principle. The adoption of this statement required the State to record investments of the Pension Trust Fund at fair
value instead of amortized cost. (See Note 15.)

Grants:

Revenues from federal reimbursement type grants are recorded when the related expenses are incurred.

Property, Plant and Equipment:

Significant property, plant and equipment of enterprise funds are stated at cost. Depreciation of the cost of
property, plant and equipment of the enterprise funds is provided on the straight-line basis over estimated useful
lives of 25 to 50 years for depreciable real property, 5 to 10 years for building improvements, and 3 to 10 years for
equipment Construction period interest is capitalized. Repairs and maintenance are charged to operations in the
period incurred. Replacements, additions and betterments are capitalized.

Debt Refinancing:

During 1996, the State adopted GASB Statement No. 23 "Accounting and Financial Reporting for Refundings of
Debt Reported by Proprietary Activities," which requires the gain or loss associated with enterprise fund debt
refinanced to be deferred and amortized to interest expense over the life of the new debt. (See Note 9.)

Lottery Revenues, Prizes and Operating Transfers:

Revenues and prizes of the Maryland State Lottery Agency (Lottery) are primarily recognized as drawings are
held. Certain prizes are payable in deferred installments. Such liabilities are recorded at the present value of
amounts payable in the future. State law requires the Lottery to transfer to the State revenues in excess of amounts
allocated to prize awards, operating expenses and capital expenditure. The excess Revenues from certain select
games are transferred to the State's general fund, which then transfers the amounts to the Maryland Stadium
Authority for operations and to cover the State's capital lease payments to the Maryland Stadium Authority.

Provisions for Insurance and Loan Losses:

Current provisions are made for estimated losses resulting from insuring loans and uncollectible loans. Loss
provisions are based on the current status of insured and direct loans, including delinquencies, economic
conditions, loss experience, estimated value of collateral and other factors which may affect their realization.

Inventories:

Inventories of the enterprise funds are stated at the lower of cost, using the first-in, first-out method, or
market.

D. Component Units — Higher Education Fund:
Basis of Accounting:

The financial statements of the Higher Education Component Unit have been prepared in accordance with
Governmental Accounting Standards which allow colleges and universities to follow the American Institute of
Certified Public Accountants' reporting model.

The accounts of the higher education institutions are maintained and reported on the accrual basis of
accounting except for tuition and fees revenue and depreciation expense as explained in the following paragraphs.

Fund Accounting:

The financial activities of the higher education institutions are recorded in funds which classify the various
transactions by specified activities or objectives. Fund balances of current restricted, loan and endowment funds
are reported as reserved for higher education programs and higher education general endowment funds.

Unrestricted revenue is accounted for in the current unrestricted fund. Restricted gifts, grants, endowment
income and other restricted resources are accounted for in the current restricted fund, loan funds, endowment and
plant funds. Revenue and expenditures are reported in the current restricted fund when financial resources are
used for the current operating purposes for which they have been provided. Transactions related to the various
student loan programs are accounted for in loan funds. Resources dedicated to the acquisition of and investment in

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