Neighborworks CFO Convening 2015 Footnote Disclosure Samples Prepared by S. Scott Seamands Lindquist, von Husen & Joyce LLP

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1 Neighborworks CFO Convening 2015 Footnote Disclosure Samples Prepared by S. Scott Seamands Lindquist, von Husen & Joyce LLP The first paper, generated from the STRENGTH MATTERS Financial Statement Disclosures Project demonstrates a format for simplifying the disclosure of the complicated inter-relationships of all entities included in a consolidated financial statement. It suggests a three-part format: Part 1 Identification of the principal "lines of business" conducted by the consolidated group, such as property development, property management, resident services and lending. The names of the organizations that provide each of these major business lines are disclosed in this section. Part 2 A list of real estate owned, identifies the entity owning each property along with some key information about each property, such as the property's city, date placed in service, number of rental units, property type and nature of the ownership entity (e.g. limited partnership, not-forprofit corporation, LLC, etc.). Part 3 A listing of all other entities that are included in the consolidation along with a general disclosure of the nature of their activities and their relationship to the parent organization. This suggested format improves the readability of financial disclosure by eliminating the commonly-seen table displaying each general partner s ownership share of each consolidated partnership. Most ownership shares range from.01% to 1%. CFOs and lenders concurred that the distinction between such small ownership percentages did not justify including this table. A statement that controlling partnership interests range between.01% and 1% (since the remaining interests are held by limited partners) would suffice. The second paper is on notes payable, which can be one of the longest footnote disclosures found in a consolidated financial statement. The lenders and CFOs in the working group believe that aggregating similar notes payable by repayment terms will produce a more informative disclosure than the often-seen aggregation by lender type (e.g., city, county, state, etc.) Additional insights and suggestions from the lenders include: Present the parent-only notes payable disclosed separately from that of the other consolidated affiliates o Lenders usually read the consolidated financial statement as part of their underwriting process for approving parent-company debt. o The obligations of other entities included in the consolidated financial statement are of secondary interest to the lenders who are evaluating the parent company's ability to repay a loan.

2 Clarify whether debt is secured or unsecured and full-recourse or non-recourse o The sample wording includes this information. Identify the maturities for each loan type by year instead of presenting only the aggregate maturities for each year o The table of debt maturities over the next five years in the sample disclosure paper follows this format. Pay close attention to construction completion date to accurately disclose the debt maturities o It can be challenging to estimate the maturities on construction loans that are expected to be refinanced or repaid with investor capital. When permanent loan commitments are in place, disclosure of the debt maturities for each of the next five years is difficult to estimate since the date of loan conversion from construction to permanent can float, depending on when construction is completed. o The best practice sample wording includes a disclosure of this fact. Use a table instead of a paragraph-format if there are many credit lines o Sample wording for disclosure of multiple credit lines is also included in the paper. The group of lenders who reviewed the sample notes payable wording commented that following this guidance makes financial statements more transparent, easier to evaluate, and exhibits a commitment to well-organized financial management by the organization. Demonstrating strength through increased financial transparency can lead to improved access to capital, which is the mission of STRENGTH MATTERS. The third paper addresses the fact that many of the restricted net asset disclosures do not provide enough information about the nature of restrictions. Oftentimes the disclosure merely consists of names of donors or programs, which have little meaning to others outside of the reporting organization. Here are some of the observations and recommendations from the CFOs and lenders who worked on this project: It would be preferable to group the temporarily restricted programs into similar categories (e.g., capital improvements, resident services programs, etc.) The table format, showing beginning balances by category, contributions received and releases from restrictions, followed by ending balances by category, is desirable as it supports the balance shown in the temporarily restricted net assets (TRNA) section of the balance sheet as well as the TRNA released from restrictions amount shown on the activities statement. Permanent restrictions disclosures are generally done in a paragraph format and it is helpful to disclose that this type of donor-imposed restriction extends into perpetuity. Internal designations by an organization's board of directors, for example, helps describe the nature of the designation. Lenders are interested in learning about the cash balances that correspond to the temporary or permanently restricted net assets. Although such cash may be included in the operating cash line on an organization's balance sheet, a supplemental cash composition table can describe the components of operating cash that are attributable to restrictions or internal designations.

3 Organizations that follow the best practice format in this paper will provide their financial statement users with more information that allows those users to better assess the availability of the net assets for future years' activities. Lenders are particularly interested in these disclosures and welcome the guidance provided by this paper. The fourth paper provides a suggested format for the disclosure of an organization's commitments and contingencies. The lenders and CFOs that we worked with found it meaningful to separate commitments from contingencies so that financial statement readers can differentiate between future events that will happen (commitments) and events that may happen (contingencies). Here are some of the additional insights and suggestions included in this paper: Present a disclosure of a parent company's guarantees to its consolidated affiliates: Lenders find it helpful, though a consolidated group's financial statement is only required to disclose commitments and contingencies to third party organizations that are not included in the consolidated group. Distinguish contingent loss liabilities from other contingencies: It is recommended that you separate contingent liabilities that could result in a future loss to the consolidated group from other contingencies that may only require one affiliate to transfer cash to another affiliate without reducing the consolidated group's net assets. Disclose more about pending litigation: Although the information about ongoing cases should not be too detailed, more information about the likely exposure to loss and the amount of available insurance coverage would be helpful. Disclose about compliance with loan covenants (if applicable): It usually takes the form of a general statement that various loan covenants are in effect and are being compiled with, rather than specifying particular covenants since there may be many. Quantify and disclose capital commitments for signed construction contracts with unrelated parties: This is recommended if the amount not yet incurred is material. Use a table format for guarantees, identifying the aggregate maximum outstanding exposure by type: You can provide the necessary information while presenting it in a more comprehensive way than lengthy paragraphs. Organizations that don't wish to copy the suggested disclosure format may still find the paper useful since it contains a sample covering each of the most common commitment and contingency disclosures. This can be useful in determining whether an organization has included a disclosure of all significant items. The fifth paper provides a suggested format for Investment disclosures. The lenders and CFOs from organizations across the nation that we worked with found it meaningful to separately identify and describe investments maintained on the cost, equity and fair value methods of accounting and to include a table summarizing those investments balances into categories by accounting method utilized, before providing the details about each category.

4 The summary table of investments begins with investments stated at fair value, which are typically marketable securities. In the details following the table, the required information about Level 1, Level 2 and Level 3 investments can be presented. The group that worked on this paper felt specific details about the nature of the marketable securities wasn t necessary. Information such as the amount held in U.S. equities, short-term bond funds, international equities, etc. was not useful to these lenders or CFOs. The summarized financial information for entities accounted for under the equity method should contain a subtotal to disclose net operating income before depreciation and interest. This gives the reader more information about performance of these companies, which are generally real estate partnerships. Investments accounted for using the cost method are generally non-marketable and where the investor controls less than 20% of the decision-making ability of the investee. Board representation is a consideration that could give an investor more control, but the 20% threshold should still be considered. If there are more than five voting board members, the investor wouldn t appear to have more than a 20% share of the influence. The footnote should disclose enough information about the nature of these investments to let the reader know what each category of investment represents. The sixth paper presents a sample disclosure for Property and Equipment. The lenders and CFOs from organizations across the nation that we worked with found it meaningful to separately identify and describe property held for rental, development in progress, property held for investment and property held for sale. A list of real estate held for rental is suggested to be included in the list of affiliates, so the property and equipment disclosure reflects the aggregate amounts of each category: land, buildings, furnishings, etc. If the organization s offices represent a material amount,that should be separately disclosed since that property is not held for rental to others outside of the consolidated group. Disclosure of development in progress should be detailed so that the reader can identify each of the significant properties included in the total, along with the costs to date, expected dates of completion and the number of units in each development. Property held for investment is less common, since developers generally begin developing real property shortly after it is acquired. Occasionally property may be held for a longer term before any development activity is undertaken. A separate disclosure for this category of property should be made, along with information about the significant components of this account balance. Property held for sale is typical of single-family home developers but not common for multi-family owners. When a property is held for sale, it should be moved to the current asset section unless an active market for the property type doesn t exist. Since this is unusual for multi-family developers, a disclosure of the significant components of this account balance would be helpful.

5 The seventh paper presents a sample disclosure for related party transactions. A real estate developer s consolidated financial statement may not reflect any related party transactions when all inter-company transactions have been eliminated through the consolidation process. In many such cases, supplemental consolidating schedules provide enough information about the eliminated intercompany transactions that are displayed on each consolidated entity s column. The disclosure format that we created with the help of lenders and CFOs from organizations across the nation reflects the gross amount of related party transactions prior to eliminating entries, as well as the net amount after eliminations. This format is suggested because related party transactions are a significant part of the parent company s financial statement. Lenders are interested in identifying revenue streams available to the parent company for debt service. Since supplemental consolidating schedules are not a required part of the financial statements, the note disclosure should reflect significant related party transactions affecting the parent company when this information isn t readily available elsewhere in the financial statements. Terms for paying significant balances due to or from related parties should be described so that readers understand the impact of such transactions on future cash flows for affected entities. Disclosure of the nature of relationships among related parties is generally included in the list of consolidated entities. Although only significant un-eliminated related party transactions are required to be disclosed, some judgment is needed to determine which other related party transactions are helpful to disclose. For example, payroll and overhead expense reimbursement charges or allocations among consolidated entities need not be disclosed. Major categories of related party revenue and receivables recognized by the parent company and similar corporate entities are likely to be of greatest interest to financial statement users. A real estate developer s consolidated financial statement may not reflect any related party transactions when all inter-company transactions have been eliminated through the consolidation process. In many such cases, supplemental consolidating schedules provide enough information about the eliminated inter-company transactions that are displayed on each consolidated entity s column. The disclosure format that we created with the help of lenders and CFOs from organizations across the nation reflects the gross amount of related party transactions prior to eliminating entries, as well as the net amount after eliminations. This format is suggested because related party transactions are a significant part of the parent company s financial statement. Lenders are interested in identifying revenue streams available to the parent company for debt service. Since supplemental consolidating schedules are not a required part of the financial statements, the note disclosure should reflect significant related party transactions affecting the parent company when this information isn t readily available elsewhere in the financial statements. Terms for paying significant balances due to or from related parties should be described so that readers understand the impact of such transactions on future cash flows for affected entities.

6 Disclosure of the nature of relationships among related parties is generally included in the list of consolidated entities. Although only significant un-eliminated related party transactions are required to be disclosed, some judgment is needed to determine which other related party transactions are helpful to disclose. For example, payroll and overhead expense reimbursement charges or allocations among consolidated entities need not be disclosed. Major categories of related party revenue and receivables recognized by the parent company and similar corporate entities are likely to be of greatest interest to financial statement users.