The Pennsylvania Horticultural Society

Transcription

1 Consolidated Financial Statements and Report of Independent Certified Public Accountants in Accordance with OMB Uniform Guidance and the City of Philadelphia Subrecipient Audit Guide June 30, 2016 and 2015

2 Contents Page Report of Independent Certified Public Accountants 3 Consolidated financial statements Statements of financial position 5 Statements of activities 6-7 Statement of changes in net assets 8 Statements of cash flows 9 Notes to consolidated financial statements 10 Supplementary information Consolidated Schedule of Functional Expenses 34 Schedule of Expenditures of Federal and City Awards 35 Notes to Schedule of Expenditures of Federal and City Awards 36 City of Philadelphia schedules Office of Housing and Community Development 37 Other matters Report of Independent Certified Public Accountants on Internal Control Over Financial Reporting and on Compliance and Other Matters Required by Government Auditing Standards 44 Report of Independent Certified Public Accountants on Compliance for Each Major Federal Program and on Internal Control Over Compliance Required by the Uniform Guidance and the City of Philadelphia Subrecipient Audit Guide 46 Schedule of Findings and Questioned Costs 49 Status of Prior Year Findings 53

3 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Grant Thornton LLP Two Commerce Square 2001 Market St., Suite 700 Philadelphia, PA T F GrantThornton.com linked.in/grantthorntonus twitter.com/grantthorntonus Report on the financial statements We have audited the accompanying consolidated financial statements of The Pennsylvania Horticultural Society, which comprise the consolidated statements of financial position as of June 30, 2016 and 2015, and the related consolidated statements of activities, changes in net assets and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, and the City of Philadelphia Subrecipient Audit Guide. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of as of June 30, 2016 and 2015, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other matters Supplementary information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidated schedule of functional expenses presented on page 34 is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. The accompanying Schedule of Expenditures of Federal and City Awards on page 35 as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards and the City of Philadelphia Subrecipient Audit Guide, is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. The accompanying City of Philadelphia schedules presented on pages 37 to 42 are presented for the purpose of additional analysis as required by the City of Philadelphia Subrecipient Audit Guide and are not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements, or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole. Other reporting required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report, dated March 31, 2017, on our consideration of s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering The Pennsylvania Horticultural Society s internal control over financial reporting and compliance. Philadelphia, Pennsylvania March 31, 2017

5 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION June 30, ASSETS Cash and cash equivalents $ 938,959 $ 984,194 Accounts and contributions receivable, net of allowance for doubtful accounts Government grants 3,230,685 2,395,132 Other grants and contributions 358, ,083 Other 508, ,503 Prepaid expenses and other assets 298, ,196 Inventory 145, ,862 Property and equipment, net 3,420,582 4,005,685 Investments, at fair value 56,214,662 62,856,542 Beneficial interest in perpetual trust 1,559,688 1,678,107 Collections (Note A) - - Total assets $ 66,675,215 $ 73,151,304 LIABILITIES AND NET ASSETS Liabilities Accounts payable and accrued expenses $ 3,786,571 $ 3,154,275 Accrued pension obligations 3,062,887 1,893,499 Capital lease obligations 170, ,365 Deferred revenue and membership dues 1,177,060 1,328,366 Tenant improvement allowance 1,099,343 1,190,955 Annuities payable 122, ,192 Line of credit obligations 1,100,000 1,300,000 Total liabilities 10,519,165 9,260,652 Commitments and contingencies (Note K) Net assets Unrestricted 22,987,434 28,688,396 Temporarily restricted 15,910,499 17,825,720 Permanently restricted 17,258,117 17,376,536 Total net assets 56,156,050 63,890,652 Total liabilities and net assets $ 66,675,215 $ 73,151,304 The accompanying notes are an integral part of these consolidated financial statements. 5

6 CONSOLIDATED STATEMENT OF ACTIVITIES Year ended June 30, 2016 Temporarily Permanently Unrestricted restricted restricted Total Revenue and support Ticket revenue $ 5,458,535 $ - $ - $ 5,458,535 Sales 2,512, ,512,411 Events 518, ,027 Program service revenue 3,247, ,247,755 Government contracts 7,499, ,499,100 Other grants and contributions 1,115,079 1,599,861-2,714,940 Membership dues 2,017, ,017,550 Interest and dividends, net 339, , ,121 Net realized and unrealized loss on investments (2,410,889) (1,042,529) (69,151) (3,522,569) Net assets released from program and time restrictions 2,028,958 (1,979,690) (49,268) - Release of endowment under spending rule 822,468 (822,468) - - Total revenue and support 23,148,510 (1,915,221) (118,419) 21,114,870 Expenses Flower Show 10,005, ,005,614 Urban Greening 12,691, ,691,947 Education Services 1,547, ,547,689 Development 1,660, ,660,743 Meadowbrook Farm 1,662, ,662,505 Special projects 2, ,906 Total expenses 27,571, ,571,404 Changes in net assets before net unrecognized pension loss (4,422,894) (1,915,221) (118,419) (6,456,534) Net unrecognized pension loss (Note M) (1,278,068) - - (1,278,068) Changes in net assets (5,700,962) (1,915,221) (118,419) (7,734,602) Net assets, beginning of year 28,688,396 17,825,720 17,376,536 63,890,652 Net assets, end of year $ 22,987,434 $ 15,910,499 $ 17,258,117 $ 56,156,050 The accompanying notes are an integral part of this consolidated financial statement. 6

7 CONSOLIDATED STATEMENT OF ACTIVITIES Year ended June 30, 2015 Temporarily Permanently Unrestricted restricted restricted Total Revenue and support Ticket revenue $ 4,274,939 $ - $ - $ 4,274,939 Sales 2,166, ,166,517 Events 528, ,446 Insurance proceeds 355, ,520 Program service revenue 3,049, ,049,118 Government contracts 5,243, ,243,219 Other grants and contributions 862,802 1,091,263-1,954,065 Membership dues 1,759, ,759,363 Interest and dividends, net 375, , ,147 Loss on disposal of property and equipment (51,950) - - (51,950) Net realized and unrealized (loss) gain on investments (776,652) (799,168) 25,909 (1,549,911) Net assets released from program and time restrictions 1,791,005 (1,706,059) (84,946) - Release of endowment under spending rule 848,415 (848,415) - - Total revenue and support 20,426,446 (1,870,936) (59,037) 18,496,473 Expenses Flower Show 10,417, ,417,249 Urban Greening 9,745, ,745,183 Education Services 1,378, ,378,817 Development 1,570, ,570,866 Meadowbrook Farm 1,484, ,484,261 Special projects 44, ,095 Total expenses 24,640, ,640,471 Changes in net assets before net unrecognized pension loss (4,214,025) (1,870,936) (59,037) (6,143,998) Net unrecognized pension loss (Note M) (988,838) - - (988,838) Changes in net assets (5,202,863) (1,870,936) (59,037) (7,132,836) Net assets, beginning of year 33,891,259 19,696,656 17,435,573 71,023,488 Net assets, end of year $ 28,688,396 $ 17,825,720 $ 17,376,536 $ 63,890,652 The accompanying notes are an integral part of this consolidated financial statement. 7

8 CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS Years ended June 30, 2016 and 2015 Temporarily Permanently Unrestricted restricted restricted Total Balance, July 1, 2014 $ 33,891,259 $ 19,696,656 $ 17,435,573 $ 71,023,488 Changes in net assets (5,202,863) (1,870,936) (59,037) (7,132,836) Balance, June 30, ,688,396 17,825,720 17,376,536 63,890,652 Changes in net assets (5,700,962) (1,915,221) (118,419) (7,734,602) Balance, June 30, 2016 $ 22,987,434 $ 15,910,499 $ 17,258,117 $ 56,156,050 The accompanying notes are an integral part of this consolidated financial statement. 8

9 CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended June 30, Operating activities Changes in net assets $ (7,734,602) $ (7,132,836) Adjustments to reconcile changes in net assets to net cash used in operating activities Change in pension valuation 1,278, ,838 Change in fair value of beneficial interest in perpetual trust 118,419 - Depreciation 807, ,654 Net realized and unrealized loss on investments 3,453,417 1,549,911 Loss on disposal of property and equipment - 51,950 Changes in Accounts and contributions receivable (753,987) 239,625 Prepaid expenses and other assets (181,042) 180,590 Inventory 20,481 31,818 Accounts payable and accrued expenses 632,296 1,021,105 Accrued pension obligations (108,680) (305,118) Deferred revenue and membership dues (151,306) 465,963 Tenant improvement allowance (91,612) 1,190,955 Annuities payable (28,444) (26,519) Net cash used in operating activities (2,739,081) (1,020,064) Investing activities Purchase of property and equipment (222,808) (2,757,345) Purchases of investments (8,153,742) (11,695,821) Proceeds from sale of investments 11,342,205 14,442,547 Net cash provided by (used in) investing activities 2,965,655 (10,619) Financing activities Proceeds from credit line borrowings 1,200,000 1,300,000 Repayments on credit line borrowings (1,400,000) - Principal payments on capital lease obligations (71,809) (72,433) Net cash (used in) provided by financing activities (271,809) 1,227,567 (Decrease) increase in cash and cash equivalents (45,235) 196,884 Cash and cash equivalents, beginning of year 984, ,310 Cash and cash equivalents, end of year $ 938,959 $ 984,194 Supplemental information Cash paid for interest $ 40,420 $ 22,225 Cash paid for capital lease obligation $ 87,797 $ 32,805 The accompanying notes are an integral part of these consolidated financial statements. 9

10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2016 and 2015 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Organization and Principles of Consolidation (the Society ) is a not-for-profit membership organization founded in 1827 that offers programs, activities, workshops and publications for gardeners of all levels and interests. The Society motivates people to improve the quality of life and create a sense of community through horticulture. Proceeds from the Society s Philadelphia Flower Show, as well as contributions and contracts from foundations, corporations, government agencies and individuals, support the Society s programs and initiatives, including community education, training opportunities and a comprehensive urban greening program supporting the development and ongoing care of community gardens, parks, vacant land, sustainable environmental initiatives and high profile public green spaces. The Society is the sole member of Meadowbrook Farm, a not-for-profit entity. Meadowbrook Farm is a garden estate that provides facilities for Society educational programs and gardens that are open to the public for tours. In addition, Meadowbrook Farm has a retail nursery operation and forces plants for exhibition at the Philadelphia Flower Show. The Society is required to maintain Meadowbrook Farm in perpetuity pursuant to the bequest of the donor s estate. The Society is also the sole member of Philadelphia Flower Show, Incorporated ( PFSI ), a not-for-profit entity. The accompanying consolidated financial statements include the activities of the Society, Meadowbrook Farm and PFSI, collectively referred to as PHS. All significant intercompany balances have been eliminated. 2. Cash and Cash Equivalents PHS considers all highly liquid debt instruments purchased with an original maturity of three months or less, which are not intended to be held for investment purposes, to be cash equivalents. 3. Contributions and Net Assets Net assets are categorized as follows: Unrestricted - net assets are not subject to donor-imposed restrictions or the donor-imposed restrictions have expired. Temporarily restricted - net assets are subject to donor-imposed restrictions that permit PHS to use or expend the assets as specified. The restrictions will be met either by actions of PHS or the passage of time. Permanently restricted - net assets are subject to donor-imposed stipulations that neither expire by passage of time nor can be fulfilled or otherwise removed by PHS. The related assets available for use are determined by the underlying donor agreements. (Continued) 10

11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Contributions, including unconditional pledges, are recognized as revenue in the period the promise is received. Contributions of assets other than cash are recorded at their estimated fair value at the date of donation. Contributions that are restricted by the donor are reported as increases in temporarily or permanently restricted net assets depending upon the nature of the restrictions. When a restriction expires (that is, when a stipulated time or purpose restriction is accomplished), temporarily restricted net assets are transferred to unrestricted net assets. Donor restricted contributions whose restrictions are met in the same fiscal year are initially recorded as temporarily restricted contributions and subsequently reclassified to the unrestricted category. When PHS receives contributions of long-lived assets or cash or other assets restricted to the purchase of long-lived assets, the related temporarily restricted net assets are released to unrestricted net assets over the estimated life of the long-lived assets. This amount approximates current year depreciation expense. Investment income and gains earned on permanently restricted net assets held by PHS are recorded as temporarily restricted until they are transferred to unrestricted net assets for use in operations (see Note I). 4. Allowance for Doubtful Accounts PHS continually monitors accounts and contributions receivable for collectability issues. An allowance for doubtful accounts is based upon management s judgment and is established based on a review of the types of individual accounts, prior collection history, the nature of services provided and other pertinent factors. Accounts deemed uncollectible are charged to the allowance. There was no allowance for doubtful accounts as of June 30, 2016 and Inventory Inventory primarily relates to plants and other items offered for sale at Meadowbrook Farm. Inventory is valued at the lower of cost or market. Cost is determined on a first in, first out basis. 6. Property and Equipment Property and equipment are capitalized at cost, at the date of purchase, or at fair market value as of the date of donation. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives. Amortization of leasehold improvements is included in depreciation. Nursery buildings Furniture and equipment Machinery and equipment Vehicles Nursery improvements Leasehold improvements Equipment and vehicles under capital leases 10 years 3-10 years 5 years 5 years 5 years Lesser of lease term or useful life 4-5 years (Continued) 11

12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. 7. Investments and Beneficial Interest in Perpetual Trust PHS s investments are stated at fair value (see Note F). Purchases and sales of securities are recorded on a trade-date basis. Interest is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. PHS has adopted an investment policy for all investments to produce a predictable level of income and appreciation to meet PHS s organizational objectives while achieving a maximum total return for the assets at a level consistent with prudent management. Under this policy, as approved by the Board, the assets are invested in a manner that is intended to produce returns that exceed spending, while assuming a moderate level of investment risk. Actual returns may vary from the intended results. To satisfy its long-term rate of return objectives, PHS relies on a total return strategy in which investment returns are achieved through both capital appreciation and yield. PHS targets a diversified asset allocation that places greater emphasis on equity-based investments to achieve its long-term objectives within prudent risk constraints. The beneficial interest in perpetual trust is stated at fair value. The investment policy of the beneficial interest in perpetual trust is determined and administered by a third-party trustee. PHS is the beneficiary of income earned based on the spending rule policy of the trust. 8. Collections PHS does not capitalize its collections. All collections are protected and preserved and are held for exhibition to the public for educational purposes and not financial gain. It is PHS s policy to restrict proceeds from the sale of collection items for the purchase of other collection items. The collections are material to the consolidated financial statements and include library, art and educational assets, and the Meadowbrook Farm gardens and house. The purchase of additional collections and proceeds from the sale of collections are reflected on the consolidated statements of activities as change in net assets related to collection items not capitalized, collection items purchased but not capitalized, and proceeds from sales of collection items, respectively, if applicable. 9. Gift Annuities PHS maintains a gift annuity program whereby PHS receives a transfer of assets from a donor and agrees to pay such annuitant a fixed amount of money quarterly for his or her lifetime. Upon the death of the annuitant, the remaining balance will be available for PHS for daily operations. The annuity is not assignable, with the exception that it may be assigned to PHS. 10. Revenue Recognition The Society recognizes ticket revenue, sales, events, program service revenue and governmental contracts in the period earned. (Continued) 12

13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 11. Deferred Revenue and Membership Dues Deferred revenue reflects deposits received from vendors for the following year s marketplace at the Flower Show, as well as ticket revenue, income received under fee-for-service grants and governmental contracts for services that have not yet been performed, and deferred lease credit for renovations paid by the lessor. Membership dues are recognized as revenue in the applicable membership period. Any unearned amounts are included in deferred revenue. 12. Tenant Improvement Allowance In March 2014, the Society signed an amendment to the lease agreement for its office space. The amendment includes a tenant improvement allowance in the amount of $1,259,664 which was used to construct improvements and renovations to the space and has been capitalized as leasehold improvements as of June 30, 2016 and The allowance is being amortized over the life of the lease and had a balance of $1,099,343 and $1,190,955 as of June 30, 2016 and 2015, respectively. 13. Sponsorships PHS receives sponsorships from organizations that help to support the Flower Show. Such revenue is accounted for as exchange transactions in the accompanying consolidated financial statements. 14. Income Taxes The Society, PFSI and Meadowbrook Farm are exempt from most federal income taxes under Section 501(c)(3) of the Internal Revenue Code (the Code ). However, the Society is subject to tax on unrelated business income which includes revenue from advertising in its publication. There was no income tax provision or benefit recorded for the year ended June 30, The Society has a net operating loss carryforward, expiring at various dates through 2034, of approximately $713,000. A full valuation allowance has been established for the deferred tax asset resulting from the net operating loss carryforward since it is uncertain as to whether or not it will be utilized in the future. As of June 30, 2016, PHS did not identify any material uncertain tax positions taken or expected to be taken in a tax return which would require adjustment to or disclosure in its consolidated financial statements. The Society, Meadowbrook Farm and PFSI are potentially subject to federal examinations for years subsequent to June 30, Advertising Costs The Society expenses advertising costs as incurred. Advertising expense was approximately $445,000 and $485,000 for the years ended June 30, 2016 and 2015, respectively. (Continued) 13

14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued 16. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ( U.S. GAAP ) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Actual results could differ from those estimates. 17. Functional Allocation of Expenses The costs of providing the various programs and other activities have been summarized on a functional basis in the consolidated statements of activities. Accordingly, certain costs have been allocated to the programs and supporting services benefited. 18. Defined Benefit Pension Plan PHS accounts for its defined benefit plan in accordance with the recognition and measurement provision of Financial Accounting Standards Board ( FASB ) Accounting Standards Codification ( ASC ) Topic 715, Compensation - Retirement Benefits. 19. Recently Issued Accounting Pronouncements In May 2014, the FASB issued Accounting Standards Update ( ASU ) , Revenue from Contracts with Customers, to clarify the principles for recognizing revenue and to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for these goods and services. ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. An entity will apply the amendments in this update using either a full retrospective application, which applies the standard to each prior period presented, or under the modified retrospective application, in which an entity recognizes the cumulative effect of initially applying the new standard as an adjustment to the opening balance sheet of retained earnings at the date of initial application. Revenue in periods presented before that date will continue to be reported under guidance in effect before the change. The Society has not determined the impact of ASU at this time. (Continued) 14

15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued In February 2016, the FASB issued ASU , Leases, which requires that most leased assets be recognized on the balance sheet as assets and liabilities for the rights and obligations created by these leases. ASU is effective for fiscal years beginning after December 15, Early application is permitted. An entity is required to apply the amendments in ASU under the modified retrospective transition approach. This approach includes a number of optional practical expedients, which are described in the final standard. Under these practical expedients, an organization will continue to account for leases that commence before the effective date in accordance with current U.S. GAAP, unless the lease is modified. However, lessees are required to recognize on the balance sheet leased assets and liabilities for operating leases at each reporting date. The Society has not determined the impact of ASU at this time. In August 2016, the FASB issued a new standard related to the presentation of financial statements of not-for-profit entities. This standard intends to make certain improvements to the current reporting requirements for not-for-profit entities including: (1) the presentation for two classes of net assets at the end of the period, rather than the currently required three classes, as well as the annual change in each of the two classes; (2) the removal of the requirement to present or disclose the indirect method (reconciliation) when using the direct method for the statement of cash flows; and (3) the requirement to provide various enhanced disclosures relating to various not-for-profit specific topics. The new standard is effective for annual financial statements beginning after December 15, The Society has not determined the impact of the new standard at this time. NOTE B - CONCENTRATION OF CREDIT RISK 1. Cash The Society maintains its cash balances in the custody of four financial institutions in non-interest and interest bearing accounts. The Society s accounts are insured up to the Federal Deposit Insurance Corporation limit of $250,000 at each financial institution. At June 30, 2016 and 2015, the total cash balance in aggregate of approximately $1,245,000 and $1,384,000, respectively, exceeded the federal insured limits by approximately $735,000 and $798,000, respectively. The Society mitigates any potential risk by depositing funds with major financial institutions. The Society has not experienced any losses in such accounts, and management believes it is not exposed to any significant credit risk on its cash and cash equivalents. 2. Significant Grants and Contributions Receivable and Revenue At June 30, 2016, PHS had uncollateralized accounts receivable from various public agencies. One agency made up approximately 53% and 60% of government contract revenues for the years ended June 30, 2016 and 2015, respectively. Two agencies made up approximately 64% and 53% of government grants accounts receivable as of June 30, 2016 and 2015, respectively. One not-for-profit agency made up approximately 5% and 10% of other grants and contributions revenue for the years ended June 30, 2016 and 2015, respectively. Five not-for-profit agencies made up approximately 97% and three not-for-profit agencies made up approximately 91% of other grants and contributions receivable as of June 30, 2016 and 2015, respectively. (Continued) 15

16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE B - CONCENTRATION OF CREDIT RISK - Continued 3. Investments PHS invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in PHS s consolidated statements of financial position and consolidated statements of activities. NOTE C - OTHER GRANTS AND CONTRIBUTIONS RECEIVABLE Other grants and contributions receivable at June 30, 2016 and 2015 of $358,673 and $297,083, respectively, are all expected to be received within the next year. NOTE D - PROPERTY AND EQUIPMENT Property and equipment consist of the following as of June 30, 2016 and 2015: Nursery buildings $ 562,607 $ 562,607 Furniture and equipment 4,111,166 3,888,357 Machinery and equipment 450, ,971 Vehicles 142, ,943 Nursery improvements 583, ,760 Leasehold improvements 2,675,139 2,675,139 Equipment and vehicles under capital leases 395, ,529 8,922,115 8,699,306 Less: accumulated depreciation (5,501,533) (4,693,621) $ 3,420,582 $ 4,005,685 Depreciation expense was $807,911 and $723,654 for the years ended June 30, 2016 and 2015, respectively. 16

17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE E - INVESTMENTS AND BENEFICIAL INTEREST IN PERPETUAL TRUST Investments and beneficial interest in perpetual trust at fair value (see Note F) are as follows at June 30, 2016 and 2015: Money market funds $ 2,421,249 $ 3,442,843 Mutual funds 14,382,646 12,615,277 Equity securities 4,537,416 4,816,268 Exchange traded funds 3,710,733 12,141,143 Common investment funds 31,162,618 29,841,011 56,214,662 62,856,542 Beneficial interest in perpetual trust 1,559,688 1,678,107 Total $ 57,774,350 $ 64,534,649 Interest and dividends are shown on the consolidated statements of activities net of investment expense of $341,525 and $351,355 for the years ended June 30, 2016 and 2015, respectively. NOTE F - FAIR VALUE MEASUREMENTS PHS accounts for the fair value of its financial instruments in accordance with the guidance in ASC Topic 820, Fair Value Measurements ( ASC 820 ). ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels: Level 1 Level 2 Level 3 Inputs are quoted prices in active markets for identical assets or liabilities. Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data. Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. (Continued) 17

18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE F - FAIR VALUE MEASUREMENTS - Continued The following is a description of the valuation methodologies used for investments measured at fair value as of June 30, 2016 and 2015: 1. Level 1 Fair Value Measurements Money market funds and exchange-traded funds are valued based on quoted market prices in active markets, for identical assets. Equity securities are valued at the closing price reported on the active market on which the individual securities are traded. Mutual funds are valued based on quoted net asset values of the shares held by PHS. 2. Level 2 Fair Value Measurements Certain common investment funds for which quoted market prices are not available are valued based on the net asset value, as a practical expedient, of the underlying funds owned by the trust, less its liabilities, and then divided by the number of shares outstanding. 3. Level 3 Fair Value Measurements The beneficial interest in perpetual trust is valued based on the fair value of the underlying investments of the trust, which consists of money market funds, equity securities and mutual funds. PHS will never have the ability to redeem its interest in the trust. Alternative investments for which quoted market prices are not available are valued based on the net asset value, as a practical expedient, of the underlying funds owned by the trust, less its liabilities, and then divided by the number of shares outstanding. The following tables set forth by level, within the fair value hierarchy, PHS s investments and beneficial interest in perpetual trust measured at fair value as of June 30, 2016 and 2015: June 30, 2016 Level 1 Level 2 Level 3 Total Money market funds $ 2,421,249 $ - $ - $ 2,421,249 Mutual funds 14,382, ,382,646 Equity securities 4,537, ,537,416 Exchange traded funds 3,710, ,710,733 Common investment funds: Fixed income - 3,258,112-3,258,112 Alternative - 11,214,258 (a) - 11,214,258 Value - 7,335,345 (b) - 7,335,345 Growth and emerging markets - 9,354,903 (c) - 9,354,903 Beneficial interest in perpetual trust - - 1,559,688 1,559,688 Total assets at fair value $ 25,052,044 $ 31,162,618 $ 1,559,688 $ 57,774,350 (Continued) 18

19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE F - FAIR VALUE MEASUREMENTS - Continued June 30, 2015 Level 1 Level 2 Level 3 Total Money market funds $ 3,442,843 $ - $ - $ 3,442,843 Mutual funds 12,615, ,615,277 Equity securities 4,816, ,816,268 Exchange traded funds 12,141, ,141,143 Common investment funds: Fixed income - 5,487,696-5,487,696 Alternative - - 5,046,017 (a) 5,046,017 Value - 8,001,102 (b) - 8,001,102 Growth and emerging markets - 11,306,196 (c) - 11,306,196 Beneficial interest in perpetual trust - - 1,678,107 1,678,107 Total assets at fair value $ 33,015,531 $ 24,794,994 $ 6,724,124 $ 64,534,649 Common Investment Funds - Alternative Investments: (a) These funds consist of the following: 1. The LCG Hedged Equity Fund invests in underlying long/short equity funds. The fund management s objective is to generate long-term capital appreciation over a full market cycle with less risk than the broad equity market. The investment can be redeemed quarterly, with prior notice of 65 days after an initial one-year soft lock-up period, which expired in September There are no unfunded commitments to the fund as of June 30, 2016 and Magnitude International Class A invests in underlying direct hedge funds. The fund management s objective is to deliver attractive risk-adjusted returns through manager selection, seeking out compelling opportunities and limiting passive exposures to major risk factors. The investment can be redeemed quarterly, with prior notice of 65 days. There are no unfunded commitments to the fund as of June 30, 2016 and Harvest MLP Income Fund invests in publicly-traded MLPs and U.S. energy infrastructure companies. The fund management s objective is to take advantage of opportunities to invest in MLPs and U.S. energy infrastructure companies. The investment can be redeemed monthly, with prior notice of 30 days. There are no unfunded commitments to the fund as of June 30, 2016 and (b) The Silchester International Value Equity Trust invests in publicly traded, non-u.s. equity securities. Management of the fund does not short securities, utilize leverage, margin or borrow. The investment approach is a bottom up one. The investment can be redeemed on the first business day of each month and requires a notice of at least six days before the end of the month. There are no unfunded commitments to the fund as of June 30, 2016 and (Continued) 19

20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE F - FAIR VALUE MEASUREMENTS - Continued (c) These funds consist of the following: 1. For 2016, City of London Emerging Market Equity Fund invests in equities of international companies that derive the majority of their profits from emerging economies. The fund s objective is to allocate assets through fundamental analysis with durations of 12 to 18 months. There are no redemption restrictions and no unfunded commitments as of June 30, For 2016, Oppenheimer Funds, Inc. Global Institutional International Equity Fund invests in international equities. The fund s objective is to invest in high-quality companies which fund management believes have a sustainable, above-average growth potential over a three- to five-year time horizon. There are no redemption restrictions and no unfunded commitments as of June 30, For 2016, the Aberdeen Global Frontier Markets Equity Fund invests in the securities of companies predominantly in emerging market countries in order to generate long-term total return. There are no redemption restrictions and no unfunded commitments as of June 30, The following is a reconciliation of investments for which significant unobservable inputs (Level 3) were used in determining value Common investment funds Beginning balance, July 1, $ 5,046,017 $ 1,778,665 Purchases 400,000 4,750,000 Redemptions (750,000) (1,829,249) Dividends reinvested - 2,685 Unrealized (loss) gain (325,457) 343,916 Transfers into Level 2 (4,370,560) - Ending balance, June 30, $ - $ 5,046,017 Beneficial interest in perpetual trust Beginning balance, July 1, $ 1,678,107 $ 1,737,144 Dividends reinvested 23, Withdrawals (72,750) (85,216) Unrealized (loss) gain (69,150) 25,909 Ending balance, June 30, $ 1,559,688 $ 1,678,107 20

21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE G - CAPITAL LEASE OBLIGATIONS The Society leases equipment under capital leases that expire through The future minimum lease payments under these capital leases for the next five years, and in the aggregate, and the present value of the net minimum lease payments are as follows: Year ending June 30, 2017 $ 108, , , ,994 Total minimum lease payments 190,118 Less imputed interest (a) (19,562) Present value of net minimum lease payments $ 170,556 (a) Amount necessary to reduce minimum lease payments to present value calculated at PHS s incremental borrowing rate at the inception of the leases. NOTE H - LINE OF CREDIT The Society has an unsecured line of credit with a bank in the amount of $2,500,000. The line of credit bears interest at LIBOR plus 175 basis points. Interest is payable monthly. The Society is not subject to any financial covenants under this line of credit. As of June 30, 2016 and 2015, the Society had $1,100,000 and $1,300,000, respectively, outstanding on the line of credit and incurred interest expense of $22,538 and $1,688, respectively. In January 2017, the Society s revolving line of credit agreement was extended to May 1, All other terms and conditions pertaining to the revolving line of credit agreement remain the same. As of March 31, 2017, there was no balance outstanding under the line of credit. NOTE I - ENDOWMENT FUNDS PHS s investments include both donor-restricted endowment funds and funds designated by PHS s Board to function as endowments. As required by U.S. GAAP, net assets associated with endowment funds, including funds designated by the Board to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. PHS maintains the financial controls necessary to ensure proper expenditures from donor-restricted and Board-designated funds. PHS maintains master investment accounts for its donor-restricted and Board-designated endowments. Realized and unrealized gains and losses as well as investment income from securities in the master investment accounts are allocated monthly to the individual endowments based on the relationship of the market value of each endowment to the total market value of the master investment accounts, as adjusted for additions to or deductions from those accounts. (Continued) 21

22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE I - ENDOWMENT FUNDS - Continued 1. Board-Designated Unrestricted Endowment Funds In 2009, PHS s Board had designated certain unrestricted funds, which exceeded PHS s needs, to function as endowments. While these unrestricted resources are available to support expenditures without appropriation by the Board, a spending policy has been adopted by the Board providing for a spending rate of approximately 7% for yearend June 30, 2016 and 4% for year-end June 30, The amount available for spending each fiscal year is determined by utilizing a rolling calendar three-year trailing average of market values. PHS s Board authorized transfers in the amount of $2,207,785 for year-end June 30, 2016 and $1,459,200 for year-end June 30, 2015 to be utilized for operating purposes. 2. Permanently Restricted Endowments The use of permanently restricted net assets and related income and gains is limited by Pennsylvania Statute Act 141. Each year, the Board determines the amount that can be spent, subject to donor restrictions. PHS has elected to utilize the total return concept for administering its permanently restricted funds by transferring between 2% and 7% of the fair value of the investments (based upon an average of three or more years). Meadowbrook Farm Funds permanently restricted for the benefit of Meadowbrook Farm are available to support Meadowbrook Farm operations and programs. During the years ended June 30, 2016 and 2015, the Board authorized transfers of 5% which amounted to $760,000 and $789,943, respectively. Other Funds permanently restricted for other purposes are available to support urban greening and other programs. During the years ended June 30, 2016 and 2015, the Board authorized transfers of 4% which amounted to $62,468 and $58,472, respectively. Funds with Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or PA Act 141 requires PHS to retain as a fund of perpetual donation. In accordance with U.S. GAAP, deficiencies of this nature that are reported in unrestricted net assets were $755,124 as of June 30, These deficiencies resulted from unfavorable market fluctuations that occurred subsequent to annual appropriation for certain programs deemed prudent by the Board of Directors. There were no such deficiencies as of June 30, (Continued) 22

23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE I - ENDOWMENT FUNDS - Continued 3. Beneficial Interest in Perpetual Trust - Permanently Restricted Endowment Under the terms of a perpetual trust held by a third party, PHS is the beneficiary of income earned based on the spending rule policy of the trust. Changes in the fair value of the trust s assets are recognized as a change in fair value of beneficial interest in perpetual trust in the consolidated statements of activities. Income is unrestricted and is recorded in the period received by PHS on the consolidated statements of activities. 4. Endowment Funds - Net Asset Composition PHS s endowment funds by net asset category are as follows as of June 30, 2016 and 2015: 2016 Unrestricted Temporarily restricted Permanently restricted Total Donor-restricted endowment funds $ - $ 269,700 $ 15,698,429 $ 15,968,129 Board-designated endowment funds 26,518, ,518,002 Total funds $ 26,518,002 $ 269,700 $ 15,698,429 $ 42,486, Unrestricted Temporarily restricted Permanently restricted Total Donor-restricted endowment funds $ - $ 1,122,199 $ 15,698,429 $ 16,820,628 Board-designated endowment funds 31,176, ,176,416 Total funds $ 31,176,416 $ 1,122,199 $ 15,698,429 $ 47,997,044 (Continued) 23

24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE I - ENDOWMENT FUNDS - Continued PHS had the following endowment fund related activities for the years ended June 30, 2016 and 2015: Unrestricted Temporarily restricted Permanently restricted Total Balance at July 1, 2014 $ 33,782,026 $ 2,190,422 $ 15,698,429 $ 51,670,877 Investment income 375, , ,546 Net realized/unrealized loss (776,652) (429,650) - (1,206,302) Total investment return (400,948) (219,808) - (620,756) Appropriations of endowment assets for expenditure (2,204,662) (848,415) - (3,053,077) Balance at June 30, ,176,416 1,122,199 15,698,429 47,997,044 Investment income 307, , ,840 Net realized/unrealized loss (2,410,888) (204,170) - (2,615,058) Total investment return (2,103,186) (30,032) - (2,133,218) Appropriations of endowment assets for expenditure (2,555,228) (822,467) - (3,377,695) Balance at June 30, 2016 $ 26,518,002 $ 269,700 $ 15,698,429 $ 42,486,131 24

25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE J - NET ASSETS 1. Temporarily Restricted Net Assets Temporarily restricted net assets are restricted by the donors primarily for program expenses to be incurred in future periods as follows: Flower Show $ 422,087 $ 631,202 Urban Greening 1,548,804 1,516,693 Education Services 127,323 49,835 Meadowbrook Farm General operations in future periods - 717,550 General operations in future periods - 9,422 Philadelphia Museum of Art Landscape Restoration Fund 1,318,807 1,444,768 Legacy Landscapes 12,359,540 13,344,330 Other 133, , Permanently Restricted Net Assets Permanently restricted net assets are as follows: $ 15,910,499 $ 17,825, Beneficial interest in perpetual trust $ 1,559,688 $ 1,678,107 Urban Greening 1,028,013 1,028,013 Meadowbrook Farm 14,495,416 14,495,416 Other 175, ,000 $ 17,258,117 $ 17,376,536 25

26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE K - COMMITMENTS AND CONTINGENCIES 1. Leases The Society leases various facilities and equipment under operating leases ending in years 2015 through Total rental expense was $647,856 and $627,429 for the years ended June 30, 2016 and 2015, respectively. The following is a schedule by year of approximate future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of June 30, 2016: Year ending June 30, 2017 $ 572, , , , ,836 Thereafter, 2022 through ,083,644 Total $ 8,060, Potential Lawsuits At times, PHS is subject to disputes or legal actions in the ordinary course of business. Management does not believe the outcome of such disputes or legal actions will have a material adverse effect on PHS s financial position or results of operations. NOTE L - LICENSE AGREEMENT PHS has a license and revenue sharing agreement with the Pennsylvania Convention Center. The license fee expense for each of the years ended June 30, 2016 and 2015 was $272,000. The revenue sharing agreement for each of the years ended June 30, 2016 and 2015 provided for an additional license fee equal to 20% of paid attendance in excess of 225,000 attendees. There were no additional license fees under this agreement for 2016 and

27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE M - PENSION PLANS 1. Defined Benefit Plan The Society has a non-contributory defined benefit pension plan (the Plan ) covering substantially all employees. The Plan provides for pre-retirement death benefits, as well as pension benefits. The Society s funding policy is to contribute amounts at least equal to the minimum funding requirements as required by the Employee Retirement Income Security Act of 1974 ( ERISA ). During the years ended June 30, 2016 and 2015, the Society contributed $430,000 and $305,000, respectively to the Plan. The expected contribution to the Plan for the year ending June 30, 2017 is $400,000. Effective January 1, 2007, the Executive Committee of the Council of the Society froze the Plan to new participants and froze the accrual of benefits under the Plan. The Society s investment policy for the Plan assets is to seek long-term growth by maintaining a diverse, actively managed portfolio of equity and fixed income securities, with targeted allocations of approximately 60% in equity securities and 40% in fixed income securities. Cash and cash equivalents are not to be held except on a temporary basis. The assets will be reallocated periodically to meet the targeted allocations. PHS has an Investment Committee that monitors the performance of its investment managers and uses outside investment analysts to analyze and comment on the Society s investment strategy. PHS has adopted the recognition provisions of ASC Topic 715, Compensation - Retirement Benefits, which requires that the funded status of defined benefit pension and postretirement plans be fully recognized in the consolidated statements of financial position. The Society utilizes a June 30 measurement date for the Plan. The following table sets forth the Plan s funded status and amounts recognized in the consolidated financial statements as of and for the years ended June 30, 2016 and 2015: Projected benefit obligation $ (8,407,086) $ (7,660,870) Fair value of Plan assets, net of liabilities 5,344,199 5,767,371 Excess of benefit obligation over Plan assets $ (3,062,887) $ (1,893,499) (Continued) 27

28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE M - PENSION PLANS - Continued The components of net periodic pension cost include the following at June 30, 2016 and 2015: Amounts recognized in the consolidated statement of financial position Accrued pension obligation $ 3,062,887 $ 1,893,499 Unrestricted net assets (actuarial loss) (3,608,750) (2,330,682) Weighted average assumptions: Discount rate 3.27% 4.13% Expected return on Plan assets 6.25% 7.00% Contributions $ 430,000 $ 305,000 Benefits paid 349, ,183 Accumulated benefit obligation 8,407,086 7,660,870 Service cost $ 88,511 $ 62,394 Interest cost 305, ,201 Amortization of net loss 152,086 63,125 Expected return on Plan assets (360,881) (421,588) Total $ 185,070 $ (13,868) To develop the assumptions for the long-term rate of return, PHS considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each class was then weighted based on the target asset allocation to develop the expected longterm rate of return on assets for the portfolio. This resulted in the selection of the 6.25% assumption. The Plan s asset managers investment approach/methodology is intended, over the long term, to provide performance in between Blended Index Returns and Blended Lipper Returns, which is performance between index and actively managed benchmarks. Contributions paid to the Plan for the years ended June 30, 2016 and 2015 were $293,750 and $291,250, respectively. (Continued) 28

29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE M - PENSION PLANS - Continued The weighted-average asset allocations at June 30, 2016 and 2015, by asset category, are as follows: Equity securities 60.10% 69.02% International equities Fixed income securities Cash and cash equivalents As of June 30, 2016, the following benefit payments are expected to be paid: % % Year ending June 30, 2017 $ 382, , , , , ,287,422 Total $ 4,438,321 Expected benefit payments are based on the same assumptions used to measure the benefit obligation. The Plan uses appropriate valuation techniques based on the available inputs to measure the fair value of its investment portfolio. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. At June 30, 2016, the Plan did not utilize any Level 3 inputs to measure the fair value of its investment portfolio. The following is a description of the valuation methodologies used for the Plan s assets measured at fair value as of June 30: Level 1 Fair Value Measurements The fair value of mutual funds is based on quoted net asset values of the shares held by the Plan at year-end. (Continued) 29

30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE M - PENSION PLANS - Continued Level 2 and Level 3 Fair Value Measurements Common investment funds for which quoted market prices are not available are valued based on the net asset value of the underlying funds owned by the trust, less its liabilities and then divided by the number of shares outstanding. The following table sets forth the components of the Plan s assets at fair value as of June 30, 2016 and 2015: 2016 Level 1 Level 2 Total Money market $ 73,897 $ - $ 73,897 Mutual funds Large cap 1,183,508-1,183,508 Mid cap 256, ,493 Growth 798, ,676 Index 456, ,715 Fixed income 1,096,868-1,096,868 Common investment funds Growth - 358, ,177 Fixed income - 759, ,952 Alternative - 424, ,913 $ 3,866,157 $ 1,543,042 $ 5,409, Level 1 Level 2 Total Money market $ 36,615 $ - $ 36,615 Mutual funds Large cap 1,468,848-1,468,848 Mid cap 760, ,687 Growth 744, ,231 Index 729, ,804 Fixed income 1,077,318-1,077,318 Common investment funds Growth - 379, ,111 Fixed income - 503, ,805 Index - 109, ,052 $ 4,817,503 $ 991,968 $ 5,809,471 (Continued) 30

31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE M - PENSION PLANS - Continued 2. Defined Contribution Plan The Society sponsors a defined contribution retirement plan (the Plan ), pursuant to Section 403(b) of the Code, covering all employees of the Society at the beginning of the month following commencement of employment. The Plan allows for employee contributions to the Plan up to the maximum amount allowed by the Code. The Society makes safe harbor contributions to the Plan. PHS contributed $175,891 and $137,394 to the Plan for the years ended June 30, 2016 and 2015, respectively. NOTE N - CONTRIBUTED SERVICES A number of unpaid volunteers have made significant contributions of time to PHS. The value of these contributed services is not reflected in these consolidated financial statements since they did not meet the criteria for recognition under U.S. GAAP. NOTE O - RELATED PARTY TRANSACTIONS The Society has an agreement with the Neighborhood Gardens Trust - A Philadelphia Land Trust ( NGT ) to collaboratively care for and strengthen the community garden network and open space in the City of Philadelphia using land in the land trust. NGT owns and/or leases 30 properties, of which 11 gardens participate in the Society s City Harvest program. The arrangement furthers the missions of both organizations. For the years ended June 30, 2016 and 2015, PHS provided approximately $67,000 and $72,000, respectively, of inkind contributions related to the use of PHS office space and equipment, as well as program and administrative services provided by PHS employees on behalf of NGT. These gifts are recorded as expenses in the functional classification for the program in which the gifts in kind were used. As of June 30, 2016 and 2015, NGT owed $3,062 and $10,777, respectively, to the Society. 31

32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED June 30, 2016 and 2015 NOTE P - FUNCTIONAL EXPENSES Expenses incurred during the year are categorized by program/function as follows for the years ended June 30, 2016 and 2015: Program expenses Flower Show $ 8,724,744 $ 8,931,355 Urban Greening 11,058,382 8,355,151 Education Services 1,349,562 1,182,145 Meadowbrook Farm 1,448,358 1,264,564 Special projects 2,904 44,095 Total program expenses 22,583,950 19,777,310 Management and general 3,539,311 3,516,360 Supporting services Membership support 943, ,716 Fundraising 504, ,085 Total supporting services expenses 1,448,143 1,346,801 Total expenses $ 27,571,404 $ 24,640,471 NOTE Q - SUBSEQUENT EVENTS The Society evaluated its June 30, 2016 consolidated financial statements for subsequent events through March 31, In December 2016, the Society obtained an amendment to the lease agreement for its warehouse space whereby the term of the lease was extended to June 30, All other terms and conditions pertaining to the original lease agreement remain the same. Other than the lease amendment noted above and the extension of the Society s revolving line of credit agreement as disclosed in Note H, the Society is not aware of any additional subsequent events that would require recognition or disclosure in the consolidated financial statements. 32

33 SUPPLEMENTARY INFORMATION

34 CONSOLIDATED SCHEDULE OF FUNCTIONAL EXPENSES Year ended June 30, 2016 Flower Urban Education Meadowbrook Special Management Show Greening Services Development Farm Projects Total and general Total Salaries $ 1,231,839 $ 2,153,022 $ 531,147 $ 668,798 $ 481,190 $ - $ 5,065,996 $ 1,317,330 $ 6,383,326 Employee benefits 427, , , , ,248-1,621, ,975 2,095,776 Staging 2,423, ,423,125-2,423,125 Exhibitor cost reimbursements 1,003, ,003,290-1,003,290 Convention Center license fee 272, , ,000 Advertising and publicity 523,341 29,503 3,392 3,585 33, ,893 8, ,150 Professional services 125,030 31,746 3,649 41, , , ,448 Program and project expenses 2,022,807 7,592, , , ,563 2,906 10,818,249-10,818,249 Publications , , ,187 Training and development 4,736 7,893 2,317 2,880 2,655-20,481 6,464 26,945 Occupancy 147, ,404 72,178 89, , , , ,933 Depreciation 343, ,053 41,533 47,887 78, , , ,911 Insurance 184,364 52,746 6,063 6,409 39, ,923 14, ,684 Office expenses 16,182 19,720 2,267 2, ,566 1,006,814 1,047,380 Sub-total 8,724,744 11,058,382 1,349,561 1,448,143 1,448,357 2,906 24,032,093 3,539,311 27,571,404 Allocation of management and general 1,280,870 1,633, , , ,148-3,539,311 (3,539,311) - Total functional expenses $ 10,005,614 $ 12,691,947 $ 1,547,689 $ 1,660,743 $ 1,662,505 $ 2,906 $ 27,571,404 $ - $ 27,571,404 34

35 SCHEDULE OF EXPENDITURES OF FEDERAL AND CITY AWARDS Year ended June 30, 2016 Federal Awards Federal CFDA Grantor s Grant Grant Federal grantor/pass-through grantor/program title number number period amount Expenditures U.S. Department of Housing and Urban Development Pass-through the City of Philadelphia, Office of Housing and Community Development Community Development Block Grants/Entitlement Grants /01/ /31/2016 $ 377,000 $ 377,000 Community Development Block Grants/Entitlement Grants /01/ /30/ , , ,406 Environmental Protection Agency Urban Waters Small Grants /01/ /30/ ,679 5,939 U.S. Department of Agriculture Community Food Projects /01/ /31/ ,000 59,060 Outreach and Assistance for Socially Disadvantaged and Veteran Farmers and Ranchers /01/ /31/ , , ,784 U.S. Department of the Interior, National Park Service National Park Service Conservation, Protection, Outreach, and Education P15AC /01/ /30/ , ,000 Total Federal Awards 1,032,129 City of Philadelphia Awards Office of Housing and Community Development - Green City Strategy* N/A /01/ /31/2016 3,720,000 3,276,083 Total City Awards 3,276,083 Total Federal and City Awards $ 4,308,212 * This contract is tied to the Community Development Block Grant # and is issued as one contract from the City of Philadelphia. The accompanying notes to the Schedule of Expenditures of Federal and City Awards should be read in conjunction with this schedule. 35

36 NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AND CITY AWARDS June 30, 2016 NOTE A - GENERAL INFORMATION The accompanying Schedule of Expenditures of Federal and City Awards presents all federal and city awards required to be reported, by funding agency, received by for the year ended June 30, The information in this schedule is presented in accordance with the requirements of the Uniform Guidance. All awards received directly from federal agencies, as well as federal awards passed through other governmental agencies or not-for-profit organizations, are included. Such pass-through awards received from the City of Philadelphia are subject to the City of Philadelphia Subrecipient Audit Guide. Because the schedule presents only a selected portion of the operations of, it is not intended to and does not present the financial position, changes in net assets, or cash flows of The Pennsylvania Horticultural Society. NOTE B - BASIS OF ACCOUNTING The accompanying Schedule of Expenditures of Federal and City Awards is presented on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in the Uniform Guidance and other allowable cost standards, wherein certain types of expenditures are not allowable or are limited as to reimbursement. NOTE C - RELATIONSHIP TO BASIC CONSOLIDATED FINANCIAL STATEMENTS Federal and city expenditures are reported in the consolidated statement of activities as expenses. The expenditures reported in the consolidated financial statements differ from the expenditures reported in the Schedule of Expenditures of Federal and City Awards because not all expenditures are required to be reported in the Schedule of Expenditures of Federal and City Awards. 36

37 OHCD - GREEN CITY STRATEGY SCHEDULE OF SOURCE AND STATUS OF FUNDS CONTRACT # For the period July 1, 2015 to June 30, 2016 CDBG Program Other City Non-City funds income funds funds Total Total contract (final authorized budget) $ 377,000 $ - $ 3,720,000 $ - $ 4,097,000 Less Funds drawn down - prior fiscal year Funds drawn down - current fiscal year 214,229-1,813,866-2,028,095 Total funds drawn down 214,229-1,813,866-2,028,095 Funds still available for draw down $ 162,771 $ - $ 1,906,134 $ - $ 2,068,905 Total funds drawn down $ 214,229 $ - $ 1,813,866 $ - $ 2,028,095 Add Program income Total funds received 214,229-1,813,866-2,028,095 Less Program income expended Funds applied - prior fiscal year Funds applied - current fiscal year 377,000-3,276,083-3,653,083 Total funds applied 377,000-3,276,083-3,653,083 Total funds due from funding source $ 162,771 $ - $ 1,462,217 $ - $ 1,624,988 Total funds available for disposition $ - $ - $ 443,917 $ - $ 443,917 37

38 OHCD - GREEN CITY STRATEGY SCHEDULE OF PROGRAM EXPENDITURES CONTRACT # Year ended June 30, 2016 Accrued Expenditures Project Budget Accrued Expenditures 7/1/15 to 6/30/16 Cumulative to June 30, 2016 Other Other Other Other Non- Other Non- Other Non- CDBG City City Total CDBG City City Total CDBG City City Total Funds Funds Funds Funds Funds Funds Funds Funds Funds Funds Funds Funds Program Delivery Fees $ - $ - $ - $ - $ - $ 803,745 $ - $ 803,745 $ - $ 803,745 $ - $ 803,745 VLM - Target Area Stabilization ,000 72, , ,000 72, ,118 VLM - Choice Neighborhood ,194-77,194-77,194-77,194 Maintenance - Stabilized Parcels ,413,845-1,413,845-1,413,845-1,413,845 Maintenance - Untreated Vacant Land , , , ,968 Maintenance - PHCD/Landbank Parcels , , , ,510 Maintenance/Training - 5th District ,000-40,000-40,000-40,000 Documentation/Signage ,828-5,828-5,828-5,828 PHA Stabilization Treatment , , , ,875 Total Program Costs $ - $ - $ - $ - $ 377,000 $ 3,276,083 $ - $ 3,653,083 $ 377,000 $ 3,276,083 $ - $ 3,653,083 38

39 OHCD - GREEN CITY STRATEGY RECONCILIATION SCHEDULE CONTRACT # For the period July 1, 2015 to June 30, 2016 Amount per Amount per books and June 30, 2016 Category records subrecipient invoices Differences Contract amount $ 4,097,000 $ 4,097,000 $ - Program cost Current year 3,653,083 3,653,083 - Cumulative 3,653,083 3,653,083 - Funds drawn down Current year 2,028,095 3,653,083 1,624,988 (a) Cumulative 2,028,095 3,653,083 1,624,988 (a) Balance of contract $ 443,917 $ 443,917 $ - (a) - Differences represent amounts receivable from funding source as of June 30,

40 PHILADELPHIA GREEN - GENERAL SCHEDULE OF SOURCE AND STATUS OF FUNDS CONTRACT # For the period July 1, 2015 to June 30, 2016 CDBG Program Other City Non-City funds income funds funds Total Total contract (final authorized budget) $ 350,000 $ - $ - $ 9,036,061 $ 9,386,061 Less Funds drawn down - prior fiscal year Funds drawn down - current fiscal year 259, ,492,895 11,752,075 Total funds drawn down 259, ,492,895 11,752,075 Funds still available for draw down $ 90,820 $ - $ - $ (2,456,834) $ (2,366,014) Total funds drawn down $ 259,180 $ - $ - $ 11,492,895 $ 11,752,075 Add Program income Total funds received 259, ,492,895 11,752,075 Less Program income expended Funds applied - prior fiscal year Funds applied - current fiscal year 346, ,492,895 11,839,301 Total funds applied 346, ,492,895 11,839,301 Total funds due from funding source $ 87,226 $ - $ - $ - $ 87,226 Total funds available for disposition $ 3,594 $ - $ - $ (2,456,834) $ (2,453,240) 40

41 PHILADELPHIA GREEN - GENERAL SCHEDULE OF PROGRAM EXPENDITURES CONTRACT # Year ended June 30, 2016 Accrued Expenditures Project Budget Accrued Expenditures 7/1/15 to 6/30/16 Cumulative to June 30, 2016 Other Other Other Other Non- Other Non- Other Non- CDBG City City Total CDBG City City Total CDBG City City Total Funds Funds Funds Funds Funds Funds Funds Funds Funds Funds Funds Funds Total Personnel $ 246,025 $ - $ 1,947,115 $ 2,193,140 $ 246,025 $ - $ 2,127,841 $ 2,373,866 $ 246,025 $ - $ 2,127,841 $ 2,373,866 Fringe Benefits 78, , ,794 78,975-1,224,015 1,302,990 78,975-1,224,015 1,302,990 Professional Services , , ,069 32, ,069 32,069 Travel - - 5,300 5, ,032 4, ,032 4,032 Occupancy - - 5,908 5, ,439 9, ,439 9,439 Consumable Supplies ,698 29, ,061 23, ,061 23,061 Program Costs 25,000-5,758,625 5,783,625 21,406-8,072,438 8,093,844 21,406-8,072,438 8,093,844 Total Program Costs $ 350,000 $ - $ 9,036,061 $ 9,386,061 $ 346,406 $ - $ 11,492,895 $ 11,839,301 $ 346,406 $ - $ 11,492,895 $ 11,839,301 41

42 PHILADELPHIA GREEN - GENERAL RECONCILIATION SCHEDULE CONTRACT # For the period July 1, 2015 to June 30, 2016 Amount per Amount per books and June 30, 2016 Category records subrecipient invoices Differences Contract amount $ 350,000 $ 350,000 $ - Program cost Current year 346, ,406 - Cumulative 346, ,406 - Funds drawn down Current year 259, ,406 87,226 (a) Cumulative 259, ,406 87,226 (a) Balance of contract $ 3,594 $ 3,594 $ - (a) - Differences represent amounts receivable from funding source as of June 30,

43 OTHER MATTERS

44 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS REQUIRED BY GOVERNMENT AUDITING STANDARDS Grant Thornton LLP Two Commerce Square 2001 Market St., Suite 700 Philadelphia, PA T F GrantThornton.com linked.in/grantthorntonus twitter.com/grantthorntonus The Board of Directors We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the consolidated financial statements of The Pennsylvania Horticultural Society (the Society ), which comprise the consolidated statement of financial position as of June 30, 2016, and the related consolidated statements of activities, changes in net assets and cash flows for the year then ended, and the related notes to the consolidated financial statements, and have issued our report thereon dated March 31, Internal control over financial reporting In planning and performing our audit of the consolidated financial statements, we considered the Society s internal control over financial reporting ( internal control ) to design audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of internal control. Accordingly, we do not express an opinion on the effectiveness of the Society s internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and, therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as described in the accompanying schedule of findings and questioned costs, we identified certain deficiencies in internal control that we consider to be a material weakness and a significant deficiency in the Society s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the Society s consolidated financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. We consider the deficiency described in the accompanying schedule of findings and questioned costs as item # to be a material weakness in the Society s internal control and item # to be a significant deficiency in the Society s internal control. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 44

45 Compliance and other matters As part of obtaining reasonable assurance about whether the Society s consolidated financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed an instance of noncompliance or other matters, described in the accompanying schedule of findings and questioned costs as item # , that is required to be reported under Government Auditing Standards. Society s responses to findings The Society s responses to our findings, which are described in the accompanying schedule of findings and questioned costs, were not subjected to the auditing procedures applied in the audit of the consolidated financial statements, and accordingly, we express no opinion on the Society s responses. Intended purpose The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Society s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Society s internal control and compliance. Accordingly, this report is not suitable for any other purpose. Philadelphia, Pennsylvania March 31,

46 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE AND THE CITY OF PHILADELPHIA SUBRECIPIENT AUDIT GUIDE Grant Thornton LLP Two Commerce Square 2001 Market St., Suite 700 Philadelphia, PA T F GrantThornton.com linked.in/grantthorntonus twitter.com/grantthorntonus The Board of Directors Report on compliance for each major federal program We have audited the compliance of (the Society ) with the types of compliance requirements described in the U.S. Office of Management and Budget s OMB Compliance Supplement and the City of Philadelphia Subrecipient Audit Guide that could have a direct and material effect on its major federal program for the year ended June 30, The Society s major federal program is identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s responsibility Management is responsible for compliance with the requirements of laws, regulations, contracts, and grants applicable to the Society s federal programs. Auditor s responsibility Our responsibility is to express an opinion on compliance for the Society s major federal program based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards ( Uniform Guidance ) and the City of Philadelphia Subrecipient Audit Guide. The above-mentioned standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Society s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for the major federal program. However, our audit does not provide a legal determination of the Society s compliance. Grant Thornton LLP U.S. member firm of Grant Thornton International Ltd 46

47 Opinion on each major federal program In our opinion, the Society complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on its major federal program for the year ended June 30, Other matters The results of our audit procedures disclosed instances of noncompliance, described in the accompanying schedule of findings and questioned costs as item # , that are required to be reported in accordance with the Uniform Guidance. Our opinion on each major federal program is not modified with respect to these matters. The Society s response to the noncompliance findings identified in our audit, which is described in the accompanying schedule of findings and questioned costs, was not subjected to the auditing procedures applied in the audit of compliance, and accordingly, we express no opinion on the Society s response. Report on internal control over compliance Management of the Society is responsible for designing, implementing, and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Society s internal control over compliance with the types of compliance requirements that could have a direct and material effect on the major federal program to design audit procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for the major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance and the City of Philadelphia Subrecipient Audit Guide, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Society s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies and, therefore, material weaknesses or significant deficiencies may exist that were not identified. We identified certain deficiencies in internal control over compliance, described in the accompanying schedule of findings and questioned costs as item # , that we consider to be a material weakness in the Society s internal control over compliance. The Society s response to the findings on internal control over compliance identified in our audit, which is described in the accompanying schedule of findings and questioned costs, was not subjected to the auditing procedures applied in the audit of compliance, and accordingly, we express no opinion on the Society s response. 47

48 The purpose of this Report on Internal Control Over Compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance and the City of Philadelphia Subrecipient Audit Guide. Accordingly, this report is not suitable for any other purpose. Philadelphia, Pennsylvania March 31,

49 SCHEDULE OF FINDINGS AND QUESTIONED COSTS Year ended June 30, 2016 Section I - Summary of Auditor s Results Financial Statements Type of auditor s report issued: Unmodified Material weakness(es) identified? X yes no Significant deficiency(ies ) identified? X yes none reported Federal Awards Internal control over major program: Material weakness(es) identified? X yes no Significant deficiency(ies) identified? yes X none reported City Awards Internal control over major program: Material weakness(es) identified? X yes no Significant deficiency(ies) identified? yes X none reported Type of auditor s report issued on compliance for major program: Unmodified Are any audit findings disclosed that are required to be reported in accordance with 2 CFR (a)? X yes no Identification of major program: CFDA Number Name of Federal Program or Cluster Community Development Block Grants/ Entitlement Grants Dollar threshold used to distinguish between type A and type B programs: $750,000 Auditee qualified as low-risk auditee? X yes no 49

50 SCHEDULE OF FINDINGS AND QUESTIONED COSTS - CONTINUED Year ended June 30, 2016 Section II - Financial Statement Findings Finding # Material Weakness - Review/Approval of Materials Invoices - Financial Reporting Summary Management identified three invoices approved by the Program Director and paid without appropriate documentation for whether the materials had been received within the reporting period. These invoices were recorded in the wrong period, which resulted in management s adjustment to decrease expenses and related government contract revenues for the year ended June 30, 2016 by $68,773. Refer to Section III for additional details. Finding # Significant Deficiency - Review/Approval of Journal Entries - Financial Reporting Criteria Segregation of duties over key financial reporting processes, including journal entry preparation, is an important internal control that reduces the likelihood of fraud and/or error occurring. The objective of this review should be to prevent or detect and correct an error on a timely basis. Journal entries should be supported by evidence of review. Condition Our audit procedures include obtaining an understanding of the review controls in place surrounding the journal entry process. Through that review, it was noted that certain journal entries were prepared and recorded by the Associate Director of Finance without evidence of review and approval by another member of the Finance department prior to closing the Society s financial reporting cycle. Cause A limited population of journal entries prepared and posted by the Associate Director of Finance were not reviewed by another member of the Finance department prior to closing the Society s financial reporting cycle. Effect As a result of the lack of evidence of review and approval of a limited population of journal entries, errors and/or fraud can occur and not be detected and corrected on a timely basis. There were no audit adjustments identified in the 2016 consolidated financial statements prepared by management. Questioned Costs None. Recommendation We recommend that management review current responsibilities of the Finance department to ensure that no individual is preparing and posting their own journal entries without evidence of review by another individual. 50

51 SCHEDULE OF FINDINGS AND QUESTIONED COSTS - CONTINUED Year ended June 30, 2016 Section II - Financial Statement Findings - Continued Views of Responsible Officials To mitigate the condition noted above, management plans to improve the review process over journal entries. The Finance department will institute a three-pronged approach to enhance the existing journal entry review process. First, all journal entries will be reviewed by a supervisor prior to closing of the financial reporting cycle. Second, Finance will review the system generated list of journal entries to confirm that each entry was posted by authorized personnel. Third, Finance will match the approved journal entry documents to the system generated list to ensure only approved entries have been posted. Contacts Heather Foor, Chief Financial Officer hfoor@pennhort.org Kim Reif, Senior Director of Finance kreif@pennhort.org Section III - Federal Award Findings and Questioned Costs Finding # Material Weakness - Review/Approval of Materials Invoices CFDA Community Development Block Grants/Entitlement Grants U.S. Department of Housing and Urban Development Pass-through the City of Philadelphia, Office of Housing and Community Development Contract # /1/2015-6/30/2016 Reporting Criteria OMB Uniform Guidance requires that appropriate internal controls are established for each direct and material compliance requirement such that program charges (including materials invoices) are reviewed and approved by an appropriate employee of the organization as evidence that those charges are reported appropriately for the respective programs (2 CFR Section ). Condition Three invoices were approved by the Program Director and paid without appropriate documentation for whether the materials had been received within the reporting period. Context Management identified three invoices reported in the wrong period. These invoices related to materials. For the year ended June 30, 2016, there were approximately 86 materials invoices. 51

52 SCHEDULE OF FINDINGS AND QUESTIONED COSTS - CONTINUED Year ended June 30, 2016 Section III - Federal Award Findings and Questioned Costs - Continued Effect Management recorded an adjustment to decrease expenses and related government contract revenues for the year ended June 30, 2016 by $68,773. In addition, the Society submitted incorrect reports to its funder (the City of Philadelphia) for the year ended June 30, 2016 due to the inclusion of $68,773 of expenses submitted for reimbursement which were not obligations in the year ended June 30, Cause A review of materials invoices is performed by finance personnel; however, that review does not include review of delivery documentation. Questioned Costs None. Recommendation We recommend that management review internal control processes related to materials invoices. Specifically, management should reiterate the importance of evidence of review of appropriate support prior to approval of materials vendor invoices. The review should ensure that only those materials/supplies that have been received by the Society during the reporting period are expensed and reported to the City of Philadelphia for purposes of reimbursement. Repeat Finding No. Statistically Valid Sampling The sample was not intended to be, and was not, a statistically valid sample. Views of Responsible Officials Management strengthened existing internal controls over the review and approval of vendor invoices. In 2017, management revised the Society s policy to clearly require evidence of review of delivery documents or receipts prior to approval of materials vendor invoices. Management conducted organization-wide training on the documents required to support payments to vendors and the importance of reporting expenditures to the City in the correct reporting period. Contacts Heather Foor, Chief Financial Officer hfoor@pennhort.org Kim Reif, Senior Director of Finance kreif@pennhort.org 52

53 STATUS OF PRIOR YEAR FINDINGS Year ended June 30, 2016 Section IV - Status of Prior Year Findings Finding # Material Weakness - Restatement of Accounts In the prior year, PHS reviewed net asset restrictions, noting that several amounts had been classified in the incorrect net asset category when the gifts were received in 2006 and, therefore, should have been reclassified in the correct category. The funds were spent in accordance with donor intent. The reclassification of net assets does not have any impact on total net assets. An audit adjustment of $1.2 million was recorded to reclassify temporarily restricted net assets to permanently restricted net assets. An audit adjustment of $165,000 was recorded to reclassify unrestricted net assets to temporarily restricted net assets. The reclassification of net assets did not have any impact on total net assets. Views from Responsible Officials - Status The donor contribution review and reconciliation process successfully ensured contributions received were recorded in the appropriate net asset categories aligned with the donor intent. Contacts Heather Foor, Chief Financial Officer hfoor@pennhort.org Kim Reif, Senior Director of Finance kreif@pennhort.org 53

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