Museum of Fine Arts Consolidated Financial Statements June 30, 2015 and 2014

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1 Consolidated Financial Statements

2 Index Page(s) Independent Auditor s Report Consolidated Financial Statements Statements of Financial Position... 3 Statements of Activities Statements of Cash Flows... 6 Notes to Financial Statements

3 Independent Auditor s Report To the Trustees of the Museum of Fine Arts We have audited the accompanying consolidated financial statements of the Museum of Fine Arts (the Museum ) and its subsidiary, which comprise the consolidated statements of financial position as of, and the related consolidated statements of activities and of cash flows for the years then ended. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the 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 the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit 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 our 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, we consider internal control relevant to the Museum 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 Museum 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. PricewaterhouseCoopers LLP, 125 High Street, Boston, MA T: (617) , F: (617) ,

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Museum of Fine Arts and its subsidiary at, and the changes in their net assets and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Boston, Massachusetts October 13,

5 Consolidated Statements of Financial Position (in thousands of dollars) Assets Cash and cash equivalents $ 8,906 $ 15,873 Short-term investments 68,033 60,965 Accounts receivable, net of allowance of $190 and $183 for 2015 and 2014, respectively 1,932 1,680 Inventories (Note 1) 1,761 1,741 Prepaid expenses 1,911 2,102 Pledges receivable, net (Note 2) 12,372 12,305 Total current assets 94,915 94,666 Pledges receivable, net (Note 2) 51,575 52,241 Funds held by trustee (Note 7) 5,000 - Investments, at fair value (Notes 1, 3 and 4) 609, ,050 Property, plant and equipment, net (Note 6) 388, ,179 Beneficial interest in perpetual trusts (Notes 4 and 8) 23,591 24,069 Assets of split-interest agreements (Notes 4 and 9) 9,717 9,945 Other assets (Note 11) 4,089 3,886 Total assets $ 1,186,768 $ 1,223,036 Liabilities and Net Assets Line-of-credit (Note 7) $ 816 $ 677 Current portion of note payable (Note 7) Current portion of capital lease payable (Note 11) Accounts payable 3,012 3,729 Accrued expenses 7,482 8,267 Deferred income 5,047 2,529 Total current liabilities 16,410 15,690 Liability under split-interest agreements (Note 9) 7,001 6,986 Long-term debt (Note 7) 145, ,000 Long-term capital lease payable (Note 11) Asset retirement obligation (Note 1) 7,002 6,772 Other liabilities (Notes 4 and 7) 25,173 23,603 Total liabilities 200, ,051 Commitments and contingencies (Notes 12) Unrestricted net assets 197, ,182 Temporarily restricted net assets (Note 5) 485, ,009 Permanently restricted net assets (Note 5) 303, ,794 Total net assets 986,075 1,009,985 Total liabilities and net assets $ 1,186,768 $ 1,223,036 The accompanying notes are an integral part of these consolidated financial statements. 3

6 Consolidated Statement of Activities Year Ended June 30, 2015 Unrestricted Temporarily Permanently Auxiliary Restricted Restricted Combined (in thousands of dollars) Operating Services Designated Plant Total Funds Funds Totals Operating support and revenue Support Gifts to annual appeal $ 7,685 $ - $ - $ - $ 7,685 $ - $ - $ 7,685 Contributions, gifts and grants 444 4,563 5,007 33,307 5,296 43,610 Total support 8,129-4,563-12,692 33,307 5,296 51,295 Program revenue Membership corporate 1,002 1,002 1,002 Membership general 8,925 8,925 8,925 Tuition - school 22,799 22,799 22,799 Admissions 7,238 7,238 7,238 Exhibitions 3,904 3,904 3,904 Education programs 2,293 2, ,598 Sales from merchandise operations 5,621 5,621 5,621 Beneficial interest in perpetual trust income (Note 8) 1, ,090 1,090 Short-term investment income Investment return designated for current operations (Note 3) 10,900 10,900 19,371 30,271 Parking operations 3,922 3,922 3,922 Restaurant food service 2,744 2,744 2,744 Rent revenue (Note 11) 3,450 3,450 3,450 Other ancillary services 3,301 1,260 4,561 1,075 5,636 Total program revenue 71,604 5, ,260 78,547 20,959-99,506 Funds released from restrictions MFA 21,156 (8,390) 24,769 37,535 (37,535) - SMFA 3,992 3,992 (3,992) - Total operating support 104,881 5,621 (3,765) 26, ,766 12,739 5, ,801 Expenses Program services Exhibitions 5,550 5,550 5,550 Collections and curatorial 11, ,904 11,904 Educational programs 2, ,254 2,254 Educational services 1,021 1,021 1,021 Program support 2,064 2,064 2,064 Membership activities 2, ,510 2,510 School program 24,413 24,413 24,413 Parking operations 1,119 1,119 1,119 Restaurant food service 1,288 1,288 1,288 Merchandising operations 2,330 2,330 2,330 Cost of sales from merchandise operation 2,793 2,793 2,793 Rental expenses for off-site locations 1,367 1,367 1,367 Other 2,190 2,190 2,190 Total program services 55,371 5, , ,803 Supporting services Administration 12,970 1,149 14,119 14,119 Development 6,216 6,216 6,216 Public information 5,956 5,956 5,956 Facilities 5,676 5,676 5,676 Utility costs 3,526 3,526 3,526 Protective services 6,534 6,534 6,534 Interest on debt 4,512 4,512 4,512 Depreciation 22,619 22,619 22,619 Other 5 1,624 1,629 1,629 Total supporting services 45,395-1,149 24,243 70, ,787 Total expenses 100,766 5,123 1,458 24, , ,590 Change in net assets 4, (5,223) 1,786 1,176 12,739 5,296 19,211 Nonoperating activities Excess (deficit) of investment return over amounts designated for current operations (Note 3) (33,371) (478) (33,805) Change in value of split-interest agreements - (432) (699) (1,131) Change in fair value of interest rate swap agreements (1,449) (1,449) (1,449) Funds released from restrictions 6,736 6,736 (6,736) - Transfers (4,928) 5, (784) Change in net assets related to collection items Collection items purchased (7,124) (7,124) (7,124) Collection items sold Increase (decrease) in net assets (813) (28,584) 4,408 (23,910) Net assets Beginning of year 197, , ,794 1,009,985 End of year $ 197,448 $ 485,425 $ 303,202 $ 986,075 The accompanying notes are an integral part of these consolidated financial statements. 4

7 Consolidated Statement of Activities Year Ended June 30, 2014 Unrestricted Temporarily Permanently Auxiliary Restricted Restricted Combined (in thousands of dollars) Operating Services Designated Plant Total Funds Funds Totals Operating support and revenue Support Gifts to annual appeal $ 7,526 $ - $ - $ - $ 7,526 $ - $ - $ 7,526 Contributions, gifts and grants 393 1, ,149 40,577 13,925 56,651 Total support 7,919-1, ,675 40,577 13,925 64,177 Program revenue Membership corporate Membership general 8,392 8,392 8,392 Tuition - school 25,094 25,094 25,094 Admissions 6,751 6,751 6,751 Exhibitions 6,150 6,150 6,150 Education programs 2,204 2, ,427 Sales from merchandise operations 5,583 5,583 5,583 Beneficial interest in perpetual trust income (Note 8) ,055 1,055 Short-term investment income Investment return designated for current operations (Note 3) 10,385 10,385 18,346 28,731 Parking operations 3,682 3,682 3,682 Restaurant food service 2,561 2,561 2,561 Rent revenue (Note 11) 3,450 3,450 3,450 Other ancillary services 2,916 1,388 4,304 1,026 5,330 Total program revenue 73,537 5, ,388 80,569 19, ,303 Funds released from restrictions MFA 18,066 (1,677) 16,208 32,597 (32,597) - SMFA 1,488 1,488 (1,488) - Total operating support 101,010 5, , ,329 26,226 13, ,480 Expenses Program services Exhibitions 3,663 3,663 3,663 Collections and curatorial 11, ,294 12,294 Educational programs 2, ,286 2,286 Educational services 1,001 1,001 1,001 Program support 2,072 2,072 2,072 Membership activities 2, ,336 2,336 School program 25,638 25,638 25,638 Parking operations Restaurant food service 1,149 1,149 1,149 Merchandising operations 2,415 2,415 2,415 Cost of sales from merchandise operation 2,795 2,795 2,795 Rental expenses for off-site locations 1,394 1,394 1,394 Other 1,930 1,930 1,930 Total program services 53,669 5,210 1,061-59, ,940 Supporting services Administration 10,805 1,043 11,848 11,848 Development 5,805 5,805 5,805 Public information 5,902 5,902 5,902 Facilities 5,527 5,527 5,527 Utility costs 3,433 3,433 3,433 Protective services 6,445 6,445 6,445 Interest on debt 4,669 4,669 4,669 Depreciation 22,474 22,474 22,474 Other 208 1,690 1,898 1,898 Total supporting services 42,794-1,043 24,164 68, ,001 Total expenses 96,463 5,210 2,104 24, , ,941 Change in net assets 4, (2,001) (6,531) (3,612) 26,226 13,925 36,539 Nonoperating activities Excess (deficit) of investment return over amounts designated for current operations (Note 3) ,099 2,034 61,492 Change in value of split-interest agreements - (473) (209) (682) Change in fair value of interest rate swap agreements (784) (784) (784) Funds released from restrictions 7,460 7,460 (7,460) - Transfers (1,242) 2,555 1, (1,693) - Change in net assets related to collection items Collection items purchased (7,767) (7,767) (7,767) Collection items sold Increase (decrease) in net assets 3, (7,315) (2,724) 77,772 14,057 89,105 Net assets Beginning of year 199, , , ,880 End of year $ 197,182 $ 514,009 $ 298,794 $ 1,009,985 The accompanying notes are an integral part of these consolidated financial statements. 5

8 Consolidated Statements of Cash Flows (in thousands of dollars) Cash flows from operating activities Change in net assets $ (23,910) $ 89,105 Adjustments to reconcile change in net assets to net cash used for operating activities Net realized (gains) losses and change in unrealized appreciation 5,390 (86,206) Net change in beneficial interest in perpetual trust 478 (2,034) (Gain) loss on disposal of assets (1) 8 Noncash interest expense - 58 Forgiveness of note payable - (217) Depreciation and amortization expense 24,056 23,776 Noncash compensation Acquisition and sales of art, net 6,736 7,460 Allowance for doubtful accounts 7 6 Noncash contributed securities received (1,836) (2,636) Proceeds from sale of contributed securities 979 1,562 Nonoperating contributions and bequests (37,746) (53,429) Change in value of split-interest agreements 1, Change in fair value of interest rate swaps 1, Noncash rental revenue (113) (113) (Increase) decrease in assets Accounts receivable (259) 121 Pledges receivable 599 (6,890) Net assets of split-interest agreements (888) (496) Inventories (20) 95 Prepaid expenses Other assets (242) (436) Increase (decrease) in liabilities Accounts payable, accrued expenses and deferred income 3,341 (400) Asset retirement obligations Other liabilities Net cash (used for) operating activities (20,186) (28,525) Cash flows from investing activities Purchases of short term investments (93,360) (80,175) Sales of short term investments 86,292 77,568 Change in funds held in trust (5,000) - Proceeds from sale of pooled and long-term investments 277, ,256 Purchases of pooled and long-term investments (256,225) (318,096) Proceeds from sale of assets 1 3 Purchases of building additions and equipment (12,215) (7,470) Acquisition of art (7,124) (7,767) Proceeds from sales of art Net cash (used for) investing activities (9,913) (3,374) Cash flows from financing activities Permanently restricted contributions 4,663 13,336 Temporarily restricted contributions 33,083 40,093 Proceeds from sale of contributed securities with donor restrictions 857 1,074 Proceeds from (repayments of) line of credit 139 (198) Repayments of capital lease (40) (54) Payments of bond issuance costs (110) - Repayments of debt (15,460) (16,874) Net cash provided by financing activities 23,132 37,377 Net (decrease) increase in cash (6,967) 5,478 Cash and cash equivalents Beginning of year 15,873 10,395 End of year $ 8,906 $ 15,873 Supplemental disclosure of cash flow information Interest paid $ 4,699 $ 4,661 Purchases of building additions remaining in accounts payable and accrued expenses $ 381 $ 2,708 Purchases of equipment via capital lease $ 174 $ - The accompanying notes are an integral part of these consolidated financial statements. 6

9 1. Significant Accounting Policies Organization The Museum of Fine Arts (the Museum ) is a non-profit corporation founded in 1870 for cultural and educational purposes. On July 1, 2001, the Museum spun off its retail division known as Enterprise into a for-profit subsidiary corporation, Museum Enterprise Partners ( MEP ). In June 2003, the Board of Directors of MEP voted to suspend operations as of June 30, As of June 30, 2004, MEP became an inactive corporation. The Museum operations include the School of the Museum of Fine Arts ( SMFA ). Basis of Presentation The accompanying financial statements have been prepared on the accrual basis of accounting. The prior year statement of cash flows have been revised to properly classify the acquisitions and sales of art as a cash outflow from investing activities. As a result cash outflows from operations decreased by $7,460,000 from $35,985,000 to $28,525,000. Cash flows from investing changed by the same amount from a cash inflow of $4,086,000 to a cash outflow of $3,374,000. The Museum has concluded this revision is immaterial. There was no impact on total cash flows in the statement. Principles of Consolidation The consolidated financial statements for the fiscal years ended include the financial statements of the Museum and MEP. All significant intercompany balances and transactions have been eliminated in consolidation. Income Taxes The Museum is a non-profit organization described under Internal Revenue Code ( IRC ) Section 501(c)(3) and is exempt from federal income taxes under IRC Section 501(a). MEP is an inactive for-profit corporation subject to income taxes. Unrestricted Net Assets Unrestricted net assets are not subject to donor-imposed stipulations. Revenues are reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulations or law. Expirations of temporary restrictions on net assets, that is, the donor-imposed stipulated purpose has been accomplished and/or the stipulated time period has elapsed, are reported as reclassifications between the applicable classes of net assets as funds released from restrictions. Temporarily Restricted Net Assets Temporarily restricted net assets include gifts, pledges, trusts and remainder interests, income and gains which can be expended for specific purposes but for which restrictions have not yet been met. Such restrictions include restrictions where donors have specified the purpose for which the net assets are to be spent, or time limitations imposed by donors or implied by the nature of the gift (capital projects, pledges to be paid in the future, life income funds) or by interpretations of law (investment gains available for appropriation but not appropriated in the current period). When the donor s intent has not been specified, the pledge or gift is classified as a temporarily restricted net asset pending final confirmation from the donor. 7

10 Permanently Restricted Net Assets Permanently restricted net assets include the historical dollar amounts of gifts, including pledges, trusts and remainder interests, which are required by donors to be permanently invested. Pledges (Note 2), trusts and remainder interests (Notes 8 and 9) are reported at their estimated net realizable values. Collections In accordance with the general practice of art museums, the cost of works of art are charged directly to the funds available for such purposes and are not capitalized. The value of objects acquired by gift cannot be reasonably estimated and, therefore, is not recorded in the statement of activities. Donated Goods and Services The financial statements for the years ended include amounts for donated services totaling approximately $1,208,000 and $1,026,000, respectively. These amounts do not include items capitalized as part of property, plant and equipment. Cash and Cash Equivalents All highly liquid debt instruments purchased with an original maturity of three months or less are classified as cash equivalents and approximate fair value. Investments Liquid investments not classified as cash equivalents are included in short-term investments. The Museum reports investments of all funds at fair value. Investments in limited partnerships, limited liability corporations, or privately held investments which are recorded at fair value as reported by the General Partner or investment manager. Purchases and sales are recorded on the trade date. Realized gains and losses on portfolio transactions are accounted for by a variety of cost methods. Investment income is recorded on the accrual basis. The Museum s privately held investment funds, including common trusts and commingled funds, are carried at estimated fair value determined by management, based upon valuations provided by management of the privately held investment funds as of. Since investments in privately held investment funds are not marketable, the estimated value is subject to uncertainty and therefore, may differ materially from the value that would have been used had a market for such investments existed. Pooled Investment Income The use of endowment earnings (interest, dividends, realized gains and losses and changes in unrealized appreciation) for operations is limited to 5.5% of the average market value of the endowment funds over the twelve quarters ended on the last day of March 2014 for the fiscal year ended June 30, 2015 and 5.5% of the average market value of the endowment funds over the twelve quarters ended on the last day of March 2013 for the fiscal year ended June 30, Income earned in excess of the spending amount is reinvested, and any shortfall of investment income under this spending amount is funded from previous year s unspent income. 8

11 Property, Plant and Equipment Land, buildings and improvements, equipment and construction in progress are stated at cost. Betterments which materially add to the value of the related assets or materially extend the useful life of the assets are capitalized. Equipment and furnishings of relatively small dollar values are expensed in the current operating period. Buildings and improvements are depreciated over a range from 5 to 30 years on a straight-line basis. Equipment consists primarily of data processing systems and is being depreciated over its estimated useful life, 3 to 10 years, on a straight-line basis. Costs related to construction in progress have been capitalized for projects that are expected to be completed and placed in service in a future period. Deferred Financing Costs Costs incurred in connection with the placement of the Massachusetts Health and Educational Facilities Authority ( MHEFA ), Variable Rate Revenue Bonds, Museum of Fine Arts Issue, Series A-1 (2007) and Series A-2 (2007), have been deferred and are being amortized over the term of the obligation on a straight-line basis. Auxiliary Services Enterprise Merchandising expenses include payroll, fringe benefits and other direct costs. Inventory The inventory valuation method is the lower of cost or market, and cost is determined using the first-in, first-out method. Use of Estimates The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Revenues Membership dues received from individuals and corporations pertaining to all membership categories are recognized as revenue upon receipt. Tuition and Fees Student tuition and fees are recorded as revenue during the year in which the related academic services are rendered. Student tuition and fees received in advance of services to be rendered are recorded as deferred revenue. Student Aid Student aid in the amount of $4,127,000 and $4,494,000 for the years ended June 30, 2015 and 2014, respectively, has been classified as a reduction of student tuition and fees. Fund-Raising Expense For the years ended, the Museum incurred fund-raising expenses of approximately $5,292,000 and $5,189,000, respectively. Asset Retirement Obligations Conditional asset retirement obligations ( ARO ) meet the definition of liabilities and should be recognized when incurred if their fair values can be reasonably estimated. 9

12 These asset retirement obligations are primarily related to asbestos and lead paint at Museum buildings that is not subject to abatement remediation unless the buildings are demolished or undergo major renovations or repairs. AROs arise from regulations that specify how to dispose of asbestos and lead paint if the buildings are demolished or renovated. At, the remaining ARO associated with conditional retirement obligations totaled $7,002,000 and $6,772,000, respectively. The Museum recognized $229,000 and $222,000 of operating expenses relating to the accretion of liabilities recorded for the years ended, respectively. 2. Pledges Receivable Pledges receivable, net in the amount of approximately $63,947,000 and $64,546,000 are recorded in the financial statements at, respectively. Pledges expected to be collected within one year are recorded at their net realizable value. Pledges that are expected to be collected in future years are recorded at the present value of estimated future cash flows. The present value of estimated future cash flows has been measured utilizing a combination of the risk free rates of return plus 1% and the Museum s unsecured borrowing rate. The resulting discount amounted to approximately $18,133,000 and $21,403,000 at, respectively. At, the Museum has conditional pledges totaling $15,930,000 and $27,104,000 before discount, which will be reflected in the financial statements once the conditions have been met. Pledges, net of discount, are expected to be collected as follows: (in thousands of dollars) In one year or less $ 14,048 $ 14,070 Less: Allowance for unfulfilled pledges (1,676) (1,765) Current portion of pledges receivable 12,372 12,305 Between one year and five years 22,112 24,690 Greater than five years 29,463 27,551 $ 63,947 $ 64,546 10

13 3. Investments Investments of the endowment and certain other funds are pooled on a fair value basis, with each fund subscribing to or disposing of units on the basis of the fair value per endowment unit at the beginning of the month within which the transaction takes place. The cost and fair value of the investments at are as follows: (in thousands of dollars) Fair Value Cost Fair Value Cost Pooled investments Cash and short-term investments $ 18,680 $ 18,680 $ 34,264 $ 34,264 Mutual funds 45,948 44,354 52,205 46,701 Stocks 65,569 57,043 53,484 37,067 Common trusts and commingled fundsstocks 199, , , ,418 Common trusts and commingled fundsfixed income 55,050 55,827 60,849 58,389 Multistrategy funds 160, , , ,429 Private equity 51,263 41,999 50,479 41,163 Total pooled investments 596, , , ,431 Other long-term investments Common trusts and commingled fundsstocks 12,900 11,561 12,352 11,106 Private equity Other Total other long-term investments 12,939 11,593 12,393 11,140 $ 609,555 $ 533,983 $ 636,050 $ 524,571 Activity of pooled investments on a per unit basis for the years ended was as follows: Per Unit Basis Beginning fair value $ 5,854 $ 5,550 Appreciation (depreciation) for the year (30) 304 Ending fair value $ 5,824 $ 5,854 The Attorney General of Massachusetts has issued written guidance that all capital appreciation on donor-restricted endowment funds that has not been appropriated in accordance with the donor restrictions should be classified as temporarily restricted net assets. Accordingly, $318,524,000 and $352,545,000 of accumulated realized gains and unrealized appreciation are classified within temporarily restricted net assets at, respectively. These temporarily restricted net assets will only be utilized in accordance with the endowment spending policy and will function in the same manner as permanently restricted net assets under the Museum s policies. 11

14 The following schedule summarizes the investment return based on the endowment classification in the statement of activities for the years ended : 2015 Temporarily (in thousands of dollars) Unrestricted Restricted Total Investment dividends and interest $ 568 $ 1,766 $ 2,334 Net realized gains (losses) and change in unrealized appreciation (depreciation) 10,376 (16,146) (5,770) Total return on investments $ 10,944 $ (14,380) $ (3,436) Investment return designated for current operations 10,900 19,371 30,271 Excess (deficit) of investment return over amounts designed for current operations Pooled investment funds $ 44 $ (33,751) $ (33,707) Nonpooled investment funds $ 44 $ (33,371) (33,327) Other perpetual trusts (478) $ (33,805) 2014 Temporarily (in thousands of dollars) Unrestricted Restricted Total Investment dividends and interest $ 490 $ 1,493 $ 1,983 Net realized gains and change in unrealized appreciation 10,254 73,891 84,145 Total return on investments $ 10,744 $ 75,384 $ 86,128 Investment return designated for current operations 10,385 18,346 28,731 Excess of investment return over amounts designed for current operations Pooled investment funds $ 359 $ 57,038 $ 57,397 Nonpooled investment funds - 2,061 2,061 $ 359 $ 59,099 59,458 Other perpetual trusts 2,034 $ 61,492 Foreign Investments The Museum invests in foreign investments. Investment security valuations initially expressed in foreign currencies are converted into U.S. dollars based upon current exchange rates at the balance sheet date. 12

15 4. Fair Value Disclosures The Museum applies fair value accounting guidance which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under this guidance as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement data. The Museum elected to early adopt subtopic Disclosures for Investments in Certain Entities That Calculate Net Asset Value Per Share (or its Equivalent) in fiscal year This fair value guidance establishes a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace. Observable inputs reflect market data obtained from sources independent of the reporting entity and unobservable inputs reflect the entities own assumptions about how market participants would value an asset or liability based on the best information available. Valuation techniques used to measure fair value under this fair value guidance must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by the Museum for financial instruments measured at fair value on a recurring basis. The three levels of inputs are as follows: Level 1 Level 2 Level 3 Quoted prices in active markets for identical assets or liabilities. Market price data is generally obtained from exchange or dealer markets. The Museum does not adjust the quoted price for such assets and liabilities. Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the same term of the assets or liabilities. Inputs are obtained from various sources including market participants, dealers and brokers. Unobservable inputs that are supported by little or no market activity which require the reporting entity to develop its own assumptions. Assets and liabilities measured at fair value are based on one or more of three valuation techniques noted in the fair value accounting guidance. The three valuation techniques are as follows: Market Approach Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities; Cost Approach Amount that would be required to replace the service capacity of an asset (i.e., replacement cost); and 13

16 Income Approach Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques). A financial instrument s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following fair value hierarchy tables present information about the Museum s assets and liabilities measured at fair value on a recurring basis based upon the lowest level of significant input to the valuations. Also presented are investments measured at fair value using the net asset value ( NAV ) per share (or its equivalent) practical expedient, which have not been classified in the fair value hierarchy due to the adoption of the new accounting standard. These investments are listed as other investments. For estimating the fair value of investments in investment companies that have a calculated value of their capital account or NAV in accordance with, or in a manner consistent with US generally accepted accounting principles ( US GAAP ), as a practical expedient, the Museum is permitted to estimate the fair value of an investment at the measurement date using the reported NAV without further adjustment unless the entity expects to sell the investment at a value other than NAV or if the NAV is not calculated in accordance with US GAAP. The Museum s investments in common trusts, commingled funds, private equity, natural resources, real estate and certain hedge funds in the absolute return portfolio are fair valued based on the most current NAV. The Museum has assessed factors including, but not limited to, managers compliance with Fair Value Measurement standard, price transparency and valuation procedures in place, the ability to redeem at NAV at the measurement date, and existence of certain redemption restrictions at the measurement date. 14

17 The value of certain alternative investments represents the ownership interest in the NAV of the respective limited partnership interests in hedge, private equity, real estate and other similar funds. The fair values (NAV) of the securities held by limited partnerships that do not have readily determinable fair values are determined by the general partner and are based on appraisals, or other estimates that require varying degrees of judgment. If no public market exists for the investment securities, the fair value is determined by the general partner taking into consideration, among other things, the cost of the securities, prices of recent significant placements of securities of the same issuer, and subsequent developments concerning the companies to which the securities relate. The Museum has performed due diligence around these investments to ensure NAV is an appropriate measure of fair value as of Quoted Significant Prices in Other Significant Active Observable Unobservable Other Total Markets Inputs Inputs Investments Fair (in thousands of dollars) (Level 1) (Level 2) (Level 3) (Other) Value Assets Short-term investments and investments Short-term investments $ 86,713 $ - $ - $ - $ 86,713 Stocks 65, ,569 Mutual funds - stocks 45, ,948 Common trusts and commingled funds - fixed income ,050 55,050 Common trusts and commingled funds - stocks , ,887 Other Private equity ,280 51,280 Multistrategy funds , ,119 Total investments 198, , ,588 Beneficial interest in perpetual trusts ,591-23,591 Assets of split-interest agreements - - 9,717-9,717 Total assets at fair value $ 198,230 $ - $ 33,330 $ 479,336 $ 710,896 Liabilities Interest rate swaps payable $ - $ 23,960 $ - $ - $ 23,960 Total liabilities at fair value $ - $ 23,960 $ - $ - $ 23,960 15

18 2014 Quoted Significant Prices in Other Significant Active Observable Unobservable Other Total Markets Inputs Inputs Investments Fair (in thousands of dollars) (Level 1) (Level 2) (Level 3) (Other) Value Assets Short-term investments and investments Short-term investments $ 95,229 $ - $ - $ - $ 95,229 Stocks 53, ,484 Mutual funds - stocks 52, ,205 Common trusts and commingled funds - fixed income ,849 60,849 Common trusts and commingled funds - stocks , ,680 Other Private equity ,496 50,496 Multistrategy funds , ,048 Total investments 200, , ,015 Beneficial interest in perpetual trusts ,069-24,069 Assets of split-interest agreements - - 9,945-9,945 Total assets at fair value $ 200,918 $ - $ 34,038 $ 496,073 $ 731,029 Liabilities Interest rate swaps payable $ - $ 22,510 $ - $ - $ 22,510 Total liabilities at fair value $ - $ 22,510 $ - $ - $ 22,510 Investments included in other consist of the Museum s ownership in various investments including common trusts, commingled funds, and alternative investments including limited partnership interests in hedge, private equity, real estate, and other similar funds. The Museum s management, with the assistance of the Investment Committee and an independent advisory consultant, evaluates and monitors all endowment investments. The Investment Committee is comprised primarily of investment professionals. Interest rate are valued using broker quotes and models using market observable inputs. Because the swaps have inputs that can usually be corroborated by observable market data, they are generally classified within Level 2. 16

19 The guidance also requires additional disclosures to enable user of the financial statements to understand the nature and risk of the Museum s investments. Furthermore, investments which can be redeemed at NAV by the Museum on the measurement date or in the near term are classified as Other. Investments which cannot be redeemed on the measurement date or in the near term are also classified as Other. Redemption Frequency Unfunded (if Currently Redemption Category Fair Value Commitments Eligible) Notice Period (in thousands of dollars) Common trusts and commingled funds Stocks $ 212,887 $ - Anytime to annually 5 to 120 days Common trusts and commingled funds Fixed income 55,050 - Anytime 2 days Multistrategy funds Absolute return 28,985 - Annually on inception 90 days or with deferred payout already noticed Long/short 34,138 - Quarterly to triennially 30 to 60 days after lockup Open mandate 71,945 - Quarterly to bi-annually, 60 to 180 days sometimes with deferral or already noticed payout Multistrategy 19,526 - Quarterly to annually 45 to 65 days or on inception already noticed Emerging markets credit 5,525 - Quarterly 45 days notice Private equity Fund of funds 2, Buyout 22,076 13,493 Expansion capital 15,301 4,566 Natural resources/other 8,376 5,543 Real estate 3,242 3,113 Other Preferred stock certificates 22 - Total Level 3 and Other investments $ 479,358 $ 26,861 As noted above, the Museum has made commitments to various limited partnerships. The Museum expects these funds to be called over the next 1 to 8 years. The Museum expects liquidity to be received within the next 1 to 10 years. Beneficial interests in perpetual trusts and assets of split-interest agreements are valued by the trustees of the agreements and are based on valuation of the underlying marketable securities or for those securities which do not have a readily determinable fair value by the trustee based on appraisals or other estimates which require judgment. These balances are included within Level 3. The primary unobservable inputs used in the fair value measurement of the perpetual trust assets 17

20 are the underlying securities held by the trust. Significant fluctuation in the discount rates utilized in the calculations of assets of split-interest agreements could result in a material change in fair value. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Museum believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a materially different estimate of fair value at the reporting date. The following table is a rollforward of the statement of financial position amounts for financial instruments classified by the Museum within Level 3 of the fair value hierarchy defined above. For the year ended June 30, 2015: Beneficial Interests Assets in of Perpetual Split-interest (in thousands of dollars) Other Trusts Agreements Total Fair value at July 1, 2014 $ 24 $ 24,069 $ 9,945 $ 34,038 Unrealized losses - (478) (430) (908) Purchases Sales (2) - - (2) Fair value at June 30, 2015 $ 22 $ 23,591 $ 9,717 $ 33,330 For the year ended June 30, 2014: Beneficial Interests Assets in of Perpetual Split-interest (in thousands of dollars) Other Trusts Agreements Total Fair value at July 1, 2013 $ 24 $ 22,035 $ 10,073 $ 32,132 Unrealized gains - 2, ,605 Purchases - - (699) (699) Fair value at June 30, 2014 $ 24 $ 24,069 $ 9,945 $ 34,038 All net unrealized gains (losses) in the table above are reflected in the accompanying statement of activities and have been included in the excess of investment return over amounts designated for current operations or change in value of split interest agreements. Net unrealized gains (losses) relate to those financial instruments held by the Museum at. 18

21 5. Endowments The following disclosures are made for endowment net asset classification of donor-restricted endowment funds for a not-for-profit organization that is subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act of (UPMIFA) and additional disclosures about an organization s endowment funds. The Museum s endowment consists of approximately 781 individual donor-restricted endowment funds for a variety of purposes plus the following where the assets have been designated for endowment: donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. The net assets are classified and reported based on the existence or absence of donor-imposed restrictions. The Board of Trustees of the Museum has interpreted UPMIFA as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, the Museum classifies as permanently restricted net assets, (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure of the Museum in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Museum considers the following factors in making a determination to appropriate or accumulate endowment funds: a. The duration and preservation of the fund b. The purposes of the Museum and the donor-restricted endowment fund c. General economic conditions d. The possible effect of inflation and deflation e. The expected total return from income and the appreciation of investments f. Other resources of the organization g. The investment policies of the organization. The Museum had the following endowment activities during the year ended June 30, 2015 delineated by net asset class. 19

22 Endowment net asset composition and changes by type of fund as of June 30, 2015: Board Temporarily Permanently (in thousands of dollars) Restricted Restricted Restricted Total Endowment net assets at beginning of year $ 7,548 $ 377,502 $ 257,024 $ 642,074 Investment return 44 (23,387) - (23,343) Gifts 4, ,030 12,566 Appropriation of endowment assets for expenditure - (11,143) - (11,143) Donor redesignation 18 (936) 1, Other (331) - - (331) Endowment net assets at end of year $ 11,638 $ 342,213 $ 266,584 $ 620,435 Endowment net asset composition and changes by type of fund as of June 30, 2014: Board Temporarily Permanently (in thousands of dollars) Restricted Restricted Restricted Total Endowment net assets at beginning of year $ 7,195 $ 320,630 $ 246,057 $ 573,882 Investment return ,910-67,269 Gifts 1, ,456 14,034 Appropriation of endowment assets for expenditure - (10,089) - (10,089) Donor redesignation - 4 (1,489) (1,485) Other (1,537) - - (1,537) Endowment net assets at end of year $ 7,548 $ 377,502 $ 257,024 $ 642,074 Endowment Funds With Deficits From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the value of the initial and subsequent donor gift amounts (deficit). These deficits resulted from unfavorable market fluctuations that occurred shortly after the investment of newly established endowments, and authorized appropriation that was deemed prudent. When donor endowment deficits exist, they are classified as a reduction of unrestricted net assets. There were no deficits of this nature reported in unrestricted net assets for the years ended June 30, 2015 and Return Objectives and Risk Parameters The Museum has adopted endowment investment and spending policies that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchase power of endowment assets. Under this policy, the return objective for the endowment assets shall be to maximize the return based on the endowment s target allocation applied to the appropriate individual benchmarks. The Museum s objective for its endowment funds over time is to provide an average rate of return of approximately 8.5% annually. Actual returns in any given year may vary from this amount. 20

23 Strategies Employed for Achieving Investment Objectives To achieve its long-term rate of return objectives, the Museum relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized gains) and current yield (interest and dividends). The Museum targets a diversified asset allocation that places greater emphasis on equity-based investments to achieve its long-term objectives within prudent risk constraints. Endowment Spending Allocation and Relationship of Spending Policy to Investment Objectives The Board of Trustees of the Museum determines the method to be used to appropriate endowment earnings for expenditure. The use of endowment earnings (interest, dividends, realized gains and losses and changes in unrealized appreciation) for operations is limited to 5.5% of the average market value of the endowment funds over the twelve quarters internally ended on the last day of March 2014 for the fiscal year ended June 30, 2015 and 5.5% of the average market value of the endowment funds over the twelve quarters internally ended on the last day of March 2013 for the fiscal year ended June 30, Income earned in excess of the spending amount is reinvested, and any shortfall of investment income under this spending amount is funded from previous year s unspent income. The Board considers the expected long term rate of return on its endowment. Accordingly, over the long term, the Museum s objective is for the current spending policy to allow its endowment to grow at an average of 3.0% annually, consistent with its intention to maintain the purchasing power of the endowment assets as well as to provide additional real growth through new gifts. 6. Property, Plant and Equipment Property, plant and equipment are reported at cost and consist of the following at June 30, 2015 and 2014: (in thousands of dollars) Land and improvements $ 27,076 $ 27,076 Buildings and improvements 534, ,163 Equipment 56,704 51, , ,291 Accumulated depreciation (230,519) (207,553) 387, ,738 Construction in progress 680 5,441 Net property, plant and equipment $ 388,326 $ 402,179 Depreciation expense was approximately $23,915,000 and $23,645,000 for the years ended, respectively. 21

24 7. Long-Term Debt On December 13, 2007, MHEFA (the Issuer) issued $100,000,000 of Revenue Bonds, Museum of Fine Arts Issue Auction Rate Securities Series A-1 (2007) and $85,000,000 of Revenue Bonds, Museum of Fine Arts Issue, Series A-2 (2007), pursuant to a Loan and Trust Agreement dated as of October 11, 2007 among the Issuer, the Museum and the Trustee. The final maturity date of the Revenue Bonds is December 1, No payment of principal is due until that date. The bonds bear interest at a variable rate. The mode of Series A-1 (2007) and Series A-2 (2007) was converted from auction rate securities to variable rate demand bonds on April 3, 2008 and April 2, 2008, respectively. The bonds bear interest at a variable rate and are remarketed on a daily basis. The Museum simultaneously entered into a Standby Bond Purchase Agreement (the 2008 Agreement) with a bank and the Trustee relating to the Series A-1 (2007) and Series A-2 (2007) bond issuance to purchase tendered bonds, with an initial available commitment of $185,000,000 plus an available interest commitment equal to 35 days of interest payments under the terms of the Agreement. The 2008 Agreement had a term of five years, expiring on April 2, The Museum paid an annual commitment fee of 0.19% based on the amount of available commitment under the 2008 Agreement. On June 1, 2010, the 2008 Agreement was amended to extend the term to April 1, The commitment fee was increased from 0.19% to 0.35%. On April 1, 2014, the 2008 Agreement was amended to extend the term to April 1, The 2008 Agreement requires the Museum to maintain certain credit ratings. The 2008 Agreement now has an available commitment amount of $45,000,000 plus an available interest commitment equal to 35 days of interest payments. On October 18, 2012, the Museum entered into a new Standby Bond Purchase Agreement (the October 2012 Agreement) with a second bank and the Trustee relating to the Series A-1 (2007) bond issuance to purchase tendered bonds. This October 2012 Agreement replaced a portion of the 2008 Agreement. The October 2012 Agreement had a term of three years, expiring on October 19, On June 25, 2015, the Museum entered into a new Standby Bond Purchase Agreement (the June 2015 Agreement) with a different bank and the Trustee relating to the Series A-1 (2007) bond issuance to purchase tendered bonds. The June 2015 Agreement has an available commitment of $100,000,000 plus an available interest commitment equal to 35 days of interest payments. The Museum will pay a commitment fee of 0.30%. The June 2015 Agreement has a term of three years, expiring on June 25, The June 2015 Agreement requires the Museum to maintain certain credit ratings. Under the 2008 Agreement repayment of tendered bonds, occurs ratably over a term defined in the 2008 Agreement beginning eighteen months after tender. The schedule of maturities under the Agreement would be $5,625,000, $11,250,000, $11,250,000 and $16,875,000 if the maximum amount of the 2008 Agreement was utilized as of June 30, 2015 and repaid over the amortization period defined in the 2008 Agreement. Under the June 2015 Agreement repayment of tendered bonds will occur ratably over a term defined in the June 2015 Agreement beginning eighteen months after tender. The schedule of maturities under the new Agreement would be $12,500,000, $25,000,000, $25,000,000 and $37,500,000 if the maximum amount of the June 2015 Agreement was utilized as of June 30, 2015 and over the amortization period defined in the June 2015 Agreement. 22