American Psychological Association, Inc. and Subsidiaries

Transcription

1 American Psychological Association, Inc. and Subsidiaries Audited Consolidated Financial Statements With Supplementary Information Years Ended December 31, 2014 and 2013 The report accompanying these financial statements was issued by BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of BDO International Limited, a UK company limited by guarantee.

2 Audited Consolidated Financial Statements with Supplementary Information Years Ended December 31, 2014 and 2013

3 Contents Independent Auditor s Report 1-2 Consolidated Financial Statements Consolidated Statements of Financial Position 3 Consolidated Statements of Activities and Change in Net Assets 4 Consolidated Statements of Cash Flows Independent Auditor s Report on Supplementary Information 30 Consolidating Statement of Financial Position Consolidating Statement of Activities and Change in Net Assets Schedule of Board-Designated Net Assets 36-37

4 Tel: Fax: Greensboro Drive Suite 700 McLean, VA Independent Auditor s Report Board of Directors American Psychological Association, Inc. Washington, D.C. We have audited the accompanying consolidated financial statements of American Psychological Association, Inc. and subsidiaries (collectively, referred to as the Association), which comprise the consolidated statement of financial position as of December 31, 2014 and 2013, and the related consolidated statements of activities and change 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 Consolidated 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. 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 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 Association 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 Association 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. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 1

5 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Psychological Association, Inc. and subsidiaries as of December 31, 2014 and 2013, and the change 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. McLean, Virginia June 5,

6 Consolidated Financial Statements

7 American Psychological Association, Inc. And Subsidiaries Consolidated Statements of Financial Position December 31, Assets Current assets Cash and cash equivalents $ 34,118,749 $ 41,522,809 Cash and cash equivalents, divisions 8,675,512 8,465,871 Investments, divisions 1,554,650 1,378,214 Accounts receivable 24,483,886 19,480,503 Publications inventory 4,062,713 4,090,000 Other current assets 1,506,314 1,481,193 Total current assets 74,401,824 76,418,590 Investments 93,587,219 91,168,686 Property and equipment, net 80,862,439 78,112,804 Deferred financing costs, net 574, ,513 Deferred leasing costs, net 6,478,425 3,929,725 Rental abatements 6,524,028 6,091,705 Other assets 3,057,340 5,312,229 Total assets $ 265,485,298 $ 261,724,252 Liabilities and net assets Current liabilities Accounts payable and accrued expenses $ 20,406,334 $ 15,471,098 Line-of-credit 5,000,000 - Current portion of long-term debt 3,706,827 4,491,458 Amounts collected/held for divisions and other groups 10,312,418 9,470,175 Deferred revenue 54,369,167 53,779,188 Total current liabilities 93,794,746 83,211,919 Post retirement medical benefit obligation 2,019,096 1,657,857 Interest rate swap liabilities 13,469,782 11,461,569 Deferred compensation 3,834,933 3,584,229 Other liability 366, ,500 Long-term debt 90,496,188 94,203,016 Total liabilities 203,980, ,505,090 Net assets Unrestricted APA Designated 20,437,164 20,993,828 APA Undesignated 39,244,565 44,469,819 APAPO Undesignated 1,822,824 1,755,515 Total net assets 61,504,553 67,219,162 Total liabilities and net assets $ 265,485,298 $ 261,724,252 See accompanying notes to the consolidated financial statements. 3

8 American Psychological Association, Inc. And Subsidiaries Consolidated Statements of Activities and Change in Net Assets Years Ended December 31, Revenues Licensing, royalties, and rights $ 64,515,289 $ 61,061,688 Member dues and fees 13,715,849 14,229,131 Rental income 18,524,547 17,793,739 Sales of publications 13,748,315 14,419,310 Journal subscriptions 11,632,595 12,110,738 Grants and contracts 1,798,443 2,534,834 Service and application fees 4,087,832 4,067,294 Convention and conference fees 2,878,261 2,742,353 Advertising 2,975,028 2,748,125 Pass-through expense reimbursements 1,193,084 1,024,380 Interest income 23,943 37,781 Mailing list rental 162, ,814 Contributions 337, ,915 Other revenue 2,043,709 1,810,066 Total revenues 137,637, ,197,168 Expenses Salaries 50,155,209 48,461,641 Consulting and contractual services 10,883,947 10,751,559 Benefits 12,144,494 11,751,265 Building operating expenses 10,542,272 10,170,732 Publication production expenses 17,129,372 16,358,601 Depreciation and amortization 6,407,369 5,869,214 Finance related expense 1,099,588 1,101,419 Advertising 2,184,731 2,296,651 Convention and other meeting expenses 4,880,437 4,413,399 Office expenses 3,888,206 3,450,968 Equipment and technology 3,994,605 3,344,500 Honoraria and contributions 2,835,999 2,445,213 Non-staff travel 2,990,933 3,293,471 Stipends and grants 2,104,157 2,209,212 Staff travel 1,050,455 1,226,879 Space occupancy 312, ,029 Professional practice grants 644, ,180 Business management expenses 1,458,648 1,288,893 Expense recoveries (1,537,081) (1,534,675) Total expenses 133,170, ,784,151 Increase in net assets before other (expense) income 4,467,089 7,413,017 Other (expense) income Investment income Realized and unrealized gains on investments, net of management fees 1,042,660 14,384,661 Interest income 1,384,648 1,131,488 Unrealized (losses) gains on interest rate swap liabilities (2,008,213) 6,747,444 Interest expense (5,024,709) (5,252,152) Loss on disposal of property and equipment (369,271) - Loss on disposal of deferred leasing costs (83,119) - Miscellaneous income - 6,250,000 Legal settlement expense (4,215,000) - Provision for income taxes (908,694) (1,371,244) Total other (expense) income (10,181,698) 21,890,197 Change in net assets (5,714,609) 29,303,214 Net assets, beginning of the year 67,219,162 37,915,948 Net assets, end of the year $ 61,504,553 $ 67,219,162 See accompanying notes to the consolidated financial statements. 4

9 American Psychological Association, Inc. And Subsidiaries Years Ended December 31, Cash flows from operating activities: Change in net assets $ (5,714,609) $ 29,303,214 Adjustments to reconcile change in net assets to net cash and cash equivalents provided by operating activities: Depreciation and amortization 6,407,369 5,869,213 Loss on disposal of property and equipment 369,271 - Loss on disposal of deferred leasing costs 83,119 - Net realized and unrealized losses (gains) on investments 1,577,646 (13,596,190) Unrealized losses (gains) on interest rate swap liabilities 2,008,213 (6,747,444) Interest on deferred financing costs 116, ,114 Termination revenue booked in lieu of payments under note payable - NASW (819,434) - Rent reduction in lieu of payments under note payable - NASW (113,215) (257,049) Changes in operating assets and liabilities: Accounts receivable (5,003,383) (2,082,219) Publications inventory 27, ,000 Other current assets (25,121) (313,048) Rental abatements (432,323) (96,828) Other assets 2,254,889 (2,779,864) Accounts payable and accrued expenses 4,935,236 1,053,676 Amounts collected/held for divisions and other groups 842, ,758 Deferred revenue 589,979 1,464,565 Post-retirement medical benefit obligation 361,239 67,458 Deferred compensation 250, ,101 Other liability (20,500) (30,500) Total adjustments 13,409,709 (15,334,257) Net cash provided by operating activities 7,695,100 13,968,957 Cash flows from investing activities: Net decrease (increase) in money market instruments held in investments 3,961,978 (6,582,118) Purchases of investments (30,723,998) (13,465,114) Proceeds from sales and maturities of investments 22,589,405 24,457,759 Purchases of property and equipment (8,761,282) (14,132,354) Payments under deferred leasing costs (3,396,812) (172,541) Net cash used in investing activities (16,330,709) (9,894,368) Cash flows from financing activities: Net borrowings under bank line-of-credit 5,000,000 - Principal payments under long-term debt (3,558,810) (3,401,114) Net cash provided by (used in) financing activities 1,441,190 (3,401,114) Net (decrease) increase in cash and cash equivalents and cash and cash equivalents, divisions (7,194,419) 673,475 Cash and cash equivalents and cash and cash equivalents, divisions, beginning of the year 49,988,680 49,315,205 Cash and cash equivalents and cash and cash equivalents, divisions, end of the year $ 42,794,261 $ 49,988,680 Reconciliation of cash and cash equivalents and cash and cash equivalents, divisions to statements of financial position: Cash and cash equivalents $ 34,118,749 $ 41,522,809 Cash and cash equivalents, divisions 8,675,512 8,465,871 Supplemental disclosures of cash flow information: Consolidated Statements of Cash Flows $ 42,794,261 $ 49,988,680 Cash paid for interest $ 4,915,105 $ 5,136,814 Cash paid for income taxes, net of refunds received $ 957,478 $ 1,371,244 See accompanying notes to the consolidated financial statements. 5

10 1. Organization and Summary of Significant Accounting Policies The American Psychological Association, Inc. (APA), a District of Columbia not-for-profit corporation, is a national membership organization created to advance psychology as a science and profession and as a means of promoting health, education and human welfare. APA s operations are supported primarily by membership dues, subscriptions, and other publication revenue. In addition to the accounts of APA, the consolidated financial statements include the accounts of the following entities: American Psychological Association Practice Organization The American Psychological Association Practice Organization (APAPO) is a District of Columbia nonprofit corporation that is exempt from federal income taxes under Section 501(c)(6) of the Internal Revenue Code. APAPO was created by APA to promote the mutual professional interests of practicing psychologists. The APAPO Political Action Committee (PAC) was created in 2012 to provide the opportunity for individuals interested in the future of the psychology profession to contribute to the support of candidates for federal office who believe in, and have demonstrated their beliefs in, the principles to which the profession is dedicated. The PAC is organized and operates in compliance with the Federal Election Campaign Act of The PAC is a tax-exempt, non-profit, unincorporated political committee that operates as a separate, segregated fund. APA 750 LLC APA 750 LLC was formed on November 13, 2002 under the laws of the State of Delaware. The American Psychological Association (APA) is the sole member of the LLC. APA 750 LLC was formed to own and operate a commercial office building containing approximately 351,000 square feet (750 First Street). APA 750 LLC created a subsidiary named Conference Center LLC (the subsidiary or CCLLC) which was legally formed on July 28, 2014, under the laws of the State of Delaware. The purpose of Conference Center LLC is to lease from APA 750 LLC the new conference center facility on the top floor of the building located at 750 First Street, and to manage the rental of the conference center to tenants and other third parties. APA 750 LLC is the sole member of CCLLC. CCLLC had no financial activity in APA Ten G LLC APA Ten G LLC (the LLC), a Delaware limited liability company formed on November 12, 2002, is 100% owned by the American Psychological Association (APA), a non-profit District of Columbia corporation. All intercompany transactions, which consist primarily of contracted services, rent, and intercompany borrowings and advances, have been eliminated in consolidation. The significant accounting policies followed by APA and its consolidated subsidiaries (collectively referred to as the Association) are described below: 6

11 Basis of Accounting The consolidated financial statements of the Association have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Use of Estimates The preparation of consolidated 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 and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, upon settlement, actual results could differ from those estimates. Revenue Recognition Member dues and fees, journal subscriptions and electronic licensing revenue are recorded as revenue in the period of the related membership, subscription or license. Deferred revenue represents unearned fees expected to be earned in the future. Advertising revenue is recorded as revenue when the advertisement is published. Other publication sales are recorded as revenue when the publication is shipped to the customer. APA receives grant funding from federal agencies and private foundations. Revenue is recognized only to the extent of expenditures under the terms of the grants. Grant funds not yet received are accrued to the extent that unreimbursed expenses have been incurred for the purposes specified by an approved grant. Excess expenses incurred are borne by APA. Unexpended funds are returned to the grantors if required by the grant agreement. Some grant payments are received in advance of related expenditures. These amounts are reflected in the accompanying consolidated statements of financial position as deferred revenue. Fees for seminars, conferences, and meetings and sponsorship thereof are recognized as revenue in the period the related events are held. Fee and service revenue received in advance of the related event is reflected as deferred revenue in the accompanying consolidated statements of financial position. Registration and exhibit fees are recognized upon completion of the related event. Certain tenant leases contain rental abatement provisions and rental rate escalation clauses. The aggregate rent payments due over the lives of the leases are recognized as rental revenue on a straight-line basis over the full term of the leases. The differences between cash rental revenues received and rental revenues due from tenants over the lives of the leases using a straight-line calculation are recorded as rental abatements with a corresponding offset to current period rental revenue. Contributions are recognized in the period received or promised. Contributions received are considered to be available for use unless specifically restricted by the donor. Amounts received that are designated for a future period, or are restricted by the donor for specific purposes are reported as temporarily restricted or permanently restricted support that increases those net 7

12 asset classes. Unconditional promises to give, which do not state a due date, are presumed to be time-restricted by the donor until received and are reported as temporarily restricted net assets. Contributions are recorded at fair value, which is net of estimated uncollectible amounts. The Association uses the allowance method to determine uncollectible unconditional contribution receivable. The allowance is based on experience as well as management s analysis of specific contributions made, including such factors as prior collection history, type of contribution, and nature of fundraising activity Other revenues are recognized when earned. Miscellaneous Income APA entered into an agreement with APA Insurance Trust (the Agreement) that will provide APA $6,250,000 over a three-year period to compensate for revisions to the APAIT trust document that alter APA s relationship with APAIT, including removing the APA Board of Directors from involvement in the internal governance of APAIT and changing other rights and responsibilities of APA as contained in the old trust document. Under the terms of the Agreement, APA received $2,000,000 in 2013 and $2,000,000 in January The final payment of $2,250,000 is due in July 2015, which is included in accounts receivable in the accompanying consolidated statements of financial position. Measure of Operations APA s income includes all membership, journal subscriptions, publication sales, licensing/royalties, rental income and other revenues and expenses critical to APA s mission. Realized and unrealized investment gains and losses, unrealized gains and losses on interest rate swaps, interest expense related to long-term debt, provisions for income taxes, and certain other non-recurring transactions are considered to be other income (expense). Cash Equivalents APA considers investments with original maturities of three months or less to be cash equivalents, and excludes cash equivalents held temporarily for long-term investment purposes by investment custodians. Cash equivalents consist primarily of commercial paper and money market funds. Accounts Receivable Accounts receivable consists of amounts billed to customers for goods and services provided by year-end. Included in these amounts at December 31, 2014 and 2013 are billed invoices totaling $17,623,969 and $12,365,047, respectively, for annual licenses of electronic products for which the service period has commenced. APA provides an allowance for doubtful accounts based upon a review of outstanding receivables, historical collection information, and existing economic conditions. APA has determined that no allowance is necessary for 2014 and

13 Publications Inventory Inventory consists primarily of books available for sale. Inventory items are recorded either at cost or at a value that approximates cost. Slow moving inventory is deemed to have no value, and therefore is not included in the valuation. Investments The Association s investments are recorded at fair value. investments consist of the following at December 31: The Association s noncurrent Cost Fair Value Cost Fair Value Money market funds $ 5,423,611 $ 5,423,611 $ 9,604,483 $ 9,604,483 Mutual funds 33,545,215 33,165,012 40,047,071 43,292,475 Common stocks 47,961,364 54,998,596 37,390,030 38,271,728 $ 86,930,190 $ 93,587,219 $ 87,041,584 $ 91,168,686 Investments held on behalf of APA s divisions consist of the following at December 31: Cost Fair Value Cost Fair Value Mutual funds $ 1,405,084 $ 1,554,650 $ 1,263,305 $ 1,378,214 The interest earned on cash and investments is recorded as interest income or investment income in the accompanying consolidated statements of activities and change in net assets. Investment income on long-term investments is recorded net of management fees in the accompanying consolidated statements of activities and change in net assets. Gains and losses on investments, including changes in market value, are reported in the consolidated statements of activities and change in net assets as increases or decreases in unrestricted net assets unless their use is temporarily or permanently restricted by donor stipulation. Realized gains are recorded net of management fees of $619,242 and $495,936 for the years ended December 31, 2014 and 2013, respectively. Property and Equipment The Association s policy is to capitalize property and equipment purchases in excess of $5,000. Property and equipment is recorded at cost. Expenditures for major additions and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment is retired, or otherwise disposed of, the cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Buildings and improvements are amortized from the dates that the related buildings and improvements were substantially completed using the straight-line method over estimated useful lives not to exceed forty years. Tenant improvements are amortized over the term of the tenants leases. Furniture, fixtures, and equipment are depreciated on a straight-line basis over their estimated useful lives, which range from three to ten years. 9

14 Valuation of Long-Lived Assets The Association accounts for the valuation of long-lived assets under authoritative guidance issued by the Financial Accounting Standards Board (the FASB), which requires that long-lived assets be reviewed for impairment whenever events or circumstances indicate that their carrying amounts may not be recoverable. Recoverability of the long-lived assets is measured by a comparison of their carrying amounts to future undiscounted net cash flows they are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which their carrying amounts exceed their estimated fair values. Assets to be disposed of are reportable at the lower of the carrying amount or fair value, less costs to sell. No indicators of impairment were identified for the years ended December 31, 2014 and When assets are sold or retired, the related cost and accumulated amortization and depreciation are removed. Any gains or losses resulting from disposition are credited or charged to operations. Expenditures for repairs and maintenance are expensed as incurred. Deferred Financing Costs Deferred financing costs consist of commissions, fees and costs incurred to obtain long-term financing and are amortized over the term of the related financing agreement using the effective interest method. The amortization of these costs is included in interest expense in the accompanying consolidated statements of activities and change in net assets. Deferred financing costs of $574,023 and $690,513 are recorded net of accumulated amortization of $2,025,570 and $1,909,080 at December 31, 2014 and 2013, respectively. Interest expense related to deferred financing costs for the years ended December 31, 2014 and 2013 was $116,490 and $120,114, respectively. Deferred Leasing Costs Deferred leasing costs consist of fees and costs incurred in the successful negotiation of leases and are deferred and amortized on the straight-line basis over the terms of the respective leases. Deferred leasing costs of $6,478,425 and $3,929,725 are shown net of accumulated amortization of $10,256,530 and 9,946,497 as of December 31, 2014 and 2013, respectively. Amortization expense for the years ended December 31, 2014 and 2013 was $764,992 and $678,947, respectively. Classification of Net Assets APA groups net assets into the following two classes: Unrestricted Net Assets - Undesignated APA s net assets are classified as unrestricted. APA s and APAPO s net assets result from revenues derived from providing goods and services, less expenses incurred in providing goods and services, and performing administrative functions. 10

15 Unrestricted Net Assets - Board-Designated APA has Board-designated net assets for accreditation stabilization, APAIT business agreement, convention, APA centralized application for graduate education in psychology, draw from longterm portfolio, good governance project implementation work group, intern stimulus plan, investment in APA, investment in APA 2.0, strategic plan initiatives, and web relaunch. The accreditation stabilization designation was established to moderate fees charged for accreditation over time. The convention designation was established to enhance programming with the goal of augmenting the convention experience. The web relaunch designation was established in 2007 to redesign the APA website to better meet the needs of members and the public. The investment in APA plan designation was established in 2010 to fund the creation of new publication products, enhance IT support to facilitate the delivery of these new products, and expand marketing efforts. The investment in APA 2.0 was established in 2014 to expand the APA family of products. The Strategic Plan Initiatives designation was established in 2012 to maximize organizational effectiveness, expand Psychology s role in advancing health, and increase recognition of Psychology as a science. APA centralized application for graduate education in psychology was established in 2013 to provide services to student applicants of graduate level psychology programs, and to departments and institutions that participate. Good governance project implementation work group was set up by Council in 2013 to operationalize the Good Governance recommendations adopted by Council. APAIT business agreement was established in 2013 to set aside the revenue received consistent with an agreement with the APA Insurance Trust for future expenditures as determined by the Board of Directors. Intern stimulus plan was established in 2013 to increase the number of APA-accredited internship programs and positions. The draw from long-term portfolio fund was established in 2014 to fund projects of importance to the association with up to three percent of the value of the long-term investment portfolio, averaged over the preceding three years. Functional Expenses APA is a national membership organization created to advance psychology as a science and profession and as a means of promoting health, education and human welfare. APAPO promotes the mutual professional interests of practicing psychologists. In accordance with authoritative guidance issued by the FASB, the disclosure for gross operating expenses related to providing these services on a functional basis, prior to eliminations on a consolidated basis (excluding APA 750 and APA Ten G), are as follows for the years ended December 31: APA APAPO APA APAPO Member and program services $ 91,239,666 $ 3,530,827 $ 89,208,767 $ 3,842,037 Fund raising - 477, ,468 General and administrative 29,820, ,208 27,293, ,620 $121,060,510 $ 4,884,976 $ 116,502,747 $ 4,976,125 11

16 Derivative Financial Instruments APA and APA 750 have entered into interest rate swap agreements to mitigate changes in interest rates on their variable rate borrowings. The notional amounts of these agreements are used to measure the interest to be paid or received and do not represent the amount of exposure to loss. The Association s policies prohibit the use of derivative financial instruments for speculative purposes. The Association accounts for derivatives in accordance with authoritative guidance issued by the FASB, which requires not-for-profit entities to recognize all derivatives as either assets or liabilities in the consolidated statements of financial position and measure those instruments at their fair value. The guidance also requires that changes in the derivatives fair value be recognized in the consolidated statements of activities and change in net assets. Management formally documents its derivative transactions, including identifying the hedge instruments and hedged items, as well as its risk management objectives, strategies for entering into the hedge transactions, and how the hedging instrument s effectiveness in hedging exposure to the hedge transaction s variability in cash flows attributable to the hedged risk will be assessed. The Association s interest rate swap liabilities are considered to be derivatives and are recognized as liabilities at fair value in the accompanying consolidated statements of financial position as of December 31, 2014 and Changes in the fair value of the interest rate swap liabilities are recorded as unrealized gains or losses in the accompanying consolidated statements of activities and change in net assets. The Association recognized unrealized loss of $2,008,213 and unrealized gain of $6,747,444 on the interest rate swap liabilities for the years ended December 31, 2014 and 2013, respectively. Income Taxes APA is exempt from Federal income tax under Section 501 (c)(3) of the Internal Revenue Code (IRC) and from District of Columbia franchise tax under applicable tax regulations, except for income from activities not related to its tax-exempt purpose, which primarily includes its share of income from APA Ten G and a portion of its income from APA 750. APA is not a private foundation under Section 509(a)(1) of the IRC. APA accounts for unrelated business income taxes in accordance with authoritative guidance issued by the FASB. APAPO is a nonprofit organization and is exempt from federal income taxes under Section 501(c)(6) of the Internal Revenue Code on income other than unrelated business income. APAPO is subject to income tax in the District of Columbia on its unrelated business income. APAPO had no significant unrelated taxable business income during The PAC is generally exempt from federal income tax under Section 527 of the IRC. However, investment income earned on PAC funds is subject to federal and District of Columbia income taxes. The PAC generated no taxable income for the year ended December 31, APA 750, APA Ten G and CCLLC are generally not subject to income taxes due to their tax status as disregarded entities. As such, the income, deductions, credits and other tax attributes of the LLCs flow directly to the member (i.e. APA). In accordance with authoritative guidance issued by the FASB, APA recognizes tax liabilities when, despite the management s belief that tax return positions are supportable, APA believes that certain positions may not be fully sustained upon review by tax authorities. Benefits from tax 12

17 positions are measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense. APA is generally no longer subject to income tax examinations by the U.S. federal, state or local tax authorities for years ended December 31, 2010 and prior. Management has evaluated APA s tax positions and has concluded that APA has taken no material uncertain tax positions that require adjustment to the consolidated financial statements to comply with the provisions of this guidance. Fair Value of Financial Instruments The fair value of the Association s cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses, and other accrued liabilities approximate their carrying amounts due to the relatively short maturity of these items. Concentrations of Credit Risk The Association s assets that are exposed to credit risk consist primarily of cash and cash equivalents and contract receivables. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Association has never experienced any losses related to these balances. Amounts on deposit in excess of federally insured limits at December 31, 2014 approximate $33.6 million. Contract receivables consist primarily of amounts due from various agencies of the federal government or prime contractors doing business with the federal government. Historically, the Association has not experienced significant losses related to contract receivables and, therefore, believes that the credit risk related to contract receivables is minimal. Post-Retirement Medical Benefit Plan Under authoritative guidance issued by the FASB, employers are required to fully recognize the overfunded or underfunded positions (the difference between the fair value of plan assets and the benefit obligation) of the postretirement medical benefit in the consolidated statements of financial position. The guidance also requires employers to recognize the actuarial gains and losses and the prior service costs and credits that arise during the period. New Accounting Pronouncements In April 2013, the FASB issued ASU , Services Received from Personnel of an Affiliate (ASU ). The amendments in ASU require a recipient not-for-profit entity to recognize all services from personnel of an affiliate that directly benefit the recipient not-for-profit entity. Those services should be measured at the cost recognized by the affiliate for the personnel providing those services. However, if measuring a service received from personnel of an affiliate at cost will significantly overstate or understate the value of the service received, the recipient not-for-profit entity may elect to recognize that service received at either (1) the cost recognized by the affiliate for the personnel providing that service or (2) the fair value of that service. The amendments are effective prospectively for fiscal years beginning after June 15, In May 2014, the FASB issued ASU , Revenue from Contracts with Customers (Topic 606). This new guidance establishes a comprehensive revenue recognition standard for virtually all 13

18 industries under accounting principles generally accepted in the United States of America, including those that previously followed industry-specific guidance. The principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance is effective beginning on January 1, Management is evaluating the potential impact of this new guidance on the consolidated financial statements. Reclassifications Certain amounts in the 2013 consolidated financial statements have been reclassified to conform to the 2014 presentation, with no effect on the change in net assets, as previously reported. 2. Property and Equipment Property and equipment consists of the following at December 31: Land $ 9,705,320 $ 9,705,320 Buildings and improvements 129,069, ,982,137 Furniture, fixtures and equipment 30,981,391 28,822, ,756, ,509,471 Less: accumulated depreciation and amortization (88,894,223) (85,396,667) $ 80,862,439 $ 78,112,804 Depreciation and amortization expense on property and equipment totaled $5,642,377 and $5,190,266 for the years ended December 31, 2014 and 2013, respectively. 3. Benefit Plans 401(k) plan APA provides a defined contribution retirement plan (the Plan) that is a savings plan operating under Section 401(k) of the IRC. The Plan became effective on January 1, The purpose of the Plan is to provide retirement benefits for participating employees. Under the Plan, APA makes contributions to an insurance company based on a percentage of the payroll of covered employees. The contributions, together with voluntary employee contributions, are used to purchase annuities and other investments, the rights to which immediately vest with the employees. APA recorded contributions to the Plan of $2,336,698 and $2,319,323 for the years ended December 31, 2014 and 2013, respectively. 14

19 Post-Retirement Medical Benefit Plan In 2004, APA established a post-retirement medical benefit plan for employees with 15 years of service who retire at or after age 59 1/2. Spouses are eligible for coverage when the retiree obtains coverage. Retiree and spouse coverage ends when each becomes eligible for Medicare. APA accounts for these post-retirement benefits in accordance with authoritative guidance issued by the FASB. Effective January 1, 2007, the post-retirement medical benefit was modified to close this benefit to employees who were not hired prior to January 1, APA s post-retirement medical benefit obligation was $2,019,096 and $1,657,857 as of December 31, 2014 and 2013, respectively. These amounts are reflected as liabilities in the accompanying consolidated statements of financial position. The following table presents the change in post-retirement medical benefit obligation in the consolidated statements of financial position for the years ended December 31, 2014 and 2013: Changes in benefit obligations Benefit obligations at the beginning of the year $ 1,657,857 $ 1,590,399 Service cost 89,314 91,225 Interest cost 77,942 66,564 Actuarial loss (gain) 224,593 (55,315) Benefits paid (30,610) (35,016) $ 2,019,096 $ 1,657,857 The post-retirement medical benefit cost is included in benefits expense in the accompanying consolidated statements of activities and change in net assets and is comprised of the following for the years ended December 31: Service cost $ 89,314 $ 91,225 Interest cost of the projected benefit obligation 77,942 66,564 Amortization of unrecognized prior service cost (27,489) (24,997) $ 139,767 $ 132,792 For 2014 and 2013, the discount rate used in the calculation of the projected benefit obligation and cost was 4.00% and 4.50%, respectively. Assumed health care cost trend rates are as follows for the years ending December 31: Healthcare cost trend rate assumed for next year 9.00% 8.68% Rate to which the cost trend rate is assumed to decline 4.00% 4.50% Year that the rate reaches the ultimate trend rate

20 Assumed health care cost trend rates have a significant effect on the amounts reported for the post-retirement plan. A one-percentage-point change in assumed health care cost trend rates would have the following effect as of and for the years ended: % increase 1% decrease 1% increase 1% decrease Effect on accumulated postretirement benefit obligation $ 171,881 $ (154,102) $ 151,891 $ (135,881) Effect on total service and interest cost components $ 17,760 $ (15,752) $ 18,097 $ (15,919) As of December 31, 2014, the following post-retirement medical benefit payments are expected to be paid: Years Ending December 31, 2015 $ 81, , , , , ,767,000 Section 457(b) Plan APA provides a defined contribution retirement plan (the 457(b) Plan) under Section 457(b) of the IRC. The 457(b) Plan became effective on September 1, To be eligible to participate, an employee must have an employment contract with APA and a base annual salary of $110,000 or greater. The 457(b) Plan allows eligible employees to contribute up to 25% of their gross earnings on a pretax basis, subject to Internal Revenue Code limitations. There are no employer matching contributions. Employee contributions are remitted to an insurance company and are used to purchase annuities and other investments. Until paid or made available to the participant or beneficiary, all deferred amounts and investments earnings related to deferral amounts are solely the property and rights of APA and are subject to claims of APA s general creditors. Participants rights under the 457(b) Plan are equal to those of a general creditor of APA. As of December 31, 2014 and 2013, the 457(b) Plan assets totaled $2,721,889 and $2,481,689, respectively, and are included in other assets and in deferred compensation in the accompanying consolidated statements of financial position. Executive Supplemental Compensation APA provides an executive supplemental compensation and termination benefit allowance to eligible employees. To be eligible, an employee must be an executive director and have been employed by APA for at least five years. The benefit is forfeited if the employee is terminated with cause, or voluntarily terminates prior to their employment contract expiration date. At December 31, 2014 and 2013, accrued supplemental compensation under this arrangement totaled $1,113,044 and $1,102,540, respectively, and are included in deferred compensation in the 16

21 accompanying consolidated statements of financial position. APA recorded related expense totaling $279,221 and $287,182 in 2014 and 2013, respectively. Additionally, APA recorded payouts related to this benefit totaling $268,718 and $0 in 2014 and 2013, respectively. 4. Long-Term Debt and Line-of-Credit Long-term debt consists of the following at December 31: Long-term loan; variable interest rate; collateralized by real property; maturing May 2018 $ 21,229,958 $ 21,969,947 Tax exempt bonds; variable interest rate; collateralized by real property; maturing May ,750,000 14,525,000 Long-term loan; variable interest rate; collateralized by real property; maturing May ,725,126 26,583,185 NASW promissory note; 8%; repaid through a monthly rent reduction - 932,649 Note payable; 4.60%; collateralized by real property; maturing December ,497,931 34,683,693 94,203,015 98,694,474 Less: current portion of long-term debt (3,706,827) (4,491,458 ) $ 90,496,188 $ 94,203,016 The following schedule shows principal payments due under long-term debt as of December 31, 2014: Years ending December 31, APA APA 750 APA Ten G Total 2015 $ 769,685 $ 1,695,670 $ 1,241,472 $ 3,706, ,831 1,770,277 1,299,799 3,870, ,264 1,848,352 1,360,867 4,047, ,821,178 34,160,827 1,424,803 54,406, ,491,744 1,491,744 Thereafter ,679,246 26,679,246 APA $ 21,229,958 $ 39,475,126 $ 33,497,931 $ 94,203,015 In August 1995, under a Note Purchase Agreement, APA issued $25,000,000 in 7.76% Series B Secured Notes (the Series B Notes), due July 1, Principal payments on the Series B Notes were due quarterly and scheduled to commence on October 1, Interest on the unpaid principal balance was due quarterly at the stated rate until maturity of the Series B Notes. APA pledged a letter of credit as collateral for this loan. In May 2008, APA refinanced the Series B Notes with a term loan in the amount of $25,501,167 at a rate of one-month LIBOR plus 0.85% (1.01% at December 31, 2014) and principal amortized over

22 25 years. The term loan is secured by a deed of trust on the commercial building owned by APA 750. Under the provisions of the term loan, principal and interest payments are due monthly, commencing on June 1, 2008 and continuing until May 21, 2018, the maturity date of the term loan. The debt agreement is subject to separate interest rate swap agreements until June 1, 2028 (see Note 5). In addition, APA had a bank line-of-credit, under which the maximum borrowings available were $10,000,000. Interest payments on outstanding borrowings were due monthly at LIBOR plus 1.0%. The line-of-credit agreement expired May 31, On September 6, 2013, APA established a line-of-credit with another bank, under which the maximum borrowings are $10,000,000. Interest payments on outstanding borrowings are due monthly at LIBOR plus 1.12% (1.28% at December 31, 2014). The line-of-credit agreement expires, if not renewed, on September 1, This line-of-credit is secured by APA s deposit accounts and investment property. There was an outstanding balance due under the line-of-credit of $5,000,000 and $0 at December 31, 2014 and 2013, respectively. This balance was repaid in March APA 750 LLC In November 2002, APA 750 repaid an existing financing loan, including principal of $45,780,142 and accrued interest of $581,424, with proceeds from a $52,000,000 note payable. The $52,000,000 note payable consisted of a note payable (long-term note) in the amount of $25,000,000 at a variable interest rate initially set at LIBOR plus 1.4% interest amortized over ten years. In addition, APA 750 entered into a short-term unamortized financing arrangement (bridge note) in the amount of $27,000,000 at the same interest rate. On March 27, 2003, the bridge loan of $27,000,000 was replaced by $21,100,000 in tax-exempt bonds from the District of Columbia which were backed by a letter of credit. The long-term note of $25,000,000 was increased to $30,900,000. On May 21, 2008, APA 750 renegotiated the terms of the long-term note and the tax-exempt bonds. The long-term note maturity was extended and the bank loan spread was reduced to LIBOR plus 0.85% (1.01% at December 31, 2014). The letter of credit maturity date was also extended and the annual letter of credit fee was reduced from 0.80% to 0.60%. APA 750 borrowed an additional $3,598,833 under the long-term note to cover financing costs. The notes payable are collateralized by the property at 750 First Street and are guaranteed by APA. Under the terms of the long-term note payable, principal and interest installments are due monthly. The maturity date of both the tax-exempt debt and the long-term note is May 21, The debt agreements are subject to separate interest rate swap agreements (see Note 5). APA 750 is subject to various debt covenants, including leasing at least 170,000 square feet of space in the property, APA maintaining its 501(c)(3) status, and APA maintaining unencumbered liquid assets of at least $33 million, unless APA receives a credit rating of BBB minus (BBB-) or higher, in which case the liquid assets required to be maintained would be reduced to $25 million. On September 5, 2003, Standard & Poor s assigned APA a rating of BBB, thus reducing the liquid assets requirement to $25 million henceforth. In September 2006, Standard & Poor s upgraded APA s rating to BBB+ with a stable outlook. As of December 2012, Standard & Poor s confirmed the BBB+ rating with a stable outlook. On December 11, 2012, extending until December 31, 2015, a Fourth Amendment to the Credit, Reimbursement and Security Agreement was entered into 18

23 which amended the debt covenant requirements for APA to maintain unencumbered liquid assets of at least $35 million, regardless of Standard & Poor s credit rating. On April 30, 2013, a fifth amendment reduces the requirement back to at least $25 million from June 30, 2016, and thereafter if APA maintains an unenhanced unsecured credit rating of BBB- or better. On June 16, 2014, a sixth amendment eases the requirement to meet a debt coverage service ratio by allowing an exception to default if APA and the APA 750 have unencumbered liquid assets equal to no less than 1.0 times the amount of their funded indebtedness for borrowed money as measured for the same period. APA 750 LLC - NASW Note Payable On September 6, 2002, G Place Limited Partnership (the Partnership), the predecessor of APA 750 LLC, purchased the National Association of Social Workers (NASW) 8% limited partnership interest through issuance of a $3,000,000 promissory note. The promissory note accrued interest at 8%, compounded annually. The payment terms of the note were made retroactive to February 1, 2002, in accordance with the purchase agreement. In conjunction with the purchase, NASW entered into a new 15-year lease. Under the terms of the purchase agreement, the promissory note was repaid through a monthly rent reduction in the amount of $28,479 (comprised of interest and principal) over the 15-year lease term effective February 1, 2002, through January 31, For the years ended December 31, 2014, and 2013, interest expense of $39,806 and $84,704, respectively, was incurred and the principal on the note was reduced by $113,215 and $257,049, respectively. In conjunction with the NASW note payable, APA guaranteed payment of the promissory note in the event the lease was terminated early under a non-default termination. The purchase agreement also provided for NASW s right to participate in the net proceeds of the sale or disposition realized by the LLC in the event the property was sold during NASW s 15-year lease term. The percentage of participation declined ratably over the lease term. Effective June 1, 2014, the LLC and NASW entered into an agreement whereas NASW forgave the LLC for the balance due under the note payable in exchange for allowing NASW to terminate a portion of their current lease agreement with the LLC. The remaining lease term and space was extended through January 31, The remaining note payable due of $819,434 was recorded to rental revenue as a termination fee as a result of the reduction of NASW s leased space. APA s guaranty of the promissory note and NASW s right to participate in the net proceeds of any sale of the property terminated as of June 1, APA Ten G LLC On November 15, 2002, APA Ten G entered into a note with a third party lender in the amount of $43,000,000 at 5.66% interest amortized over 30 years. The note is secured by a deed of trust, assignment of leases and rents, and a security agreement and fixture filing that encumbers the real property and improvements thereon owned by APA Ten G and includes a blanket assignment of all rents and leases of the property. Certain agreements, permits, and contracts are also pledged as collateral. On September 4, 2012, this note was refinanced with the same lender in the amount of $36,000,000 at 4.60% interest amortized over 20 years. This note requires monthly payments of principal and interest of $229,