Consolidated Financial Statements and Federal Awards Report Required by Uniform Guidance December 31, 2016 and 2015 Goodwill Industries of Central

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1 Consolidated Financial Statements and Federal Awards Report Required by Uniform Guidance December 31, 2016 and 2015 Goodwill Industries of Central Arizona, Inc. and Subsidiaries

2 Table of Contents December 31, 2016 and 2015 Independent Auditor s Report... 1 Consolidated Financial Statements Consolidated Statements of Financial Position... 3 Consolidated Statement of Activities... 4 Consolidated Statement of Functional Expenses... 6 Consolidated Statements of Cash Flows... 8 Notes to Consolidated Financial Statements Uniform Guidance and Supplemental Reports Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Independent Auditor s Report on Compliance for Its Major Federal Program and Report on Internal Control Over Compliance Required by the Uniform Guidance Schedule of Findings and Questioned Costs... 32

3 Independent Auditor s Report The Board of Directors Goodwill Industries of Central Arizona, Inc. and Subsidiaries Phoenix, Arizona Report on the Financial Statements We have audited the accompanying consolidated financial statements of Goodwill Industries of Central Arizona, Inc. and Subsidiaries (Goodwill), which comprise the consolidated statement of financial position as of December 31, 2016, and the related consolidated statements of activities, functional expenses, and cash flows for the year 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. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Goodwill as of December 31, 2016, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America N. Central Ave., Ste. 400 Phoenix, AZ T F EOE 1

4 Other Matter The consolidated financial statements of Goodwill as of December 31, 2015, were audited by other auditors, whose report dated April 4, 2016 expressed an unmodified opinion on those audited statements. Other Matter Supplementary Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by the audit requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated in all material respects in relation to the consolidated financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated March 29, 2017 on our consideration of Goodwill s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, 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 the 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 Goodwill s internal control over financial reporting and compliance. Phoenix, Arizona March 29,

5 Consolidated Statements of Financial Position December 31, 2016 and Assets Cash and cash equivalents $ 9,142,609 $ 10,511,361 Accounts receivable, net 2,284,041 2,419,100 Pledge receivables, net 84,595 - Prepaid expenses 910, ,446 Inventory 7,626,647 6,957,650 Investments 10,308,757 10,470,243 Beneficial interests in assets held in trust 279, ,978 Land, buildings and equipment, net 41,112,533 39,759,345 Deferred compensation plan 607, ,608 Other assets, net 177,076 87,318 Total assets $ 72,533,761 $ 71,935,049 Liabilities Accounts payable $ 2,296,328 $ 2,912,194 Accrued expenses 6,834,677 6,321,395 Deferred rent and revenue 20,947,631 18,001,115 Long-term debt 7,318,779 8,943,068 Capital lease obligations 35, ,308 Interest-rate swap liability 241, ,796 Total liabilities 37,673,474 36,652,876 Net Assets Board designated - unrestricted 688, ,146 Unrestricted 33,819,371 34,248,231 Total unrestricted net assets 34,507,437 34,936,377 Temporarily restricted 73,024 68,818 Permanently restricted 279, ,978 Total net assets 34,860,287 35,282,173 Total liabilities and net assets $ 72,533,761 $ 71,935,049 See Notes to Consolidated Financial Statements 3

6 Consolidated Statement of Activities Year Ended December 31, 2016 Temporarily Permanently Unrestricted Restricted Restricted Total Support and Revenues Thrift operations $ 143,368,683 $ - $ - $ 143,368,683 Workforce development services 1,331, ,331,741 Contributions and grants 3,331, ,331,244 Commercial services contracts 3,022, ,022,127 Special events Less cost of direct benefits to donors Other income 269, ,199 Total revenue, support, and gains 151,322, ,322,994 Functional Expenses Program services expense Thrift operations 124,593, ,593,546 Workforce development 8,449, ,449,778 Commercial services 3,308, ,308,654 Total program expenses 136,351, ,351,978 Supporting services expense Management and general 15,147, ,147,929 Fundraising 304, ,847 Total supporting services expenses 15,452, ,452,776 Total functional expenses 151,804, ,804,754 Other Gains and Losses Loss on sale/disposal of property and equipment (241,814) - - (241,814) Investment income (loss), net 188,854 4, ,060 Change in value of beneficial interest - - 2,848 2,848 Change in value of interest rate swap 105, ,780 Total other gains and losses 52,820 4,206 2,848 59,874 Change in Net Assets (428,940) 4,206 2,848 (421,886) Net Assets, Beginning of Year 34,936,377 68, ,978 35,282,173 Net Assets, End of Year $ 34,507,437 $ 73,024 $ 279,826 $ 34,860,287 See Notes to Consolidated Financial Statements 4

7 Consolidated Statement of Activities Year Ended December 31, 2015 Temporarily Permanently Unrestricted Restricted Restricted Total Support and Revenues Thrift operations $ 131,981,373 $ - $ - $ 131,981,373 Workforce development services 1,182, ,182,958 Contributions and grants 2,656, ,656,490 Commercial services contracts 4,219, ,219,458 Special events 542, ,871 Less cost of direct benefits to donors (225,218) - - (225,218) Other income 238, ,671 Total revenue, support, and gains 140,596, ,596,603 Functional Expenses Program services expense Thrift operations 111,524, ,524,154 Workforce development 8,458, ,458,940 Commercial services 4,471, ,471,809 Total program expenses 124,454, ,454,903 Supporting services expense Management and general 15,004, ,004,807 Fundraising 276, ,466 Total supporting services expenses 15,281, ,281,273 Total functional expenses 139,736, ,736,176 Other Gains and Losses Loss on sale/disposal of property and equipment (59,289) - - (59,289) Investment income (loss), net (42,307) (179) - (42,486) Change in value of beneficial interest - - (19,255) (19,255) Change in value of interest rate swap 98, ,672 Total other gains and losses (2,924) (179) (19,255) (22,358) Change in Net Assets 857,503 (179) (19,255) 838,069 Net Assets, Beginning of Year 34,078,874 68, ,233 34,444,104 Net Assets, End of Year $ 34,936,377 $ 68,818 $ 276,978 $ 35,282,173 See Notes to Consolidated Financial Statements 5

8 Consolidated Statement of Functional Expenses Year Ended December 31, 2016 Program Services Support Services Thrift Workforce Commercial Management Operation Development Services Total and General Fundraising Total Payroll and Benefit Costs Total payroll costs $ 56,913,249 $ 5,501,932 $ 2,672,326 $ 65,087,507 $ 8,440,805 $ 37,799 $ 73,566,111 Payroll taxes and benefits 8,813, , ,157 10,310,124 1,502,811 5,847 11,818,782 Total payroll and benefit costs 65,726,892 6,465,256 3,205,483 75,397,631 9,943,616 43,646 85,384,893 Other Expenses Professional fees 715,024 72,264 12, , ,872 17,328 1,684,016 Subcontract services ,297 32, , ,522 New or donated goods purchased 5,647, ,647, ,647,561 Telephone, postage and freight 748,976 78,019 43, , ,306 10,659 1,163,182 Supplies 1,870,348 46, ,280 2,143, ,252 3,254 2,299,575 Rent and occupancy expense 31,446, ,886 89,166 32,375,085 (86,695) 6,981 32,295,371 Property maintenance 1,528,076 34,679 13,541 1,576,296 33,488 4,238 1,614,022 Internal services allocation 776,157 75,096 (866,556) (15,303) 15, Taxes, insurance and fees 662,118 5,500 23, ,931 80, ,594 Trash removal 870,404 1,445 35, ,127 11, ,957 Client assistance - 6,799-6, ,799 Community support ,775 82,775 Equipment costs and maintenance 1,750,791 41,782 82,642 1,875, ,696 4,424 2,439,335 Advertising and promotion 2,539, ,819 11,295 2,729, ,202 33,367 2,957,071 Vehicle operating costs 2,161,126 4, ,809 2,406,491 11, ,418,492 Goodwill Industries International and other dues 146,989 81,396 4, ,905 53, ,541 Interest 321,707-2, ,488 58, ,494 Bank and credit card fees 1,646, ,647, ,465 6,002 1,826,507 Bad debt expense 25,858-14,268 40,126-2,042 42,168 In-kind expenses , ,777 Staff training and organizational culture development 111,991 38,920 2, , ,667 36, ,819 Subscriptions and publications 1, ,275 30, ,406 Other expense 421, ,402 21, , ,561 47, ,852 Total other expenses 53,391,647 1,659,828 (8,881) 55,042,594 3,798, ,584 59,096,836 Total expenses before depreciation 119,118,539 8,125,084 3,196, ,440,225 13,742, , ,481,729 Depreciation and Amortization 5,475, , ,052 5,911,753 1,405,655 5,617 7,323,025 $ 124,593,546 $ 8,449,778 $ 3,308,654 $ 136,351,978 $ 15,147,929 $ 304,847 $ 151,804,754 See Notes to Consolidated Financial Statements 6

9 Consolidated Statement of Functional Expenses Year Ended December 31, 2015 Program Services Support Services Thrift Workforce Commercial Management Operation Development Services Total and General Fundraising Total Payroll and Benefit Costs Total payroll costs $ 50,590,785 $ 5,375,124 $ 3,139,539 $ 59,105,448 $ 8,407,954 $ 119,944 $ 67,633,346 Payroll taxes and benefits 8,517,064 1,034, ,659 10,420,973 1,512,703 25,242 11,958,918 Total payroll and benefit costs 59,107,849 6,409,374 4,009,198 69,526,421 9,920, ,186 79,592,264 Other Expenses Professional fees 680,044 32,462 20, ,517 1,211,786 10,725 1,955,028 Subcontract services ,466 41, , ,970 New or donated goods purchased 4,338, ,338, ,338,554 Telephone, postage and freight 662,999 69,729 63, , ,530 11,075 1,074,489 Supplies 1,655,228 46, ,747 2,071, , ,238,043 Rent and occupancy expense 28,538, ,570 93,878 29,481,792 (119,079) 11,544 29,374,257 Property maintenance 1,328,044 43,570 12,209 1,383,823 31,440-1,415,263 Internal services allocation 700,333 83,223 (812,258) (28,702) 28, Taxes, insurance and fees 723,396 6,812 69, , , ,904 Trash removal 541,386 1,191 41, ,094 10, ,294 Client assistance 11,705 3,825 1,486 17,016 6,015 39,185 62,216 Equipment costs and maintenance 1,379,803 52,160 85,123 1,517, ,807 5,733 2,035,626 Advertising and promotion 2,358, ,467 17,536 2,539, ,582 30,279 2,744,302 Vehicle operating costs 1,911,790 7, ,277 2,194,359 15, ,210,157 Goodwill Industries International and other dues 141,695 54,966 17, ,794 36,815 6, ,734 Interest 362, ,916 76, ,363 Bank and credit card fees 1,468,959 1, ,470, ,383 6,000 1,591,032 Bad debt expense 154,851 1,803 9, , ,494 In-kind expenses ,098-87,098 Staff training and organizational culture development 88,483 31,598 2, , ,186 1, ,331 Subscriptions and publications ,429 5,097 13, ,820 Other expense 341, ,784 49, , ,780 3, ,627 Total other expenses 47,389,388 1,687, ,904 49,437,773 3,687, ,961 53,252,602 Total expenses before depreciation 106,497,237 8,096,855 4,370, ,964,194 13,608, , ,844,866 Depreciation and Amortization 5,026, , ,707 5,490,709 1,396,282 4,319 6,891,310 $ 111,524,154 $ 8,458,940 $ 4,471,809 $ 124,454,903 $ 15,004,807 $ 276,466 $ 139,736,176 See Notes to Consolidated Financial Statements 7

10 Consolidated Statements of Cash Flows Years Ended December 31, 2016 and Cash Flows from Operating Activities Change in net assets $ (421,886) $ 838,069 Adjustments to reconcile change in net assets to net cash from operating activities Depreciation and amortization 7,323,025 6,891,310 Loss on sale of property and equipment 241,814 59,289 In-kind contribution of software (959,513) (836,777) Provision for bad debts 42, ,494 Discount on pledge receivables 4,513 - Realized/unrealized (gains) losses on investments (8,496) 273,716 Change in value of beneficial interests in assets held in trust (2,848) 19,255 Change in value of interest rate swap (105,780) (98,672) Changes in operating assets and liabilities Accounts receivable, net 276, ,213 Pledge receivables (91,150) - Prepaid expenses and other assets (33,487) 2,596 Inventory (668,997) (585,949) Deferred compensation plan (131,686) 223,421 Accounts payable (615,866) 522,280 Accrued expenses 513, ,864 Deferred rent and revenue (657,538) (662,619) Net Cash from Operating Activities 4,703,844 7,861,490 Cash Flows from Investing Activities Purchases of property and equipment (7,947,722) (4,392,779) Purchases of long-term investments (3,545,442) (5,372,627) Proceeds from sale of investments 3,715,424 5,141,397 Net Cash used for Investing Activities (7,777,740) (4,624,009) Cash Flows from Financing Activities Payments on long-term debt (1,624,289) (1,629,796) Payments on capital leases (93,265) - Proceeds from tenant improvement allowances 3,422,698 1,048,600 Net Cash from (used for) Financing Activities 1,705,144 (581,196) Net Change in Cash and Cash Equivalents (1,368,752) 2,656,285 Cash and Cash Equivalents, Beginning of Year 10,511,361 7,855,076 Cash and Cash Equivalents, End of Year $ 9,142,609 $ 10,511,361 See Notes to Consolidated Financial Statements 8

11 Consolidated Statements of Cash Flows Years Ended December 31, 2016 and Supplemental Disclosure of Cash Flow Information Cash paid for interest $ 382,494 $ 439,363 Supplemental Disclosure of Non-Cash Investing and Financing Activities Equipment financed through capital lease arrangement $ - $ 128,308 Unpaid accounts payable balances on construction in process $ 154,097 $ 902,254 In-kind contribution of software $ 959,513 $ 836,777 See Notes to Consolidated Financial Statements 9

12 Notes to Consolidated Financial Statements Years Ended December 31, 2016 and 2015 Note 1 - Principal Activity and Significant Accounting Policies Organization Goodwill Industries of Central Arizona, Inc., Goodwill Community Services, Inc., and Goodwill Industries of Central Arizona Foundation, Inc. (hereinafter referred to collectively as Goodwill ) are nonprofit corporations with locations in metropolitan Phoenix, Yuma and Prescott, Arizona. Our primary mission, through the goodwill of others, is to create the pathway to a better future for all by helping those who desire self-sufficiency. We achieve this mission through strategic initiatives and partnerships that empower individuals, strengthen families, and build stronger communities. Goodwill s support is principally from the sale of donated goods in our retail thrift-store operations, maintenance contracts, and fee-for-service contracts with federal, state, and local governments. Goodwill provides education and career services, as well as job placement opportunities and postemployment support to individuals with barriers to employment. Services include employment training and education, work experience, and employment retention services. Goodwill services help people and families in our community achieve a better life through work and independence. Goodwill also creates employment and job-training opportunities for people in our community by providing onestop services for all repair and maintenance needs, to include roofing, plumbing, electrical, painting, general repair, lawn services and custodial services. These services are provided to area businesses, federal, state and local governments, as well as other community partners. Principles of Consolidation The consolidated financial statements include the accounts of Goodwill Industries of Central Arizona, Inc., Goodwill Community Services, Inc., and Goodwill Industries of Central Arizona Foundation, Inc. because Goodwill Industries of Central Arizona has both control and an economic interest in these entities. All significant intercompany accounts and transactions have been eliminated in consolidation. Concentrations of Credit Risk Goodwill manages deposit concentration risk by placing cash and cash equivalents with financial institutions believed to be creditworthy. At times, amounts on deposit may exceed insured limits or include uninsured investments in money market funds. To date, no losses have been experienced in any of these accounts. Credit risk associated with accounts receivable and pledge receivables is considered to be limited due to high historical collection rates. Investments are made by diversified investment managers whose performance is monitored by Goodwill. Although the fair values of investments are subject to fluctuation on a year-to-year basis, Goodwill believes that the investment policies and guidelines are prudent for the long term welfare of the organizations. Cash and Cash Equivalents Goodwill considers all cash and highly liquid financial instruments with original maturities of three months or less, and which are neither held for nor restricted by donors for long-term purposes, to be cash and cash equivalents. Cash and highly liquid financial instruments restricted to building project, permanent endowment, or other long-term purposes are excluded from this definition. 10

13 Notes to Consolidated Financial Statements Years Ended December 31, 2016 and 2015 Accounts Receivable Accounts receivable consist primarily of uncollateralized customer obligations and landlord tenant improvement allowance receivables. Uncollateralized customer obligations are stated at the invoice amount and are due upon billing. Landlord tenant improvement allowance receivables are stated at the amount of reimbursable costs incurred. Account balances with invoices over ninety days old are considered delinquent. Payments of accounts receivable are applied to the specific invoices identified on the customer's remittance advice or, if unspecified, to the earliest unpaid invoice. Goodwill typically does not charge interest on overdue receivable balances. The allowance for uncollectable accounts receivable is determined based on historical experience, an assessment of economic conditions, and review of subsequent collections. At December 31, 2016 and 2015, the allowance was $11,290 and $153,978, respectively. Pledge Receivables Goodwill records unconditional pledge receivables expected to be collected within one year at net realizable value. Unconditional pledge receivables expected to be collected in future years are initially recorded at fair value using present value techniques incorporating risk-adjusted discount rates designed to reflect the assumptions market participants would use in pricing the asset. In subsequent years, amortization of the discounts is included in contribution revenue in the consolidated statements of activities. The allowance for uncollectable pledge receivables is based on historical experience, an assessment of economic conditions, and a review of subsequent collections. Pledge receivables are written off when deemed uncollectable. There was an allowance on pledge receivables of $2,042 and $0 as of December 31, 2016 and 2015, respectively. Inventory Donated goods inventory is recorded utilizing the costs of production, processing, transportation, and occupancy in relation to the estimated rotation of inventory. The donated goods inventory is valued using a methodology which approximates fair value at the date of donation. Inventory also consists of goods purchased for resale, primarily consisting of mattresses, furniture and food and beverage. Investments Investment purchases are recorded at cost, or if donated, at fair value on the date of donation. Thereafter, investments are reported at their fair values in the consolidated statements of financial position. Net investment return or loss is reported in the consolidated statements of activities and consists of interest and dividend income, realized and unrealized capital gains and losses, less investment management and custodial fees. Beneficial Interests in Assets Held in Trust Goodwill has been named as an irrevocable beneficiary of several perpetual trusts held and administered by independent trustees. Perpetual trusts provide for the distribution of the net income of the trusts to Goodwill; however, Goodwill will never receive the assets of the trusts. At the date notice of a beneficial interest is received, a permanently restricted contribution is recorded in the consolidated statements of activities, and a beneficial interest in assets held in trust is recorded in the consolidated statements of financial position at the fair value of the underlying trust assets. Thereafter, beneficial interests in the trusts are reported at the fair value of the trusts assets in the consolidated statements of financial position, with trust distributions and changes in fair value recognized in the consolidated statements of activities. 11

14 Notes to Consolidated Financial Statements Years Ended December 31, 2016 and 2015 Interest-Rate Swap Goodwill entered into an interest-rate swap to mitigate interest-rate risk on bonds payable (Note 12). The related liability or asset is reported at fair value in the consolidated statements of financial position, and unrealized gains or losses are included in the consolidated statements of activities. Land, Buildings and Equipment and Related Depreciation Purchased property and equipment over $5,000 is recorded at cost, or if donated at fair value at the date of donation. Costs of maintenance and repairs that do not improve or extend the useful lives of the respective assets are expensed currently. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets ranging from three to forty years, or in the case of capitalized leased assets or leasehold improvements, the lesser of the useful life of the asset or the lease term. When assets are sold or otherwise disposed of, the cost and related depreciation or amortization are removed from the accounts, and any resulting gain or loss is included in the consolidated statements of activities. Goodwill reviews the carrying values of property and equipment for impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. When considered impaired, an impairment loss is recognized to the extent carrying value exceeds the fair value of the asset. There were no indicators of asset impairment during the years ended December 31, 2016 and Net Assets Net assets, revenues, gains, and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets and changes therein are classified and reported as follows: Unrestricted Net Assets Net assets available for use in general operations. Unrestricted board-designated net assets consist of net assets designated by the Board of Directors for operating reserve and board-designated endowment. Temporarily Restricted Net Assets Net assets subject to donor restrictions that may or will be met by expenditures or actions of management and/or the passage of time, and certain income earned on permanently restricted net assets that has not yet been appropriated for expenditure by the Board of Directors. Goodwill reports contributions as temporarily restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statements of activities as net assets released from restrictions. Permanently Restricted Net Assets Net 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 by management. The restrictions stipulate that resources be maintained permanently but permit Goodwill to expend the income generated in accordance with the provisions of the agreements. Thrift Store Revenues Thrift store sales revenues are recognized when the merchandise is sold, typically at the point of sale in thrift stores or salvage facilities. 12

15 Notes to Consolidated Financial Statements Years Ended December 31, 2016 and 2015 Contracts and Grants Goodwill receives workforce development grants from various local government entities, corporations and other not-for-profit organizations. Goodwill has contracts to provide maintenance services to commercial businesses and other organizations. Goodwill recognizes amounts received from contracts and grants as earned when services are rendered under unit of service contracts or as allowable costs are incurred under cost reimbursement contracts. A receivable is recorded to the extent the amount earned exceeds cash advances. Conversely, a liability is recorded when cash advances exceed amounts earned. Funding sources may, at their discretion, request reimbursement for expenses or return of funds, or both, as a result of noncompliance by Goodwill with the terms of the grant or contract. Additionally, if Goodwill terminates its activities, all unearned amounts are to be returned to the funding sources. Donated Services and In-Kind Contributions Volunteers contribute significant amounts of time to program services, administration, and fundraising and development activities; however, the consolidated financial statements do not reflect the value of these contributed services because they do not meet recognition criteria prescribed by generally accepted accounting principles. Contributed goods are recorded at fair value at the date of donation. Self-Insurance Goodwill is self-insured for a portion of their health insurance claims. An estimate for claims is charged to expense for claims incurred but not paid and for future claims for injuries existing at year-end based on prior claims experience and pending claims. The estimate uses claims data from a healthcare lag report. The estimate is derived from a combination of different averaging methods. Average monthly claims experience is analyzed across various time intervals throughout the year in order to identify patterns and trends. Functional Expenses The costs of providing Goodwill's various program and other activities have been summarized on a functional basis in the accompanying consolidated statements of activities. The consolidated statements of functional expenses present the natural classification detail of expenses by function. Accordingly, certain costs have been allocated among the programs and supporting services benefited. Advertising Goodwill uses advertising to promote its programs to the various groups it serves and for recruitment and fundraising. Advertising costs are charged to operations as incurred. Advertising expenses charged to operations were $2,957,071 for 2016 and $2,744,302 for

16 Notes to Consolidated Financial Statements Years Ended December 31, 2016 and 2015 Income Taxes Goodwill Industries of Central Arizona, Inc., Goodwill Community Services, Inc., and Goodwill Industries of Central Arizona Foundation, Inc. are organized as Arizona nonprofit corporations and have been recognized by the Internal Revenue Service (IRS) as exempt from federal income taxes under Section 501(a) of the Internal Revenue Code as organizations described in Section 501(c)(3) and have been determined not to be private foundations. Accordingly, contributions to them qualify for the charitable contribution deduction under Section 170(b)(1)(A). Each entity is annually required to file a Return of Organization Exempt from Income Tax (Form 990) with the IRS. In addition, the entities are subject to income tax on net income that is derived from business activities that are unrelated to their exempt purposes. Goodwill has determined that each entity is not subject to unrelated business income tax and has not filed Exempt Organization Business Income Tax Returns (Forms 990- T) with the IRS, or its Arizona equivalent, Forms 99-T. Each entity has appropriate support for any tax positions taken affecting its annual filing requirements, and as such, does not have any uncertain tax positions that are material to the financial statements. Goodwill would recognize future accrued interest and penalties related to unrecognized tax benefits and liabilities in income tax expense if such interest and penalties are incurred. Use of Estimates The preparation of the 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. Actual results may differ from these estimates. Reclassifications Certain reclassifications of amounts previously reported have been made to the accompanying financial statements to maintain consistency between periods presented. The reclassifications had no impact on net income or net assets. Recent Accounting Pronouncements In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) to improve financial reporting about leasing transactions (Topic 842). The ASU affects all lease transactions. The Company as a lessee is required to recognize a right-of-use asset and a lease liability, initially measured at present value of the lease payments, on the consolidated statement of financial position. For leases greater than twelve months, Goodwill as a lessee, must also recognize interest on the lease liability separately from amortization of the right-of-use asset in the consolidated statement of activities. Repayments of the principal portion of the lease liability must be classified within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the consolidated statements of cash flows. Leases for less than twelve months recognize a single lease cost on a straight-line basis. Goodwill has several leasing transactions. The amendments in this update are effective for years beginning after December 15, Goodwill is currently evaluating the impact of adopting ASU and believes the effect will be material to the consolidated financial statements. 14

17 Notes to Consolidated Financial Statements Years Ended December 31, 2016 and 2015 Note 2 - Fair Value Measurements and Disclosures Goodwill reports certain assets at fair value in the consolidated financial statements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal, or most advantageous, market at the measurement date under current market conditions regardless of whether that price is directly observable or estimated using another valuation technique. Inputs used to determine fair value refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available. A three-tier hierarchy categorizes the inputs as follows: Level 1 Quoted prices (unadjusted) in active markets for identical assets that can access at the measurement date. Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and market-corroborated inputs. Level 3 Unobservable inputs for the asset or liability. In these situations, Goodwill develops inputs using the best information available in the circumstances. In some cases, the inputs used to measure the fair value of an asset or a liability might be categorized within different levels of the fair value hierarchy. In those cases, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. Assessing the significance of a particular input to entire measurement requires judgment, taking into account factors specific to the asset or liability. The categorization of an asset within the hierarchy is based upon the pricing transparency of the asset and does not necessarily correspond to management s assessment of the quality, risk or liquidity profile of the asset or liability. A significant portion of investment assets are classified within Level 1 because they are comprised of open-end mutual funds with readily determinable fair values based on daily redemption values. Goodwill invests in fixed income securities and hold an interest rate swap traded in the financial markets. The fixed income securities and interest rate swap are valued by the custodians of the securities using pricing models based on credit quality, time to maturity, stated interest rates and market-rate assumptions, and are classified within Level 2. The fair values of beneficial interests in assets held in trust are determined by us using present value techniques and risk-adjusted discount rates designed to reflect the assumptions market participants would use in pricing the underlying assets, and are based on the fair values of trust investments as reported by the trustees. These are considered to be Level 3 measurements. 15

18 Notes to Consolidated Financial Statements Years Ended December 31, 2016 and 2015 The following table presents assets and liabilities measured at fair value on recurring basis at December 31, 2016: December 31, 2016 Fair Value Measurements at Report Date Using Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable Assets Inputs Inputs Total (Level 1) (Level 2) (Level 3) Assets Cash and cash equivalents $ 543,923 $ 543,923 $ - $ - Equity mutual funds 3,234,622 3,234, Fixed income 6,138,705-6,138,705 - Hedge funds 225, , Investments in Public REIT's 99,036 99, Commodities 66,509 66, Total investments $ 10,308,757 $ 4,170,052 $ 6,138,705 $ - Beneficial interests in assets held in trust $ 279,826 $ - $ - $ 279,826 Liabilities Interest-rate swap $ 241,016 $ - $ 241,016 $ - The following table presents assets and liabilities measured at fair value on recurring basis at December 31, 2015: December 31, 2015 Fair Value Measurements at Report Date Using Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable Assets Inputs Inputs Total (Level 1) (Level 2) (Level 3) Assets Cash and cash equivalents $ 675,620 $ 675,620 $ - $ - Equity mutual funds 3,717,994 3,717, Fixed income 6,076, ,498 5,371,131 - Total investments $ 10,470,243 $ 5,099,112 $ 5,371,131 $ - Beneficial interests in assets held in trust $ 276,978 $ - $ - $ 276,978 Liabilities Interest-rate swap $ 346,796 $ - $ 346,796 $ - 16

19 Notes to Consolidated Financial Statements Years Ended December 31, 2016 and 2015 Below is a reconciliation of the beginning and ending balance of assets measured at fair values on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2016 and 2015: Beneficial interest in assets held in trust Balance January 1, 2015 $ 296,233 Change in value of beneficial interest (19,255) Balance at December 31, ,978 Change in value of beneficial interest 2,848 Balance at December 31, 2016 $ 279,826 Goodwill recognized $2,848 of unrealized gains and $19,255 of unrealized losses from the trust in 2016 and 2015, respectively which is reported as a change in value of beneficial interest in the accompanying consolidated statements of activities. The beneficial interest in the trust is classified as permanently restricted. Note 3 - Net Investment Return Net investment return consists of the following for the years ended December 31, 2016 and 2015: Operating investments Interest and dividends $ 182,175 $ 228,114 Net realized and unrealized gain (loss) 6,679 (270,421) 188,854 (42,307) Temporarily restricted investments Interest and dividends 2,389 3,116 Net realized and unrealized gain (loss) 1,817 (3,295) 4,206 (179) Total investment income (loss), net $ 193,060 $ (42,486) 17

20 Notes to Consolidated Financial Statements Years Ended December 31, 2016 and 2015 Note 4 - Accounts Receivable Accounts receivable consisted of the following at December 31: Thrift operations $ 167,893 $ 299,734 Commercial maintenance 206, ,501 Workforce development 319, ,234 Goodwill community services 60, ,484 Landlord tenant improvement allowances 1,512,355 1,331,000 Other 27,766 20,125 2,295,331 2,573,078 Less allowance for doubtful accounts (11,290) (153,978) Total accounts receivable, net $ 2,284,041 $ 2,419,100 Included in accounts receivable are receivables from government entities of $373,256 and $762,882, at December 31, 2016 and 2015, which represents approximately 16% and 30%, respectively, of the balance. Note 5 - Pledge Receivables Unconditional pledge receivables are estimated to be collected as follows at December 31, 2016 and 2015: Within one year $ 23,800 $ - In one to five years 67,350-91,150 - Less discount to net present value at rate of 3.5% (4,513) - Less allowance for doubtful accounts (2,042) - Total pledge receivables, net $ 84,595 $ - Note 6 - Inventory During 2016 and 2015, Goodwill recognized the increase in donated goods inventory as support and revenues. This merchandise requires program related expenses/processes before it reaches its point of sale. The balances of inventory as of December 31 are as follows: Donated goods inventory, beginning of year $ 6,288,434 $ 5,738,434 Net increase in donated goods inventory 601, ,000 Donated goods inventory end of year 6,889,735 6,288,434 Purchased goods for resale in inventory 736, ,216 Total inventory $ 7,626,647 $ 6,957,650 18

21 Notes to Consolidated Financial Statements Years Ended December 31, 2016 and 2015 Note 7 - Land, Building, and Equipment Land, buildings, and equipment consisted of the following at December 31: Land $ 5,676,351 $ 5,766,350 Buildings and leasehold improvements 41,399,909 36,630,144 Equipment 24,635,153 22,286,365 Vehicles 1,676,395 1,638,286 Construction in progress 1,395,610 1,736,211 74,783,418 68,057,356 Less accumulated depreciation and amortization (33,670,885) (28,298,011) Total land, buildings and equipment, net $ 41,112,533 $ 39,759,345 Depreciation expense totaled $7,312,238 and $6,879,332 for the years ended December 31, 2016 and 2015, respectively. Goodwill has entered into a construction commitment for leasehold improvements for a new retail store as of December 31, 2016 for an estimated cost of approximately $473,000. For the year ended December 31, 2016, construction had not begun and no costs had been incurred related to this contract. Note 8 - Line of Credit Goodwill has a $1,500,000 revolving line of credit from a bank to help finance its working capital needs. The line is unsecured, and interest is payable monthly on outstanding balances at the Intercontinental Exchange Benchmark Administration Libor Daily Floating Rate plus 1.5% (2.2% and 1.8% at December 31, 2016 and 2015, respectively) and matures April 1, No amounts were outstanding under the line of credit at December 31, 2016 and In accordance with the revolving line of credit agreement, Goodwill is required to maintain compliance with certain financial and non-financial covenants. 19

22 Notes to Consolidated Financial Statements Years Ended December 31, 2016 and 2015 Note 9 - Long-Term Debt Long-term debt consisted of the following as of December 31: Note payable to a bank; original amount of $8,175,000; payable in monthly installments of $65,861, including interest of 65.00% of the monthly LIBOR rate plus 2.10% (2.6% as of December 31, 2016, through December 2021; secured by real property. $ 2,796,016 $ 3,235,176 Note payable to bank; original amount of $4,050,000; payable in monthly installments of $41,190, including a fixed interest rate of 4.037% through June 2023; secured by real property. 2,816,645 3,187,025 Note payable to a bank; original amount of $4,000,000; payable in monthly installments of $71,118, including interest at a fixed rate of 2.54%, through December 2018; secured by real property. 1,662,268 2,461,530 Note payable to a store landlord; original amount of $137,543; payable in monthly installments of $1,597, including a fixed interest rate of 7.00%, through July ,850 59,337 Total long-term debt $ 7,318,779 $ 8,943,068 Annual maturities of long-term debt outstanding at December 31, 2016 are as follows: Years Ending December 31, 2017 $ 1,694, ,765, , ,014, ,072,138 Thereafter 803,441 Total long-term debt $ 7,318,779 Under the terms of the debt agreements, Goodwill is required to maintain a fixed charge coverage ratio and an unrestricted liquidity ratio. In December 2005, Goodwill entered into a loan agreement with a bank whereby a municipality issued taxexempt bonds and loaned the bond proceeds to Goodwill for the purpose of purchasing thrift stores and equipment. Goodwill's indebtedness under this agreement is reflected as the notes payable due December 2021 above. The terms of the notes coincide with the terms of the bonds. In the event that Goodwill or the municipality undergoes a transaction or organizational change that would result in the bonds becoming taxable, Goodwill is subject to a 3% increase in interest rate on the related note payable. 20

23 Notes to Consolidated Financial Statements Years Ended December 31, 2016 and 2015 Note 10 - Operating Leases Goodwill leases several thrift stores and office space under various non-cancelable operating leases expiring at various dates through November Future minimum lease payments are as follows: Years Ending December 31, Operating Leases 2017 $ 25,708, ,794,871 25,468,205 24,285,977 22,716,937 Thereafter 115,652,089 Total minimum lease payments $ 239,626,642 Rent expense for the years ended December 31, 2016 and 2015 totaled approximately $21,765,000 and $19,457,000 respectively. Note 11 - Capital Leases Goodwill has entered into capital lease agreements for certain equipment values at $208,385. These obligations carry interest at 10.43% and are due in monthly installments expiring December Leased property under capital leases at December 31, 2016 and 2015 includes: Equipment $ 208,385 $ 128,308 Less accumulated depreciation (40,387) (2,100) Future minimum lease payments are as follows: $ 167,998 $ 126,208 Years Ending December 31, $ Capital Leases 11,141 15,359 14,819 Total minimum lease payments 41,319 Less amount representing interest (6,276) Capital lease obligation $ 35,043 21

24 Notes to Consolidated Financial Statements Years Ended December 31, 2016 and 2015 Note 12 - Interest Rate Swap Goodwill is exposed to interest rate risk through its borrowing activities. As of December 31, 2016 and 2015, one of Goodwill's long-term borrowings is a variable rate instrument. Goodwill previously entered into an interest rate swap contract under which Goodwill agreed to pay an amount equal to a specified fixed rate of interest times a notional principal amount, and receives in return an amount equal to a specified variable rate of interest times the same notional principal amount. Goodwill maintains an interest-rate risk management strategy that uses its derivative instrument to minimize significant, unanticipated earnings fluctuations caused by interest-rate volatility. Goodwill's specific goals are (1) to manage interest-rate sensitivity by modifying the repricing or maturity characteristics of certain debt instruments and (2) to lower (where possible) the cost of its borrowed funds. Interest-rate fluctuations create an unrealized appreciation or depreciation in the market value of Goodwill's debt when compared with its cost. The effect of this unrealized appreciation or depreciation in market value, however, will generally be offset by income or loss on derivative instruments that are linked to the debt. By using derivative financial instruments to hedge exposure to a change in interest rates, Goodwill exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes Goodwill, which creates repayment risk for Goodwill. When the fair value of a derivative contract is negative, Goodwill owes the counterparty and therefore, it does not possess repayment risk. Goodwill minimizes the credit (or repayment) risk in its derivative instrument by (1) entering into transactions with high-quality counterparties, and (2) limiting the amount of exposure to the counterparty. Goodwill does not anticipate nonperformance by the counterparties. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest rate contracts is managed by the establishment and monitoring of parameters that limit the types and degree of market risk that may be undertaken. Goodwill entered into an interest rate swap agreement that effectively converted approximately $8,175,000 of the Goodwill s LIBOR-based variable-rate debt to a fixed rate. The counterparty to the swap agreement is the bank (a major U.S. financial institution) that holds Goodwill s LIBOR-based variable-rate debt. Under the swap agreement, Goodwill pays interest at a fixed rate of 5.99% and, in return, receives interest at a variable rate based on one-month LIBOR rate % (2.60% and 2.37% at December 31, 2016 and 2015, respectively). The net effect of the swap is to fix the interest rate on notional amount of $2,796,016 and $3,203,725 at December 31, 2016 and 2015, respectively, of Goodwill s LIBOR-based variable-rate debt payable at 5.99% maturing on December 31, The interest rate swap agreement qualifies as a cash flow hedge, and accordingly, the fair value of the interest rate swap agreement, which is adjusted regularly, is recorded in Goodwill s statement of financial position as an asset or liability, as necessary, with a corresponding adjustment to other charges. The fair value of the Goodwill s interest rate swap was a liability totaling $241,016 and $346,796 at December 31, 2016 and 2015, respectively. The unrealized holding gain on this interest rate swap was $105,780 and $98,672 for the period ended December 31, 2016 and 2015, respectively. 22

25 Notes to Consolidated Financial Statements Years Ended December 31, 2016 and 2015 Note 13 - Restricted Net Assets Temporarily restricted net assets consist of $73,024 and $68,818 of funds restricted for the Barker Scholarship Fund as of December 31, 2016 and 2015, respectively. Releases and contributions to temporarily restricted net assets consist of investment income or loss. Permanently restricted net assets consist of a beneficial interests in assets held in trust. Distributions from perpetual trusts are available for the purposes specified by the donors, or in certain cases, of unrestricted use. The permanently restricted net assets balances, consist $279,826 and $276,978 as of December 31, 2016 and 2015, respectively. Note 14 - Retirement Plan Goodwill sponsors a 401(k) plan covering employees who meet specified age and service requirements. Goodwill may contribute a discretionary amount to the plan, pending approval by Goodwill's Board of Directors. During 2016 and 2015, Goodwill's discretionary match was 4%. Goodwill contributed matching contributions of $521,696 and $508,794 for 2016 and Goodwill sponsors a 403(b) plan covering certain highly compensated employees as determined by IRS guidelines. Goodwill may contribute a discretionary amount to the plan, pending approval by Goodwill's Board of Directors. During 2016 and 2015, Goodwill's discretionary match was 2.5%. Goodwill contributed matching contributions of $45,647 and $45,937 for 2016 and Goodwill has deferred compensation agreements with certain highly compensated key employees. Participants may contribute to the plan not to exceed certain federal IRS limitations. Goodwill may elect to make a matching contribution. Goodwill contributed matching contributions of $82,903 and $65,130 for 2016 and The agreements are accounted for individually in accordance with the terms of the underlying contract agreements. Goodwill has accrued $607,294 and $475,608 at December 31, 2016 and 2015, related to these agreements and the accrual is included as a component of accrued expenses in the consolidated statements of financial position. At December 31, 2016 and 2015, the required funds to meet this obligation were invested in equity mutual funds. Note 15 - Donated Materials Goodwill receives donated professional services and materials as follows during the years ended December 31, 2016 and 2015: Computer software $ 959,513 $ 836,777 Advertising 139,777 87,098 Total donated materials $ 1,099,290 $ 923,875 During 2016 and 2015, Goodwill s donation of computer software was included in property and equipment. 23

26 Notes to Consolidated Financial Statements Years Ended December 31, 2016 and 2015 Note 16 - Commitments and Contingencies Legal Matters Periodically, Goodwill is involved in litigation and claims arising in the normal course of operations. In the opinion of management, based on consultation with legal counsel, losses, if any, from these matters, are covered by insurance or are immaterial. Self-Funded Group Health Insurance During 2008, Goodwill elected to self-insure a portion of their employees' health benefits and is liable for all benefits incurred and/or paid for covered services delivered to eligible participants, subject to maximum liability limits as defined in the plan. In order to limit claim liability, Goodwill has purchased stop-loss insurance coverage for claims in excess of $200,000 per individual and $6,300,000 in the aggregate. Estimates for claims payable, which include both reported and unreported claims, are included in accrued expenses, at which time claim expense is also recorded. The amount charged to expense for claims was approximately $4,000,000 and $3,700,000 for the years ended December 31, 2016 and 2015, respectively. Accrued claims incurred but not reported or paid that are included in accrued expenses in the accompanying consolidated statements of financial position totaled $673,200 and $962,852 for the years ended December 31, 2016 and 2015, respectively. Service Agreements Goodwill has multi-year service agreements with vendors expiring through November Future minimum payments on service contracts are as follows: Years Ending December 31, $ 1,765,027 1,553,199 1,550, ,131 Total future minimum payments on service contracts $ 5,415,236 24

27 Notes to Consolidated Financial Statements Years Ended December 31, 2016 and 2015 Note 17 - Subsequent Events Goodwill has evaluated subsequent events through March 29, 2017, which is the date the consolidated financial statements were available to be issued. Goodwill signed an asset transfer agreement with Goodwill Industries of Northern Arizona on March 7, Goodwill Industries of Northern Arizona Inc. will transfer its assets to Goodwill Industries of Central Arizona, Inc. on the scheduled closing date of March 31, As a result of this transaction, the people of Arizona will be provided with the resources and support they need to secure sustainable employment and provide a better quality of life for themselves and their families. The expansion of retail stores in the northern market will aide in providing funds to support the delivery of career services in the community. The support of the community is vital to the success of Goodwill s ability to fulfill its mission of empowering individuals, strengthening families and building stronger communities. 25

28 Federal Awards Reports in Accordance with Uniform Guidance and Supplemental Reports December 31, 2016 Goodwill Industries of Central Arizona, Inc. and Subsidiaries

29 Schedule of Expenditures of Federal Awards Year Ended December 31, 2016 Federal Grantor/Pass Through Grantor/ Program of Cluster Title Federal CFDA Pass Through Federal Number Number Expenditures U.S. Department of Labor Pass-through Programs from: Goodwill Industries International, Inc. Senior Community Service AD A-24 $ 551,388 Employment Program Senior Community Service Employment Program AD A ,653 Total U.S. Department of Labor Pass-Through Programs 1,105,041 U.S. Department of Economic Security Pass-through Programs from: Goodwill Industries International, Inc. Services to ADES Children Program ADES ,542 Total Federal Financial Assistance $ 1,225,583 26

30 Notes to Schedule of Expenditures of Federal Awards December 31, 2016 Note 1 - Basis of Presentation The accompanying schedule of expenditures of federal awards includes the federal grant activity of Goodwill Industries of Central Arizona, Inc. and Subsidiaries (Goodwill), and is presented on the accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of the Uniform Guidance. Goodwill received federal awards indirectly through pass-through entities. No federal financial assistance has been provided to a subrecipient. Note 2 - Summary of Significant Accounting Policies Expenditures reported on the schedule of expenditures of federal awards are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in Sub-part E, Cost Principles of the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. Goodwill s summary of significant accounting policies are presented in Note 1 of the consolidated financial statements. Goodwill has not elected to use the ten percent of indirect cost rate allowed under the Uniform Guidance. 27

31 Independent Auditor s Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards The Board of Directors Goodwill Industries of Central Arizona, Inc. and Subsidiaries Phoenix, Arizona We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, the consolidated financial statements of Goodwill Industries of Central Arizona, Inc. and Subsidiaries (Goodwill), which comprise the consolidated statement of financial position as of December 31, 2016, and the related consolidated statements of activities, functional expenses, and cash flows for the year then ended, and the related notes to the consolidated financial statements, and have issued our report thereon dated March 29, Internal Control over Financial Reporting In planning and performing our audit of the consolidated financial statements, we considered Goodwill s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the consolidated financial statements, but not for the purpose of expressing an opinion on the effectiveness of Goodwill s internal control. Accordingly, we do not express an opinion on the effectiveness of Goodwill s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s consolidated financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether Goodwill s consolidated financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of consolidated financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards N. Central Ave., Ste. 400 Phoenix, AZ T F EOE 28

32 Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Phoenix, Arizona March 29,

33 Independent Auditor s Report on Compliance for Its Major Federal Program and Report on Internal Control Over Compliance Required by the Uniform Guidance The Board of Directors Goodwill Industries of Central Arizona, Inc. and Subsidiaries Phoenix, Arizona Report on Compliance for Its Major Federal Program We have audited Goodwill Industries of Central Arizona, Inc. and Subsidiaries (Goodwill) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on Goodwill s major federal program for the year ended December 31, Goodwill s major federal program is identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal program. Auditor s Responsibility Our responsibility is to express an opinion on the compliance for Goodwill s major federal program based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about Goodwill s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for its major federal program. However, our audit does not provide a legal determination of Goodwill s compliance. Opinion on the Major Federal Program In our opinion, Goodwill has complied, in all material respects, with the compliance requirements referred to above that could have a direct and material effect on its major federal program for the year ended December 31, N. Central Ave., Ste. 400 Phoenix, AZ T F EOE 30