CAPINCROUSELL: THE UNIVERSITY AND SEMINARY Financial Statements With Independent Auditors? Report And Federal Awards In Accordance with the Uniform Guidance Year Ended June 30, 2017 7,) 0%67)5U6 81-9)56-7< %1( 6)0-1%5< Table of Contents Page B]ST_T]ST]c 9dSXc^abj JT_^ac 1 Financial Statements Statements of Financial Position Statements of Activities Statements of Cash Flows 3 4 6 Notes to Financial Statements 7 Federal Awards Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards B]ST_T]ST]c 9dSXc^abj JT_^ac ^] B]cTa]P[ <^]ca^[ GeTa Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards B]ST_T]ST]c 9dSXc^abj JT_^ac ^] <^\_[XP]RT U^a >PRW EPY^a ?TSTaP[ Program and Report on Internal Control Over Compliance Required by the Uniform Guidance Schedule of Findings and Questioned Costs Auditee Summary Schedule of Prior Audit Findings 33 34 35 37 39 41 -1()3)1()17 %8(-7256U 5)3257 Board of Trustees The Master's University and Seminary Santa Clarita, California Report on the Financial Statements We have audited the accompanying financial statements of The EPbcTajb University and Seminary (TMUS), which comprise the statements of financial position as of June 30, 2017 and 2016, and the related statements of activities and cash flows for the years then ended, and the related notes to the financial statements. +4A4;8@8AFOE /8ECBAE=5=?=FI 9BD F<8 (=A4A6=4? 0F4F8@8AFE Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. $G7=FBDEO /8ECBAE=5=?=FI Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the PdSXc^ajb judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the T]cXchjb preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the T]cXchjb internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. %+*(*!.B?32<8!.=B96C2?5"!0B7A6!&$* 12?D2<2"!/-!,%&() +%+#,,)#%'%, 42>7<4?=B@6#4=; Board of Trustees The Master's University and Seminary Santa Clarita, California Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The EPbcTajb University and Seminary (TMUS) as of June 30, 2017 and 2016, and the changes in its net assets and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Report on Supplementary Information Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards (Uniform Guidance), is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 25, 2017 on our consideration of LEMKjb internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering LEMKjb X]cTa]P[ R^]ca^[ ^eTa UX]P]RXP[ aT_^acX]V P]S R^\_[XP]RT* Tarzana, California October 25, 2017 -2- THE MASTER'S UNIVERSITY & SEMINARY Statements of Financial Position June 30, 2017 ASSETS: Current assets: Cash and cash equivalents Accounts receivable, net of allowance for uncollectible accounts of $60,000 each year Notes receivable, current portion (note 3) Prepaids and other assets Assets held for sale $ Cash held for annuitants, trustors, and endowments Notes receivable, net of current portion (note 3) Investments (note 4) Future interest in split interest agreement (note 5) Land, buildings, and equipment, net (note 7) Total Assets LIABILITIES AND NET ASSETS: Current liabilities: Accounts payable and accrued expenses Accrued payroll and benefits Deferred revenue and other deposits, current portion Debt instruments payable, current portion (note 9) 276,126 13,000 1,690,181 4,240,314 10,648,966 161,975 5,500 1,164,465 4,000 6,493,953 1,124,255 29,263,563 2,921,317 45,557,039 47,827 962,255 25,090,695 2,814,609 45,415,373 $ 80,824,712 $ 493,892 523,687 1,855,189 4,829,421 7,702,189 $ 532,367 813,545 2,264,965 705,680 4,316,557 $ -3- 5,158,013 89,515,140 Net assets (note 11): Unrestricted Temporarily restricted Permanently restricted See notes to financial statements $ $ Deferred revenue and other deposits, net of current portion Interest rate swap agreement (note 10) Debt instruments payable, net of current portion (note 11) Due to annuitants Due to trustors and other remaindermen under trust agreements Total Liabilities and Net Assets 4,429,345 2016 103,912 22,849,612 3,987,309 414,472 35,057,494 18,222 510,783 26,338,963 793,483 432,504 32,410,512 24,156,231 8,163,494 22,137,921 54,457,646 22,904,076 6,225,907 19,284,217 48,414,200 89,515,140 $ 80,824,712 THE MASTER'S UNIVERSITY & SEMINARY Statements of Activities Year Ended June 30, 2017 Temporarily Restricted Unrestricted OPERATING REVENUES AND RECLASSIFICATIONS: Student tuition and fees Auxiliary enterprises Less institutional scholarships Net tuition and fees revenue $ 35,813,332 8,910,080 (13,457,793) 31,265,619 $ 2016 Permanently Restricted - $ Total - - - 3,702,505 819,992 4,180,561 - 1,876,596 384,598 1,437,848 (1,876,596) (384,598) (1,437,848) $ Temporarily Restricted Unrestricted 35,813,332 8,910,080 $ 34,431,070 9,361,250 (13,457,793) 31,265,619 (12,605,373) 31,186,947 3,163,713 - 11,046,779 819,992 - $ Permanently Restricted - $ Total - $ 34,431,070 9,361,250 - - (12,605,373) 31,186,947 4,158,936 763,022 3,168,571 - 510,799 - 7,838,306 763,022 - 1,518,915 192,681 876,133 (1,518,915) (192,681) (876,133) - - Gifts and private grants Other income Net assets released from restrictions: Scholarships Student missions Operating expenses Total Operating Revenue and Reclassifications 39,487,158 481,519 3,163,713 43,132,390 38,696,634 580,842 510,799 39,788,275 OPERATING EXPENSES: Instruction Institutional support Student services Auxiliary enterprises Academic support Plant operations Depreciation Interest on indebtedness Total Operating Expenses 12,024,475 7,900,050 6,242,637 5,974,090 2,890,792 2,651,735 2,149,671 608,318 40,441,768 - - 12,024,475 7,900,050 6,242,637 5,974,090 2,890,792 2,651,735 2,149,671 608,318 40,441,768 11,228,925 7,041,059 6,095,290 6,164,240 2,705,154 2,570,101 2,088,199 583,542 38,476,510 - - 11,228,925 7,041,059 6,095,290 6,164,240 2,705,154 2,570,101 2,088,199 583,542 38,476,510 481,519 3,163,713 2,690,622 220,124 580,842 510,799 1,311,765 Change in Net Assets from Operations (954,610) (continued) See notes to financial statements -4- THE MASTER'S UNIVERSITY & SEMINARY Statements of Activities (continued) Year Ended June 30, 2017 Temporarily Restricted Unrestricted 2016 Permanently Restricted Total OTHER CHANGES IN NET ASSETS: Net assets releasedcapital expenditures Investment income (loss) Net change in split interest agreements Unrealized gain (loss) on interest rate swap (note 10) Non-operating gains (losses) Total Other Changes in Net Assets 17,379 26,599 (310,009) 406,871 7,861 2,206,765 1,456,068 (310,009) Change in Net Assets 1,252,155 1,937,587 22,904,076 6,225,907 827,619 947,035 Net Assets, Beginning of Year Net Assets, End of Year $ 24,156,231 (827,619) 2,257,088 $ 8,163,494 - $ Temporarily Restricted Unrestricted Total 393,883 (149,859) (393,883) (455,559) (23,677) (13,509) (58,742) (95,928) 406,871 7,861 3,352,824 (376,002) 5,424 (150,231) (862,951) (58,742) (376,002) 5,424 (1,071,924) 2,853,704 6,043,446 69,893 (282,109) 452,057 239,841 19,284,217 48,414,200 22,834,183 18,832,160 48,174,359 22,137,921 3,204,123 Permanently Restricted (266,031) $ 54,457,646 See notes to financial statements -5- $ 22,904,076 - 6,508,016 $ 6,225,907 $ 19,284,217 (605,418) $ 48,414,200 THE MASTER'S UNIVERSITY & SEMINARY Statements of Cash Flows Year Ended June 30, 2017 2016 CASH FLOWS FROM OPERATING ACTIVITIES: Change in net assets Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation Amortization of debt issue costs Recurring debt issue costs Write-off of notes receivable Change in value of interest rate swap agreement Decrease in future interest in split interest agreement Unrealized and realized (gains) losses on securities Donated fixed asset additions Donated assets held for sale Contributions restricted for land, buildings, equipment, and endowments Due to annuitants Due to trustors and other remaindermen under trust agreements Changes in operating assets and liabilities: Accounts receivable Prepaids and other assets Accounts payable, accrued expenses, deferred revenue, other Accrued payroll and benefits Net Cash Provided by Operating Activities $ 6,043,446 $ 239,841 2,149,976 44,796 (4,726) (406,871) (106,708) (2,486,448) (4,236,314) (641,233) 3,000,062 (18,032) 2,088,199 43,063 (6,592) 55,655 376,002 (4,476) 1,135,411 (210,000) (96,681) 21,607 14,985 (114,151) (525,716) (601,383) (289,858) 1,806,840 79,785 (242,487) 846,594 10,473 4,351,379 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of investments Purchase of investments Change in cash held for annuitants, trustors, and endowments Payments received on notes receivable New notes receivable issued Fixed asset additions Net Cash Used in Investing Activities 105,534 (1,791,954) 47,827 105,500 (275,000) (2,156,732) (3,964,825) 321,714 (2,364,480) 1,173,782 15,500 (1,805,744) (2,659,228) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments Proceeds from new debt Proceeds from borrowings on lines of credit Principal payments on lines of credit Contributions restricted for land, buildings, equipment, and endowments Net Cash Provided by (Used in) Financing Activities (597,289) 85,373 5,400,000 (4,100,000) 641,233 1,429,317 (492,436) 193,763 5,650,000 (5,700,000) 96,681 (251,992) Net Change in Cash and Cash Equivalents (728,668) Cash and Cash Equivalents, Beginning of Year 1,440,159 5,158,013 Cash and Cash Equivalents, End of Year $ See notes to financial statements -6- 4,429,345 3,717,854 $ 5,158,013 THE MASTER'S UNIVERSITY & SEMINARY Statements of Cash Flows Year Ended June 30, 2017 2016 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest (none capitalized) Purchases of equipment and improvements not yet paid for Conversion of note to an annuity $ $ $ See notes to financial statements -7- 540,642 134,910 193,764 $ $ $ 525,904 104,159 - THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 1. NATURE OF ORGANIZATION: The Master's University and Seminary (TMUS), formerly The Master's College and Seminary, formerly Los Angeles Baptist College, was incorporated in 1927 in California as a not-for-profit liberal arts college and seminary. The Master's University offers undergraduate and graduate study programs to national and international students. The Master's Seminary offers undergraduate and graduate study programs, leading to degrees in divinity and theology, to national and international students. TMUS is a nonprofit organization that is exempt from income taxes under section 501(c)(3) of the Internal Revenue Code (IRC) and comparable state laws. However, TMUS is subject to federal income tax on any unrelated business taxable income. In addition, TMUS is subject to federal income tax on any unrelated business taxable income and is not classified as a private foundation within the meaning of Section 509(c) of the IRC. TMUS is accredited by the Western Association of Schools and Colleges Senior College and University Commission (WSCUC). TMUS' primary sources of income are from tuition and fees paid by students and donor contributions. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The financial statements of TMUS have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. A summary of the significant accounting policies is described below to enhance the usefulness of the financial statements to the reader. CASH AND CASH EQUIVALENTS For statements of financial position and cash flow purposes, cash and cash equivalents include cash on hand, cash on deposit, money market accounts, and commercial paper with original maturities of 90 days or less. These accounts may, at times, exceed federally insured limits. TMUS has not experienced any losses in such accounts. TMUS continually monitors all accounts, assessing any potential risks and periodically re-balances its portfolio accordingly. INVESTMENTS For statements of financial position and cash flow purposes, investments consist primarily of money market funds, equities, and mutual funds. Investments are carried at fair value, which is based upon quoted market prices or on the net asset value of the underlying investments. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Realized and unrealized gains and losses are reported as unrestricted net investment income in the statements of activities unless restricted by the donor. Donated securities are recorded at market value on the date of the gift and thereafter carried in accordance with the above provisions. -8- THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued: INVESTMENTS, continued Investment securities are exposed to various risks, such as changes in interest rates or credit ratings and market fluctuations. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment securities, it is possible that the value of the TMUS' investments and total net assets balance could fluctuate materially. ACCOUNTS AND NOTES RECEIVABLE Accounts and notes receivable are reported net of any anticipated losses due to uncollectible accounts. TMUS' policy for determining when receivables are past due or delinquent is after a student misses three payments. Uncollectible accounts are reported as additions to the allowance for bad debts when it is determined the amounts will become uncollectible. TMUS does not assess finance charges against student receivables, but charges a monthly late payment fee of $25. Once a student is no longer enrolled and has failed to make the required payments, the account is placed on nonaccrual status, assigned to a collection agency, and written off against the allowance. The allowance for doubtful accounts is maintained at a level which, in management's judgment, is adequate to absorb potential losses inherent in the receivable portfolio. The amount of the allowance is based on management's evaluation of the collectability of the receivable portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired notes, and economic conditions. Allowances for impaired notes receivable are generally determined based on collateral values or the present value of estimated cash flows. PREPAIDS AND OTHER ASSETS Prepaids and other assets consist of inventory, prepaid expenses, and cash value of life insurance policies. Bookstore inventory is valued at the lower of cost or market and accounted for on a first-in, first-out basis. Inventory represents new and used books and supplies for resale in the bookstore. ASSETS HELD FOR SALE During the year ended June 30, 2017, an individual donated five violins for the purpose of establishing an annuity. The violins were recorded at approximately $4,300,000, which represents appraised value less estimated selling costs. In conjunction with the contribution, an annuity was established on behalf of the donor. The annuity liability recorded equaled $2,915,520, which amount was funded prior to June 30, 2017, in accordance with California law. Upon the termination of the life interest in the annuity, the residual value will be added to an existing scholarship endowment. -9- THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued: LAND, BUILDINGS, AND EQUIPMENT Land, buildings, and equipment are carried at cost or, if donated, at fair market value on the date of the gift. Maintenance and repairs are charged as current expenses. Expenditures in excess of $1,000 for land, buildings, and equipment acquired for use for more than one year are capitalized at cost. Depreciation and amortization on buildings and equipment are based upon the estimated useful lives of the assets and are computed using a straight-line method. The ranges of useful lives are from 25 to 50 years for buildings and from 3 to 10 years for equipment. The building under lease is amortized over 50 years (see note 8). Contributions of cash restricted by the donor for acquiring property and equipment are reported as increases in temporarily restricted net assets. When the property or equipment is acquired, TMUS reclassifies the net assets from temporarily restricted to unrestricted. NET ASSETS All financial transactions have been reported by net asset classification according to the presence or absence of donor-imposed stipulations. The financial statements report amounts by class of net assets: Unrestricted net assets are those currently available at the discretion of the board for use in TMUS' bcXeTg\baf TaW g[bfX eXfbheVXf \aiXfgXW \a _TaW* Uh\_W\aZf* TaW Xdh\c`Xag{aXg, Temporarily restricted net assets are those which are stipulated by donors for specific operating purposes or for the acquisition of property and equipment. This classification also includes TMUS' future interest in split interest agreements, which are restricted by expiration of a time restriction. Permanently restricted net assets amounts are those for which the principal is stipulated by donors to be invested in perpetuity. The income on the funds is used as specified by the donor. All contributions are considered available for unrestricted use, unless specifically restricted by the donor or subject to legal restrictions. TMUS records contributions as temporarily restricted if they are received with donor stipulations that limit their use either through purpose or time restrictions, or both. When donor restrictions expire, that is, when the purpose restriction is fulfilled or the time restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statements of activities as net assets released from restrictions. -10- THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued: SUPPORT, REVENUE, AND EXPENSES Student tuition and fees are recorded as revenue in the period during which the academic services are rendered. Student tuition and fees received prior to when services are rendered are recorded as deferred revenues. Revenue is earned once the tuition is no longer refundable. Traditional school terms end prior to fiscal year-end. For non-traditional programs, revenue is pro-rated between fiscal years using a straight-line proportional method. Contributions, including promises-to-give receivable, are recognized as revenue in the period the contribution or unconditional promises-to-give are received and are reported as increases in the appropriate category of net assets. All other income is recorded when earned. Expenses of TMUS are recorded when incurred in accordance with the accrual basis of accounting. All expenses are reported as reductions in unrestricted net assets. CONTRIBUTED SERVICES Accounting standards for revenue recognition requires recording the value of donated services that create or enhance non-financial assets or require specialized skills. Many volunteers have contributed significant amounts of their time to activities of TMUS. However, since the above requirements were not met, the value of the contributed services is not recorded in the financial statements. DEFERRED GIVING PROGRAMS Gift Annuities: TMUS has a gift annuity plan whereby donors may contribute assets to TMUS in exchange for the right to receive a fixed-dollar annual return during their lifetimes. This transaction provides for a portion of the transfer to be considered a charitable contribution for income tax purposes. The difference between the amount contributed for the gift annuity and the liability for future payments, determined on an actuarial basis, is recognized as contribution income at the date of the gift. The liability for future payments is reported on the statements of financial position under the caption due to annuitants. The annuity liability is revalued annually based upon actuarially computed present values. The resulting actuarial gain or loss is reflected in the statements of activities under the caption net change in split interest agreements. California law requires that California gift annuity assets be segregated from all other assets. California law also requires that no more than 50% of the assets for California gift annuities be invested in equity securities. TMUS is in compliance with these requirements (see note 6). -11- THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued: DEFERRED GIVING PROGRAMS, continued Irrevocable Agreements: As trustee, TMUS administers irrevocable trusts, charitable remainder unitrusts, and charitable remainder annuity trusts. These trusts provide for the payment of lifetime distributions to the grantor or other designated beneficiaries. At the death of the lifetime beneficiaries, the trusts provide for the distribution of assets to designated parties. Irrevocable Agreements, continued: The difference between the amount contributed and the liability for future payments, determined on an actuarial basis, is recognized as temporarily restricted contributions at the date of the gift. The difference between the assets in trust and the liabilities is reported on the statements of financial position as temporarily restricted net assets. The present value of the expected payments to the trustors over their life expectancy is reported on the statements of financial position as a liability under the caption due to trustors and other remaindermen under trust agreements. The change in the amount of the liabilities, net of investment income, trustor payments, and terminations, is reflected in the statements of activities under the caption net change in split interest agreements. FUNCTIONAL ALLOCATION OF EXPENSES The costs of providing the various program services and supporting activities have been summarized on a functional basis in a note to the financial statements. Certain costs, such as depreciation and payroll, have been allocated among the program services and supporting activities. Currently, there are no joint costs that have been allocated among program, general and administrative, and fundraising functions. AUXILIARY ENTERPRISES Auxiliary enterprises reflect the activities of TMUS' bookstore, food service, summer facilities usage, IBEX short-term trips, and dormitory operations. Income from auxiliary enterprises is recorded when earned. USE OF ESTIMATES 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 certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. ADVERTISING Advertising expense was $123,124 and $282,266 for the years ended June 30, 2017 and 2016, respectively. Advertising costs are used to promote TMUS and are expensed as incurred. -12- THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued: ADOPTION OF ACCOUNTING STANDARD In April 2015, the Financial Accounting Standards Board (FASB) issued guidance that replaces the existing accounting standards for deferred debt issuance costs in Accounting Standards Update (ASU) 2015-03, Simplifying the Presentation of Debt Issuance Costs, with retroactive application required. The guidance s effective for fiscal years beginning after December 15, 2015, and required deferred debt issuance costs related to a recognized debt liability to be presented in the statements of financial position as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts (ie., a contra liability), rather than as an asset. TMUS adopted the provision of this guidance in the fiscal year ended June 30, 2017. See note 9 for the unamortized portion of deferred debt issuance costs. RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform with current year presentation. 3. NOTES RECEIVABLE: Notes receivable consist of: June 30, 2017 Notes to certain faculty and staff, consisting of loans for relocation and housing assistance, collateralized by property in southern California, generally non-interest bearing, due upon the earliest of the sale of the property or termination. TMUS shares in the appreciation of the property when sold equal to the ratio of the note receivable amount to the purchase price of the property. $ Notes to faculty and staff members, unsecured, payment over 10 years at 3.32% and 4.45% interest. $ 113,500 1,137,255 (13,000) Less current portion $ -13- 1,023,755 2016 1,124,255 923,755 44,000 967,755 (5,500) $ 962,255 THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 4. INVESTMENTS: Investments consist of: June 30, 2017 Equities Fixed income mutual funds Privately held mutual funds Cash and money market funds 2016 $ 17,724,519 4,942,456 2,900,535 3,696,053 $ 15,592,725 4,653,504 2,694,206 2,150,260 $ 29,263,563 $ 25,090,695 Investment income (loss) consists of: Year Ended June 30, 2017 2016 Dividends and interest Realized gains Unrealized gains (losses) $ 654,541 432,163 2,424,892 $ 538,664 1,198,530 (2,329,466) $ 3,511,596 $ (592,272) Investment income is reported net of related fees, which totaled $135,372 and $143,420 for the years ended June 30, 2017 and 2016, respectively. Investment income is included in the financial statements as follows: Year Ended June 30, 2017 2016 Investment income (loss) Included in unrestricted net change in split interest agreement Included in temporarily restricted net change in split interest agreement $ $ -14- 3,204,123 $ (605,418) 255,871 21,807 51,602 (8,661) 3,511,596 $ (592,272) THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 4. INVESTMENTS, continued: Unrealized gains (losses) by classification: Year Ended June 30, 2017 2016 Unrestricted Temporarily restricted Permanently restricted $ 728,679 1,522,864 173,349 $ (532,176) (1,779,576) (17,714) $ 2,424,892 $ (2,329,466) TMUS uses appropriate valuation techniques based on the available inputs to measure the fair value of its investments. When available, TMUS measures fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value. Level 3 inputs are only used when Level 1 or Level 2 inputs are not available. Level 1 Fair Value Measurements The fair values of common stock, corporate bonds, and U.S. government securities are based on quoted market prices, when available. Level 3 Fair Value Measurements The fair value of the investment in a privately held company is based on current value of cash and investments of the company. Alternative investments are valued based on the net asset value of each of the underlying investments. Each of the underlying companies obtains an annual audit, from which the net asset value is compared to the value reported to the brokerage firm holding the investments. -15- THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 4. INVESTMENTS, continued: TMUS' investments are reported at fair value in the accompanying statements of financial position. Fair Value June 30, 2017: Equities: Institutional international equity Growth equity Value equity Emerging markets Commodity securities Small cap Real estate $ 7,338,128 3,470,851 2,668,836 2,265,244 1,253,227 418,960 309,273 17,724,519 4,942,456 2,900,535 3,696,053 $ 7,338,128 3,470,851 2,668,836 2,265,244 1,253,227 418,960 309,273 17,724,519 4,942,456 3,696,053 $ 2,900,535 - $ 29,263,563 $ 26,363,028 $ 2,900,535 $ 5,450,784 3,591,748 2,557,842 2,054,102 1,154,475 427,574 356,200 15,592,725 4,653,504 2,694,206 2,150,260 $ 5,450,784 3,591,748 2,557,842 2,054,102 1,154,475 427,574 356,200 15,592,725 4,653,504 2,150,260 $ 2,694,206 - $ 25,090,695 $ 22,396,489 $ 2,694,206 Fixed income mutual funds Privately held mutual funds Money market June 30, 2016: Equities: Institutional international equity Growth equity Value equity Emerging markets Commodity securities Small cap Real estate Fair Value Measurements Using: Quoted Prices in Active Significant Markets for Unobservable Identical Assets Inputs (Level 1) (Level 3) Fixed income mutual funds Privately held mutual funds Money market -16- THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 4. INVESTMENTS, continued: There were no changes in valuation techniques for the year ended June 30, 2017. The following tables provide further details of the Level 3 fair value measurements: Privately held mutual funds Balance, June 30, 2016 Total gains (realized/unrealized) included in investment income on the statements of activities $ Balance, June 30, 2017 $ 2,694,206 206,329 2,900,535 Privately held mutual funds Balance, June 30, 2015 Total losses (realized/unrealized) included in investment income on the statements of activities $ Balance, June 30, 2016 $ 2,725,494 (31,288) 2,694,206 TMUS uses the Net Asset Value (NAV) to determine the fair value for all hedge funds which (a) do not have a readily determinable fair value and (b) prepare their financial statements consistent with the measurement principles of an investment company or have attributes of an investment company. -17- THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 4. INVESTMENTS, continued: The following table lists investments in other investment companies (in partnership format) by major category at June 30, 2017. Investment Category Hedge Funds Strategy Generate superior, long-term return with less risk than the market Limited Partnerships Generate superior, long-term return with less risk than the market Fair Value Determined Using NAV $ 2,066,707 Amount of Unfunded Commitments $ - 833,828 1,195,353 2,900,535 $ 1,195,353 $ -18- Timing to Draw Down Redemption Commitments Terms Funded at time Redemptions of investment can occur quarterly As called by general partner By consent of general partner Redemption Restrictions Minimum residual investment equal to the greater of $100,000 or 20% of initial investment Restricted by the availability of cash to meet the general obligations of the limited partnership Redemption Restrictions in Place at Year End No additional restrictions Normal consent of general partner THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 4. INVESTMENTS, continued: The following table lists investments in other investment companies (in partnership format) by major category at June 30, 2016. Investment Category Hedge Funds Strategy Generate superior, long-term return with less risk than the market Limited Partnerships Generate superior, long-term return with less risk than the market Fair Value Determined Using NAV $ 1,940,546 Amount of Unfunded Commitments $ - 753,660 421,060 $ 2,694,206 $ 421,060 -19- Timing to Draw Down Redemption Commitments Terms Funded at time Redemptions of investment can occur quarterly As called by general partner By consent of general partner Redemption Restrictions Minimum residual investment equal to the greater of $100,000 or 20% of initial investment Restricted by the availability of cash to meet the general obligations of the limited partnership Redemption Restrictions in Place at Year End No additional restrictions Normal consent of general partner THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 5. FUTURE INTEREST IN SPLIT INTEREST AGREEMENT: TMUS is the beneficiary of an irrevocable trust for which TMUS is not the trustee. This constitutes a future interest in this irrevocable trust. The present value of TMUS' future cash flow is classified as an addition to permanently restricted net assets due to the restrictions imposed by the donor. The terms of the trust call for payments to TMUS to begin many years in the future after the life interests have expired. The donor restricts the principal and interest earned. The present value was $2,921,317 and $2,814,609 for the years ended June 30, 2017 and 2016, respectively. 6. ASSETS HELD FOR ANNUITANTS, TRUSTORS, AND ENDOWMENTS: TMUS is holding a variety of assets for the benefit of annuitants and trustors and to fund endowments. These are included in the statements of financial position in the respective accounts as described below. Those assets are as follows: June 30, 2017 2016 Cash and cash equivalents - current portion Cash held long-term for annuitants and trustors Investments $ 198,560 5,160,229 $ 169,052 47,827 1,589,988 Total held for annuitants and trustors $ 5,358,789 $ 1,806,867 Investments Land, buildings, and equipment Annuities benefitting endowments (net) Assets held for sale - endowment portion Future interest in split interest agreements $ 15,882,561 1,474,996 774,567 1,084,480 2,921,317 $ 14,620,205 1,474,996 374,407 2,814,609 Total held for endowments $ 22,137,921 $ 19,284,217 The assets held for endowments at June 30, 2017 and 2016, includes the purchase and renovation of an apartment complex (shown above as land, buildings, and equipment) used as a dormitory. TMUS pays $72,000 per year to the respective scholarship fund of the endowment funds for the usage of the apartment complex. -20- THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 7. LAND, BUILDINGS, AND EQUIPMENT: Land, buildings, and equipment consist of: June 30, 2017 Land and improvements Buildings Building under lease (note 8) Leasehold improvements Equipment Library materials $ Less accumulated depreciation Construction in progress Total land, buildings, and equipment Plus debt issuance costs Less total debt instruments payable (note 9) Plus debt instruments not secured by real property (note 9) Net investment in land, buildings, and equipment 8. 9,770,710 39,860,064 5,171,579 827,597 10,542,860 6,236,745 72,409,555 (31,364,191) 4,511,675 45,557,039 172,216 (27,851,249) 2016 $ 216,185 $ 18,094,191 10,399,986 39,179,620 5,171,579 560,967 14,497,389 6,095,508 75,905,049 (35,004,752) 4,515,076 45,415,373 212,287 (27,256,929) 464,009 $ 18,834,740 SEMINARY BUILDING: In 1997, to provide adequate space for the operations of its seminary, TMUS contracted with Grace Community Church of the Valley (the Church) to construct a building on the property of the Church. The building is used for the seminary library and faculty office space. Under the terms of the agreement, the Church constructed the property and holds title to it. The building is leased to TMUS on a 50-year term, with the rent paid in advance. The rent for the entire term of the lease is equal to the development and construction costs of the building. Therefore, TMUS has paid for all construction and development costs. TMUS will not pay any additional rent during the term of the lease. TMUS is responsible for maintenance and utilities on the building during the lease. At the termination of the lease, the building remains the property of the Church. TMUS may extend the lease for five additional terms of 10 years each. -21- THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 8. SEMINARY BUILDING, continued: Due to the nature of the lease, in particular the long term, and because TMUS and the Church are related parties, the costs paid by TMUS have been capitalized as buildings under lease. This amount is classified on the statements of financial position in the land, buildings, and equipment section. The cost is being amortized over 50 years. 9. DEBT INSTRUMENTS PAYABLE: Debt instruments payable consist of : June 30, 2017 Bond issue, secured by Deed of Trust, interest at a monthly variable rate (2.0591% at June 30, 2017) is paid monthly. Bond issue was purchased by a bank under agreement through December 2021. Mandatory principal payments are due monthly. The interest rate for a portion of the bond issue has been fixed by virtue of an interest rate swap (note 10). $ 2016 22,948,000 $ 23,396,000 Note payable, secured by apartment building, with interest rate of 5.0%, amortized over 25 years with monthly principal and interest payments of $2,457, maturing in November 2018. 387,064 396,920 Note payable, unsecured, interest rate 0.0%, amortized over 9 years with monthly principal payment of $4,505, maturing in June 2021. 216,185 270,245 Note payable, unsecured, interest rate 9.0% accruing to the balance of note, payable on demand. See discussion below. - 193,764 4,300,000 3,000,000 27,851,249 (4,829,421) (172,216) 27,256,929 (705,680) (212,286) Bank revolving lines of credit. See discussion below. Total debt instruments payable Less current portion Less debt issue costs Long-term portion of debt instruments payable $ -22- 22,849,612 $ 26,338,963 THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 9. DEBT INSTRUMENTS PAYABLE, continued: Debt instruments payable will mature as follows: Year Ending June 30, 2018 2019 2020 2021 2022 $ 4,829,421 915,763 559,060 579,005 20,968,000 $ 27,851,249 TMUS has a revolving line of credit with a bank in the amount of $5,000,000 as of June 30, 2017. As of June 30, 2017 and 2016, the line of credit had an outstanding balance of $4,300,000 and $3,000,000 respectively. The bank line of credit expires on December 21, 2017, and is secured by real property. Interest is calculated based on the borrowing terms, prime borrowings rate (4.00% at June 30, 2017) or LIBOR borrowing rate plus 1% (2.22% as of June 30, 2017). As of June 30, 2017, prime borrowings were $0, and LIBOR borrowings were $4,300,000. Management's intention is to repay the line of credit draws within two to three months of the draw. The balance of the LIBOR borrowing were repaid in a series of payments of $1,000,000 on August 8, 2017, $1,000,000 on August 28, 2017, $1,000,000 on September 11, 2017, and $1,300,000 on September 25, 2017. During the year ended June 30, 2017, the 9% interest rate, unsecured note payable on demand was transferred by the donor into a charitable gift annuity. Interest expense is as follows: Year Ended June 30, 2017 2016 Interest incurred Amortization of deferred debt issue costs -23- $ 563,522 44,796 $ 540,479 43,063 $ 608,318 $ 583,542 THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 10. INTEREST RATE SWAP AGREEMENT: In December 2014, TMUS entered into an interest rate swap agreement to manage the economic effect of variable interest obligations associated with the direct purchase bond issue described in note 9. The interest payable on a portion of the line effectively becomes a fixed rate, thereby reducing the impact of future interest rate changes on future interest expense. Contractual terms are as follows: Fixed rate Variable rate Remaining term of contract in years Original note payable balance covered by agreement (notional amount) Notional amount outstanding at year-end 2017 1.494% 0.73745% 4 $ $ 12,000,000 11,474,000 2016 1.494% 0.32057% 5 $ $ 12,000,000 11,698,000 The agreement is accounted for as a fair value hedge. The unrealized gains and losses on this agreement are included in unrealized loss on interest rate swap in the statements of activities and the corresponding fair value liability is reported as interest rate swap agreements in the statements of financial position. The effects of derivative instruments on the financial statements were as follows as of June 30, 2017 and 2016, respectively, and for the years then ended: Fair Value of Derivative Instruments in Statement of Financial Position Fair Value 2017 Statement Location Fair value hedge: Interest rate swap agreement Interest rate swap $ (103,912) Fair Value 2016 $ (510,783) Effects of Derivative Instruments on Statement of Activities Statement Location Fair value hedge: Interest rate swap agreement Unrealized gain (loss) on interest rate swap agreement $ -24- Gain (Loss) 2017 406,871 Gain (Loss) 2016 $ (376,002) THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 11. NET ASSETS: Unrestricted net assets consist of: June 30, 2017 Net investment in land, buildings, and equipment Board designated Undesignated 2016 $ 18,094,191 503,637 5,558,403 $ 18,834,740 486,018 3,583,318 $ 24,156,231 $ 22,904,076 Temporarily restricted net assets are available for the following purposes: June 30, 2017 Various scholarships For future operations Future interest in trust agreements 2016 $ 5,917,117 2,104,191 142,186 $ 3,676,161 2,388,797 160,949 $ 8,163,494 $ 6,225,907 Permanently restricted net assets are restricted to: June 30, 2017 Investment in perpetuity, the income from which is expendable to support various scholarships and operations 12. $ 22,137,921 2016 $ 19,284,217 ENDOWMENTS: TMUS' endowment consists of 38 individual funds established for a variety of purposes. As required by accounting principles generally accepted in the United States of America, net assets associated with endowment funds, including funds designated by the board of trustees to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. -25- THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 12. ENDOWMENTS, continued: The board of trustees of TMUS has interpreted the State Prudent Management of Institutional Funds Act (SPMIFA) as requiring the preservation of the fair value of the original gift, as of the gift date of the donorrestricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, TMUS classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment when the applicable donor gift instrument so specifies. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the organization in a manner consistent with the standard of prudence prescribed by SPMIFA. In accordance with SPMIFA, TMUS considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: 1. The duration and preservation of the fund 2. The purposes of the organization and the donor-restricted endowment fund 3. General economic conditions 4. The possible effect of inflation and deflation 5. The expected total return from income and the appreciation of investments 6. Other resources of the organization 7. The investment policies of the organization Endowment net asset composition by type of fund at June 30, 2017: Temporarily Restricted Endowment net assets $ 4,036,847 Permanently Restricted $ 22,137,921 Total $ 26,174,768 Endowment net asset composition by type of fund at June 30, 2016: Temporarily Restricted Endowment net assets $ 2,450,538 Permanently Restricted $ -26- 19,284,217 Total $ 21,734,755 THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 12. ENDOWMENTS, continued: Changes in endowment net assets for year ended June 30, 2017: Temporarily Restricted Endowment net assets, June 30, 2016 Investment return: Investment income Net gains (realized and unrealized) $ 2,450,538 $ 310,009 (889,940) 4,036,847 $ - 55,774 (1,255,723) $ Total 19,284,217 566,135 1,910,114 2,476,249 Contributions Amounts appropriated for expenditure Other changes: Change in value of future split interest Endowment net assets, June 30, 2017 Permanently Restricted $ 21,734,755 566,135 1,910,114 2,476,249 3,163,713 - 3,219,487 (1,255,723) (310,009) 2,853,704 1,963,764 22,137,921 $ 26,174,768 Changes in endowment net assets for year ended June 30, 2016: Temporarily Restricted Endowment net assets, June 30, 2015 Investment return: Investment income Net losses (realized and unrealized) $ Contributions Amounts appropriated for expenditure Other changes: Change in value of future split interest Endowment net assets, June 30, 2016 $ -27- 3,433,084 Permanently Restricted $ Total 18,832,160 $ 22,265,244 458,929 (828,593) (369,664) - 458,929 (828,593) (369,664) 17,806 (689,429) 510,798 - 528,604 (689,429) 58,741 (612,882) (58,741) 452,057 (160,825) 2,450,538 $ 19,284,217 $ 21,734,755 THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 12. ENDOWMENTS, continued: Funds with Deficiencies: From time to time, the fair value of assets associated with individual donor restricted endowment funds may fall below the level that the donor or SPMIFA requires TMUS to retain as a fund of perpetual duration. When the investment income does not provide the normal level for scholarship distributions, TMUS will fund those scholarships from the unrestricted fund. No such deficiencies existed as of June 30, 2017 and 2016, respectively. Return Objectives and Risk Parameters: TMUS has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that TMUS must hold in perpetuity or for a donor-specified period(s) as well as board designated funds. Under this policy, as approved by the board of trustees, the endowment assets are invested in a manner that is intended to produce an inflation adjusted income stream to grow the corpus above the inflation rate. TMUS expects its endowment funds, over time, to provide an average rate of return of approximately 6.5% annually. Actual returns in any given year may vary from this amount. Strategies Employed for Achieving Objectives: To satisfy its long-term rate-of-return objectives, TMUS relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). TMUS targets a diversified asset allocation that places a greater emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints. Spending Policy and How the Investment Objectives Related to Spending Policy: TMUS has a policy of appropriating for distribution each year 5% percent of its endowment YhaWnf average fair value over the three previous calendar year ends. In establishing this policy, TMUS considered long-term expected return on its endowment. Accordingly, over the long-term, TMUS expects the current spending policy to allow its endowment to grow at an average of 1.5% annually. This is consistent with MFNLn objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term as well as to provide additional real growth through new gifts and investment returns. -28- THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 13. FUNCTIONAL ALLOCATION OF EXPENSES: Expenses incurred in the current year were spent in the following categories: Year Ended June 30, 2017 2016 Program Services: Education Supporting Activities: General and administrative Fundraising $ $ 7,587,139 1,925,203 $ 14. 30,929,426 40,441,768 29,873,062 6,847,697 1,755,751 $ 38,476,510 EDUCATION AND GENERAL EXPENSES: Education and general expenses consist of: Year Ended June 30, 2017 2016 Instruction Institutional support Student services Academic support Plant operations 15. $ 12,024,475 7,900,050 6,242,637 2,890,792 2,651,735 $ 11,228,925 7,041,059 6,164,240 2,705,154 2,570,101 $ 31,709,689 $ 29,709,479 RETIREMENT: TMUS has in effect a contributory retirement plan through the Teachers Insurance and Annuity Association (TIAA) for all employees who elect to participate. Participants may contribute any percent of their covered salary annually up to the legal limit with TMUS matching the amount contributed up to 6% (Seminary) or 4% (University). The University program was temporarily suspended from January 1, 2009 to June 30, 2015. All contributions are fully vested when paid. TMUS' contribution was $522,197 and $482,675 during the years ended June 30, 2017 and 2016, respectively. -29- THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 16. COMMITMENTS AND CONTINGENCIES: LEASE COMMITMENTS TMUS is committed under noncancelable lease agreements for equipment. In most cases, management expects that, in the normal course of business, leases will be renewed or replaced by other leases. Leases require monthly payments of $13,497 and expire through February 2021. Future minimum payments under non-cancelable leases are as follows: Year Ending June 30, 2018 2019 2020 2021 $ 79,220 82,567 82,567 26,679 $ 271,033 Rent expense under cancelable and non-cancelable lease contracts was $95,578 and $96,477 for the years ended June 30, 2017 and 2016, respectively. STUDENT FINANCIAL ASSISTANCE PROGRAMS TMUS participates in the delivery of student financial aid programs administered by the Department of Education and California Student Aid Commission. The related activity is subject to audit both by independent certified public accountants and by representatives of the administering agencies regarding compliance with applicable regulations. Any resultant findings of noncompliance could potentially result in the required return of related funds received and/or the assessment of fines or penalties, or the discontinuation of eligibility for participation. In the opinion of management, audit adjustments, if any, will not have a significant effect on the financial position or result of activities of TMUS. 17. RELATED PARTIES: Several members of MFNLn board of trustees act in a similar capacity on the governing boards of other organizations, including the Church and Grace to You. See note 8 for discussion of a lease between the Church and TMUS. Classes for MFNLn Seminary are held at the Church facilities. TMUS reimburses the Church for use of the Church's facilities, maintenance, and custodial support for the seminary building, information technology, and print production support. TMUS paid the Church $381,120 and $378,857 as of the years ended June 30, 2017 and 2016, respectively. TMUS had payables of $21,262 and $34,143 to the Church for the years ended June 30, 2017 and 2016, respectively. -30- THE MASTER'S UNIVERSITY & SEMINARY Notes to Financial Statements June 30, 2017 and 2016 17. RELATED PARTIES, continued: During the years ended June 30, 2017 and 2016, TMUS paid $392,900 and $137,071 respectively, to the businesses owned by a family member of management for marketing, public relations, and video production services. TMUS paid $18,000 to a board member for consulting services performed during both the years ended June 30, 2017 and 2016. 18. SUBSEQUENT EVENTS: Subsequent events were evalutated through October 25, 2017 which is the date the financial statements were available to be issued. -31- FEDERAL AWARDS 7,) 0%67)5U6 81-9)56-7< %1( 6)0-1%5< Schedule of Expenditures of Federal Awards Year Ended June 30, 2017 Federal Grantor/Pass Through Grantor/Program or Cluster Title STUDENT FINANCIAL ASSISTANCE CLUSTER: U.S. Department of Education: Federal Direct Student Loan Program Federal Pell Grants Federal Supplemental Educational Opportunity Grant Program Federal Work-Study Program Total Student Financial Assistance Cluster Federal CFDA Number 84.268 84.063 Federal Expenditures $ 84.007 84.033 Total Expenditures of Federal Awards 62,437 85,643 8,717,629 $ See notes to schedule of expenditures of federal awards -33- 7,094,115 1,475,434 8,717,629 7,) 0%67)5U6 81-9)56-7< %1( 6)0-1%5< Notes to Schedule of Expenditures of Federal Awards June 30, 2017 A. BASIS OF PRESENTATION: The accompanying schedule of expenditures of federal awards (the schedule) includes the federal grant activity of The EPbcTajb University and Seminary (TMUS) under programs of the federal government for the year ending June 30, 2017. The information in the schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Therefore, some amounts presented in the schedule may differ from amounts presented in, or used in the preparation of, the basic financial statements. Although TMUS is required to match certain grants, as defined by the grants, no such matching has been included as expenditures in the schedule. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Expenditures in the schedule are reported on the accrual basis of accounting. Such expenditures are recognized following, as applicable, OMB Circular A-122, Cost Principles for Non-Profit Organizations, or the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. Negative amounts shown on the schedule represent adjustments or credits made in the normal course of business to amounts reported as expenditures in prior years. TMUS has elected not to use the 10-percent de minimis indirect cost rate allowed under the Uniform Guidance. C. RELATIONSHIP TO FINANCIAL STATEMENTS: The amount of total expenditures of federal awards reconciles to the revenue in the statement of activities as follows: Total expenditures of federal awards Less: Federal Direct Student Loan Program Federal Pell Grants $ Government grants for student financial aid per statement of activities $ 8,717,629 (7,094,115) (1,475,434) 148,080 D. SUBRECIPIENTS, NON-CASH ASSISTANCE, FEDERAL INSURANCE, LOANS, AND LOAN GUARANTEES: TMUS did not provide any federal funds to subrecipients nor did they receive any federal non-cash assistance, insurance, loans, or loan guarantees. -34- -1()3)1()17 %8(-7256U 5)3257 ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Board of Trustees The Master's University and Seminary Santa Clarita, California We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, the financial statement of The EPbcTajb University and Seminary (TMUS), which comprise the statements of financial position as of June 30, 2017 and 2016, and the related statements of activities and cash flows for the years then ended, and the related notes to the financial statements, and have issued our report thereon dated October 25, 2017. Internal Control Over Financial Reporting In planning and performing our audits of the financial statements, we considered LEMKjb internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of LEMKjb internal control. Accordingly, we do not express an opinion on the effectiveness of LEMKjb X]cTa]P[ R^]ca^[* A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the T]cXchjb financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. %+*(*!.B?32<8!.=B96C2?5"!0B7A6!&$* 12?D2<2"!/-!,%&() +%+#,,)#%'%, 42>7<4?=B@6#4=; Board of Trustees The Master's University and Seminary Santa Clarita, California Compliance and Other Matters As part of obtaining reasonable assurance about whether LEMKjb financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. We noted certain other matters that we reported to management of TMUS in a separate letter dated October 25, 2017. Purpose of This Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of LEMKjb internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering LEMKjb internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Tarzana, California October 25, 2017 -36- -1()3)1()17 %8(-7256U 5)3257 ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE Board of Trustees The Master's University and Seminary Santa Clarita, California Report on Compliance for Each Major Federal Program We have audited The EPbcTajb University and Seminary (TMUS) compliance with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Compliance Supplement that could have a direct and material effect on each of LEMKjb major federal programs for the year ended June 30, 2017. LEMKjb major federal programs are identified in the summary of PdSXc^abj results section of the accompanying schedule of findings and questioned costs. +4A4;8@8AFJE /8ECBAE=5=?=FI Management is responsible for compliance with federal statues, regulations, and the terms and conditions of its federal awards applicable to its federal programs. $G7=FBDEJ /8ECBAE=5=?=FI Our responsibility is to express an opinion on compliance for each of LEMKjb major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States of America; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about LEMKjb compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal _a^VaP\* A^fTeTa( ^da PdSXc S^Tb ]^c _a^eXST P [TVP[ STcTa\X]PcX^] ^U LEMKjb R^\_[XP]RT* Opinion on Each Major Federal Program In our opinion, The Master's University and Seminary complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30, 2017. %+*(*!.B?32<8!.=B96C2?5"!0B7A6!&$* 12?D2<2"!/-!,%&() +%+#,,)#%'%, 42>7<4?=B@6#4=; Board of Trustees The Master's University and Seminary Santa Clarita, California Report on Internal Control Over Compliance Management of TMUS is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered LEMKjb internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express P] ^_X]X^] ^] cWT TUUTRcXeT]Tbb ^U LEMKjb X]cTa]P[ R^]ca^[ ^eTa R^\_[XP]RT* A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. However, material weaknesses may exist that have not been identified. Purpose of This Report The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Tarzana, California October 25, 2017 -38- 7,) 0%67)5U6 81-9)56-7< %1( 6)0-1%5< Schedule of Findings and Questioned Costs June 30, 2017 Section I - Summary of Audit Results Financial Statements: Lh_T ^U PdSXc^abj aT_^ac XbbdTS6 d]\^SXUXTS Internal control over financial reporting: $ Material weakness(es) identified? yes & no $ Significant deficiency(ies) identified that are not considered a material weakness? yes & none reported yes & no Noncompliance material to financial statements noted? Federal Awards: Internal control over major programs: $ Material weakness(es) identified? yes & no $ Significant deficiency(ies) identified that are not considered a material weakness? yes & none reported yes & no Lh_T ^U PdSXc^abj aT_^ac XbbdTS ^] R^\_[XP]RT U^a \PY^a _a^VaP\b6 d]\^SXUXTS Any audit findings that are required to be reported in accordance with 2 CFR Part 200.516(a)? Identification of major program(s): CFDA Numbers 84.268, 84.063, 84.007, 84.033 Name of Federal Program or Cluster Student Financial Assistance Dollar threshold used to distinguish between type A and type B programs: $750,000 & Auditee qualified as low-risk auditee? -39- yes no 7,) 0%67)5U6 81-9)56-7< %1( 6)0-1%5< Schedule of Findings and Questioned Costs June 30, 2017 Section II - Financial Statement Findings There are no current findings in internal control over financial reporting required to be reported in accordance with Government Auditing Standards. Section III - Federal Award Findings and Questioned Costs There are no current year findings that were considered material instances of noncompliance in accordance with Title 2 U.S. Code of Federal Regulations Part 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. -40- 7,) 0%67)5U6 81-9)56-7< %1( 6)0-1%5< Auditee Summary Schedule of Prior Audit Findings June 30, 2017 Financial Statement Findings There were no prior year findings in internal control over financial reporting. Federal Award Findings There were no prior year findings or questioned costs. -41-