Notes to Financial Statements
June 30, 2002 and 2001
(1) Summary of Significant Accounting Policies
(a) General
Johns Hopkins University is a private, nonprofit institution that provides
education and related services to students and others, research and related
services to sponsoring organizations and professional medical services
to patients. The University is based in Baltimore, Maryland, but also
maintains facilities and operates education programs elsewhere in Maryland,
in Washington, D.C. and, on a more limited scale, in several additional
states and certain foreign countries.
Education and related services (e.g., room, board, etc.) are provided to approximately 19,200 students, including 10,500 full-time students and 8,700 part-time students, and produce about 12% of the University’s operating revenues. The full-time students are divided about equally between graduate level (including postdoctoral) and undergraduate level. Students are drawn from a broad geographic area, including most of the states in the United States and numerous foreign countries. The majority of the part-time students are graduate level students from the Baltimore-Washington, D.C. area.
Research and related services (e.g., research training) are provided
through more than 1,200 agreements with government and private sponsors.
Grants, contracts
and similar agreements produce about 58% of the University’s operating
revenues. Approximately 89% of the revenues from research and related
services comes from departments and agencies of the United States Government.
Major government sponsors include the Department of Health and Human Services,
the Department of Defense, the National Aeronautics and Space Administration
and the Agency for International Development; these sponsors provided
approximately 36%, 30%, 10% and 7%, respectively, of revenues from grants,
contracts and similar agreements in 2002.
Professional medical services are provided by members of the University’s
faculty to patients at Johns Hopkins Hospital and other hospitals and
outpatient care facilities in the Baltimore area and produce about 9%
of the University’s operating revenues. The patients are predominantly
from the Baltimore area, other parts of Maryland or surrounding states.
(b) Basis of Presentation
The financial statements include the accounts of the various academic
and support divisions, the Applied Physics Laboratory (APL), the Johns
Hopkins University Press and affiliated organizations which are controlled
by the University, including JHPIEGO Corporation, Peabody Institute of
the City of Baltimore and the Fund for Johns Hopkins Medicine. Investments
in organizations which the University does not control, including Dome
Corporation, Johns Hopkins Healthcare LLC and Johns Hopkins Home Care
Group, Inc., are accounted for using the equity method. Certain amounts
for 2001 have been reclassified to conform to the presentation for 2002.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements and revenues and expenses recognized during the reporting period. Actual results could differ from those estimates.
Net assets, revenues and gains and losses are classified based on the
existence or absence of donor-imposed restrictions. Accordingly, net assets
of the University are classified and reported as follows:
Permanently restricted—Net assets subject to donor-imposed
stipulations that they be maintained permanently by the University. Generally,
the donors of these assets permit the University to use all or part of
the income earned on related investments for general or specific purposes,
primarily divisional and departmental support and student financial aid.
Temporarily restricted—Net assets subject to donor-imposed
stipulations that may or will be met by actions of the University and/or
the passage of time.
Unrestricted—Net assets that are not subject to donor-imposed
stipulations.
Revenues are reported as increases in unrestricted net assets unless
the use of the related assets is limited by donor-imposed restrictions.
Expenses are reported as decreases in unrestricted net assets. Gains and
losses on investments are reported as increases or decreases in unrestricted
net assets unless their use is restricted by explicit donor stipulations
or by law. Expirations of temporary restrictions recognized on net assets
(i.e., the donor-stipulated purpose has been fulfilled and/or the stipulated
time period has elapsed) are reported as reclassifications from temporarily
restricted net assets to unrestricted net assets. Temporary restrictions
on gifts to acquire long-lived assets are considered met in the period
in which the assets are acquired or placed in service.
(c) Contributions
Contributions, including unconditional promises to give, are recognized
as revenues in the appropriate category of net assets in the period received,
except that contributions which impose restrictions that are met in the
same fiscal year they are received are included in unrestricted revenues.
Contributions received for capital projects or perpetual or term endowment
funds and contributions under split interest agreements or perpetual trusts
are reported as nonoperating revenues. All other contributions are reported
as operating revenues. Changes in the nature of any restrictions on contributions
due to amendments to agreements with donors are recognized by adjusting
operating and nonoperating contribution revenues in the period in which
the amendments are approved. Conditional promises to give are not recognized
until the conditions on which they depend are substantially met. Contributions
of assets other than cash are recorded at their estimated fair value at
the date of gift, except that contributions of works of art, historical
treasures and similar assets held as part of collections are not recognized
or capitalized.
Allowance is made for uncollectible contributions receivable based upon
management’s judgment and analysis of the creditworthiness of the
donors, past collection experience and other relevant factors. Estimated
collectible contributions to be received after one year are discounted
using a risk-free rate for the expected period of collection. Amortization
of the discount is recorded as additional contribution revenue.
(d) Cash and Cash Equivalents
Short-term investments with maturities at dates of purchase of three months
or less are classified as cash equivalents, except that any such investments
purchased with funds on deposit with bond trustees, with funds held in
trusts by others or by external endowment investment managers are classified
with the applicable assets. Cash equivalents include short-term U.S. Treasury
securities and other highly liquid investments and are carried at cost
which approximates fair value.
(e) Investments
Investments are stated at their fair values which are generally determined
based on quoted market prices or estimates provided by external investment
managers or other independent sources. In the limited cases where such
values are not available, historical cost is used as an estimate of fair
value.
Assets of pooled endowment and similar funds are invested on the basis of a total return policy to provide income and to realize appreciation in investment values. Realized investment gains of these funds may be used to support operations provided that the funds have market values in excess of their historical values. The endowment investment pool payout was approximately 5.3% and 4.5%, respectively, of average market values in 2002 and 2001.
Investment income included in operating revenues consists of income and
realized gains and losses on investments of working capital and nonpooled
endowment funds (except where restricted by donors) and the annual appropriation
of income and realized gains for pooled endowment and similar funds approved
by the Board of Trustees. All unrealized gains and losses, any difference
between the income and realized gains earned and the appropriated amount
for pooled endowment and similar funds and income and realized gains restricted
by donors are reported as nonoperating revenues or losses.
(f) Investment in Plant Assets
Investments in plant assets are stated at cost, if purchased, or at estimated
fair value at the date of gift, if donated, less accumulated depreciation
and amortization. Depreciation of buildings, equipment and library collections
and amortization of leasehold improvements are computed using the straight-line
method over the estimated useful lives of the assets. Land and certain
historic buildings are not subject to depreciation. Title to certain equipment
purchased using funds provided by government sponsors is vested in the
University. Such equipment is included in investment in plant assets.
Certain facilities and equipment used by the APL in connection with its
performance under agreements with the United States Government are owned
by the government. These facilities and equipment are not included in
the balance sheet; however, the University is accountable to the government
for them.
(g) Split Interest Agreements and Perpetual Trusts
The University’s split interest agreements with donors consist primarily
of irrevocable charitable remainder trusts for which the University serves
as trustee. Assets held in these trusts are included in investments. Contribution
revenues are recognized at the date the trusts are established after recording
liabilities for the present value of the estimated future payments to
be made to the donors and/or other beneficiaries. The liabilities are
adjusted during the terms of the trusts for changes in the values of the
assets, accretion of the discounts and other changes in estimates of future
benefits.
The University is also the beneficiary of certain perpetual trusts held
and administered by others. The present values of the estimated future
cash receipts from the trusts are recognized as assets and contribution
revenues at the dates the trusts are established. Distributions from the
trusts are recorded as contributions and the carrying value of the assets
is adjusted for changes in estimates of future receipts.
(h) Fair Values of Financial Instruments
Fair values of financial instruments approximate their carrying values
in the financial statements, except for indebtedness for which fair value
information is provided in
note 7.
(i) Affiliated Institutions
The University has separate administrative agreements for the exchange
of services with Johns Hopkins Hospital (Hospital) and other medical and
educational institutions. Costs incurred by the University in providing
services to these institutions and the related reimbursements are reported
as operating expenses and revenues, respectively, in the appropriate object
and source classifications. Costs incurred by the University for services
provided by these institutions are reported as operating expenses in the
appropriate object classifications.
The University holds several endowment and similar funds which were designated
for purposes or activities that are carried out by the Hospital. The assets
of these funds are included in investments and the related income is paid
to the Hospital. The carrying values of the funds are adjusted for earnings
from and changes in the fair values of the investments, and distributions
paid and are excluded from the University’s net assets.
(j) Insurance
The University, together with other institutions, has formed captive insurance
companies which arrange and provide professional liability, general liability
and property damage insurance for their shareholders. Defined portions
of claims paid by these companies are self-insured. The University’s
annual payments to the companies for insurance coverage are based on actuarial
studies and are included in operating expenses.
(k) Sponsored Projects
Revenues under grants, contracts and similar agreements with sponsors
are recognized as expenditures are incurred for agreement purposes. These
revenues include recoveries of facilities and administrative costs which
are generally determined as a negotiated or agreed-upon percentage of
direct costs, with certain exclusions. Facilities and administrative cost
recovery revenues for the academic and support divisions of the University
were $190,661,000 in 2002 and $170,669,000 in 2001.
(l) Student Financial Aid
The University provides financial aid to eligible students, generally
in a “package” that includes loans, compensation under work-study
programs and/or grant and scholarship awards. The loans are provided primarily
through programs of the United States Government (including direct and
guaranteed loan programs) under which the University is responsible only
for certain administrative duties. The grants and scholarships include
awards provided from gifts and grants from private donors, income earned
on endowment funds restricted for student aid and general funds. Grant
and scholarship awards were $106,367,000 in 2002 and $96,644,000 in 2001
and are netted against tuition and fees revenues.
(m) Income Taxes
The University is qualified as a not-for-profit organization under section
501(c)(3) of the Internal Revenue Code, as amended. Accordingly, it is
not subject to income taxes except to the extent it has taxable income
from businesses that are not related to its exempt purpose.
(n) Derivative Financial Instruments
Effective July 1, 2000, the University adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities. This Statement requires that all derivatives be measured
at fair value and that they be recognized in the balance sheet as assets
or liabilities. There was no cumulative effect at July 1, 2000 of adoption
of this Statement as all of the derivative instruments held by the University
at that date (consisting of futures and forward currency contracts) were
stated at fair value in accordance with the applicable authoritative guidance.
The effect of adoption in 2001, relating to the accounting for an interest
rate swap agreement entered into in April 2001, was not material.
The University’s external investment managers are authorized to use specified derivative financial instruments, including futures and forward currency contracts, in managing the assets under their control, subject to restrictions and limitations adopted by the Board of Trustees.
Futures contracts, which are commitments to buy or sell designated financial instruments at a future date for a defined price, may be used to adjust asset allocation, neutralize options in securities or construct a more efficient portfolio. The managers have made limited use of exchange-traded interest rate futures contracts. Margin requirements are met in cash; however, the managers settle their positions on a net basis and, accordingly, the cash requirements are substantially less than the contract amounts. Forward currency contracts, which are agreements to exchange designated currencies at a future date at a specified rate, may be used to hedge currency exchange risk associated with investments in fixed-income securities denominated in foreign currencies and investments in equity securities traded in foreign markets. The managers settle these contracts on a net basis and, accordingly, the cash requirements are substantially less than the contract amounts. Changes in the market value of the futures and forward currency contracts are included in investment income and were not significant in 2002 and 2001.
The University makes limited use of interest rate swap agreements to manage interest rate risk associated with variable rate debt. Under interest rate swap agreements, the University and the counterparties agree to exchange the difference between fixed rate and variable rate interest amounts calculated by reference to specified notional principal amounts during the agreement period. Notional principal amounts are used to express the volume of these transactions, but the cash requirements and amounts subject to credit risk are substantially less.
Parties to interest rate exchange agreements are subject to market risk for changes in interest rates and risk of credit loss in the event of nonperformance by the counterparty. The University does not require any collateral under these agreements, but deals only with highly rated financial institution counterparties and does not expect that any counterparties will fail to meet their obligations.
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