Financial Statements Years Ended June 30, 2013 and Children's Hospital and Healthcare Services Foundation

Transcription

1 Financial Statements Years Ended June 30, 2013 and 2012 Children's Hospital and Healthcare Services Foundation

2 Children's Hospital and Healthcare Services Foundation Contents Page Report of Independent Auditors 1-2 Financial Statements Statements of Financial Position 3 Statements of Activities 4-5 Statements of Cash Flows 6 Notes to Financial Statements 7-15 Supplementary Information Schedules of Functional Expenses 16-17

3 Report of Independent Auditors Board of Directors Children's Hospital and Healthcare Services Foundation Report on the Financial Statements We have audited the accompanying financial statements of Children's Hospital and Healthcare Services Foundation (a nonprofit organization), which comprise the statements of financial position as of June 30, 2013 and 2012, and the related statements of activities and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these 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 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 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 audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Children's Hospital and Healthcare Services Foundation, as of June 30, 2013 and 2012, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. 1

4 Other Matter Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The schedules of functional expenses are presented for purposes of additional analysis and are not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. Richmond, Virginia October 21,

5 Children's Hospital and Healthcare Services Foundation Statements of Financial Position June 30, Assets Current assets Cash and cash equivalents $ 1,147,291 $ 681,329 Bequests receivable 234, ,000 Prepaid expenses 16,183 20,888 Pledges receivable - current 76, ,205 Total current assets 1,474,586 1,359,422 Property and equipment - net 29,374 38,018 Other assets Investments 136,233, ,752,393 Beneficial interest in perpetual trusts 17,298,706 16,340,229 Trust asset held for charitable remainder trust 143, ,441 Contributions receivable from remainder trusts 1,287,336 1,169,894 Pledges receivable - long term 235, ,434 Total other assets 155,199, ,863,391 Liabilities and Net Assets $ 156,702,981 $ 138,260,831 Current liabilities Accounts payable and accrued expenses $ 55,193 $ 52,577 Accrued payroll and benefits 43,156 46,420 Grants payable 814, ,229 Total current liabilities 912, ,226 Long-term liabilities Liabilities under split-interest agreements 40,023 40,519 Total liabilities 952, ,745 Net assets Unrestricted 125,205, ,289,152 Temporarily restricted 4,035,572 3,597,282 Permanently restricted 26,509,210 25,485,652 Total net assets 155,750, ,372,086 $ 156,702,981 $ 138,260,831 The accompanying notes are an integral part of these financial statements. 3

6 Children's Hospital and Healthcare Services Foundation Statements of Activities Years Ended June 30, 2013 and 2012 (Next Page)

7 Children's Hospital and Healthcare Services Foundation Statement of Activities Year Ended June 30, 2013 U00 U01 U02 Temporarily Permanently Unrestricted Restricted Restricted Total Revenue, support and other changes Contributions $ 1,272,451 $ 1,023,498 $ - $ 2,295,949 Legacies and bequests 1,579, ,660 65,081 1,763,737 Trust income 728, ,018 Investment income 2,871, ,783-3,004,621 Realized gains on investments 2,489, ,090-2,605,327 Unrealized gains on investments 12,503, ,564-13,102,195 Change in value of split-interest agreements - 979, ,477 1,937,632 Net assets released from restrictions 2,776,460 (2,776,460) - - Total revenue, support and other changes 24,221, ,290 1,023,558 25,437,479 Special events Revenues 129, , ,923 Less - expenses (166,214) - - (166,214) Net benefit special events (36,291) 246, ,709 Total revenues 24,185, ,290 1,023,558 25,647,188 Expenses (see schedule of functional expenses) Program services 5,380, ,380,792 Fundraising 1,009, ,009,560 Management and general: Operating expenses 712, ,542 Other expenses 166, ,374 7,269, ,269,268 Change in net assets 16,916, ,290 1,023,558 18,377,920 Net assets - beginning of year 108,289,152 3,597,282 25,485, ,372,086 Net assets - end of year $ 125,205,224 $ 4,035,572 $ 26,509,210 $ 155,750,006 The accompanying notes are an integral part of these financial statements. 4

8 Children's Hospital and Healthcare Services Foundation Statement of Activities Year Ended June 30, 2013 U00 U01 U02 Temporarily Permanently Unrestricted Restricted Restricted Total Revenue, support and other changes Contributions $ 1,272,451 $ 1,023,498 $ - $ 2,295,949 Legacies and bequests 1,579, ,660 65,081 1,763,737 Trust income 728, ,018 Investment income 2,871, ,783-3,004,621 Realized gains on investments 2,489, ,090-2,605,327 Unrealized gains on investments 12,503, ,564-13,102,195 Change in value of split-interest agreements - 979, ,477 1,937,632 Net assets released from restrictions 2,776,460 (2,776,460) - - Total revenue, support and other changes 24,221, ,290 1,023,558 25,437,479 Special events Revenues 129, , ,923 Less - expenses (166,214) - - (166,214) Net benefit special events (36,291) 246, ,709 Total revenues 24,185, ,290 1,023,558 25,647,188 Expenses (see schedule of functional expenses) Program services 5,380, ,380,792 Fundraising 1,009, ,009,560 Management and general: Operating expenses 712, ,542 Other expenses 166, ,374 7,269, ,269,268 Change in net assets 16,916, ,290 1,023,558 18,377,920 Net assets - beginning of year 108,289,152 3,597,282 25,485, ,372,086 Net assets - end of year $ 125,205,224 $ 4,035,572 $ 26,509,210 $ 155,750,006 The accompanying notes are an integral part of these financial statements. 4

9 Children's Hospital and Healthcare Services Foundation Statement of Activities Year Ended June 30, 2012 U00 U01 U02 Temporarily Permanently Unrestricted Restricted Restricted Total Revenue, support and other changes Contributions $ 1,311,516 $ 964,358 $ 1,000,134 $ 3,276,008 Legacies and bequests 1,556, ,432 1,976,821 Trust income 864, ,021 Investment income 3,068, ,341-3,227,821 Realized gains on investments 2,185, ,757-2,294,238 Unrealized gains on investments (5,491,613) (251,574) - (5,743,187) Change in value of split-interest agreements - (102,515) (853,639) (956,154) Net assets released from restrictions 1,649,729 (1,649,729) - - Total revenue, support and other changes 5,144,003 (771,362) 566,927 4,939,568 Special events Revenues 208, , ,451 Less - expenses (172,724) - - (172,724) Net benefit special events 35, , ,727 Total revenues 5,179,630 (554,262) 566,927 5,192,295 Expenses (see schedule of functional expenses) Program services 4,068, ,068,748 Fundraising 1,279, ,279,033 Management and general: Operating expenses 572, ,869 Other expenses 166, ,374 6,087, ,087,024 Change in net assets (907,394) (554,262) 566,927 (894,729) Net assets - beginning of year 109,196,546 4,151,544 24,918, ,266,815 Net assets - end of year $ 108,289,152 $ 3,597,282 $ 25,485,652 $ 137,372,086 The accompanying notes are an integral part of these financial statements. 5

10 Children's Hospital and Healthcare Services Foundation Statements of Cash Flows Years Ended June 30, Cash flows from operating activities Change in net assets $ 18,377,920 $ (894,729) Adjustments to reconcile to net cash from operating activities: Depreciation and amortization 9,681 11,568 Unrealized gains on investments (13,102,195) 5,743,187 Realized gains on investments (2,605,327) (2,294,238) Restricted contributions (65,081) (1,420,566) Change in fair value of split interest agreements (1,937,632) 956,154 Change in: Bequests receivable 265,466 1,650,000 Prepaid expenses 4,705 (9,130) Pledges receivable - net 309, ,917 Accounts payable and accrued expenses 2,616 6,487 Accrued payroll and benefits (3,264) 8,704 Grants payable 65,374 (528,021) Net cash from operating activities 1,321,675 3,544,333 Cash flows used in investing activities Purchase of property and equipment (1,037) - Proceeds from sale of investments 11,704,232 15,072,425 Purchase of investments (13,477,743) (21,680,458) Net cash used in investing activities (1,774,548) (6,608,033) Cash flows from financing activities Restricted contributions 65,081 1,420,566 Proceeds received from expired trusts 853, ,916 Payments under split interest agreements - (3,810) Net cash from financing activities 918,835 1,758,672 Net change in cash and cash equivalents 465,962 (1,305,028) Cash and cash equivalents - beginning of year 681,329 1,986,357 Cash and cash equivalents - end of year $ 1,147,291 $ 681,329 The accompanying notes are an integral part of these financial statements. 6

11 Children's Hospital and Healthcare Services Foundation Notes to Financial Statements June 30, 2013 and Organization and Nature of Activities Children's Hospital and Healthcare Services Foundation (Foundation) was created in 1978 and is a Virginia not-for-profit corporation located in Richmond, Virginia. The Foundation is a non-membership, non-stock corporation under the laws of Virginia, with the sole purpose to provide financial support to, and engage in fundraising activities in support of the health and general welfare of children. The Foundation s primary focus is to provide financial support to Crippled Children s Hospital d/b/a Children s Hospital of Richmond of the VCU Health System (Hospital) and pediatric services at Virginia Commonwealth University Health System Authority (VCUHS), collectively known as Children s Hospital of Richmond at VCU (CHoR). 2. Summary of Significant Accounting Policies Presentation of Net Assets Net assets, and revenues, expenses and gains and losses, are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of the Foundation and changes therein are classified and reported as follows: Unrestricted net assets Net assets that are not subject to donor-imposed stipulations. Temporarily restricted net assets Net assets subject to donor-imposed stipulations that will be met either by actions of the Foundation and/or the passage of time. Permanently restricted net assets Net assets subject to donor-imposed stipulations that they be maintained in perpetuity. 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. Contributions, including unconditional promises to give, are recognized as revenues in the period received. Conditional promises to give are not recognized until they become unconditional, that is, when the conditions on which they depend are substantially met. Contributions of assets other than cash are recorded at their estimated fair value. Income and realized net gains on investments of endowment and specific purpose funds are reported as follows: As increases in permanently restricted net assets if the terms of the gift or the Foundation s interpretation of relevant state law require that they be added to the principal of a permanent endowment fund. As increases in temporarily restricted net assets until the amounts are appropriated for expenditure in a manner consistent with the standard of prudence prescribed by the Uniform Prudent Management of Institutional Funds Act as enacted by Virginia in

12 Cash Equivalents The Foundation considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Investments Investments in equity securities with readily determinable fair values and all investments in debt securities are reported at fair value. Board-designated investments, which are classified as unrestricted investments, and donor-restricted investments for the Foundation are combined in a single investment pool and carried at fair value based on quoted market prices or estimated fair value based on similar types of investments. This pool includes mutual funds, and corporate equity securities. The land referred to in Note 4 is considered an investment by the Foundation and is stated at cost. Fair Value Measurements Financial assets required to be measured on a recurring basis (at least annually) are classified under a threetier hierarchy for fair value investments. Fair value is the amount that would be received to sell an asset, or paid to settle a liability, in an orderly transaction between market participants at the measurement date. The classification of assets and liabilities within the hierarchy is based on whether inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources while unobservable inputs reflect estimates about market data. Investments, pledges, assets held under split-interest agreements, and beneficial interests in remainder trusts are the only assets of the Foundation measured at fair value on a recurring basis. Property and Equipment Property and equipment includes software and equipment recorded at cost. Depreciation and amortization expense are determined using the straight-line method over a five year estimated useful life. Split-Interest Gifts The Foundation has beneficial interests in various split-interest agreements. The contribution portion of an agreement is recognized as revenue when the Foundation has the unconditional right to receive benefits under the agreement and is measured at the expected future payments to be received. Any assets received under a trustee agreement are recorded at fair value. Any liabilities to third-party beneficiaries are recorded at the present value of the expected payments. All present value calculations are made using risk-adjusted rates and life expectancy tables. During the term of an agreement, any changes in actuarial assumptions are recognized as changes in value of split-interest agreements in the statement of activities. The Foundation has also been named as a remainder beneficiary or contingent beneficiary in various wills and split-interest agreements. No financial information is currently available for these interests. Grants Payable During 2013, the Foundation did not award any grants to CHoR and during 2012 the Foundation awarded one grant to CHoR. The amounts are disbursed as the expenditures occur. 8

13 Concentration of Credit Risk Investments consist primarily of financial instruments including cash equivalents, equity and fixed income securities, and money market funds. These financial instruments may subject the Foundation to concentrations of credit risk, as, from time to time, balances may exceed amounts insured by the Federal Deposit Insurance Corporation. The market value of securities are dependent on the ability of the issuer to honor its contractual commitments, and the investments are subject to changes in market values. The Foundation s cash is in financial institutions whose credit ratings are monitored by management. Investments in marketable securities are divided among many industries. The majority of the Foundation s contributions are received from donors located in the greater Richmond, Virginia area. As such, the Foundation s ability to generate resources via contributions is dependent upon the economic health of that area. Release of Restrictions When a restriction expires or is fulfilled, temporarily restricted net assets are reclassified to unrestricted net assets. The time restrictions on contributions receivable expire when the receivable is due or the payment is made, whichever is earlier, unless the donor has otherwise restricted the use of the contributed assets. The time restrictions on charitable gift trusts expire at the end of the term of the agreement, which usually coincides with the beneficiary s death. Restrictions on contributions of property and equipment (or contributions restricted to the purchase of property and equipment) expire when the asset is placed into service unless the donor has restricted the use for a specified term. Income Taxes The Foundation is exempt from income tax under the Internal Revenue Code Section 501(c)(3) and the tax statutes of the Commonwealth of Virginia; accordingly, the accompanying financial statements do not reflect a provision or liability for federal and state income taxes. The Foundation has determined that it does not have any material unrecognized tax benefits or obligations as of June 30, Fiscal years ending on or after June 30, 2010 remain subject to examination by federal and state taxing authorities. The Foundation has been classified as a public charity under Internal Revenue Code Section 509(a)(1) and 170(b)(1)(A)(vi). Use of Estimates The preparation of 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 financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Subsequent Events In preparing these financial statements, the Foundation has evaluated events and transactions for potential recognition or disclosure through October 21, 2013, the date the financial statements were available to be issued. Future Pronouncement In April 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) Not-for-Profit Entities: Services Received from Personnel of an Affiliate. The amendments in this ASU require a recipient non-for-profit entity to recognize all services received 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 9

14 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 in this ASU are effective prospectively for fiscal years beginning after June 15, The Hospital has contracts in place for the majority of services it receives from their affiliated organization and would need to evaluate the impact of measuring these services at cost versus the contracted amounts as well as consider any services provided that are absent a formal contract or agreement. At present, the Hospital has not evaluated the impact of the adoption of this ASU, so the impact of adoption is unknown. 3. Pledges Receivable The Foundation had a pledge receivable from a single donor at June 30: Pledges due within one year $ 76,578 $ 157,205 Pledges due in two to five years 250, , , ,205 Fair value discount of 3% (14,351) (35,566) Pledges receivable net $ 312,227 $ 621,639 In order to simplify their accounting process for pledges receivable, the Foundation has elected to record all pledges receivable at fair value. The process utilizes the income approach with discounted cash flows, providing a single discounted value for all pledges. The fair value adjustment for 2013 and 2012 was $(21,215) and $(27,878) and is included in contribution income in the statements of activities. No changes in the fair value measurement were attributable to instrument specific credit risk. The discount rate for 2013 and 2012 was 3%. 4. Investments Investments are summarized as follows: June 30, 2013 Fair Value Cost Cash and cash equivalents $ 917,861 $ 917,861 Mutual funds 102,803,927 87,554,476 Corporate equity securities 31,513,318 19,669,548 Land held as an investment 998, ,320 $ 136,233,426 $ 109,140,205 June 30, 2012 Fair Value Cost Cash and cash equivalents $ 634,744 $ 634,744 Mutual funds 91,173,385 85,987,980 Corporate equity securities 25,945,944 17,140,324 Land held as an investment 998, , $ 118,752,393 $ 104,761,368

15 5. Fair Value of Measurements Accounting standards establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below: Level 1 Level 2 Level 3 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Foundation has the ability to access. Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability. Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The asset or liability s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. Following is a description of the valuation methodologies used for assets and liabilities measured at fair value. There have been no changes in the methodologies used at June 30, Beneficial interests in perpetual trusts: Valued by estimating future cash flows from the trusts (which hold diversified portfolios) and discounting them into perpetuity using a market participant s expected return on endowments and investments. This has typically been measured by the fair value of the underlying assets in the trust. Trust assets held: Valued at closing price reported on the active market on which individual securities held by the trust are traded. Contributions receivable from remainder trusts: Valued by calculating the present value of the future distributions expected to be received, using published life expectancy tables and the current discount rate. Mutual funds and corporate equity securities: Valued at the closing price reported on the active market on which the individual securities are traded. Pledges receivable: Valued using the income approach based on discounted cash flows. The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the Foundation 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 different fair value measurement at the reporting date. For level 3 assets, the Foundation s management determines the fair value measurement valuation policies and procedures. At least annually, management determines if the current valuation techniques used in the fair value measurements are still appropriate and evaluates and adjusts unobservable inputs used in the fair value measurements based on current market conditions and third-party information. There were no changes in the valuation techniques during

16 During the year ended June 30, 2013, the Foundation adopted the provisions of FASB ASC 820 under ASU , Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. Related to the Foundation, the adoption primarily resulted in additional fair value Level 2 and Level 3 disclosures. Adoption of ASU did not have a material impact on the Foundation s financial statements. The following table sets forth by level, within the fair value hierarchy, the Foundation s assets and liabilities at fair value: Fair Value as of June 30, 2013 Level 1 Level 2 Level 3 Total Beneficial interests in perpetual trusts $ - $ - $ 17,298,706 $ 17,298,706 Trust assets held for charitable remainder trusts , ,904 Contributions receivable from remainder trusts - - 1,287,336 1,287,336 Mutual funds bonds 30,498, ,498,633 Mutual funds international stocks 28,519, ,519,537 Mutual funds domestic stocks 43,785, ,785,757 Domestic stocks 31,513, ,513,318 Pledges receivable , ,227 Total at fair value $ 134,317,245 $ - $ 19,042,173 $ 153,359,418 Fair Value as of June 30, 2012 Level 1 Level 2 Level 3 Total Beneficial interests in perpetual trusts $ - $ - $ 16,340,229 $ 16,340,229 Trust assets held for charitable remainder trusts , ,441 Contributions receivable from remainder trusts - - 1,169,894 1,169,894 Mutual funds bonds 31,116, ,116,066 Mutual funds international stocks 23,272, ,272,548 Mutual funds domestic stocks 36,784, ,784,771 Domestic stocks 25,945, ,945,944 Pledges receivable , ,639 Total at fair value $ 117,119,329 $ - $ 18,268,203 $ 135,387,532 12

17 Level 3 Gains and Losses The table below sets forth a summary of changes in the fair value of the Foundation s level 3 investment assets: Balance beginning of year $ 18,268,203 $ 19,872,631 Net cash on expired trusts (853,754) (341,916) Changes in present value of trusts 1,937,632 (947,595) Receipt of pledge (331,123) (342,795) Change in fair value of pledges 21,215 27,878 Balance end of year $ 19,042,173 $ 18,268,203 The following table sets forth quantitative information about Level 3 fair value measurements at June 30, 2013: Valuation Techniques Unobservable Input Range Trust receivables and beneficial interests Discounted cash flow Present value discount 2.8% - 4.4% Beneficial interest percentage 10% - 100% Pledges receivable Discounted cash flow Present value discount 3.0% 6. Property and Equipment Major classes of property and equipment consist of the following at June 30: Software $ 92,631 $ 92,631 Equipment and furniture 1,037 - Less accumulated depreciation and amortization (64,294) (54,613) $ 29,374 $ 38, Temporarily Restricted and Permanently Restricted Net Assets Temporarily restricted net assets are available for the following purposes at June 30: Healthcare services Purchase of equipment and program services $ 2,628,982 $ 2,316,093 Time restrictions 1,406,590 1,281,189 $ 4,035,572 $ 3,597,282 Permanently restricted net assets of $26,509,210 and $25,485,652 at June 30, 2013 and 2012, respectively, are investments to be held in perpetuity, the income from which is expendable to support healthcare services. 13

18 8. Endowment Funds The Foundation s endowment consists of 25 donor-restricted endowment funds held in permanently restricted funds. These funds were established for a variety of purposes. As required by generally accepted accounting principles, net assets associated with these endowment funds are classified and reported based on the existence or absence of donor imposed restrictions. The management of donor restricted endowment funds is governed by state law under the Uniform Prudent Management of Institutional Funds (UPMIFA) law as adopted by the state legislature. Virginia s version of UPMIFA was enacted during The Foundation has interpreted the relevant state law 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 Foundation 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 in a manner consistent with the standard of prudence prescribed by the state UPMIFA law. A summary of the activity in endowment funds for the year ended June 30, 2013 is as follows: Unrestricted- Board Designated Temporarily Restricted Permanently Restricted Total Endowment net assets, July 01, 2011 $ 106,915,049 $ 953,403 $ 7,724,857 $ 115,593,309 Investment income 2,954, ,776-3,108,033 Contributions 2,023,828 1,367,164 1,420,566 4,811,558 Released from restrictions - (1,311,558) - (1,311,558) Unrealized and realized gain (3,306,132) (142,817) - (3,448,949) Endowment net assets, June 30, 2012 $ 108,587,002 $ 1,019,968 $ 9,145,423 $ 118,752,393 Investment income 2,746, ,114-2,873,511 Contributions 1,042,299 1,590,110 65,081 2,697,490 Released from restrictions - (1,917,038) - (1,917,038) Appropriation for expenditure (1,880,452) - - (1,880,452) Unrealized and realized gain 14,992, ,654-15,707,522 Endowment net assets, June 30, 2013 $ 125,488,114 $ 1,534,808 $ 9,210,504 $ 136,233,426 In accordance with state UPMIFA law, the Foundation considers the following factors in making a determination to appropriate or accumulate donor restricted endowment funds: (1) the duration and preservation of the fund, (2) the purpose of the organization and the donor restricted endowment fund, (3) general economic conditions, (4) the possible effect of inflation and deflation, (5) the expected total return from income and appreciation of investments, (6) other resources of the organization, and (7) the investment policies of the organization. The primary objective of the endowment is growth of principal and the portfolio is well diversified to avoid undue exposure to any single economic sector, industry group, or individual security. Liquidity should reflect the expectation of withdrawing 5% annually. 14

19 9. Related Party Transactions An affiliation agreement (Agreement) was entered into June 30, 2010 between the Foundation and CHoR. Under the terms of the Agreement, the Foundation has agreed to raise funds for the benefit of the Hospital and pediatric services at VCUHS. The Hospital received from the Foundation approximately $505,000 and $588,000 in 2013 and 2012, respectively, to support operations of the Hospital and for the purchase of capital assets. VCUHS received from the Foundation approximately $4,700,000 and $3,380,000 in 2013 and 2012, respectively, to support operations including physician recruitment. At June 30, 2013, the Hospital included in its assets beneficial interest in certain temporarily and permanently restricted net assets of the Foundation that are to benefit the Hospital. The Hospital included temporarily restricted net assets in the Foundation of $947,383 and $542,895 at June 30, 2013 and 2012, respectively. These net assets are available for the purchase of capital assets and to support the operations of the Hospital. In addition, the Hospital included permanently restricted net assets in the Foundation of $2,392,604 and $2,327,522 at June 30, 2013 and 2012, respectively. These net assets are investments to be held in perpetuity, the income from which is expendable to support programs at the Hospital. The Hospital has leased office space at the Brook Road facility to the Foundation under a five year lease for $1 per year. 10. Life Insurance Premium The Foundation is the owner and beneficiary of a life policy received from a donor. Premium costs are contributed annually and designated by the donor for payment of the premium to maintain the policy. The policy has not built up surrender value as of June 30, Commitments and Contingencies During 2013, approximately $5.2 million was funded under commitments to support pediatric faculty recruitment and program development at VCUHS. At June 30, 2013, the Foundation had outstanding commitments totaling approximately $8 million dollars. 12. Charitable Gift Instruments The Foundation has a beneficial interest in various irrevocable perpetual trusts which totaled approximately $17.3 million at June 30, 2013 and approximately $16.3 million at June 30, The Foundation has no control over the assets of these trusts, but is legally entitled to receive a specified portion of each trust s investment income each year. The Foundation s pro-rata portion of the fair value of the trust assets is included in the accompanying statement of financial position as beneficial interest in perpetual trusts and as an increase to permanently restricted net assets. The Foundation is also the beneficiary and trustee of a charitable remainder trust. Assets of the trust will be distributed to the Foundation when the current beneficiary has deceased or when time restrictions as stated in the trust agreement have expired. The fair value of the trust assets are reflected in the accompanying statement of financial position as trust asset held for charitable remainder trust. Expected future cash flows from these trusts are discounted at 4.4% at June 30, 2013 and 4.4% at June 30, 2012 and are included in the statement of financial position as liabilities under split-interest agreements. The Foundation is also the beneficiary, but not trustee, of several charitable remainder trusts. Expected future cash flows from these trusts are discounted at 2.8% at June 30, 2013 and 2.8% at June 30, 2012 and are included in the statement of financial position as contributions receivable from remainder trusts. * * * * * 15

20 Children's Hospital and Healthcare Services Foundation Schedules of Functional Expenses Years Ended June 30, 2013 and 2012 (Next Page)

21 Children's Hospital and Healthcare Services Foundation Schedule of Functional Expenses Year Ended June 30, 2013 X00 X01 X02 Program Fund - Management Services Raising and General Total Operating expenses Gifts to Children's Hospital of Richmond $ 5,269,277 $ - $ - $ 5,269,277 Salaries and benefits - 418,746 59, ,567 Publications - 188, , ,816 Donation Day expenses - 133, ,983 Investment management fees , ,523 CMN campaign expenses - 129, ,326 Distributions to others 111, ,515 Benefits - 84,239 12,034 96,273 Miscellaneous expenses ,422 87,422 Consulting fees ,231 85,231 Outside events expenses - 54,872-54,872 Maintenance expenses ,840 49,840 Accounting fees ,600 33,600 Legal fees ,897 22,897 Bank fees ,118 18,118 Insurance ,906 17,906 Amortization expense - - 9,681 9,681 Professional development expense - - 6,856 6,856 Real estate expenses - - 5,191 5,191 Total operating expenses 5,380,792 1,009, ,542 7,102,894 Other expenses Donor restricted gift-life insurance premium , ,374 Total expenses $ 5,380,792 $ 1,009,560 $ 878,916 $ 7,269,268 See report of independent auditors. 16

22 Children's Hospital and Healthcare Services Foundation Schedule of Functional Expenses Year Ended June 30, 2012 X00 X01 X02 Program Fund - Management Services Raising and General Total Operating expenses Gifts to Children's Hospital of Richmond $ 3,965,461 $ - $ - 3,965,461 Salaries and benefits - 428,784 61, ,039 Publications - 391, ,260 Donation Day expenses - 154, ,625 Consulting fees , ,759 CMN campaign expenses - 130, ,656 Investment management fees , ,324 Distributions to others 103, ,287 Benefits - 82,567 11,795 94,362 Outside events expenses - 91,141-91,141 Miscellaneous expenses ,703 59,703 Maintenance expenses ,694 59,694 Accounting fees ,000 32,000 Legal fees ,941 26,941 Bank fees ,026 16,026 Insurance ,484 15,484 Amortization expense ,568 11,568 Professional development expense - - 4,887 4,887 Real estate expenses - - 4,433 4,433 Total operating expenses 4,068,748 1,279, ,869 5,920,650 Other expenses Donor restricted gift-life insurance premium , ,374 Total expenses $ 4,068,748 $ 1,279,033 $ 739,243 $ 6,087,024 See report of independent auditors. 17