Cornell University 2011-2012 Annual Report - DFA Home - Cornell ...

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(dollars in thousands)The University’s collections, whether paintings, rare books, or other property, have been acquired through purchases andcontributions since the University’s inception. They are recognized as capital assets and are reflected, net of accumulateddepreciation, in the consolidated statement of financial position. A collection received as a gift is recorded at fair value asan increase in net assets in the year in which it is received.H. Funds Held in Trust by OthersFunds held in trust by others represent resources that are not in the possession or under the control of the University. Thesefunds are administered by outside trustees, with the University receiving income or residual interest. Funds held in trustby others are recognized at the estimated fair value of the assets or the present value of the future cash flows due to theUniversity when the irrevocable trust is established or the University is notified of its existence. Gains or losses resultingfrom changes in fair value are recorded as nonoperating activities in the consolidated statement of activities.I. Split Interest AgreementsThe University’s split interest agreements with donors consist primarily of charitable gift annuities, pooled income funds,and charitable trusts for which the University serves as trustee. Assets held in trust are either separately invested or includedin the University’s investment pools in accordance with the agreements. Contribution revenue and the assets related tosplit interest agreements, net of related liabilities, are classified as increases in temporarily restricted net assets or permanentlyrestricted net assets. Liabilities associated with charitable gift annuities and charitable remainder trusts representthe present value of the expected payments to the beneficiaries based on the terms of the agreements. Pooled income fundsare recognized at the net present value of the net assets expected at a future date. Gains or losses resulting from changesin fair value, changes in assumptions, and amortization of the discount are recorded as changes in value of split interestagreements in the appropriate restriction categories in the nonoperating section of the consolidated statement of activities.J. EndowmentsTo ensure full compliance with NYPMIFA, a supplemental statement to the University’s investment policy was adoptedand approved by the Board of Trustees in September, 2010. The responsibility for accepting, preserving, and managingthe funds entrusted to Cornell rests, by law, with the Board of Trustees; however, the Trustees have delegated authority forinvestment decisions to the Investment Committee of the Board of Trustees. The Committee determines investment policy,objectives, and guidelines, including allocation of assets between classes of investments.The University’s investment objective for its endowment assets is to maximize total return within reasonable risk parameters,specifically to achieve a total return, net of expenses, of at least five percent in excess of inflation, as measured bythe Consumer Price Index over rolling five-year periods. The achievement of favorable investment returns enables theUniversity to distribute increasing amounts from the endowment over time so that present and future needs can be treatedequitably in inflation-adjusted terms. Diversification is a key component of the University’s standard for managing andinvesting endowment funds and asset allocation targets are subject to ongoing reviews by the Investment Committee ofthe Board of Trustees.The University applies the “prudent person” standard when making its decision whether to appropriate or accumulateendowment funds considering the following factors, in accordance with NYPMIFA: the duration and preservation ofthe endowment fund, the purposes of the institution and the endowment fund, general economic conditions includingpotential effect of inflation or deflation, the expected total return of the fund, other resources of the University, the needsof the University and the fund to make distributions and preserve capital, and the University’s investment policy.The Board authorizes an annual distribution, or payout, from endowment funds that is within a target range of 3.65 percentto 5.15 percent of a 12-quarter rolling average of the unit fair value. The Trustees may occasionally make step adjustments,either incremental or decremental, based on prior investment performance, current market conditions, or any of the factorsfor prudent judgment described above.Total distributions or spending reflected on the consolidated statement of activities includes payout, investment expenses,and service charges that support the general and stewardship costs of the University endowment.The University, in compliance with NYPMIFA, notified available donors who had established endowments prior to September17, 2010 of the new law, and offered these donors the option of requiring the University to maintain historicaldollar value for their endowment funds. A minority of donors requested this option; for those who did, the University hasdesigned procedures to ensure that the University maintains historical dollar value by not expending the payout on anyfund whose fair value is less than its historical dollar value (i.e., “underwater”).15