2,339 Venturecapitalfund 1,500 - - 1,500 Diversifiedfundsoffunds 6,425 - - 6,425 Directinvestmentfund 388 - - 388 Realestatefunds 8,366 - - 8,366 Healthcarefund 614 - - 614 Mezzaninedebtfund 710 - - 710

Splitinterestagreements

Equity/fixedincome(6) 13,089 8,372 - 4,717 Depositswithbondtrustees

Moneymarket 726 726 - - U.S.governmentagencyobligations 13,342 13,342 - -

Realproperty(7) 754 - 754 - Lifeinsurancecashsurrendervalue 509 509 - - Other 392 44 348 -

Totalassets 211,000$ 164,774$ 5,037$ 41,189$

Obligationunderinterestrateswaps(8) (3,317)$ ‐$ (3,317)$ ‐$

Totalliabilities (3,317)$ -$ (3,317)$ -$

May 31, 2011


(INTHOUSANDS)

30

Note14–FairValueofFinancialInstruments(continued)(1) InDecember2010,$3,310 investedwithaprivate fundandpreviouslycategorizedasLevel2was

transferredtoLevel1,asaresultofthefundconvertingtoapublicallytradedmutualfund.

(2) PrivatelyheldstockcharacterizedasLevel2 isvaluedusing themarketapproachbasedonrecentsalestransactions.PrivatelyheldstockcharacterizedasLevel3isvaluedbasedonthenetassetvalueoftheinvestment,whichapproximatesmarketvalue.

(3) As of May 31, 2012 and 2011, approximately 93% and 77% of the underlying mutual fund

investmentsareinfixedincomesecuritiesand7%and23%areincash,respectively.AsofMay31,2012and2011,of theunderlying fixed income investments,40%and55%are inhighqualityU.S.governmentandagencyobligations,40%and38%areindomesticcorporateobligations,and20%and 7% are in other obligations, including domestic municipal, foreign corporate and sovereignobligations,respectively.

(4) As of May 31, 2012 and 2011, approximately 70% and 73% of the underlying mutual fund

investmentsareindomesticandinternationalequities,and26%and22%areindomesticcorporateandU.S.governmentandagencyobligations,and4%and5%areincash,respectively.

(5) Amountsrepresenta limitedpartnershipinvestmentinanewerglobalmulti‐assetfundthat isstill

raising limited partner capital and deploying investments against its long‐term asset allocationstrategy.Theunderlying investments,asofMay31,2012and2011,are invested19%and50%infixedincome(corporatebonds,sovereigndebt,U.S.governmentagencyobligations),31%and28%indomesticandinternationalpublicequities,32%and19%inabsolutereturn(distresseddebtandeventdrivenstrategies),13%and2% inrealassets,and5%and1% inprivates, respectively.Thelong‐termassetallocationranges,whichshouldbereachedwithinthenextyear,arefixedincome(5‐15%), public equities (20 ‐ 40%), absolute return (20‐45%), real assets (10 ‐ 25%) and privateequity(5‐15%).

(6) Level1amountsincludeassetsof50and41charitablegiftannuitiesandcharitableremaindertrusts,

as of May 31, 2012 and 2011, respectively, where the University serves as trustee. Amounts aremaintainedwithvariouscustodialbanks,andlargelyinvestedindomesticmutualfundsfollowinga60%equities/40%fixedincomeallocationtarget.Level3amountsrepresentabeneficialinterestinthe future cash flowsof seven and six different trusts as ofMay 31, 2012 and 2011, respectively,measured under the income approach, involving a discounted cash flow analysis based on theexpectedannuitypaymentstobemadeovertheremaininglifeofeachrespectivebeneficialinterest,utilizingarisk‐freerateandadjustedfortheinherentriskoftheassetsheldintrustandtheriskofnonperformance.

(7) Realpropertyisvaluedusingtaxassessedvalues,whichapproximatemarketvalues.

(8) Interest rate swaps are valuedusing estimatesof the relatedLIBOR rates and theBMAmunicipal

swapindexratesduringthetermoftheswapagreements.


31


(9) Fairvaluesaredeterminedusingactivemarketexchangesvaluedatthelastreportedsalesprice.

(10) Alternativeinvestmentsheldthroughlimitedpartnershipsconsistprimarilyofinvestmentsthatarenot readilymarketable. Investments in thesecategories,whicharemanagedexternally, arevaluedutilizingthemostcurrentinformationprovidedbytheinvestmentmanagers.

FollowingisareconciliationofactivityfortheyearsendedMay31,2012and2011,ofassetsmeasuredatfairvaluebaseduponsignificantunobservable(nomarket)‐Level3information.

PrivatelyHeldStock

ManagedDiversifiedGlobalMulti‐

AssetPartnership

LeveragedBuy‐OutandDistressedFunds

VentureCapitalFund

Balance,May31,2010 950$ ‐$ 2,054$ 1,321$

Realizedgains(losses) ‐ (47) 85 6Unrealizedgains ‐ 227 239 262Returnofcapital/transferstoincome ‐ ‐ (39) (89)Purchases/capitalcalls ‐ 15,000 ‐ ‐Settlements ‐ ‐ ‐ ‐Transfersout(1) ‐ ‐ ‐ ‐

Balance,May31,2011 950 15,180 2,339 1,500

Realizedgains(losses) ‐ (289) 103 130Unrealizedgains(losses) (22) (80) 113 124Returnofcapital/transferstoincome ‐ ‐ (306) (119)Purchases/capitalcalls ‐ ‐ 1,433 ‐Settlements ‐ ‐ ‐ ‐Transfersout ‐ ‐ ‐ ‐

Balance,May31,2012 928$ 14,811$ 3,682$ 1,635$


(INTHOUSANDS)

32


DiversifiedFundsofFunds

DirectInvestment

FundRealEstateFunds

HealthcareFund

Balance,May31,2010 4,794$ 253$ 6,180$ 593$

Realizedgains(losses) 324 67 358 88Unrealizedgains(losses) 985 119 1,828 123Returnofcapital/transferstoincome (303) (112) ‐ (343)Purchases/capitalcalls 625 61 ‐ 153Settlements ‐ ‐ ‐ ‐

Transfersout(1) ‐ ‐ ‐ ‐

Balance,May31,2011 6,425 388 8,366 614

Realizedgains 82 322 533 158Unrealizedgains(losses) 410 (70) 1,664 (41)Returnofcapital/transferstoincome (268) (350) ‐ (203)Purchases/capitalcalls 250 ‐ ‐ 37Settlements ‐ ‐ ‐ ‐Transfersout ‐ ‐ ‐ ‐

Balance,May31,2012 6,899$ 290$ 10,563$ 565$


33


MezzanineDebtFund HedgeFund

SplitInterestAgreements

Balance,May31,2010 ‐$ 5,652$ 4,502$

Realizedgains(losses) (43) 562 ‐Unrealizedgains ‐ (170) 413Returnofcapital/transferstoincome ‐ (45) (198)Purchases/capitalcalls 753 ‐ ‐Settlements ‐ (5,697) ‐

Transfersout(1) ‐ (302) ‐

Balance,May31,2011 710 ‐ 4,717

Realizedgains(losses) 63 ‐ ‐Unrealizedgains(losses) (2) ‐ 470Returnofcapital/transferstoincome (264) ‐ (204)Purchases/capitalcalls 616 ‐ 1,744Settlements ‐ ‐ ‐Transfersout ‐ ‐ ‐

Balance,May31,2012 1,123$ ‐$ 6,727$

(1) TransfersoutofLevel3resultedfromtheredemptionofahedgefundinvestmentonDecember31,

2010,with a5%portion retainedby the fundmanageruntil completionof the fund’s audit. As ofMay31,2011,amountsareincludedinOther(Level2),withsuchamountspaidtotheUniversityinJuly2011.

RealizedandunrealizednetgainsonLevel3assetsof$3,895and$5,426fortheyearsendedMay31,2012and2011,respectively,arereportedintheconsolidatedstatementsofactivitiesasacomponentofnonoperating realized/unrealized investment gain (loss). Net unrealized gains included in theconsolidatedstatementsofactivitiesforLevel3assetsstillheldatMay31,2012are$2,589.


(INTHOUSANDS)

34

Note14–FairValueofFinancialInstruments(continued)Redemption,fundingcommitments,restrictions,andotherinformationassociatedwiththenatureandvaluation of applicable Level 2 and Level 3 investments is as follows. As of May 31, 2012, it is notprobable that any of the investments listed belowwill be sold or transferred for amounts that differfromtherecordedfairvalue.

FairValueatUnfundedCash

RedemptionFrequency Redemption

InvestmentStrategiesand

OtherMay31,2012 Commitments (ifEligible) NoticePeriod Restrictions

Managedmutualfunds(Level2)

Domesticsmall/midcap 2,798$ ‐$NormallyMonthly

10dayspriortomonthend (a)

Manageddiversifiedglobalmulti‐ 14,811 ‐assetpartnership(Level3) (b) (b) (b)Privateequitylimitedpartnershipinvestments(Level3)Leveragedbuy‐out&distressedfunds 3,682 579 (c) n/a (c),(f)Venturecapitalfund 1,635 ‐ (c) n/a (c),(g)Diversifiedfundoffunds 6,899 1,575 (d) n/a (d),(h)Directinvestmentfund 290 53 (c) n/a (c),(i)Realestatefunds 10,563 ‐ (e) (e) (e)Healthcarefund 565 28 (d) n/a (d),(j)Mezzaninedebtfund 1,123 1,958 (d) n/a (d),(k)

42,366$ 4,193$

a) Thiscategoryincludesonefund,withthefairvalueestimatedusingactivemarketexchangesvaluedatthe

last reported sales price. The investment in the fund can be redeemed given proper notice, unless anywithdrawalwouldhaveanadverseeffectonthefund.Thefund’sinvestmentobjectiveistoachievelong‐termcapitalappreciationbyinvestinginaportfolioofsmallandmediumcapitalizationcompaniesdefinedascompanieswhosemarketcapitalizationsfallwithintherangeoftheRussell2500Indexatthetimeofpurchase.

b) Thiscategoryincludesonefund,withthefairvalueestimatedusingthenetassetvalueoftheUniversity’sownershipinterestinpartner’scapital,whichapproximatesmarketvalue.TheUniversitymayreceiveupto 5% of its capital account balance as an automatic annual distribution. Currently, the University haselected to retain this 5% of its capital balance in the fund. The University may change this electionannually, and the election must be made in the first quarter of the calendar year preceding the firstcalendaryeartowhichthedistributionapplies,andamountswillbedistributedwithin90daysoftheendofthecalendaryear,orwithin10businessdaysafterthefund’sauditedfinancialstatementsfortheyeararecompleted.


35


For distributions in excess of the automatic annual distribution, the University may request thewithdrawalofalloraportionof its capitalaccounton the lastdayofanycalendaryearbyprovidingawithdrawal request at any time during the fourth quarter of the preceding calendar year. The amountmustbeat least$1,000.Theamountrequestedtobewithdrawnwillbeapportionedbetweentheliquidportion and limited liquidity portion of the University’s capital account, as determined based on theliquidityattributesoftheunderlyingfundinvestments.Thefundwillmakeadistributionwithin30daysafter the effective withdrawal date in an amount not less than 90% of the liquid portion, with theremainingliquidportionamountpaidsubsequenttothefund’sfinancialstatementaudit.Forwithdrawalamountsattributabletothelimitedliquidityportion,distributionswillbemadewithin45daysaftertherealizationordeemedrealizationofassetsheldinthataccount.Distributionsmaybemadeincashorinfundassets (orboth).The fundgeneralpartnercanalsosuspend the rightsof theUniversityandotherlimited partners to make withdrawals or receive distributions for all or part of any period of marketdisruption.Thefundgeneralpartnermayalsolimitwithdrawalssuchthattheydonotexceed15%oftheliquidsubaccountbalance.

Thefund’sobjectiveistomanageandgrowlong‐termcapitalwithequity‐likeannualreturnsof10‐12%overtime,withlowerthanaveragerisk.

c) Thiscategoryincludesfourprivateequityfunds,withthefairvaluesestimatedusingthenetassetvalue

pershareoftheinvestments,whichapproximatesmarketvalue.Eachfundisnonredeemableandcanbesoldonlyonthesecondarymarketaslongastherespectivefundgeneralpartnerreceivesanopinionfromcounsel that such a transfer is not in violation of certain sanctions of the Securities Act, InvestmentCompanyActand/orfederaltaxlaws.Distributionsarereceivedthroughtheliquidationoftheunderlyingassetsofthefunds.Iftheseinvestmentswereheld,itisestimatedthattheunderlyingassetsofthefundswouldbeliquidatedbyDecember31,2019.

d) Thiscategoryincludesfourprivateequityfunds,withthefairvaluesestimatedusingthenetassetvalue

pershareoftheinvestments,whichapproximatesmarketvalue.Thefundscanonlyberedeemedthroughtheliquidationofunderlyingassets,andasunderlyingassetsareliquidated,distributionsarereceived.Itisestimatedthattheunderlyingassetsoftheilliquidfundswillbeliquidatedbetween2014and2024.

e) ThiscategoryincludestworealestatefundsthatareprimarilyinvestedinU.S.commercialandresidential

real estate. The fair values of the investments in this categoryhavebeen estimatedusing thenet assetvalue of the University’s ownership interest in partner’s capital, which approximates market value.Investmentsrepresentingapproximately50%oftheinvestmentsinthiscategorycanberedeemedwithatleast90daysnotice,as liquidassets inthefundpermits.Theremainingportionofrealestatefundscanonlyberedeemedthroughliquidationoftheunderlyingassets.ItisestimatedthattheunderlyingassetsoftheilliquidfundswillbeliquidatedbyDecember31,2015.

f) Thesefundsincludeaninvestmentinadiversifiedportfolioofprivateequityfunds,primarilycomprised

ofdomesticleveragedbuy‐outfunds,andaninvestmentinitiatedin2012withadistresseddebtfund.


(INTHOUSANDS)

36

Note14–FairValueofFinancialInstruments(continued)g) Thefundinvestsinadiversifiedportfolioofprivateequityfunds,primarilycomprisedofdomesticventure

capitalfunds.h) The funds invest39% indomesticequity,9% in internationalbuy‐out,25% inU.S.buyout,14% inU.S.

venture capital, and 13% in international private equity, respectively. Each fund has the objective togeneratecapitalappreciationatarateinexcessofthathistoricallygeneratedbyinvestmentsinpublicallytradedequitysecurities.

i) The fund invests in privately‐held entities, which have potential for significant growth in revenue and

earnings.j) Thefundinvestsinprivateequityandstructuredequity‐relatedinvestmentsinhealthcarecompanies.

k) Thefundmakesmezzanine‐levelinvestments,whichprimarilyconsistofsubordinatedcorporatedebtand

are typically coupledwith an equity component in the formof commonor preferred stock, options, orwarrants.

The following methods and assumptions were used to estimate the value of each class of financialinstrument:Cashandcashequivalents–Duetothehighlyliquidnature,carryingvalueapproximatesfairvalue.Notesreceivable–Thecarryingvalueapproximatesfairvaluefornotesreceivable,whichareprimarilyfederallysponsoredstudentloanswithU.S.governmentmandatedinterestratesandrepaymenttermssubjecttosignificantrestrictionastotheirtransferordisposition.Contributions receivable – Fair value approximates carrying value based on the present value ofexpected future cash flows, less an allowance for collectability. The Fair ValueMeasurements andDisclosuresTopicofFASBASCrequiresafairvaluemeasurementonlyatthetimeofinitialrecognitionofapromisetogive.WHEFAbondsandnotespayable–Fairvaluesaredeterminedusingfuturecashflowsdiscountedatarateofinterestcurrentlyofferedfordebtwithsimilarremainingmaturities.Thefairvalueandcarryingvalue of the WHEFA bonds payable at May 31, 2012, were approximately $144,065 and $130,488,respectively.ThefairvalueandthecarryingvalueoftheWHEFAbondspayableatMay31,2011,wereapproximately$138,507and$134,506, respectively. The fairvalueof theWHEFAbondspayablehasbeenprovidedbya thirdparty. The fairvalueofnotespayable tobanks (including the lineof creditagreement)approximatesthecarryingvalue.


37

Note14–FairValueofFinancialInstruments(continued)Valuation limitations–Themethodsdescribedabovemayproducea fairvaluecalculation thatmaynotbeindicativeofnetrealizablevalueorreflectiveoffuturevalues.Inaddition,whiletheUniversitybelievesthat itsvaluationmethodsareappropriateandconsistentwithothermarketparticipants,theuseofdifferentmethodologiesorassumptionstodeterminefairvalueofcertainfinancial instrumentscouldresultinadifferentestimateoffairvalueatthereportingdate.Note15–RelatedPartiesContributionsreceivableincludesamountsduefrommembersoftheBoardaslistedbelow:

2012 2011

Contributionpledgereceivable,net 2,087$ 3,500$Contributionsrevenue 311 533

TheUniversityhasnumerousbanking relationshipswith abankofwhich the chairman andCEO is amemberoftheBoard.Note16–SubsequentEventsOnAugust7,2012,theWHEFARevenueBonds,Series2012Aintheamountof$7,305andSeries2012B in theamountof $3,320,were issued to finance the constructionof amixeduseparkingand retailfacilityontheUniversitycampus(theBooneAvenueRetailCenter).TheBondsareprivatelyheldbyanationalbank(theBank)andbear interestattherateofonemonthLIBORplus92basispoints,resetmonthly.InterestispaidquarterlywithprincipalpaidannuallybeginningonApril1,2014,baseduponathirtyyearamortization.Theprivateplacementwith theBankmatureson July31,2022,andmaybeextendedattheoptionoftheBank.TheBondsaresecuredonaparitybasiswithallotherBondsissuedthroughtheAuthority(seeNote9).Thecovenantsaresubstantially thesameas thoseof theexistingdebtissuedthroughtheAuthority.Thevariableinterestrateexposureisexpectedtobehedgedusingexistinginterestrateswapagreements,aspreviouslydisclosed.On July31,2012, theUniversitymadeprincipalpaymentsonothernotesof$674,ofwhich$500and$174wereotherwisescheduledfortheyearsendedMay31,2014and2015,respectively(seeNote9).

SUPPLEMENTARY INFORMATION

THECORPORATIONOFGONZAGAUNIVERSITY

UNRESTRICTEDOPERATINGEXPENSESCOMBINEDBYNATURALEXPENDITURE(INTHOUSANDS)

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The University’s classification on unrestricted operating expenses in the statements of activities arecombinedbynaturalexpendituresasofMay31,2012and2011,asfollows.

2012 2011

Salaries 82,010$ 78,258$Benefits 20,282 19,291Meetings,travel,andmemberships 10,087 9,151Scholarshipsandstudentaid 9,564 9,950Depreciation 8,769 8,870Diningexpenses 8,192 8,189Occupancy,telephone,utilities,andinsurance 8,189 8,076Interestandfeesondebt 7,081 7,214Materials,supplies,printing,andpostage 6,274 4,570Professionalfeesandcontractedservices 4,884 4,694Bookstorecostofgoodssold 3,613 2,714Maintenanceandrentals 3,558 3,846Librarymaterials 2,184 2,230Advertising,promotion,andrecruitment 846 890Otherexpenses 5,614 4,931

181,147$ 172,874$

the corporation of gonzaga university · 5/31/2012 · gonzaga university (university) is an...

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