The Broad Institute, Inc. Reports on Federal Awards in Accordance with the OMB Uniform Guidance Year Ended June 30, 2016 EIN

Transcription

1 Reports on Federal Awards in Accordance with the OMB Uniform Guidance Year Ended June 30, 2016 EIN

2 Reports on Federal Awards in Accordance with the OMB Uniform Guidance Year Ended June 30, 2016 Index Page(s) Part I - Financial Statements and Schedule of Expenditures of Federal Awards Report of Independent Auditors Financial Statements and Footnotes Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards Part II - Reports on Internal Control and Compliance Report of Independent Auditors 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 Report of Independent Auditors on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with the OMB Uniform Guidance Part III - Schedule of Findings and Questioned Costs Summary of Auditor s Results Financial Statement Findings Federal Award Findings and Questioned Costs Part IV - Summary of Status of Prior Audit Findings... 38

3 Part I - Financial Statements and Schedule of Expenditures of Federal Awards

4 Report of Independent Auditors To the Board of Directors of The Broad Institute, Inc.: We have audited the accompanying financial statements of The Broad Institute, Inc.,(the Institute ), which comprise the statements of financial position as of June 30, 2016 and 2015, and the related statements of activities and cash flows for the year then ended. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits 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 financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Institute s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers LLP, 101 Seaport Boulevard, Suite 500, Boston, MA T: (617) , F: (617) ,

5 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Institute as of June 30, 2016 and 2015, and its changes in net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal awards for the year ended June 30, 2016 is presented for purposes of additional analysis as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the schedule of expenditures of federal awards is fairly stated, in all material respects, on the basis of accounting described in Note 1, in relation to the 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 November 8, 2016 on our consideration of Institute 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 for the year ended June 30, 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 Institute s internal control over financial reporting and compliance. November 8,

6 Statements of Financial Position June 30, 2016 and 2015 (in thousands of dollars) Assets Cash and cash equivalents $ 134,682 $ 115,863 Agency cash (Note 2) 4,814 5,245 Accounts receivable, net 54,576 37,416 Materials and supplies inventory (Note 2) 15,409 13,958 Prepaid expenses and other assets 41,177 58,062 Deposits with trustee (Note 2) 7,648 13,017 Pledges receivable, net (Note 3) 329, ,012 Beneficial interest in trust (Note 2) 28,625 20,284 Investments (Note 5) 378, ,331 Property, plant and equipment, net (Note 7) 460, ,261 Total assets $ 1,455,268 $ 1,385,449 Liabilities Accounts payable $ 16,409 $ 9,354 Accrued expenses and other liabilities 40,014 33,587 Agency funds payable (Note 2) 4,814 5,245 Advance payments (Note 2) 49,816 36,606 Capital lease obligation (Note 7) 101,389 - Debt, net (Note 8) 313, ,548 Total liabilities 526, ,340 Commitments and contingencies (Note 9) Net Assets Unrestricted 180, ,964 Temporarily restricted 161, ,096 Permanently restricted 586, ,049 Total net assets 928, ,109 Total liabilities and net assets $ 1,455,268 $ 1,385,449 The accompanying notes are an integral part of these financial statements. 3

7 Statements of Activities Years Ended June 30, 2016 and Temporarily Permanently Temporarily Permanently (in thousands of dollars) Unrestricted Restricted Restricted Total Unrestricted Restricted Restricted Total Operating activities Revenues Sponsored research $ 256,705 $ - $ - $ 256,705 $ 204,403 $ - $ - $ 204,403 Endowment returns made available for operations (Note 4) 26, ,981 25, ,931 Fees and services 27, ,308 24, ,918 Gifts and pledges, net 2,488 60,334 (512) 62,310 3,265 64,463 39, ,758 Other income 4, ,546 3, ,604 Net assets released from restrictions 91,147 (91,147) ,176 (59,176) - - Total operating revenues 409,175 (30,813) (512) 377, ,297 5,287 39, ,614 Expenses Research 343, , , ,740 Management and general 63, ,073 61, ,012 Total operating expenses 406, , , ,752 Income (loss) from operations 2,287 (30,813) (512) (29,038) 4,545 5,287 39,030 48,862 Nonoperating activities Nonoperating gains (losses) Investment income , ,138-1,479 Realized and unrealized gains (losses), net 4,166 (2,761) - 1, ,017-2,445 Distribution of endowment made available for operations - 28,755 (28,755) - - 3,733 (3,733) - Change in beneficial interest in trust - 8,341-8,341-20,284-20,284 Endowment returns made available for operations (Note 4) - (26,981) - (26,981) - (25,931) - (25,931) Total nonoperating gains (losses), net 4,366 8,226 (28,755) (16,163) 769 1,241 (3,733) (1,723) Increase (decrease) in net assets 6,653 (22,587) (29,267) (45,201) 5,314 6,528 35,297 47,139 Net assets Beginning of year 173, , , , , , , ,970 End of year $ 180,617 $ 161,509 $ 586,782 $ 928,908 $ 173,964 $ 184,096 $ 616,049 $ 974,109 The accompanying notes are an integral part of these financial statements. 4

8 Statements of Cash Flows Years Ended June 30, 2016 and 2015 (in thousands of dollars) Cash flows from operating activities (Decrease) increase in net assets $ (45,201) $ 47,139 Adjustments to reconcile change in net assets to net cash provided in operating activities Depreciation 42,971 38,698 Amortization (110) 46 Pledge discount (2,187) (3,162) Provision for bad debts Realized and unrealized gains, net (1,405) (2,445) (Gain) loss on disposal of equipment, net (694) 278 Contributed securities (1,982) (6,928) Proceeds from sale of contributed securities 1,982 6,928 Change in beneficial interest in trust (8,341) (20,284) Donated equipment (2,125) (2,237) Change in operating assets and liabilities Pledges receivable 80,842 31,925 Accounts receivable (17,401) (9,745) Materials and supplies inventory (1,451) (4,252) Prepaid expenses and other assets 16,865 (35,368) Agency cash Accounts payable 4,144 2,412 Accrued expenses and other liabilities 6,236 5,047 Agency funds payable (431) (584) Advance payments 13,210 9,317 Contributions used for long-term investments (75,015) (56,450) Net cash provided in operating activities 10, Cash flows from investing activities Purchase of property, plant and equipment (36,597) (36,616) Proceeds from sale of equipment 1, Proceeds from deposits with trustee 5,369 10,321 Purchase of investments (86,004) (57,857) Proceeds from sale of investments 61,981 35,931 Net cash used in investing activities (53,944) (47,372) Cash flows from financing activities Payments on capital leases (331) - Payments on debt (12,500) (14,635) Contributions provided for long-term investments 75,015 56,450 Net cash provided in financing activities 62,184 41,815 Net increase (decrease) in cash and cash equivalents 18,819 (4,609) Cash and cash equivalents Beginning of year 115, ,472 End of year $ 134,682 $ 115,863 Supplemental information Capital expenditures accrued $ 4,744 $ 1,643 Cash paid for interest 18,299 16,653 Capital expenditures funded by capital lease obligations 101,720 - Contributed securities 1,982 6,928 The accompanying notes are an integral part of these financial statements. 5

9 Notes to the Financial Statements June 30, 2016 and Corporate Organization and Purpose The Broad Institute, Inc. ( the Institute ) located in Cambridge, Massachusetts, is a non-profit organization existing under the laws of the Commonwealth of Massachusetts. The Institute is organized as a collaboration of the Massachusetts Institute of Technology ( MIT ), Harvard University ( Harvard ) and the Harvard-Affiliated Hospitals, around scientific programs and platforms, bringing together biology and technology-focused scientists to jointly build, apply, and share with scientists worldwide the cutting edge tools and knowledge needed to revolutionize medical knowledge and practice. The Institute was first established in 2003 as a laboratory of MIT with an initial $200 million operating gift from The Eli and Edythe Broad Foundation. In order to secure the permanency of the Institute, The Eli and Edythe Broad Foundation pledged an additional endowment gift of $400 million on July 1, 2009 and the Institute became an independent 501(c) (3) organization under a collaboration agreement between the Institute, Harvard, MIT and The Broad Foundation (the Members ). 2. Summary of Significant Accounting Policies Basis of Presentation The financial statements present the activities of the Institute as a whole, including affiliated organizations controlled by the Institute, and have been prepared on the accrual basis of accounting. Resources are classified into three net asset categories according to donor-imposed or other external restrictions. The three net asset categories are defined below. Permanently Restricted Net Assets Permanently restricted net assets are subject to donor-imposed stipulations that they be maintained permanently by the Institute. Generally the donors of these assets permit the Institute to use all or part of the income earned and capital appreciation, if any, on related investments for general or specific purposes. Temporarily Restricted Net Assets Temporarily restricted net assets are subject to donor-imposed stipulations that may or will be met by actions of the Institute and/or the passage of time. Unspent gains on permanent endowment are classified as temporarily restricted until the Institute appropriates and spends such sums in accordance with Massachusetts law, at which time they will be released to unrestricted revenues. Unrestricted Net Assets Unrestricted net assets are not subject to donor-imposed stipulations. Revenues are reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments and other assets or liabilities are reported as increases or decreases in unrestricted net assets unless their use is restricted by explicit donor stipulation or law. Expirations of temporary restrictions on net assets, that is, the donor-imposed stipulated purpose has been accomplished and/or the stipulated time period has elapsed, are reported as reclassifications between the applicable classes of net assets. Amounts received for sponsored research (under exchange transactions) are reflected in unrestricted sponsored research revenue or as advance payments if expenditures have yet to be incurred. The accompanying notes are an integral part of these financial statements. 6

10 Notes to the Financial Statements June 30, 2016 and 2015 Contributions Contributions, including unconditional promises to give, are recognized as revenues in the period received. Contributions subject to donor-imposed stipulations that are met in the same reporting period are reported as unrestricted support. Promises to give that are scheduled to be received after the statement of financial position date are shown as increases in temporarily restricted net assets and are reclassified to unrestricted net assets when the purpose or items restrictions are met. Promises to give, subject to donor-imposed stipulations that the corpus be maintained permanently, are recognized as increases in permanently restricted net assets. Conditional promises to give are not recognized until they become unconditional, that is, when the conditions on which they depend are substantially met. Contributions other than cash are generally recorded at market value on the date of the gift (or an estimate of fair value). Contributions of securities are liquidated when received, unless restricted from doing so. Contributions to be received after one year are discounted at the appropriate rate commensurate with risk. Amortization of such discount is recorded as additional contribution revenue in accordance with restrictions imposed by the donor on the original contribution, as applicable. Fundraising expenditures for the years ended June 30, 2016 and 2015 were $3.0 million and $2.6 million, respectively. The Institute reports contributions in the form of equipment as unrestricted operating support at fair market value when received. Dividends, interest and net gains on endowment investments and similar funds are reported as follows: As increases in permanently restricted net assets if the terms of the gift require that they be added to the principal of a permanent endowment fund; As increases in temporarily restricted net assets if the terms of the gift or relevant state law impose restrictions on the current use of the income or net realized and unrealized gains; and As increases in unrestricted net assets in all other cases. Expenses Expenses have been presented in the statement of activities on a functional basis. The Institute uses direct identification to allocate specific expenses, including those related to payroll, equipment depreciation, and materials and services. Indirect expenses, including costs related to the operation and maintenance of long-lived assets, are allocated on the basis of square footage utilized by each function. Cash and Cash Equivalents Cash and cash equivalents include short-term, highly liquid investments with a maturity of three months or less at the time of purchase. Cash and cash equivalents held in the investment portfolio are excluded from the cash and cash equivalents line item on the statements of financial position. Agency Cash Agency cash consists of amounts held by the Institute that relate to funds for the Starr Cancer Consortium ( SCC ). An offsetting amount is recorded for the same amount in liabilities as agency funds payable. Funds awarded to the Institute by SCC were $2.0 million and $2.3 million at June 30, 2016 and 2015, respectively. The accompanying notes are an integral part of these financial statements. 7

11 Notes to the Financial Statements June 30, 2016 and 2015 Materials and Supplies Inventory The materials and supplies inventory balance at June 30, 2016 and 2015 was $15.4 million and $14.0 million, respectively, and consists of laboratory materials and supplies. The Institute uses the moving average cost basis to account for its materials and supplies inventory. Deferred Financing Costs Costs incurred in connection with the issuance of bonds have been deferred and are being amortized over the term of the obligation using the effective interest method. Unamortized bond issuance costs were $612 thousand and $631 thousand at June 30, 2016 and 2015, respectively. These costs are included in prepaid expenses and other assets on the statement of financial position. Deposits with Trustee Deposits with trustee consist principally of investments in money market accounts and have been deposited with a trustee as required under the bond and other agreements. At June 30, 2016 and 2015, respectively, the amounts consist of unexpended bond proceeds of $4.5 million and $9.7 million held for capital expenditures, and restricted cash under escrow agreements of $624 thousand and $3.3 million. The remaining $2.5 million was unrestricted, but not released from escrow by June 30, Beneficial Interest in Trust The Institute has a beneficial interest in a trust. Accordingly, the Institute recognizes its interest in the trust with changes recognized in nonoperating activities. The timing and amounts of distributions are based upon trustee approval and are reported as temporarily restricted gifts. The institute received $37.0 million and $0 in distributions for the years ended June 30, 2016 and 2015, respectively. Investments Investments are carried at fair value. Investment transactions are recorded on the trade date. Property, Plant and Equipment Property, plant and equipment are stated at cost or if received by gift or donation, at fair value, at date of gift. When assets are retired or otherwise disposed of, both the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reported as income or expense for the period. The cost of repairs and maintenance is expensed as incurred, while significant renewals and betterments are capitalized. Depreciation is calculated using the straight-line method, full-year convention for equipment and month of completion or occupancy, whichever is later, for building and leasehold improvements, over the following estimated useful lives: Building and building improvements Equipment Leasehold improvements Capital leases Years 3 8 Years The shorter of useful life or remaining lease term The shorter of useful life or remaining lease term Debt interest costs related to construction projects are capitalized as part of the project during construction. The accompanying notes are an integral part of these financial statements. 8

12 Notes to the Financial Statements June 30, 2016 and 2015 Advance Payments Advance payments represent amounts received by the Institute from corporations, foundations and other external sponsors under terms that generally require the exchange of assets, rights, or privileges between the Institute and the sponsor. Revenue is recognized as expenses are incurred on sponsored projects. Deferred Charges Deferred charges represent differences in timing between incurred expenses and billing, including the carry-forward of over and under recoveries of indirect costs related to research contracts and grants. Deferred charges also include work in progress in the specialized services facility platforms, net of payments to date. These balances are included in prepaid and other assets or in accrued expenses and other liabilities on the statement of financial position depending on their position at June 30. At June 30, 2016 and 2015, the deferred charges in prepaid and other expenses were $31.0 million and $48.4 million, respectively. The deferred charges included in accrued expenses and other liabilities were $2.4 million and $2.2 million at June 30, 2016 and 2015, respectively. Operations The statements of activities report the Institute s operating and nonoperating activities. Operating revenues and expenses consist of those activities attributable to the Institute s current annual research programs and gifts received. Nonoperating revenue includes investment income and realized and unrealized gains and losses on unrestricted cash and investment balances, the permanently restricted endowment, and earnings with deposits with trustee. Sponsored Research Revenue The Institute recognizes revenue from external organizations for services provided. Revenues earned on contracts and grants for research are recognized as related costs are incurred. Research grants provide for the recovery of direct and indirect costs. Direct and indirect costs charged to federal grants are subject to federal audit. Related indirect costs from federal grants are recorded at a fixed rate with carry-forward of over or under recoveries, which have been negotiated with the federal government through June 30, The carry-forward is included in the calculation of negotiated fixed rates in future years. Any adjustment in the rate is included or deducted from sponsored research revenue. The Institute received 56% of its sponsored research revenues from governmental agencies for the years ended June 30, 2016 and 2015, of which 98% and 99% was received from the National Institutes of Health ( NIH ), respectively. Retirement Plan The Institute maintains a retirement plan under Internal Revenue Code 401(k). This plan is funded from both employee voluntary contributions through payroll deductions and a company match contribution. The Institute matches employee contributions, dollar for dollar, up to 6% of the employees annual salary as well as an additional 3%, each year of discretionary contribution on compensation to eligible employees. Employer contributions to the plan for the years ended June 30, 2016 and 2015 totaled $7.8 million and $6.9 million, respectively. Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. The accompanying notes are an integral part of these financial statements. 9

13 Notes to the Financial Statements June 30, 2016 and 2015 Related Party The Institute has entered into agreements with related parties, including collaborations with third-party non-profit and for-profit entities, for research. Tax Status The Institute is a qualified tax-exempt organization under section 501(c) (3) of the Internal Revenue Code. 3. Pledges Receivable Pledges receivable represent unconditional promises to give. Pledges expected to be collected within one year are recorded at their net realizable value. Pledges that are expected to be collected in future years are recorded at the present value of estimated future cash flows. The present value of estimated future cash flows has been measured using risk-free rates of return adjusted for market and credit risk established at the end of the measurement period using The Fair Value Option for Financial Assets and Financial Liabilities in accounting for pledges receivable. Pledges receivable are classified as Level 3 under the valuation hierarchy described in Note 6. The measurement period of outstanding pledges is determined on a pledge by pledge basis. Included in pledges receivable is the remaining Eli and Edythe Broad Foundation endowment pledge. According to The Broad Foundation gift agreement, the remaining pledge shall be adjusted by the Foundation s cumulative rate of return on its investments. At December 31, 2015, the Foundation s annual rate of return was (0.17)%, decreasing the Institute s pledge receivable due from the Foundation by $528 thousand. At December 31, 2014, the Foundation s annual rate of return was 11.7%, increasing the Institute s pledge receivable due from the Foundation by $38.9 million. The Foundation and Institute adopted a change to the payment schedule in The Foundation is scheduled to make quarterly payments of $15.0 million until the remaining pledge balance, adjusted for annual investment returns, is paid in full. Pledges receivable included in the statements of financial position at June 30, 2016 and 2015 are expected to be realized as follows: (in thousands) Less than one year $ 77,154 $ 75,511 One to five years 253, ,200 More than five years - 25,341 Pledges receivable 330, ,052 Less: Present value discount (853) (3,040) Pledges receivable, net $ 329,357 $ 408,012 The accompanying notes are an integral part of these financial statements. 10

14 Notes to the Financial Statements June 30, 2016 and 2015 A rollforward of pledges receivable at June 30, 2016 and 2015 is as follows (in thousands): Pledges receivable, net at June 30, 2014 $ 436,775 New pledges 69,380 Pledge payments received (101,305) Pledge discount 3,162 Pledges receivable, net at June 30, ,012 New pledges 45,823 Pledge payments received (126,665) Pledge discount 2,187 Pledges receivable, net at June 30, 2016 $ 329,357 At June 30, 2016 and 2015, the Institute held $17.0 million and $17.4 million, respectively, of conditional pledges not included in pledges receivable. 4. Endowment Fund The Institute adopted the accounting standard Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), and Enhanced Disclosures for AII Endowment Funds. This standard provides guidance on the net asset classification of donor-restricted endowment funds for a not-for-profit organization that is subject to an enacted version of UPMIFA. The Institute s endowment consists of a donor-restricted permanent endowment that will be utilized to support the Institute s primary mission of genomic-based scientific research. Temporarily restricted investment income related to the permanent endowment has also been designated to this fund. Net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. Massachusetts enacted a version of UPMIFA which allows the Institute to appropriate for expenditure or accumulate so much of an endowment fund as the Institute determines is prudent for the uses, benefits, purposes and duration for which the endowment fund is established, subject to the intent of the donor as expressed in the gift instrument. Unless otherwise stated in the gift instrument, the assets in an endowment fund should be donor-restricted assets until appropriated for expenditure by the Board of Directors. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure in a manner consistent with the standard of prudence prescribed by UPMIFA. In accordance with UPMIFA, the Institute considers the following factors in making a determination to appropriate or accumulate endowment funds: a. The duration and preservation of the fund b. The purpose of the Institute and the donor-restricted endowment fund c. General economic conditions d. The possible effect of inflation and deflation e. The expected total rate of return from income and the depreciation of investments f. Other resources of the Institute g. The investment policies of the Institute At June 30, 2016, the endowment net asset composition by type of fund consisted of the following: The accompanying notes are an integral part of these financial statements. 11

15 Notes to the Financial Statements June 30, 2016 and Temporarily Permanently (in thousands) Unrestricted Restricted Restricted Total Donor-restricted funds $ - $ - $ 586,782 $ 586,782 Changes in endowment net assets for the year ended June 30, 2016 consisted of the following: 2016 Temporarily Permanently (in thousands) Unrestricted Restricted Restricted Total Endowment net assets at beginning of year $ - $ - $ 616,049 $ 616,049 Contributions and pledges - - (512) (512) Investment return Investment income Realized and unrealized gains, net - (2,614) - (2,614) Distribution of endowment made available for operations - 28,755 (28,755) - Endowment returns made available for operations - (26,981) - (26,981) Endowment net assets at end of year $ - $ - $ 586,782 $ 586,782 At June 30, 2015, the endowment net asset composition by type of fund consisted of the following: 2015 Temporarily Permanently (in thousands) Unrestricted Restricted Restricted Total Donor-restricted funds $ - $ - $ 616,049 $ 616,049 The accompanying notes are an integral part of these financial statements. 12

16 Notes to the Financial Statements June 30, 2016 and 2015 Changes in endowment net assets for the year ended June 30, 2015 consisted of the following: 2015 Temporarily Permanently (in thousands) Unrestricted Restricted Restricted Total Endowment net assets at beginning of year $ - $ 18,956 $ 580,752 $ 599,708 Contributions and pledges ,030 39,030 Investment return Investment income - 1,134-1,134 Realized and unrealized gains, net - 2,108-2,108 Distribution of endowment made available for operations - 3,733 (3,733) - Endowment returns made available for operations - (25,931) - (25,931) Endowment net assets at end of year $ - $ - $ 616,049 $ 616,049 Endowment Spending The Institute has adopted a spending policy to calculate annual distributions from its endowment funds. The policy prescribes distributions from the endowment by weighting 70% of the previous year s distribution, adjusted for inflation, and 30% to an establish spending rate of 4.7% of the endowment value two years prior. If the total calculated annual distribution exceeds 6% of the prior year s endowment value, then the annual distribution must be reduced, or unanimous approval of the Members must be secured. The spending rate applied to the endowment value two years prior was 4.7%, yielding a distribution of $27.0 million and $25.9 million for the years ending June 30, 2016 and 2015, respectively. The accompanying notes are an integral part of these financial statements. 13

17 Notes to the Financial Statements June 30, 2016 and Investments The fair value of investments were $378.8 million and $353.3 million at June 30, 2016 and 2015, respectively, including $5.1 million of Common stock at June 30, Investment return, net is comprised of the following for the years ended June 30, 2016 and 2015: (in thousands) Unrestricted Investment income $ 200 $ 341 Change in net unrealized gains (losses) on investments 2,635 (2,004) Realized gains on investments, net 1,531 2,432 Total unrestricted 4, Temporarily restricted Investment income 872 1,138 Change in net unrealized losses on investments (11,355) (8,716) Realized gains on investments, net 8,594 10,733 Total temporarily restricted (1,889) 3,155 $ 2,477 $ 3,924 Investment management fees of $1.6 million for the years ended June 30, 2016 and 2015 are netted against investment income and realized gains. 6. Fair Value Measurements The Institute has valued its financial instruments in accordance with the principles of accounting standards which establish a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace. Observable inputs reflect market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the entity s own assumptions about how market participants would value an asset or liability based on the best information available. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The Institute follows a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable. The three levels of inputs are as follows: Level 1 Level 2 Level 3 Quoted prices in active markets for identical assets or liabilities. Market price data is generally obtained from relevant exchange or dealer markets. Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the same term of the assets and liabilities. Inputs are obtained from various sources including market participants, dealers and brokers. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of assets and liabilities. The accompanying notes are an integral part of these financial statements. 14

18 Notes to the Financial Statements June 30, 2016 and 2015 The Institute has utilized the net asset valuation ( NAV ) reported by each of the underlying funds as a practical expedient to estimate the value of the investment. In 2016, the Institute retrospectively adopted ASU , Disclosures for Investments in Certain Entities that Calculate NAV per Share (or its Equivalent)( ASU ), which clarified how investments valued using NAV as a practical expedient within the fair value hierarchy should be classified. ASU removes the requirement to classify within the fair value hierarchy table certain funds measured at NAV or its equivalent as a practical expedient to estimate fair value. The adoption did not impact the Institute s statements of financial position, statements of activities, or statements of cash flows and resulted only in changes to the fair value footnote disclosures. The table below represents the Institute s financial instruments at fair value at June 30, 2016, grouped by the valuation hierarchy as defined above: 2016 Quoted Prices Significant in Active Other Significant Fair Markets for Observable Unobservable Value at Identical Assets Inputs Inputs June 30, (in thousands) (Level 1) (Level 2) (Level 3) 2016 Common stock $ 5,069 $ - $ - $ 5,069 Deposits with trustee 7, ,648 Pledges receivable, net , ,357 Beneficial interest in trust - 28,625 28,625 Total assets at fair value $ 12,717 $ - $ 357,982 $ 370,699 The table below represents the Institute s financial instruments at fair value at June 30, 2015, grouped by the valuation hierarchy as defined above: 2015 Quoted Prices Significant in Active Other Significant Fair Markets for Observable Unobservable Value at Identical Assets Inputs Inputs June 30, (in thousands) (Level 1) (Level 2) (Level 3) 2015 Deposits with trustee $ 13,017 $ - $ - $ 13,017 Pledges receivable, net , ,012 Beneficial interest in trust ,284 20,284 Total assets at fair value $ 13,017 $ - $ 428,296 $ 441,313 The accompanying notes are an integral part of these financial statements. 15

19 Notes to the Financial Statements June 30, 2016 and 2015 Investments include units in the CareGroup Investment Partnership, LLP and the Global Endowment Fund II, LP (the Funds ). Profit and losses of the Funds are allocated to the partners in the Funds according to their respective units in the Funds. The units are valued utilizing the NAV provided by the Funds. The Funds determine net asset values based on the net contribution to its underlying investment funds and its allocated share of the undistributed profits and losses, including realized and unrealized gains and losses, based on the information provided by the management or administrator of the Investment Funds, which may include the audited financial statements of the Investment Funds. The Institute has performed due diligence around the investments and has determined that NAV is an appropriate measure of fair value at June 30. Fair value of the Funds using NAV were $373.7 million and $353.3 million at June 30, 2016 and 2015, respectively. The Funds liquidity policy sets the parameters for any participant seeking to liquidate funds as follows: CareGroup Investment Partnership, LLP for up to 6% of total investments, investments are to be convertible within ten days; for the next 19% of the total investments, one-half is to be distributed within ten days and the remainder within sixty days; and for the next 75%, one quarter is to be distributed within ten days, one quarter within sixty days and the remainder within ninety days. If at any time, the withdrawal requested by a participant of the Fund is greater than the liquid investments held, semi-liquid or illiquid investments are to be used which may result in distribution delays due to the illiquid nature of such funds. For the Global Endowment Fund II, LP up to 100% of total investments, with a minimum remaining investment of $10.0 million, annually on last business day of year. Redemption notice is to be provided on or prior to September 1 of the year in question. Investment allocation at June 30, 2016 and 2015 was as follows: Hedged equity/credit 38 % 42 % Equity Cash and cash equivalents Real estate/real assets 9 5 Fixed income 4 3 Common stock % 100 % For the rollforward of pledges receivable, refer to Note 3. Beneficial interest in trust is classified within Level 3 because, for hierarchy classification purposes, the Institute cannot look through to the underlying securities held in the trust. The accompanying notes are an integral part of these financial statements. 16

20 Notes to the Financial Statements June 30, 2016 and 2015 The table below is a rollforward of the Institute s beneficial interest in trust classified within Level 3 of the fair value hierarchy at June 30, 2016 and 2015: (in thousands) Beneficial interest in trust at June 30, 2015 $ 20,284 Interest in trust 45,341 Distributions (37,000) Beneficial interest in trust at June 30, 2016 $ 28,625 The methods described above may produce a fair value that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Institute believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investments, it is at least reasonably possible that changes in the value of investment securities will occur in the near term and that such changes could materially affect market values and the amounts reported in the statement of financial position. 7. Property, Plant and Equipment The major categories of property, plant and equipment at June 30, 2016 and 2015 are summarized as follows: (in thousands) Land $ 25,000 $ 25,000 Building and building improvements 295, ,732 Equipment 160, ,195 Leasehold improvements 41,055 38,917 Building under capital lease 101,720 - Assets under construction 4, Total property, plant and equipment, gross 627, ,459 Accumulated depreciation (167,389) (148,198) Total property, plant and equipment, net $ 460,221 $ 360,261 Effective February 1, 2016, the Institute has a 50 year, $101.7 million capital lease which relates to building space. The lease provides for monthly installments of $457 thousand, including interest of 0.4% through January 31, Principal and interest payments relating to the capital lease were $331 thousand and $2.1 million, respectively, for the year ended June 30, For the years ended June 30, 2016 and 2015, respectively, the Institute had total depreciation expense of $43.0 million and $38.7 million and net (gain) loss on equipment disposals of $(694) thousand and $278 thousand. Accumulated depreciation related to building leased through capital leases was $848 thousand at June 30, The accompanying notes are an integral part of these financial statements. 17

21 Notes to the Financial Statements June 30, 2016 and Debt In May 2011, the Massachusetts Development Finance Agency (MDFA) issued $259.9 million and $83.6 million, respectively, of Revenue Bonds (the Series A and Series B ) on behalf of the Institute. The Series A Bonds are tax-exempt bonds and the Series B Bonds are federally taxable bonds. The proceeds from the bonds are being used by the Institute to finance the acquisition and construction of a building at 75 Ames Street, certain leasehold and building improvements, certain equipment and to repay a July 2010 loan used to finance leasehold improvements. The Series A Bonds mature in full on April 1, Interest is payable semiannually, each April 1 and October 1, at an annual rate ranging from 3.70% to 5.38%. The original issue premium ( OIP ) and discount ( OID ) of $5.5 million and $1.3 million, respectively, are being amortized over the life of the Series A Bonds using the effective interest rate method. OIP amortization income for the years ended June 30, 2016 and 2015 was $161 thousand and $155 thousand, respectively. OID amortization expense for the years ended June 30, 2016 and 2015 was $38 thousand and $37 thousand, respectively. These amortization amounts are included in interest expense and capitalized as part of the cost of the building through occupancy. The Series A Bonds maturing after April 1, 2021 are subject to optional redemption prior to maturity at the direction of the Institute at 100% their principal amount, plus accrued interest to the redemption date. The Series A Bonds are subject to mandatory redemption beginning on April 1, 2029 and on each April 1 thereafter at their principal amounts without premium, plus accrued interest to the redemption date. The Series B Bonds mature in full on April 1, Interest is payable semiannually, each April 1 and October 1, at an annual rate ranging from 1.15% to 4.87%. The OID of $282 thousand is being amortized over the life of the Series B Bonds using the effective interest rate method. OID amortization income for the year ended June 30, 2016 was $6 thousand and OID amortization expense for the year ended June 30, 2015 was $69 thousand, and capitalized as part of the cost of the building. The Series B Bonds are subject to optional redemption prior to maturity at the direction of the Institute at 100% their principal amount, plus accrued interest to the redemption date. The fair value of the Institute s bonds, based on available market data, at June 30, 2016 and 2015 was $358.9 million and $361.5 million, respectively. The following schedule summarizes principal installments due in the next five years and thereafter: Series A Series B (in thousands) Bonds Bonds Total 2017 $ - $ 12,500 $ 12, ,500 12, ,500 12, ,500 12, ,380-12,380 Thereafter 247, ,550 Unamortized premium 4,985-4,985 Unamortized discount (1,186) 189 (997) Debt, net $ 263,729 $ 50,189 $ 313,918 The accompanying notes are an integral part of these financial statements. 18

22 Notes to the Financial Statements June 30, 2016 and Commitments and Contingencies The Institute is the lessee of space under both operating and capital leases. Rent expense relating to leases was $14.8 million and $22.3 million for the years ended June 30, 2016 and 2015, respectively. Future minimum payments under these operating and capital leases are as follows: (in thousands) Operating Capital 2017 $ 5,485 $ 5, ,688 5, ,433 5, ,723 5, ,781 5,482 Thereafter 11, ,397 Total lease payments due $ 32,085 $ 271,807 The Institute has made certain purchase commitments not reflected in the statement of financial position at June 30, 2016 and 2015, in the amount of $22.2 million and $17.4 million, respectively, mainly related to purchases of scientific lab supplies, equipment and utilities not yet received. 10. Subsequent Events The Institute has assessed the impact of subsequent events through November 8, 2016, the date the audited financial statements were issued. The accompanying notes are an integral part of these financial statements. 19

23 Schedule of Expenditures of Federal Awards

24 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Federal Grantor/Pass-through Grantor/Program or Cluster Title Award/Pass-through CFDA Total Passed Entity Identification Number Federal Through to Number Expenditures Subrecipients Research and Development Cluster Department of Health and Human Services National Institutes of Health (NIH) Direct Human Genome Research U54HG $ 32,728,197 $ - Human Genome Research R01HG ,099 - Human Genome Research P50HG ,858, ,064 Human Genome Research U54HG ,116, ,077 Human Genome Research U41HG ,512 79,682 Human Genome Research U01HG ,222 - Human Genome Research R25HG ,201 - Human Genome Research R01HG ,652 - Human Genome Research R01HG ,083 - Human Genome Research K99HG ,987 - Human Genome Research RM1HG ,598 - Human Genome Research UM1HG ,067,019 14,035 Human Genome Research UM1HG ,360 20,299 Subtotal - Human Genome Research 47,453,756 1,009,157 Mental Health Research Grants U01MH ,293,649 - Mental Health Research Grants R01MH , ,021 Mental Health Research Grants U01MH ,502 - Mental Health Research Grants R01MH ,704 44,698 Mental Health Research Grants R21MH ,009 - Mental Health Research Grants U01MH ,139 - Mental Health Research Grants R01MH ,873 - Mental Health Research Grants R01MH Mental Health Research Grants R01MH ,459,956 - Mental Health Research Grants R01MH ,887 - Subtotal - Mental Health Research Grants 9,359, ,719 Research Infrastructure Programs R24OD ,085 90,780 Subtotal - Research Infrastructure Programs 428,085 90,780 Trans-NIH Research Support R01DK ,208, ,472 Trans-NIH Research Support U54DK ,786,433 1,865,157 Trans-NIH Research Support DP1MH ,425 - Trans-NIH Research Support U54HG ,647, ,419 Trans-NIH Research Support U54DK ,477 - Subtotal - Trans-NIH Research Support 8,261,329 3,531,048 Cancer Cause and Prevention Research R01CA ,155 - Cancer Cause and Prevention Research R01CA ,739 - Subtotal - Cancer Cause and Prevention Research 232,894 - Cancer Detection and Diagnosis Research U24CA ,269,062 2,027,797 Cancer Detection and Diagnosis Research U24CA ,393,569 1,077 Cancer Detection and Diagnosis Research U24CA ,861 - Cancer Detection and Diagnosis Research R33CA ,384 - Cancer Detection and Diagnosis Research U01CA ,827 - Subtotal - Cancer Detection and Diagnosis Research 5,834,703 2,028,874 Cancer Biology Research U24CA , ,735 Cancer Biology Research R01CA ,050 31,428 Cancer Biology Research U01CA ,922 - Cancer Biology Research U01CA ,086 - Cancer Biology Research R01CA ,520 79,745 Cancer Biology Research U24CA ,877 - Subtotal - Cancer Biology Research 1,802, ,908 Cancer Centers Support Grants U54CA ,902 33,167 Subtotal - Cancer Centers Support Grants 77,902 33,167 The accompanying notes are an integral part of this schedule. 21

25 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Federal Grantor/Pass-through Grantor/Program or Cluster Title Award/Pass-through CFDA Total Passed Entity Identification Number Federal Through to Number Expenditures Subrecipients Research and Development Cluster Department of Health and Human Services National Institutes of Health (NIH) Direct Cardiovascular Diseases Research U54HL ,486,092 - Cardiovascular Diseases Research R01HL ,925 - Cardiovascular Diseases Research K99HL ,559 - Subtotal - Cardiovascular Diseases Research 2,601,576 - Arthritis, Musculoskeletal and Skin Diseases Research R01AR ,102 - Subtotal - Arthritis, Musculoskeletal and Skin Diseases Research 138,102 - Diabetes, Digestive, and Kidney Diseases Extramural Research U01DK ,748,490 40,998 Diabetes, Digestive, and Kidney Diseases Extramural Research U54DK ,638, ,563 Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK ,395 74,164 Diabetes, Digestive, and Kidney Diseases Extramural Research K01DK ,941 - Diabetes, Digestive, and Kidney Diseases Extramural Research R01DK ,333 27,859 Diabetes, Digestive, and Kidney Diseases Extramural Research U01DK ,491 45,463 Subtotal - Diabetes, Digestive, and Kidney Diseases Extramural Research 10,499, ,047 Extramural Research Programs in the Neurosciences and Neurological Disorders R24NS ,431 - Extramural Research Programs in the Neurosciences and Neurological Disorders R01NS ,539 - Subtotal - Extramural Research Programs in the Neurosciences and Neurological Disorders 458,970 - Allergy, Immunology and Transplantation Research U19AI ,516, ,972 Allergy, Immunology and Transplantation Research R01AI , ,724 Allergy, Immunology and Transplantation Research R21AI ,222 - Allergy, Immunology and Transplantation Research 1R01AI ,233, ,520 Allergy, Immunology and Transplantation Research R01AI , ,941 Allergy, Immunology and Transplantation Research R33AI ,560 - Allergy, Immunology and Transplantation Research R21AI ,275 - Allergy, Immunology and Transplantation Research R21AI ,709 - Allergy, Immunology and Transplantation Research U24AI ,191 - Allergy, Immunology and Transplantation Research U24AI ,305 - Subtotal - Allergy, Immunology and Transplantation Research 9,883, ,157 Biomedical Research and Research Training R01GM ,629 - Biomedical Research and Research Training R01GM ,682 16,140 Biomedical Research and Research Training R01GM ,803 - Biomedical Research and Research Training R01GM ,583 - Biomedical Research and Research Training R01GM ,442 - Biomedical Research and Research Training P50GM (26,295) - Subtotal - Biomedical Research and Research Training 1,928,844 16,140 Aging Research U01AG ,604,603 1,165,089 Subtotal - Aging Research 1,604,603 1,165,089 Vision Research R21EY ,109 - Subtotal - Vision Research 41,109 - Medical Library Assistance R13LM (10,052) - Subtotal - Medical Library Assistance (10,052) - NIH National Heart, Lung, and Blood Institute HHSN C 93.RD 6,991,358 - NIH National Heart, Lung, and Blood Institute HHSN C 93.RD 6,351,566 - Subtotal - NIH National Heart, Lung, and Blood Institute Contracts 13,342,924 - NIH National Cancer Institute HHSN C 93.RD 3,066, ,506 Subtotal - NIH National Cancer Institute Contract 3,066, ,506 Subtotal - National Institutes of Health - Direct 117,005,459 10,812,592 The accompanying notes are an integral part of this schedule. 22

26 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Federal Grantor/Pass-through Grantor/Program or Cluster Title Award/Pass-through CFDA Total Passed Entity Identification Number Federal Through to Number Expenditures Subrecipients Research and Development Cluster Department of Health and Human Services National Institutes of Health (NIH) Pass-through Environmental Health - Harvard School of Public Health ,719 - Subtotal - Environmental Health 10,719 - Oral Diseases and Disorders Research - The Ohio State University ,516 - Subtotal - Oral Diseases and Disorders Research 168,516 - NIEHS Superfund Hazardous Substances_ Basic Research and Education - Boston University ,737 - Subtotal - Superfund Hazardous Substances_Basic Research and Education 186,737 - Human Genome Research - Massachusetts Institute of Technology ,666 - Human Genome Research - Dana Farber Cancer Institute ,525 - Human Genome Research - Dana Farber Cancer Institute ,162 - Human Genome Research - Brigham & Women's Hospital, Inc ,128 - Human Genome Research - University of California, San Diego ,561 - Human Genome Research - University of California, Santa Cruz A S007-P ,139 - Human Genome Research - Harvard University ,941 - Human Genome Research - Harvard School of Public Health ,788 - Subtotal - Human Genome Research 2,018,910 - Research and Training in Complementary and Alternative Medicine - University of Washington UWSC8764*(BPO11388) ,000 - Subtotal - Research and Training in Complementary and Alternative Medicine 30,000 - Mental Health Research Grants - Mt Sinai School of Medicine ,989 - Mental Health Research Grants - Massachusetts General Hospital ,620 - Mental Health Research Grants - Harvard University ,735 - Mental Health Research Grants - Harvard University ,019 - Mental Health Research Grants - Massachusetts General Hospital ,509 - Mental Health Research Grants - University of California, Los Angeles 2000 G TB ,550 - Mental Health Research Grants - Mt Sinai School of Medicine ,378 - Mental Health Research Grants - Massachusetts General Hospital ,121 - Mental Health Research Grants - Oregon Health & Science University _BI ,747 - Mental Health Research Grants - University of North Carolina ,346 - Subtotal - Mental Health Research Grants 2,611,014 - Alcohol Research Programs - University of Texas at Austin UTA ,000 - Subtotal - Alcohol Research Programs 120,000 - Trans-NIH Research Support - Redeemer's University U01HG ,065 - Trans-NIH Research Support - University of Chicago FP A ,271 - Trans-NIH Research Support - University of Maryland, Baltimore ,991 - Trans-NIH Research Support - The Jackson Laboratory ,106 - Subtotal - Trans-NIH Research Support 275,433 - Cancer Cause and Prevention Research - Brigham & Women's Hospital, Inc ,931 - Cancer Cause and Prevention Research - University of California, San Diego ,447 - Cancer Cause and Prevention Research - Harvard School of Public Health ,109 - Subtotal - Cancer Cause and Prevention Research 505,487 - Cancer Detection and Diagnostic Research - Massachusetts General Hospital ,007 - Cancer Detection and Diagnostic Research - Dana Farber Cancer Institute ,085 - Subtotal - Cancer Detection and Diagnostic Research 262,092 - Cancer Treatment Research - Children's Hospital Boston ,255 - Cancer Treatment Research - Massachusetts General Hospital ,792 - Cancer Treatment Research - The Ohio State University ,702 - Cancer Treatment Research - Dana Farber Cancer Institute ,736 - Subtotal - Cancer Treatment Research 643,485 - Cancer Biology Research - Weizmann Institute of Science R01CA ,736 - Cancer Biology Research - Dana Farber Cancer Institute ,321 - Cancer Biology Research - Dana Farber Cancer Institute ,090 - Cancer Biology Research - Dana Farber Cancer Institute ,439 - Cancer Biology Research - University of California, San Diego ,806 - Subtotal - Cancer Biology Research 768,392 - The accompanying notes are an integral part of this schedule. 23

27 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Federal Grantor/Pass-through Grantor/Program or Cluster Title Award/Pass-through CFDA Total Passed Entity Identification Number Federal Through to Number Expenditures Subrecipients Research and Development Cluster Department of Health and Human Services National Institutes of Health (NIH) Pass-through Cardiovascular Diseases Research - Massachusetts General Hospital (42,541) - Cardiovascular Diseases Research - Massachusetts General Hospital ,613 - Cardiovascular Diseases Research - Massachusetts General Hospital ,054 - Cardiovascular Diseases Research - Washington University WU ,260 - Cardiovascular Diseases Research - Massachusetts General Hospital ,660,809 - Cardiovascular Diseases Research - Massachusetts Institute of Technology ,046 - Cardiovascular Diseases Research - Brigham & Women's Hospital, Inc ,110 - Cardiovascular Diseases Research - University of Maryland School of Medicine ,688 - Subtotal - Cardiovascular Diseases Research 5,423,039 - Lung Diseases Research - Brigham & Women's Hospital, Inc ,934 - Lung Diseases Research - Harvard School of Public Health ,795 - Subtotal - Lung Diseases Research 530,729 - Blood Diseases and Resources Research - Brigham & Women's Hospital, Inc ,934 - Subtotal - Blood Diseases and Resources Research 207,934 - Arthritis, Musculoskeletal and Skin Diseases Research - Feinstein Institute for Medical Research ,160 - Arthritis, Musculoskeletal and Skin Diseases Research - Feinstein Institute for Medical Research ,231 - Arthritis, Musculoskeletal and Skin Diseases Research - Feinstein Institute for Medical Research BI ,566 - Arthritis, Musculoskeletal and Skin Diseases Research - Brigham & Women's Hospital, Inc ,100 - Arthritis, Musculoskeletal and Skin Diseases Research - Brigham & Women's Hospital, Inc ,349 - Subtotal - Arthritis, Musculoskeletal and Skin Diseases Research 593,406 - Diabetes, Digestive, and Kidney Diseases Extramural Research - Dana Farber Cancer Institute ,022 - Diabetes, Digestive, and Kidney Diseases Extramural Research - Massachusetts General Hospital ,424 - Diabetes, Digestive, and Kidney Diseases Extramural Research - Children's Hospital Boston PO# ,317 - Diabetes, Digestive, and Kidney Diseases Extramural Research - George Washington University S-DPP1314-JB ,821 - Diabetes, Digestive, and Kidney Diseases Extramural Research - Beth Israel Hospital R01DK ,677 - Diabetes, Digestive, and Kidney Diseases Extramural Research - University of Michigan (2,953) - Diabetes, Digestive, and Kidney Diseases Extramural Research - Massachusetts General Hospital ,306 - Diabetes, Digestive, and Kidney Diseases Extramural Research - Massachusetts General Hospital ,882 - Diabetes, Digestive, and Kidney Diseases Extramural Research - Montreal Heart Institute B ,286 - Diabetes, Digestive, and Kidney Diseases Extramural Research - Massachusetts General Hospital ,688 - Diabetes, Digestive, and Kidney Diseases Extramural Research - George Washington University 12-D ,050 - Diabetes, Digestive, and Kidney Diseases Extramural Research - Morsani College of Medicine AX ,088 - Subtotal - Diabetes, Digestive, and Kidney Diseases Extramural Research 1,429,608 - The accompanying notes are an integral part of this schedule. 24

28 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Federal Grantor/Pass-through Grantor/Program or Cluster Title Award/Pass-through CFDA Total Passed Entity Identification Number Federal Through to Number Expenditures Subrecipients Research and Development Cluster Department of Health and Human Services National Institutes of Health (NIH) Pass-through Extramural Research Programs in the Neurosciences and Neurological Disorders - Harvard University (18,350) - Extramural Research Programs in the Neurosciences and Neurological Disorders - Harvard School of Public Health ,908 - Extramural Research Programs in the Neurosciences and Neurological Disorders - Harvard School of Public Health ,000 - Extramural Research Programs in the Neurosciences and Neurological Disorders - Massachusetts General Hospital ,177 - Extramural Research Programs in the Neurosciences and Neurological Disorders - Massachusetts General Hospital ,283 - Subtotal - Extramural Research Programs in the Neurosciences and Neurological Disorders 325,018 - Allergy, Immunology and Transplantation Research - Washington University WU ,988,255 - Allergy, Immunology and Transplantation Research - Yale University M13A11432 (A08872) ,481 - Allergy, Immunology and Transplantation Research - Harvard University ,638 - Allergy, Immunology and Transplantation Research - University of Notre Dame TBI ,900 - Allergy, Immunology and Transplantation Research - Harvard School of Public Health ,715 - Allergy, Immunology and Transplantation Research - Washington University WU PO# X ,977 - Allergy, Immunology and Transplantation Research - Harvard School of Public Health ,772 - Allergy, Immunology and Transplantation Research - The Washington University WU ,746 - Allergy, Immunology and Transplantation Research - The Washington University WU ,724 - Allergy, Immunology and Transplantation Research - Mayo Clinic ,647 - Allergy, Immunology and Transplantation Research - University of Kentucky Research Foundation ,819 - Allergy, Immunology and Transplantation Research - Massachusetts General Hospital ,709 - Allergy, Immunology and Transplantation Research - Massachusetts General Hospital ,743 - Allergy, Immunology and Transplantation Research - Massachusetts General Hospital ,405 Allergy, Immunology and Transplantation Research - Massachusetts General Hospital ,629 - Allergy, Immunology and Transplantation Research - Emory University T (5,670) - Allergy, Immunology and Transplantation Research - Dana Farber Cancer Institute ,251 - Allergy, Immunology and Transplantation Research - Harvard University ,676 - Subtotal - Allergy, Immunology and Transplantation Research 3,660,417 - Biomedical Research and Research Training - University of California, San Diego ,124 - Biomedical Research and Research Training - Harvard University ,545 - Biomedical Research and Research Training - Harvard University ,830 - Biomedical Research and Research Training - Harvard University ,323 - Biomedical Research and Research Training - Brigham & Women's Hospital, Inc ,267 - Biomedical Research and Research Training - Harvard University ,460 - Biomedical Research and Research Training - Harvard University ,204 - Subtotal - Biomedical Research and Research Training 1,034,753 - The accompanying notes are an integral part of this schedule. 25

29 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Federal Grantor/Pass-through Grantor/Program or Cluster Title Award/Pass-through CFDA Total Passed Entity Identification Number Federal Through to Number Expenditures Subrecipients Research and Development Cluster Department of Health and Human Services National Institutes of Health (NIH) Pass-through Child Health and Human Development External Research - John Hopkins University ,764 - Child Health and Human Development External Research - Massachusetts General Hospital ,907 - Subtotal - Child Health and Human Development External Research 73,671 - Aging Research - Brigham & Women's Hospital, Inc ,772 - Aging Research - Brigham & Women's Hospital, Inc Aging Research - Rush University Medical Center R01AG ,058 - Aging Research - Rush University Medical Center R01AG ,384 - Aging Research - Rush University Medical Center R01AG ,718 - Aging Research - Rush University Medical Center R01AG ,715 - Subtotal - Aging Research 644,570 - Vision Research - University of Iowa W ,523 - Subtotal - Vision Research 80,523 - NIH National Heart, Lung, and Blood Institute - Massachusetts General Hospital ,660 - Subtotal - NIH National Heart, Lung, and Blood Institute 118,660 - Mediterranean Diet, Metabolites, and Cardiovascular Disease Project Harvard School of Public Health ,886 - Subtotal - Comprehensive Residential Drug Prevention 176,886 - and Treatment Project NIH Allergy and Infectious Diseases - The Scripps Research Institute RD 328,907 - Subtotal - NIH Allergy and Infectious Diseases Contract 328,907 - NIH National Heart, Lung, and Blood Institute - Brigham & Women's Hospital, Inc RD (4,912) - NIH National Heart, Lung, and Blood Institute - University of Mississippi Medical Center BI 93.RD 80,012 - Subtotal - NIH National Heart, Lung, and Blood Institute Contracts 75,100 - NIH NIAID - Tulane University HHSN C 93.RD 292,205 - Subtotal - NIH NIAID Contract 292,205 - NIH National Cancer Institute Leidos Biomedical Research, Inc. 15X RD 1,519,997 - University of Chicago FP RD 95,380 - Washington University WU RD 9,625 - Subtotal - NIH National Cancer Institute Contracts 1,625,002 - Total - National Institutes of Health - Pass-through 24,221,213 - Subtotal - National Institutes of Health 141,226,672 10,812,592 The accompanying notes are an integral part of this schedule. 26

30 Schedule of Expenditures of Federal Awards Year Ended June 30, 2016 Federal Grantor/Pass-through Grantor/Program or Cluster Title Award/Pass-through CFDA Total Passed Entity Identification Number Federal Through to Number Expenditures Subrecipients Research and Development Cluster United States Agency for International Development Direct USAID Foreign Assistance for Programs Overseas - U.S. Agency for International Development AID-OAA-G ,799 - Subtotal - USAID Foreign Assistance for Programs Overseas 213,799 - Department of Health and Human Services Centers for Disease Control and Prevention Direct Genome Annotation RD 52,791 - Subtotal - Department of Health and Human Services Centers for Disease Control and Prevention Contract 52,791 - National Science Foundation Direct Biological Sciences ,657 - Biological Sciences DBI ,235 - Subtotal - Biological Sciences 141,892 - Subtotal - National Science Foundation - Direct 141,892 - National Science Foundation Pass-through Geosciences - Massachusetts General Hospital ,917 - Subtotal - Geosciences 16,917 - Social, Behavioral, and Economic Sciences - Harvard University ,327 - Subtotal - Social, Behavioral, and Economic Sciences 89,327 - Subtotal - National Science Foundation - Pass-through 106,244 - Subtotal - National Science Foundation 248,136 - Department of Defense Direct Research and Technology Development HR ,733 - Subtotal - Department of Defense - Direct 52,733 - Department of Defense Pass-through Military Medical Research and Development Brigham & Women's Hospital, Inc ,712 - Military Medical Research and Development Brigham & Women's Hospital, Inc ,323 - Military Medical Research and Development Massachusetts General Hospital ,412 - Subtotal - Military Medical Research and Development 181,447 - Defense Advanced Research Projects Agency Massachusetts Institute of Technology RD 2,401,194 - Subtotal - Defense Advanced Research Projects Agency Contract 2,401,194 - Subtotal - Department of Defense - Pass-through 2,582,641 - Subtotal - Department of Defense 2,635,374 - U.S. Department of Energy Pass-through Lawrence Berkeley National Laboratory RD 429,141 - Subtotal - U.S. Department of Energy Contract 429,141 - Subtotal - U.S. Department of Energy - Passthrough 429,141 - Total Research and Development Cluster 144,805,913 10,812,592 Total Expenditures of Federal Awards $ 144,805,913 $ 10,812,592 The accompanying notes are an integral part of this schedule. 27

31 Notes to Schedule of Expenditures of Federal Awards Year Ended June 30, Basis of Presentation The accompanying Schedule of Expenditures of Federal Awards (the Schedule ) includes the federal grant transactions of the Institute, and was prepared using the cash basis of accounting. The information in this schedule is presented in accordance with the 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). Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the basic financial statements. The Institute applies its predetermined approved facilities and administrative rate when charging indirect costs to federal awards rather than the 10% de minimis cost rate as described in Section of the Uniform Guidance. For purposes of the Schedule, federal awards include all grants, contracts and similar agreements entered into directly between the Institute and agencies and departments of the federal government and all sub-awards to the Institute by non-federal organizations pursuant to federal grants, contracts and similar agreements. Negative numbers in the Schedule represent adjustments to amounts reported in prior years in the normal course of business. CFDA numbers and pass-through numbers are provided when available. 28

32 PART II - Reports on Internal Controls and Compliance

33 Report of Independent Auditors 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 To the Board of Directors of the The Broad Institute, Inc.: 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 financial statements of The Broad Institute, Inc. (the Institute ), which comprise the statement of financial position as of June 30, 2016, and the related statements of activities and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated November 8, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the Institute 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 financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Institute s internal control. Accordingly, we do not express an opinion on the effectiveness of the Institute 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 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 was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control 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. PricewaterhouseCoopers LLP, 101 Seaport Boulevard, Suite 500, Boston, MA T: (617) , F: (617) ,

34 Compliance and Other Matters As part of obtaining reasonable assurance about whether the Institute s 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 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. 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. November 8,

35 Report of Independent Auditors on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with the OMB Uniform Guidance To the Board of Directors of the The Broad Institute, Inc.: Report on Compliance for Each Major Federal Program We have audited The Broad Institute, Inc. s compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on the Institute s major federal program for the year ended June 30, The Institute 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 programs. Auditors Responsibility Our responsibility is to express an opinion on compliance of the Institute 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 types of 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 the Institute 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 each major federal program. However, our audit does not provide a legal determination of the Institute s compliance. 32

36 Opinion on Each Major Federal Program In our opinion, the Institute complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on its major federal program for the year ended June 30, Report on Internal Control Over Compliance Management of the Institute is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the Institute s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Institute's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance 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 compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. 33

37 The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. November 8,