1. Significant Accounting Policies

a. General

Yale University ("the University") is a private, not-for-profit institution of higher education located in New Haven, Connecticut. The University provides educational services primarily for students and trainees at the undergraduate, graduate and postdoctoral levels, and performs research, training and other services under grants, contracts and other similar agreements with agencies of the Federal government and other sponsoring organizations. The University’s academic organization includes Yale College, the Graduate School of Arts and Sciences, ten professional schools and a variety of research institutions and museums. The largest professional school is the Yale School of Medicine, which conducts various medical services in support of its teaching and research missions.

b. Basis of Presentation

The financial statements of Yale University include the accounts of all academic and administrative departments of the University, and certain affiliated organizations, including the Yale University Press, that are controlled by the University.

Financial statements of private, not-for-profit organizations measure aggregate net assets based on the absence or existence of donor-imposed restrictions. Three categories of net assets serve as the foundation of the accompanying financial statements. These classes are labeled unrestricted, temporarily restricted and permanently restricted net assets. Brief definitions of the three net asset classes are presented below:

Unrestricted Net Assets - Net assets derived from tuition and other institutional resources that are not subject to explicit donor-imposed restrictions. Unrestricted net assets also include a portion of the appreciation on endowment investments as described in subsequent paragraphs of this note.

Temporarily Restricted Net Assets - Net assets that are subject to explicit donor-imposed restrictions on the expenditure of contributions or income and gains on contributed assets. The temporary restrictions may expire due to the passage of time or the incurrence of expenditures that fulfill the donor-imposed restrictions. Temporarily restricted net assets are generally established in support of schools or departments of the University, often for specific purposes such as professorships, research, faculty support, scholarships and fellowships, library and art museums, building construction and other specific purposes.

Permanently Restricted Net Assets - Net assets that are subject to explicit donor-imposed stipulations that they be maintained permanently by the University. Generally, the donors of these assets permit the University to use the returns on the related investments over time for general or specific purposes.

The University’s measure of operations as presented in the Statement of Activities includes income from tuition and fees, grants and contracts, medical services, contributions for operating programs and other revenues. Operating expenses are reported on the Statement of Activities by functional categories, after allocating costs for operation and maintenance of plant, interest on indebtedness and depreciation expense. Certain of these functional categories represent expenses incurred in support of the University’s primary lines of business (as described in Note 1a) that have not been allocated on the Statement of Activities.

The University presents non-operating activity within the physical and financial capital sections of the Statement of Activities. The physical capital section includes contributions and other activities related to land, buildings and equipment that are not included in the University’s measure of operations. Similarly, the financial capital section includes contributions, investment returns and other activities related to endowment and student loan net assets utilized for long-term investment purposes. Financial capital also encompasses expendable contributions and the related accumulated appreciation that have been designated to function as endowment (i.e., funds functioning as endowment) by the Yale Corporation.

Administration of the University’s endowment is subject to the general provisions of the Uniform Management of Institutional Funds Act (UMIFA or "the Act"). Under the provisions of this State law, a governing board may appropriate for expenditure, for the uses and purposes for which an endowment fund is established, so much of the net appreciation as is deemed prudent based on standards established by the Act. While a governing board must exercise ordinary business care in the appropriation of such appreciation, the general provisions of UMIFA do not mandate that institutions retain endowment gains permanently. Generally accepted accounting principles require institutions that are subject to general UMIFA provisions to report gains on endowment assets as increases in unrestricted net assets or temporarily restricted net assets based on the absence or existence of donor-imposed restrictions. The University has applied generally accepted accounting principles when allocating investment gains to net asset classes; however, the University manages endowment gains under the premise that gains are restricted until the application of the spending policy allocates those gains to operations.

The Supplemental Statement of Operations, which is not required by generally accepted accounting principles, provides additional detail of the University’s operating results by segregating activities that are an integral part of the University’s general operating budget from other activities that are internally designated for specific purposes or uses. Expenses are reported by natural classification on the Supplemental Statement of Operations for informational purposes.

c. Cash and Cash Equivalents

Cash and cash equivalents are recorded at fair value and include U.S. Treasury notes, corporate notes, commercial paper and similar temporary investments with maturities of three months or less. Cash and cash equivalents representing investments purchased with endowment net assets are reported as investments.

d. Investments

The University's investments are recorded in the financial statements at fair value. The value of publicly-traded fixed income and equity securities is based upon quoted market prices and exchange rates, if applicable. The fair value of significant direct real estate investments is determined from periodic valuations prepared by independent appraisers.

Fair values for certain private equity and real estate investments held through limited partnerships or commingled funds are estimated by the respective external investment managers if market values are not readily ascertainable. These valuations necessarily involve assumptions and methods that are reviewed by the University’s Investments Office.

Derivative financial instruments held for investment purposes, primarily in the endowment investment portfolio, are recorded at fair value with the resulting gains or losses recognized in investment earnings. The net interest paid or received pursuant to interest rate swap agreements undertaken in connection with Yale’s variable-rate debt portfolio is recorded as interest expense. The University records the cost of managing its endowment portfolio as a decrease in financial capital within the appropriate net asset class in the Statement of Activities.

The University invests its endowment investment portfolio and allocates the related earnings for expenditure in accordance with the total return concept. A distribution of endowment return that is independent of the cash yield and appreciation of investments earned during the year is provided for program support. The University has adopted an endowment spending policy designed specifically to stabilize annual spending levels and to preserve the real value of the endowment portfolio over time. The spending policy attempts to achieve these two objectives by using a long-term targeted spending rate combined with a smoothing rule, which adjusts spending gradually to changes in the endowment market value. The Yale Corporation approved a long-term targeted spending rate of 5.0 percent effective beginning in fiscal 1996. The actual rates of spending for 1997 and 1996, when measured against the previous year’s market value, were 4.0 percent and 4.3 percent, respectively.

e. Land, Buildings and Equipment

Land, buildings and equipment are generally stated at cost and are presented net of accumulated depreciation. Annual depreciation is calculated on a straight-line basis over useful lives ranging from 15 to 50 years for buildings and improvements and 4 to 12 years for furnishings and equipment.

f. Other Assets

Capitalized software and bond issuance costs are categorized within other assets in the financial statements. Bond issuance costs are amortized over the term of the related debt and capitalized software costs are amortized over the estimated useful lives of the software, ranging from 5 to 7 years.

g. Collections

Collections at Yale include works of art, literary works, historical treasures and artifacts that are maintained in the University’s museums and libraries. These collections are protected and preserved for public exhibition, education, research and the furtherance of public service. Purchases of such collections are recorded as decreases in unrestricted net assets in the period in which the items are acquired. Proceeds from the sale of collection items or insurance recoveries are reflected as increases in the appropriate net asset class.

h. Split-Interest Agreements

The University's split-interest agreements with donors consist primarily of charitable gift annuities, pooled income funds and irrevocable charitable remainder trusts for which the University serves as trustee. Assets are invested and payments are made to donors and/or other beneficiaries in accordance with the respective agreements.

Contribution revenues for charitable gift annuities and charitable remainder trusts are recognized at the dates the agreements are established after recording liabilities for the present value of the estimated future payments to be made to the respective donors and/or other beneficiaries. For pooled income funds, contribution revenue is recognized upon establishment of the agreement at the fair value of the estimated future receipts, discounted for the estimated time period until culmination of the agreement.

i. Tuition and Fees

Tuition and fees revenue is generated from an enrolled student population of approximately 11,000. The undergraduate population of 5,312 is a diverse group attracted from across the United States and from many foreign countries. Foreign students account for approximately 6% of the undergraduate population. Tuition revenue from undergraduate enrollment represents 55.7% of net tuition revenue.

The University maintains a policy of offering qualified applicants admission to Yale College without regard to financial circumstance as well as meeting in full the demonstrated financial need of those admitted. Student need in all programs throughout the University is generally fulfilled through a combination of scholarships and fellowships, loans and employment during the academic year. Tuition and fees have been reduced by certain scholarships and fellowships in the amounts of $75.7 million and $73.5 million in 1997 and 1996, respectively.

j. Contributions

Unconditional promises to give that are expected to be collected within one year are recorded at their net realizable value. Amounts expected to be collected in future years are recorded at the present value of estimated future cash flows. The discounts on those contributions are computed using a risk-free interest rate applicable to the year in which the promise is received. Amortization of the discount is included in contribution revenue. Conditional promises to give are not included as support until such time as the conditions are substantially met. A facilities and administrative charge is assessed against current use gifts when received.

k. Grant and Contract Income

The University receives grant and contract income from governmental and private sources. In 1997 and 1996, grant and contract income received from the Federal government totaled $216.7 million and $203.6 million, respectively. The University recognizes revenue associated with the direct costs of sponsored programs as the related costs are incurred. Recovery of facilities and administrative costs of Federally-sponsored programs is at cost reimbursement rates negotiated with the University's cognizant agency, the Department of Health and Human Services (DHHS). On May 12, 1997, the University and the Federal government reached an agreement that establishes facilities and administrative cost rates under Federal grants and contracts through June 30, 2001.

l. Medical Services Income

The University has agreements with third-party payors, including health maintenance organizations, that provide payment for medical services at amounts different from standard rates established by the University. Medical services income is reported net of contractual allowances from third-party payors and others for services rendered, and further adjusted for estimates of uncollectible amounts.

m. Net Assets Released from Restrictions

Reclassification of net assets is based upon the satisfaction of the purpose for which the net assets were restricted or the completion of a time stipulation. Restricted contributions and net investment returns earned are reported as temporarily restricted support and reclassified to unrestricted when any donor-imposed restrictions are satisfied. Restricted net assets associated with physical capital assets are reclassified to unrestricted net assets when the capital asset is placed in service.

n. Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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 of revenues and expenses recognized during the reporting period. Actual results could differ from those estimates.

o. 1996 Financial Statement Presentation

The Statement of Activities includes comparative summarized information for the year ended June 30, 1996. Such information does not include sufficient detail by net asset class to constitute a presentation in conformity with generally accepted accounting principles. In addition, certain amounts have been reclassified to conform to the current year presentation.

As described in Note 1d, investments are generally shown in the financial statements at market or appraised value. The cost and market value of the University's investments (excluding cash and cash equivalents as described in Note 1c) are presented below, as of June 30, in thousands of dollars:

	1997			1996
	Market	Cost		Market	Cost
Endowment and other long-term investments:
Domestic equities	$1,227,904	$ 936,205		$1,034,619	$ 843,876
Absolute return	1,336,944	1,179,930		1,004,646	891,577
Private equities	1,217,451	805,843		1,049,305	664,636
Fixed-income	589,369	581,427		609,067	613,376
Real estate	665,391	485,224		558,091	440,566
International equities	722,081	628,999		604,854	543,185
	5,759,140	4,617,628		4,860,582	3,997,216
Assets held in trust	36,034	32,300		24,136	21,296
Other investments:
Short-term	4,935	4,935		7,529	7,529
Fixed-income	144,056	144,027		136,435	136,917
Other	59,849	58,511		21,051	20,704
	208,840	207,473		165,015	165,150
Total investments	$6,004,014	$4,857,401		$5,049,733	$4,183,662

The University has developed a diversified endowment investment portfolio with a strong orientation to equity investments and to strategies designed to take advantage of market inefficiencies. Yale’s investment objectives are guided by the University’s asset allocation policy and are achieved in partnership with superior external investment managers operating through a variety of vehicles, including separate accounts, limited partnerships and commingled funds.

Certain of Yale’s investment managers may employ derivatives and other strategies to (1) hedge against market risks, (2) arbitrage mispricings of related securities and (3) replicate long or short positions more cost effectively. Accordingly, derivatives in the University’s investment portfolio may include currency forward contracts, interest rate and currency swaps, call and put options, debt and equity futures contracts, equity swaps and other vehicles that may be appropriate in certain circumstances. Since Yale does not strive for higher returns through market timing or by making leveraged market bets, derivatives are not used for speculation. As of June 30, 1997, the University’s exposure to derivatives held in managed separate accounts was not significant. Derivatives held by limited partnerships and commingled investment trusts in which Yale invests pose no off-balance sheet risk to the University due to the limited liability structure of the investments.

Certain investment transactions, including derivative financial instruments, necessarily involve counterparty credit exposure. Such exposure is monitored regularly by the University’s Investments Office in accordance with established credit policies and other relevant criteria.

At June 30, 1997, approximately 55 percent of the University’s endowment assets were held in the form of limited partnership interests. Under the terms of certain limited partnership agreements for private equity and real estate investments, the University is obligated to remit additional funding periodically as capital calls are exercised. At June 30, 1997, the University had uncalled commitments of approximately $1,140 million. Such commitments are generally called over a period of years and contain fixed expiration dates or other termination clauses.

Endowment real estate investments are presented net of a nonrecourse mortgage loan in the amount of $52.0 million and $45.5 million at June 30, 1997 and 1996, respectively. The terms of this loan and an assigned interest rate swap agreement are described in Notes 7c and 7d, respectively.

A summary of the University’s total investment return as reported in the Statement of Activities is presented below in thousand of dollars:

	1997	1996
Endowment and other long-term investments:
Investment income	$ 137,198	$ 131,274
Realized and unrealized gains, net of investment management fees	906,436	861,105
Return on the endowment	1,043,634	992,379
Other investment income	17,337	20,103
Total return on investments	$1,060,971	$1,012,482

Endowment investment returns totaling $190.5 million and $167.7 million were allocated to operating and physical capital activities in 1997 and 1996, respectively, using the spending policy described in Note 1d.

Accounts receivable from the following sources were outstanding at June 30,

in thousands of dollars:

	1997	1996
Medical services	$ 52,119	$ 56,133
Grants and contracts	24,432	21,379
Affiliated organizations	12,227	16,059
Yale University Press receivables	6,138	4,959
Advances to employees	5,079	5,245
Other	9,056	6,651
	109,051	110,426
Less: Allowance for doubtful accounts	(20,714)	(16,294)
	$ 88,337	$ 94,132

The University and Yale-New Haven Hospital are parties to an affiliation agreement that establishes guidelines for the operation of activities between these two separate organizations. These guidelines set forth each organization’s responsibility under the common goal of delivering comprehensive patient care services. Under the terms of the arrangement, the hospital is responsible for providing a clinical setting and clinical support for the University to carry out its teaching and research missions. The University provides professional services from faculty of the Yale School of Medicine and a variety of other administrative and clinical services.

The net receivable from the hospital amounted to $6.3 million and $9.6 million at June 30, 1997 and 1996, respectively. Balances are settled in the ordinary course of business.

Contributions receivable consisted of the following unconditional promises to give as of June 30, in thousands of dollars:

Discount rates used to calculate the present value of contributions receivable at June 30, 1997 and 1996 ranged from 5.72 percent to 6.60 percent.

Student notes and interest receivable at June 30, in thousands of dollars, include:

	1997	1996
Stafford Loan Program	$29,094	$27,701
Perkins Loan Program	29,922	29,662
Tuition Postponement Option Plan	657	698
Other student loan notes	17,240	16,599
Accrued interest receivable	16,024	16,668
	92,937	91,328
Less: Allowance for doubtful accounts	(4,708)	(4,708)
	$88,229	$86,620

Student notes receivable include donor-restricted and Federally-sponsored student loans with mandated interest rates and repayment terms subject to significant restrictions as to their transfer and disposition. The fair value of these instruments could not be determined without incurring excessive costs.

Amounts received from the Federal government to fund a portion of the Perkins student loans are ultimately refundable to the Federal government and have been reported as refundable advances in the Statements of Financial Position.