The Colonial Williamsburg Foundation and Subsidiaries

Transcription

1 The Colonial Williamsburg Foundation and Subsidiaries Consolidated Financial Statements, Supplemental Schedules, Schedule of Expenditures of Federal Awards, and Independent Auditor s Reports Required by Government Auditing Standards and the Uniform Guidance Years Ended December 31, 2016 and 2015 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 The Colonial Williamsburg Foundation and Subsidiaries Consolidated Financial Statements, Supplemental Schedules, Schedule of Expenditures of Federal Awards, and Independent Auditor s Reports Required by Government Auditing Standards and the Uniform Guidance Years Ended December 31, 2016 and 2015

3 Contents Independent Auditor s Report 3-4 Consolidated Financial Statements Consolidated Statements of Financial Position 5 Consolidated Statements of Activities 6-7 Consolidated Statements of Cash Flows Supplemental Schedules Independent Auditor s Report on Supplementary Information 49 Schedules of Consolidated Endowment Fund Schedule of Expenditures of Federal Awards Schedule of Expenditures of Federal Awards 56 Notes to Schedule of Expenditures of Federal Awards 57 Independent Auditor s Reports Required by Government Auditing Standards and the Uniform Guidance Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Consolidated Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditor s Report on Compliance for the Major Federal Program; Report on Internal Control over Compliance; and Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance Schedule of Findings and Questioned Costs

4 Tel: Fax: Greensboro Drive Suite 800 McLean, VA Independent Auditor s Report The Board of Directors The Colonial Williamsburg Foundation and Subsidiaries Williamsburg, Virginia Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of The Colonial Williamsburg Foundation and Subsidiaries (the Foundation), which comprise the consolidated statements of financial position as of December 31, 2016 and 2015, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. 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 entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 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. 3

5 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Colonial Williamsburg Foundation and Subsidiaries as of December 31, 2016 and 2015, 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. Emphasis of Matter As discussed in Note 1 to the consolidated financial statements, the Foundation elected to make a change in accounting principle to no longer capitalize collection items. This change has been applied retrospectively to all periods presented in these consolidated financial statements. Our opinion is not modified with respect to this matter. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated April 17, 2017 on our consideration of the Foundation s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering The Colonial Williamsburg Foundation and Subsidiaries internal control over financial reporting and compliance. April 17,

6 Consolidated Financial Statements

7 December 31, Assets Current assets Cash and cash equivalents (Note 2) $ 6,783 $ 4,884 Trade receivables, net 5,573 4,187 Contributions receivable, net (Note 3) 6,786 5,951 Inventories 8,948 8,910 Prepaid expenses and other 1,454 2,217 Total current assets 29,544 26,149 Noncurrent assets Contributions receivable, net (Note 3) 7,976 10,700 Cash restricted to investment in real and personal property 12,836 6,394 Real and personal property, net (Note 4) 308, ,268 Endowment (Notes 5 and 6) 663, ,988 Split interest agreement investments (Note 6) 26,108 25,265 Other assets 14,920 15,310 Total noncurrent assets 1,033,785 1,077,925 Total assets $ 1,063,329 $ 1,104,074 Liabilities and Net Assets Current liabilities Accounts payable and accrued expenses $ 28,323 $ 27,639 Current maturities of long-term debt (Note 7) 5,734 7,508 Deferred income 3,212 3,164 Total current liabilities 37,269 38,311 Noncurrent liabilities Long-term debt (Note 7) 311, ,924 Split interest agreements (Note 6) 13,670 13,542 Accrued retirement and other liabilities (Note 8) 53,567 35,661 Total noncurrent liabilities 378, ,127 Total liabilities 415, ,438 Commitments and contingencies (Note 10) Consolidated Statements of Financial Position (in thousands) Net assets (Note 11) Unrestricted 236, ,294 Temporarily restricted 141, ,426 Permanently restricted 270, ,916 Total net assets 647, ,636 Total liabilities and net assets $ 1,063,329 $ 1,104,074 The accompanying notes are an integral part of the consolidated financial statements. 5

8 Consolidated Statement of Activities (in thousands) Temporarily Permanently Year Ended December 31, 2016 Unrestricted Restricted Restricted Total Changes in net assets: Operating revenues Exhibitions and Historic Area admissions $ 21,834 $ - $ - $ 21,834 Hospitality operations 67, ,646 Products: Merchandise 19, ,343 Licensing Real estate 8, ,071 Gifts and grants 23,084 14,305 3,001 40,390 Endowment support for current activities (Note 5) 70, ,925 Net assets released from restrictions (Note 12): Operating 5,051 (5,051) - - Capital 1,461 (1,461) - - Total operating revenues 218,252 7,793 3, ,046 Operating expenses Exhibitions and historical programs 48, ,215 Hospitality operations 71, ,318 Products 17, ,546 Real estate 6, ,309 Marketing and communications 23, ,538 General and administrative 30, ,526 Fundraising 12, ,894 Interest on debt (Note 7) 16, ,909 Income tax expense (Note 9) Total operating expenses 227, ,255 Operating (deficit) surplus (9,003) 7,793 3,001 1,791 Nonoperating Total endowment investment return 8,151 9,520 (33) 17,638 Endowment support for current activities from current realized earnings (24,337) (28,423) - (52,760) Excess endowment support for current activities over realized earnings (24,458) 6,292 - (18,166) Net endowment used for current activities (40,644) (12,611) (33) (53,288) Change in net asset classifications due to donor stipulations (7) Change in value of split interest agreements Gain on sale of real estate Pension-related changes other than net periodic pension cost (Note 8) (17,732) - - (17,732) Changes in net assets (67,187) (4,103) 3,139 (68,151) Net assets, beginning of year 303, , , ,636 Net assets, end of year $ 236,107 $ 141,323 $ 270,055 $ 647,485 The accompanying notes are an integral part of the consolidated financial statements. 6

9 Temporarily Permanently Year Ended December 31, 2015 Unrestricted Restricted Restricted Total Changes in net assets: The Colonial Williamsburg Foundation and Subsidiaries Consolidated Statement of Activities (in thousands) Operating revenues Exhibitions and Historic Area admissions $ 22,216 $ - $ - $ 22,216 Hospitality operations 68, ,343 Products: Merchandise 20, ,359 Licensing Real estate 8, ,075 Gifts and grants 23,423 7,034 4,944 35,401 Endowment support for current activities (Note 5) 70, ,025 Net assets released from restrictions (Note 12): Operating 3,950 (3,950) - - Capital 409 (409) - - Total operating revenues 217,653 2,675 4, ,272 Operating expenses Exhibitions and historical programs 53, ,010 Hospitality operations 71, ,879 Products 17, ,711 Real estate 5, ,619 Marketing and communications 20, ,958 General and administrative 29, ,930 Fundraising 11, ,632 Interest on debt (Note 7) 16, ,826 Income tax expense (Note 9) Total operating expenses 227, ,565 Operating (deficit) surplus (9,912) 2,675 4,944 (2,293) Nonoperating Total endowment investment return 8,044 7,469 (32) 15,481 Endowment support for current activities from current realized earnings (33,656) (31,249) - (64,905) Excess endowment support for current activities over realized earnings (15,439) 10,319 - (5,120) Net endowment used for current activities (41,051) (13,461) (32) (54,544) Change in net asset classifications due to donor stipulations (54) (120) Change in value of split interest agreements 421 1,551 (20) 1,952 Gain on sale of real estate Pension-related changes other than net periodic pension cost (Note 8) (3,508) - - (3,508) Changes in net assets (53,811) (9,355) 5,066 (58,100) Net assets, beginning of year 357, , , ,736 Net assets, end of year $ 303,294 $ 145,426 $ 266,916 $ 715,636 The accompanying notes are an integral part of the consolidated financial statements. 7

10 Consolidated Statements of Cash Flows (in thousands) Years Ended December 31, Cash flows from operating activities Change in net assets $ (68,151) $ (58,100) Adjustments to reconcile change in net assets to cash used in operating activities: Depreciation 15,670 15,778 Amortization of discount on contributions receivable 47 (85) Amortization of deferred debt issuance costs Net realized loss on disposal of real and personal property Net realized gain from endowment (55,077) (67,231) Net unrealized loss retained in endowment 35,122 49,425 Contributions restricted for endowment (4,246) (4,583) Contributions restricted for capital (8,344) (2,696) Change in net assets for split interest agreements (2,962) 447 Gifts of property (267) (1,300) Changes in assets and liabilities: Trade receivables (1,386) (1,099) Contributions receivable 1,842 (2,291) Inventories and prepaid expenses 818 (524) Other assets 295 (1,599) Accounts payable and accrued expenses 686 5,033 Deferred income (262) 1,368 Accrued retirement and other liabilities 18,214 1,840 Net cash used in operating activities (67,318) (65,242) Cash flows from investing activities Proceeds from sales of real and personal property Acquisition of real and personal property (16,243) (8,469) Proceeds from sales of investments 367, ,084 Purchases of investments (298,602) (351,721) Net cash provided by investing activities 53,303 68,429 Cash flows from financing activities Contributions restricted for endowment 4,246 4,583 Net assets released from capital restrictions 1,902 1,237 Proceeds from reversions of split interest agreements 2, Proceeds on debt 29,000 22,000 Payments of principal on debt (21,482) (34,461) Net cash provided by (used in) financing activities 15,914 (5,697) Increase (decrease) in cash and cash equivalents 1,899 (2,510) Cash and cash equivalents, beginning of year 4,884 7,394 Cash and cash equivalents, end of year $ 6,783 $ 4,884 Supplemental disclosures: Donated securities $ 8,095 $ 3,598 Cash paid for interest $ 16,876 $ 16,807 Noncash investing and financing activities: Assets financed through capital leases $ 1,029 $ 186 The accompanying notes are an integral part of the consolidated financial statements. 8

11 1. Summary of Significant Accounting Policies Organization and Principles of Consolidation The Colonial Williamsburg Foundation (the Foundation ) is a nonprofit educational organization responsible for the restoration, preservation, and interpretation of the 18th century capital of the colony of Virginia. The consolidated financial statements include the accounts of the Foundation and its Subsidiaries, Colonial Williamsburg Company (the Company ) and its subsidiary, Williamsburg Developments, Inc. (WDI). The Company is a for-profit Virginia stock corporation. The Foundation is the sole stockholder of the Company. The primary business of the Company is operating the hotels, restaurants, and recreational facilities owned by the Foundation. The Company manages certain real estate investments through its wholly owned for-profit subsidiary, WDI. The Company formed two limited liability companies to take advantage of Historic Rehabilitation Tax Credits. The Foundation and the Company are collectively referred to as Colonial Williamsburg in the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. Basis of Accounting The accompanying consolidated financial statements are presented in accordance with the accrual basis accounting. Cash Equivalents Colonial Williamsburg considers all highly marketable debt instruments purchased with an initial maturity date of three months or less and money market investments to be cash equivalents. Trade Receivables Trade receivables consist primarily of amounts due for rooms and meal charges for conference groups and in-house leisure guests staying at Colonial Williamsburg s hotel properties. An allowance for doubtful accounts is recorded to state trade receivables at their net realizable value. The allowance is based upon prior years experience and management s analysis of specific accounts. Accounts receivable are written off if reasonable collection efforts prove unsuccessful. The allowance for doubtful accounts amounted to $120 thousand for the years ended December 31, 2016 and Contributions Receivable Unconditional promises to give that are expected to be collected in future years are recorded as income in the year the pledge is received at the present value of estimated future cash flows which approximates fair value. Amortization of the discount is recorded as additional contribution revenue. There was no allowance for uncollectible pledges for the years ended December 31, 2016 and Conditional promises to give are not recognized until conditions are substantially met. Inventories Inventories consist primarily of merchandise held for sale in retail shops and food and beverages and are carried at the lower of average cost or market value. 9

12 Cash Restricted to Investment in Real and Personal Property Cash restricted to investment in real and personal property represents contributed cash restricted for purchases or construction of real and personal property and is considered a noncurrent asset. Real and Personal Property Expenditures for real and personal property that provide an economic benefit over a period of time, and for substantial improvements that extend the useful lives of properties, are capitalized. Gifts of real or personal property are recorded at fair value on the date of the gift. Buildings and improvements with a cost of $7,500 or more and all furnishings and equipment with a cost of $5,000 or more for a single item or $7,500 or more for groups of small items are recorded at historical cost and depreciated using the straightline method over useful lives ranging from 3 to 40 years. Costs associated with renovation and construction projects were $18.2 million and $7.9 million for the years ended December 31, 2016 and 2015, respectively. Repairs and maintenance costs are expensed as incurred. Collections Collections primarily consist of 18th century decorative arts and 19th century folk art, acquired through purchases and contributions since the Foundation s inception. Through the leadership of its Board of Trustees and staff, the Foundation strives to preserve, protect, and maintain the collection in perpetuity. In 2016, Colonial Williamsburg elected to make a change in accounting principle to no longer capitalize collection items. This change has been applied retrospectively to all periods presented in these consolidated financial statements. This change was a direct result of the reaccreditation process for the American Alliance of Museums. The Accreditation Commission expects the Foundation to abide by all applicable discipline-specific standards. The Foundation is subject to the Association of Art Museum Directors Code of Ethics which bars museums from capitalizing collections. While the Foundation has never depreciated or encumbered its collection, and has consistently applied accounting principles generally accepted in the United States of America (U.S. GAAP), management determined that not capitalizing collection items was a preferable accounting policy so as to not risk its accreditation status and therefore, retrospectively applied a change in accounting principle. Purchases of collection items are recorded as decreases in unrestricted net assets in the year in which the items are acquired. Proceeds from deaccession are used exclusively to acquire other items for the collection and are reflected as increases in the appropriate net asset class. 10

13 The change in accounting principle had the following effects on the consolidated statement of financial position (in thousands): December 31, 2015 As adjusted As previously reported Effect of change Noncurrent contributions receivable, net $ 10,700 $ 16,220 $ (5,520) Real and personal property, net $ 307,268 $ 386,058 $ (78,790) Total assets $ 1,104,685 $ 1,188,995 $ (84,310) Unrestricted net assets $ 303,294 $ 381,329 $ (78,035) Temporarily restricted net assets $ 145,426 $ 145,571 $ (145) Permanently restricted net assets $ 266,916 $ 273,046 $ (6,130) Total net assets $ 715,636 $ 799,946 $ (84,310) Total liabilities and net assets $ 1,104,685 $ 1,188,995 $ (84,310) December 31, 2014 As adjusted As previously reported Effect of change Unrestricted net assets $ 357,105 $ 434,579 $ (77,474) Temporarily restricted net assets $ 154,781 $ 154,926 $ (145) Permanently restricted net assets $ 261,850 $ 267,980 $ (6,130) Total net assets $ 773,736 $ 857,485 $ (83,749) The change in accounting principle had the following effects on the consolidated statement of activities (in thousands): Year ended December 31, 2015 As adjusted As previously reported Effect of change Gifts and grants $ 35,401 $ 35,810 $ (409) Exhibitions and historical programs $ 53,010 $ 52,858 $ 152 Operating deficit $ (2,293) $ (1,732) $ (561) Changes in net assets $ (58,100) $ (57,539) $ (561) 11

14 The change in accounting principle had the following effects on the consolidated statement of cash flows (in thousands): Year ended December 31, 2015 Adjusted As previously reported Effect of change Change in net assets $ (58,100) $ (57,539) $ (561) Adjustments to reconcile change in net assets to cash used in operating activities: Net realized loss on disposal or real and personal property $ 280 $ 297 $ (17) Gifts of collections and property $ (1,300) $ (1,734) $ 434 Net cash used in operating activities $ (65,242) $ (65,097) $ (145) Cash flows from investing activities Proceeds from sales of real and personal property $ 535 $ 1,106 $ (571) Acquisition of real and personal property $ (8,469) $ (9,185) $ 716 Net cash provided by investing activities $ 68,429 $ 68,284 $ 145 Decrease in cash and cash equivalents $ (2,510) $ (2,510) $ - Cash and cash equivalents, beginning of year $ 7,394 $ 7,394 $ - Cash and cash equivalents, end of year $ 4,884 $ 4,884 $ - Impairment of Long-Lived Assets Colonial Williamsburg reviews asset carrying amounts periodically in addition to whenever events or circumstances indicate that such carrying amounts may not be recoverable. When considered impaired, the carrying amount of the asset is reduced, charged to the consolidated statement of activities, to its current fair value. No impairment loss has been recognized for the years ended December 31, 2016 and Endowment Investments Investments, except investments in limited partnerships, are stated at fair value. Investments carried at market are valued on the last business day of the year. Corporate stocks traded on a national securities exchange are valued at the closing price; U.S. government and agency bonds and notes and corporate stocks traded over the counter are valued at the last bid price; corporate bonds are valued at the last bid price; and the net asset values (NAV) of mutual funds are based on valuations computed by the National Association of Securities Dealers. Colonial Williamsburg accounts for investments in limited partnerships under the equity method of accounting and adjusts these investments based on Colonial Williamsburg s share of the partnership's net income or loss. All investments are classified as endowment on the consolidated statement of financial position as noncurrent assets to recognize Colonial Williamsburg s intention to reinvest earnings continually except to the extent of the annual withdrawal. Interest and dividends, net of investment fees, and unrealized and realized gains and losses are included in the consolidated statement of activities. 12

15 Split Interest Agreements Colonial Williamsburg enters into trust or annuity arrangements under which financial interests are split among named beneficiaries. The terms of these agreements generally provide for Colonial Williamsburg to invest donated funds and provide life income benefits to the donor or the donor's designated beneficiaries. Upon termination of the agreements, the remainder interest in the investments reverts to Colonial Williamsburg. Donated funds are recorded at their fair value and are included in split interest agreements on the statement of financial position. A liability is recorded at the net present value of future payments expected to be made to named beneficiaries. Present values are calculated using average Treasury bill rates and donors life expectancies and range from 1% to 3% for the years ended December 31, 2016 and In the year a split interest agreement is made, the difference between the recorded asset and liability is recognized as contribution revenue in the consolidated statements of activities line entitled Gifts and grants. In subsequent years, the asset and liability are revalued, and the difference is reflected in the consolidated statements of activities line entitled Change in value of split interest agreements. Contribution revenue related to split interest agreements was $777 thousand and $683 thousand for the years ended December 31, 2016 and 2015, respectively. Other Assets Other assets include prepaid pension costs, and other noncurrent assets such as life tenancy arrangements. Deferred Income Deferred income represents cash received in advance of the revenue recognition criteria being met and is derived from exhibitions, historic area admissions, hospitality operations, product sales and real estate operations. Classification of Net Assets Net assets, revenues, expenses and gains and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly the net assets and changes therein are classified and reported as follows: Unrestricted net assets are not subject to donor-imposed stipulations and are available for use in general operations. Temporarily restricted net assets consist of gifts of cash and other assets received with donor stipulation that limit the use of the donated assets by either time or purpose. Permanently restricted net assets consist of assets whose use is limited by donor-imposed restrictions that neither expire by the passage of time nor can be fulfilled or otherwise removed by actions of Colonial Williamsburg. Change in Net Asset Classifications Due to Donor Stipulations As a result of new donor stipulations, some gifts have been reclassified on the consolidated statements of activities to reflect an appropriate accounting of these changes. 13

16 Revenue Recognition Exhibitions and Historic Area Admissions Colonial Williamsburg recognizes revenue from admissions to its historic area, museums, and other programs at the time services are rendered. Hospitality Operations Colonial Williamsburg recognizes lodging, food, beverage, and other related revenues at the time goods or services are provided. Products Colonial Williamsburg recognizes revenue from sales of products through retail establishments and direct marketing operations. Colonial Williamsburg also enters into licensing agreements with licensees that manufacture and market products developed with and approved by Colonial Williamsburg related to its mission. Revenue from retail establishments is recognized at the time of sale. Revenue from direct marketing operations is recognized as products are shipped. Licensing revenues are recognized at the time of sale by licensees. Product sales returns are historically not significant. Accordingly, no reserve has been established for sales returns. Real Estate Colonial Williamsburg recognizes revenue from commercial and residential real estate property leases in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 840 Leases. The guidance requires that revenue be recognized on a straight-line basis over the term of the lease, unless another systematic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. The property is being leased to tenants under operating leases. Minimum rental income is recognized on a straight-line basis over the term of the lease. Percentage rental income is recognized in the period in which the percentage rent applies. Gifts and Grants Gifts of cash and other assets are reported as temporarily or permanently restricted revenue if they are received with donor stipulations that limit the use of the donated assets. When a temporary restriction is satisfied, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets as shown on the consolidated statements of activities line entitled Net assets released from restrictions. A temporarily restricted gift whose restriction is satisfied in the same accounting period as received is recorded as unrestricted revenue. Gifts of land, buildings, and equipment are recorded at fair market value as unrestricted revenue, unless the donor restricts the use or disposal of the asset. Gifts of cash or other assets that must be used to acquire long-lived assets are reported as temporarily restricted revenue and are reclassified into unrestricted revenue as the funds are expended. 14

17 Functional Allocation of Expenses The costs of providing various programs and supporting activities have been summarized on a functional basis in the statement of activities. Direct expenses are charged to the respective programs and supporting services benefited based upon management s estimates of each program s share of the allocated costs. Following is a description of Colonial Williamsburg s program and supporting services: Exhibitions and historical programs Includes the functions required to operate and maintain the historic area, museums, and educational programs offered on- and off-site by Colonial Williamsburg. Hospitality operations Provides the management structure and operational support for the hotels and restaurants including staffing, cost of food and beverage, and other direct operating expenses. The staffing for operational support is subject to a collective bargaining agreement which was implemented on good faith at December 31, For the years ended December 31, 2016 and 2015, 64% percent of the Company s staff participated in the collective bargaining agreement. Products Provides the management structure and support services to operate retail stores, direct marketing operations and a licensing program. Real estate Provides the structure to operate and maintain the rental properties. Marketing and communications Operates ticket sales locations, provides marketing staff to create and purchase media to advertise Colonial Williamsburg and other partners. The costs of advertising are expensed as incurred. General and administrative Includes the functions necessary to maintain an effective workforce, provide general management and legal counsel for the organization, manage information technology resources, and provide financial information. Fundraising Provides the structure necessary to encourage and secure financial support from individuals, foundations, corporations and other grant makers. 15

18 The following presentation represents the functional expenses with interest expense and taxes allocated to the respective function (in thousands): Year ended December 31, Exhibitions and historical programs $ 48,424 $ 53,392 Hospitality operations 82,151 82,680 Products 18,081 18,246 Real estate 7,270 6,589 Marketing and communications 23,970 21,355 General and administrative 34,465 33,671 Fundraising 12,894 11,632 $ 227,255 $ 227,565 Operating Surplus (Deficit) Colonial Williamsburg classifies most changes in net assets as operating in nature on the consolidated statements of activities. Investment income earned on the endowment that is not utilized to support current operations, gains and losses on significant sales of real estate, and pension-related changes other than net periodic pension costs are classified as nonoperating in nature. Accounting Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. Actual results could differ from those estimates. Concentration of Credit Risk Cash and cash equivalents that potentially subject Colonial Williamsburg to concentrations of credit risk consist principally of bank accounts and short-term investments. Non-interest-bearing bank accounts are insured by the Federal Deposit Insurance Corporation (FDIC) with a limit of $250 thousand per depositor at December 31, 2016 and Investment accounts are insured by the Securities Investor Protection Corporation (SIPC). Investment balances are insured up to $500 thousand, with a limit of $500 thousand for cash. At December 31, 2016 and 2015, Colonial Williamsburg had cash and cash equivalents and cash restricted to investment in real and personal property of approximately $18.8 million and $8.4 million, respectively, in excess of FDIC and SIPC insured limits. 16

19 Risks and Uncertainties Colonial Williamsburg invests in a broad range of financial investments. Financial investments, in general, are exposed to various risks, such as interest rate, credit, program and overall market volatility. Due to the level of risk associated with certain financial investments, it is reasonably possible that changes in the values of financial investments will occur in the near term and that such changes could materially affect the amounts reported in the financial statements. Pension plan benefit obligations are reported based on certain assumptions pertaining to interest rates, inflation rates, and employee demographics, all of which are subject to change. Due to uncertainties inherent in the estimations and assumption process, it is reasonably possible that changes in these estimates and assumptions in the near term would be material to the financial statements. Reclassifications Certain amounts in the consolidated statement of activities for the year ended December 31, 2015 have been reclassified to conform with the current year financial statement presentation. Accounting Pronouncements Adopted in the Current Year In August 2014, the FASB issued Accounting Standards Update (ASU) , Presentation of Financial Statements Going Concern. ASU defines management s responsibility to evaluate whether there is substantial doubt about an organization s ability to continue as a going concern and to provide related footnote disclosures. ASU provides guidance to an organization s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The guidance is effective for Colonial Williamsburg for the fiscal year ending December 31, Management has determined this new standard has no significant impact on the consolidated financial statements. In April 2015, the FASB issued ASU , Interest Imputation of Interest (Subtopic ): Simplifying the Presentation of Debt Issuance Costs. This ASU requires that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts. Prior to the amendments, debt issuance costs were presented as a deferred charge (i.e., an asset) on the balance sheet. The amendments require the amortization of debt issuance costs to be reported as interest expense. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate on the debt. The guidance is effective for Colonial Williamsburg for fiscal years beginning after December 31, Adoption of this ASU resulted in the direct deduction of $517 thousand and $611 thousand in deferred financing costs from the long-term debt liability included in the consolidated statement of financial position as of December 31, 2016 and 2015, respectively. Recent Accounting Pronouncements Not Yet Adopted In May 2014, the FASB issued ASU , Revenue from Contracts with Customers (Topic 606) (ASU ). The update establishes a comprehensive revenue recognition standard for virtually all entities under U.S. GAAP including those that previously followed industry-specific guidance. The FASB issued ASU in August 2015 that deferred the effective date of ASU by a year. In addition, the FASB issued ASU in December 2016 that does not change the core principles of the standard, but clarifies certain narrow aspects of the standard including its scope, contract cost accounting, disclosures, illustrative examples, and other matters. The ASU becomes effective concurrently with ASU The guidance is effective for Colonial Williamsburg for the fiscal year ending December 31, Management is in the process of assessing the impact this new standard will have on the consolidated financial statements. 17

20 In July 2015, the FASB issued ASU , Inventory (Topic 330) Simplifying the Measurement of Inventory. The update requires that inventory be measured at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for Colonial Williamsburg for the fiscal year ending December 31, Management is in the process of assessing the impact this new standard will have on the consolidated financial statements. In November 2015, the FASB issued ASU , Income Taxes (Topic 740) - Balance Sheet Classification of Deferred Taxes. This ASU eliminates the guidance in Topic 740, Income Taxes, that required an entity to separate deferred tax liabilities and assets between current and noncurrent amounts in a classified balance sheet. The amendments require that all deferred tax liabilities and assets of the same tax jurisdiction or a tax filing group, as well as any related valuation allowance, be offset and presented as a single noncurrent amount in a classified balance sheet. Prior U.S. GAAP required that in a classified balance sheet, deferred tax liabilities and assets be separated into a current and a noncurrent amount on the basis of the classification of the related asset or liability. If deferred tax liabilities and assets did not relate to a specific asset or liability, such as a carryforward, they were classified according to the expected reversal date of the temporary difference. The amendments are effective for nonpublic entities in fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, Early adoption is permitted as of the beginning of any interim or annual reporting period. Entities may adopt the guidance prospectively or retrospectively. Certain transition disclosures are required. Management is in the process of assessing the impact this new standard will have on the consolidated financial statements. In February 2016, the FASB issued ASU , Leases (Topic 842). The new standard establishes a rightof-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The standard also requires lessors to treat a lease as a sale it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn t convey risks and rewards or control, an operating lease results. The guidance is effective for Colonial Williamsburg for the fiscal years beginning after December 15, A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Management is in the process of assessing the impact this new standard will have on the consolidated financial statements. In August 2016, the FASB issued ASU , Not-for-Profit Entities (Topic 958) Presentation of Financial Statements of Not-for-Profit Entities. The ASU amends the current reporting model for nonprofit organizations and enhances their required disclosures. The major changes include: (a) requiring the presentation of only two classes of net assets now entitled net assets without donor restrictions and net assets with donor restrictions, (b) modifying the presentation of underwater endowment funds and related disclosures, (c) requiring the use of the placed in service approach to recognize the expirations of restrictions on gifts used to acquire or construct long-lived assets absent explicit donor stipulations otherwise, (d) requiring that all nonprofits present an analysis of expenses by function and nature in either the statement of activities, a separate statement, or in the notes and disclose a summary of the allocation methods used to allocate costs, (e) requiring the disclosure of quantitative and qualitative information regarding liquidity and availability of resources, (f) presenting investment return net of external and direct expenses, and (g) modifying other financial statement reporting requirements and disclosures intended to increase the usefulness of nonprofit financial statements. The ASU is effective for Colonial Williamsburg s consolidated financial statements for fiscal years beginning after December 15, Early adoption is permitted. The provisions of the ASU must be applied on a retrospective basis for all years presented although certain optional practical expedients are available for periods prior to adoption. Management is in the process of assessing the impact this new standard will have on the consolidated financial statements. 18

21 In November 2016, the FASB issued ASU , Restricted Cash (Topic 230).The ASU requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows. Consequently, transfers between cash and restricted cash will not be presented as a separate line item in the operating, investing or financing sections of the cash flow statement. The ASU is effective for Colonial Williamsburg s consolidated financial statements for fiscal years beginning after December 15, The amendments should be applied retrospectively to each period presented. Early adoption is permitted. Management is in the process of assessing the impact this new standard will have on the consolidated financial statements. In March 2017, the FASB issued ASU , Compensation Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715). Under the ASU, an employer must report the service cost component in the same line item or items as other compensation costs arising from services rendered by pertinent employees during the period. The other components of net benefit cost are required to be presented in the statement of activities separately from the service cost component and outside the subtotal of income from operations if one is presented. If these other components are shown on a separate line an accurate description must be provided. If a separate line is not used, the footnotes must detail which line item these costs are included in on the statement of activities. The ASU is effective for annual periods beginning after December 15, Early adoption is permitted and there are specific requirements for what must be adopted retroactively and what must be adopted prospectively. Management is in the process of assessing the impact this new standard will have on the consolidated financial statements. 2. Cash and Cash Equivalents Cash and cash equivalents are composed of the following (in thousands): December 31, Unrestricted cash and cash equivalents $ 432 $ - Temporarily restricted cash and cash equivalents 6,351 4,884 $ 6,783 $ 4,884 19

22 3. Contributions Receivable The anticipated cash flows from contributions receivable are as follows (in thousands): December 31, Unconditional promises to give expected to be collected in: Less than one year $ 6,910 $ 6,083 One to five years 6,090 6,674 More than five years 2,128 4,308 Subtotal 15,128 17,065 Less unamortized discount (366) (414) Contribution receivable, net $ 14,762 $ 16,651 December 31, Contributions receivable, net current portion $ 6,786 $ 5,951 Contributions receivable, net noncurrent portion 7,976 10,700 Contribution receivable, net $ 14,762 $ 16,651 The discount rates used in determining the net present value of contributions receivable range from 0.11% to 2.90%. There are no contributions receivable that are considered to be uncollectible at December 31, 2016 or Conditional pledges received are as follows (in thousands): December 31, Conditional pledges, beginning of year $ 14,314 $ 14,820 Additions 2, Receipts, recognized as revenue (1,411) (606) Conditional pledges, end of year $ 15,153 $ 14,314 20

23 4. Real and Personal Property Real and personal property consists of the following (in thousands): December 31, Buildings and improvements $ 481,744 $ 479,695 Furnishing and equipment 116, ,113 Total depreciable assets 598, ,808 Less accumulated depreciation (358,064) (344,092) Total depreciable assets, net 240, ,716 Land 49,650 49,650 Capital projects in process 18,205 7,902 Real and personal property, net $ 308,336 $ 307,268 Buildings and improvements held under capital leases had a cost of $3.4 million at December 31, 2016 and Accumulated depreciation for buildings and improvements held under capital leases was $1.9 million and $1.8 million at December 31, 2016 and 2015, respectively. Furnishings and equipment held under capital leases had a cost of $1.7 million and $676 thousand at December 31, 2016 and 2015, respectively. Accumulated depreciation for furnishings and equipment held under capital leases was $530 thousand and $370 thousand at December 31, 2016 and 2015, respectively. Depreciation expense was $15.7 million for the years ended December 31, 2016 and 2015, and includes depreciation of assets held under capital leases. 5. Endowment Colonial Williamsburg s endowment consists of 204 individual funds established to support a variety of purposes. The endowment includes both donor-restricted endowment funds and funds designated by the Board of Trustees to function as endowments. As required by U.S. GAAP, net assets associated with endowment funds, including funds designated by the Board of Trustees to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. 21

24 Interpretation of Relevant Law Colonial Williamsburg interprets the Uniform Prudent Management of Institutional Funds Act (UPMIFA) of the Commonwealth of Virginia, which became effective July 1, 2008, 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, Colonial Williamsburg 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 as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by Colonial Williamsburg in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, Colonial Williamsburg 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 purposes of Colonial Williamsburg and the donor-restricted endowment fund (3) General economic conditions (4) The possible effects of inflation and deflation (5) The expected total return from income and the appreciation of investments (6) Other resources of Colonial Williamsburg (7) The investment policies of Colonial Williamsburg Funds with Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or UPMIFA requires Colonial Williamsburg to retain as a fund of perpetual duration. In accordance with U.S. GAAP, deficiencies of this nature that are reported in unrestricted net assets were $2 thousand for the years ended December 31, 2016 and These deficiencies resulted from unfavorable market fluctuations that occurred shortly after the investment of new permanently restricted contributions and continued appropriation for certain programs that was deemed prudent by the Board of Trustees. Endowment investment composition by type of fund as of December 31, 2016 and 2015 (in thousands): Unrestricted Temporarily Restricted Permanently Restricted 2016 Total Donor-restricted endowment funds $ - $ 99,243 $ 264,739 $ 363,982 Board-designated endowment funds 299, ,627 Total $ 299,627 $ 99,243 $ 264,739 $ 663,609 Unrestricted Temporarily Restricted Permanently Restricted 2015 Total Donor-restricted endowment funds $ - $ 111,854 $ 260,526 $ 372,380 Board-designated endowment funds 340, ,608 Total $ 340,608 $ 111,854 $ 260,526 $ 712,988 22