Harvard University Policy:

The American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Not-for-Profit Organizations defines net assets as the excess or deficiency of assets over liabilities classified according to the existence or absence of donor-imposed restrictions.

There are three classes of net assets:

1. Permanently restricted net assets

2. Temporarily restricted net assets

3. Unrestricted net assets

Permanently restricted and temporarily restricted net assets are restricted by the donor and can only be used for the specific purpose intended. Unrestricted net assets are not subject to donor-imposed restrictions but can be designated by the governing board of the University for a specific purpose.

The policy on accounting for net assets defines the accounting treatment and reporting requirements for the University's net assets.

For financial reporting purposes, the University's net asset balance includes its general operating funds, endowment funds, and life income funds.

The University's policy on accounting for net assets is in accordance with the Financial Accounting Standards Board, "Statement of Financial Accounting Standards," SFAS No. 116, "Accounting for Contributions Received and Made" and SFAS No. 117, "Financial Statements for Not-for-Profit Organizations." These standards require the classification of the fund resources into three net asset classes (permanently restricted, temporarily restricted, and unrestricted) pursuant to any donor- imposed restrictions.

The AICPA Audit and Accounting Guide defines the following three net asset classes:

• Permanently restricted net assets are the part of net assets resulting from:

• Contributions and other inflows of assets whose use by the University is limited by donor-imposed stipulations that neither expire by the passage of time nor can be fulfilled or otherwise removed by actions of the University.

• Other asset enhancements and diminishments subject to the same kinds of stipulations.

• Reclassifications from or to other classes of net assets as a consequence of donor-imposed stipulations

• Temporarily restricted net assets are the part of net assets resulting from:

• Contributions and other inflows of assets whose use by the University is limited by donor-imposed stipulations that either expire by the passage of time or can be fulfilled and removed by actions of the University pursuant to those stipulations.

• Other asset enhancements and diminishments subject to the same kinds of stipulations.

• Reclassifications from or to other classes of net assets as a consequence of donor-imposed stipulations.

• Unrestricted net assets are the part of net assets that is neither permanently nor temporarily restricted by donor imposed stipulations.

The University's net asset balance consists of three major fund categories that are further classified and reported in accordance with SFAS No. 117's net asset classes.

The three major net asset fund categories reported by the University include:

1. General Operating Fund

2. Endowment Fund

3. Life Income Fund

The General Operating fund (GOA) is an established fund of cash, securities, or other assets. It consists of the current funds used by the University for general operations. The GOA also includes the assets, liabilities, and obligations related to student, faculty and staff loans, and facilities.

The GOA fund receives, manages, and pays interest on deposits made by University departments, invests surplus working capital, makes loans, and arranges external financing for major capital programs.

The GOA fund is used to manage, direct, and carry out all University financial transactions, except for those related to investment activities conducted by the Harvard Management Company.

The use of the GOA fund may be permanently restricted, temporarily restricted, or unrestricted in accordance with donor-imposed specifications.

The Endowment Fund is an established fund of cash, securities, or other assets to provide income for the maintenance of the University. The use of the endowment fund may also be permanently restricted, temporarily restricted, or unrestricted. Endowment funds are generally established by donor-restricted gifts and bequests to provide a permanent endowment (a permanent source of funds) or a term endowment (income for a specified period of time). The University's endowment fund balance also includes funds functioning as endowments.

• The portion of the endowment that must be maintained permanently is classified as a permanently restricted net asset.
• The portion of the endowment that must be maintained for a specified term is classified as a temporarily restricted net asset.
• The portion of the endowment fund functioning as an endowment are board designated and are not subject to permanent donor restrictions.

The University has approximately 8,300 plus endowment funds that have been created from gifts by individual donors. Most of the endowments created have terms that stipulate that the University maintain the principal balance of the endowment forever. The University assigns the endowment funds to 39 operating units who take ownership of the fund and budgets and manages the funds according to the stipulation provided.

The endowment funds are recorded as an asset and as gift revenue at the estimated fair value of the trust assets which approximates the present value of expected future cash flows from the trust.

The Life Income Fund is an established fund of securities, or other assets that are given to the University in connection with a split-interest agreement that is part contribution and part exchange transaction. The University accepts the contribution and is obligated to make periodic stipulated payments to the donor or a third-party beneficiary for a specified period of time, usually until the death of the donor or third-party beneficiary.

The University's life income funds include pooled funds, gift annuities, and charitable remainder trust funds.

Life income funds are recorded as assets at the fair market value, net of related liabilities for the present value of estimated future payments due to beneficiaries and net of obligations under charitable remainder trusts due to other institutions.

Refer to Schedule A for the detail of the University's Net Asset Balances, their definitions, and respective object codes.

The Office of Financial Systems is responsible for writing, updating, and interpreting this policy.

The Financial Deans of the University are responsible for enforcing this policy.

For assistance in interpreting this policy, please call your Tub Financial Office.