Management Sciences for Health, Inc.

Transcription

1 Consolidated Financial Statements, Supplemental Information, Schedule of Expenditures of Federal Awards and Reports Required by Government Auditing Standards and the Uniform Guidance For the Years Ended June 30, 2016 and June 30, 2015 The report accompanying these financial statements was issued by BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of BDO International Limited, a UK company limited by guarantee.

2 Management Sciences For Health, Inc. Consolidated Financial Statements, Supplemental Information, Schedule of Expenditures of Federal Awards and Reports Required by Government Auditing Standards and the Uniform Guidance For the Years Ended June 30, 2016 and June 30, 2015

3 Contents Independent Auditor s Report 3-4 Financial Statements Consolidated Statements of Financial Position 6 Consolidated Statements of Activities 7 Consolidated Statements of Functional Expenses 8 Consolidated Statements of Cash Flows 9 Notes to Consolidated Financial Statements Supplemental Information Supplemental Consolidating Schedules Schedule of Indirect Cost Allocation 28 Schedule of Expenditures of Federal Awards Notes to Schedule of Expenditures of Federal Awards 33 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 Each Major Federal Program and Report on Internal Control Over Compliance Required by the Uniform Guidance Schedule of Findings and Questioned Costs Status of Prior Year Findings 42 2

4 Tel: Fax: Two International Place Boston, MA Independent Auditor s Report To the Board of Directors Management Sciences for Health, Inc. Medford, Massachusetts Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Management Sciences for Health, Inc. and its subsidiaries (the Organization ), which comprise the consolidated statement of financial position as of June 30, 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 of 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 that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 3

5 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Management Sciences for Health, Inc. and its subsidiaries as of June 30, 2016, and the changes in their net assets and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Report on Summarized Comparative Information We have previously audited the Organization's 2015 consolidated financial statements, and our report, dated March 30, 2016, expressed an unmodified opinion on those audited consolidated financial statements. In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2015 is consistent, in all material respects, with the audited consolidated financial statements from which it was derived. Other Matters Other Information Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The Consolidating Statement of Financial Position, the Consolidating Statement of Activities and the Schedule of Indirect Cost Allocation are presented for purposes of additional analysis and are not a required part of the basic consolidated financial statements. The accompanying schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administration Requirements Cost Principles and Audit Requirements for Federal Awards is presented for purposes of additional analysis issued by the Comptroller General of the United States, and is also 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 information 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 30, 2017 on our consideration of the Organization 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 internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Organization s internal control over financial reporting and compliance. Boston, Massachusetts March,

6 Consolidated Financial Statements

7 Consolidated Statements of Financial Position (with comparative totals for 2015) June 30, Assets: Cash and cash equivalents $ 32,438,778 $ 20,220,232 Restricted use cash Note 2 781,002 1,834,687 Grants and contracts receivable Note 3 18,673,773 17,963,094 Related party receivables Notes 3, 14 3,290,434 7,330,784 Services performed but not yet invoiced Note 3 19,820,806 13,916,350 Employee advances and other receivables Note 5 2,226,381 2,264,150 Prepaid expenses and other current assets 1,509, ,945 Deposits 409, ,007 Property and equipment, net Note 6 2,406,782 2,760,117 Total Assets $ 81,557,268 $ 67,554,366 Liabilities and Net Assets Liabilities: Accounts payable $ 3,015,187 $ 5,555,576 Accrued expenses and other current liabilities Note 7 11,517,283 6,497,957 Accrued payroll and payroll related liabilities Note 8 13,514,079 15,339,193 Deferred revenue Note 9 7,160,277 3,469,010 Deferred rent Note 12 2,356,493 2,379,576 Total Liabilities 37,563,319 33,241,312 Commitments and Contingencies Notes 12 and 15 Net Assets: Unrestricted: Unrestricted Note 2 43,640,570 33,178,925 Board designated Note , ,549 Total Unrestricted 43,779,864 34,094,474 Temporarily Restricted Note , ,580 Total Net Assets 43,993,949 34,313,054 Total Liabilities and Net Assets $ 81,557,268 $ 67,554,366 See accompanying notes to consolidated financial statements. 6

8 Consolidated Statements of Activities (with comparative totals for 2015) Temporarily Year ended June 30, Unrestricted Restricted Total Total Public Support and Other Revenue: Grants and contract revenue $ 280,653,105 $ - $ 280,653,105 $ 299,780,224 Contributions 7,323, ,574 7,594,811 3,530,180 Interest income 33,335-33,335 2,612 Miscellaneous income 355, ,964 4,340 Net assets released from restrictions (Note 10) 276,069 (276,069) - - Total Public Support and Other Revenue 288,641,710 (4,495) 288,637, ,317,356 Operating Expenses: Program services 240,051, ,051, ,443,440 Supporting Services: Management and general 39,043,353-39,043,353 40,252,016 Fundraising 950, , ,703 Total Supporting Services 39,994,185-39,994,185 40,844,719 Total Operating Expenses 280,045, ,045, ,288,159 Public Support and Other Revenue in Excess (Deficit) of Operating Expenses 8,595,975 (4,495) 8,591,480 4,029,197 Other Changes in Net Assets: Foreign exchange gain/(loss) 1,089,415-1,089,415 (1,298,448) Change in Net Assets 9,685,390 (4,495) 9,680,895 2,730,749 Net Assets, Beginning of Year 34,094, ,580 34,313,054 31,582,305 Net Assets, End of Year $ 43,779,864 $ 214,085 $ 43,993,949 $ 34,313,054 See accompanying notes to consolidated financial statements. 7

9 Consolidated Statements of Functional Expenses (with comparative totals for 2015) Year ended June 30, Program Services Supporting Services Management and General Fundraising Total 2016 Total 2015 Total Salaries and Related Expenses: Salaries, benefits, and taxes $ 103,830,733 $ 27,035,556 $ 555,703 $ 27,591,259 $ 131,421,992 $ 137,958,823 Total Salaries and Related Expenses 103,830,733 27,035, ,703 27,591, ,421, ,958,823 Other Expenses: Subcontract and grant costs 32,059, ,059,411 38,808,892 Consultants 9,052, ,551 50, ,028 9,600,292 12,836,389 Training and workshops 17,652, ,652,465 19,185,752 Equipment and supplies 20,799,905 46,555-46,555 20,846,460 18,258,361 Travel and transportation 22,977,789 1,901,253 77,203 1,978,456 24,956,245 24,539,787 Office supplies and expense 14,065,444 1,432,006-1,432,006 15,497,450 14,867,335 Occupancy 7,934,528 2,956,538-2,956,538 10,891,066 14,539,997 IT and telecommunications 3,387,868 1,358,345-1,358,345 4,746,213 4,343,220 Legal and audit 1,278,191 1,159,101-1,159,101 2,437,292 1,974,824 Outside services 6,959,756 1,263,092-1,263,092 8,222,848 10,329,122 Fundraising expenses , , , ,540 Bad debt expense 46, , ,635 Miscellaneous - 629, , , ,479 Total Expenses before Depreciation 136,214,473 11,244, ,129 11,639, ,853, ,587,333 Depreciation 6, , , , ,001 Total Expenses $ 240,051,550 $ 39,043,353 $ 950,832 $ 39,994,185 $ 280,045,735 $ 299,288,157 See accompanying notes to consolidated financial statements. 8

10 Consolidated Statements of Cash Flows (with comparative totals for 2015) For the years ended June 30, Cash Flows From Operating Activities: Change in net assets $ 9,680,895 $ 2,730,749 Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation 769, ,001 Non-cash gifts (25,222) - Bad debt expense 46, ,635 Changes in certain assets and liabilities: Restricted use cash 1,053,685 1,015,511 Grants and contracts receivable (757,531) 1,403,159 Related party receivables 4,040,350 (4,256,519) Services performed but not yet invoiced (5,904,456) (4,091,000) Employee advances and other receivables 37, ,663 Prepaid expenses and other current assets (841,877) 428,076 Deposits 187,517 - Accounts payable (2,540,389) (3,068,677) Accrued expenses and other current liabilities 5,019,326 2,115,288 Accrued payroll and payroll related liabilities (1,825,114) 3,304,715 Deferred revenue 3,691,267 (764,955) Deferred rent (23,083) 1,691,206 Net Cash Provided by Operating Activities 12,609,815 1,910,852 Cash Flows From Investing Activities: Purchase of fixed assets (391,269) - Net Cash Used In Investment Activities (391,269) - Net Increase In Cash and Cash Equivalents 12,218,546 1,910,852 Cash and Cash Equivalents, Beginning of Year 20,220,232 18,309,380 Cash and Cash Equivalents, End of Year $ 32,438,778 $ 20,220,232 See accompanying notes to consolidated financial statements. 9

11 Notes to Consolidated Financial Statements For the Years Ended June 30, 2016 and Organization Management Sciences for Health, Inc. ( MSH, or the Organization ) was established in 1971 to support the development and application of management concepts in the fields of public health and preventive medicine throughout the world. The Organization has U.S. offices in Massachusetts, Virginia, New York, and field offices in various developing countries. The Internal Revenue Service ( IRS ) has recognized the Organization as a tax-exempt organization under Section 501(c)(3). Section 501(c)(3) of the Internal Revenue Code (the Code ) provides for the exemption of organizations that are organized and operated exclusively for religious, charitable, scientific, literary or educational purposes and whose net earnings do not inure to the benefit of any private shareholder or individual. 2. Summary of Significant Accounting Policies a. Financial Statement Presentation The consolidated financial statements include the accounts of Management Sciences for Health, Inc. and its subsidiaries and are prepared in conformity with accounting principles generally accepted in the United States of America ( US GAAP ). All significant intercompany transactions have been eliminated. Unless otherwise noted, these consolidated entities are hereinafter referred to as the Organization. Consolidated subsidiaries include: Management Sciences for Health-Peru ( MSHP ), a controlled subsidiary, began operations during the fiscal year ended June 30, MSHP is registered as a nonprofit entity under the laws of Peru. Management Sciences for Health ( MSH ) LTD/GTE: ( MSHN ) established on September 13, 2006 under the laws of Nigeria. Management Sciences for Health ( MSHS ) incorporated on January 5, 2009 under the laws of Swaziland. MSH Development Services, Inc. ( MSHDS ) incorporated in Massachusetts, USA on April 20, MSHN and MSHS had no revenues or expenses in the current year and, accordingly, are not presented in the supplemental consolidating schedule of activities. b. Cash and Cash Equivalents Cash and cash equivalents represents cash on hand and short-term, highly liquid investments that are both readily convertible to cash on demand without penalty, and having maturities of three months or less, when purchased. Cash and cash equivalents include operating cash accounts, as well as money market accounts held in the United States (U.S.) and abroad. 10

12 Notes to Consolidated Financial Statements For the Years Ended June 30, 2016 and Summary of Significant Accounting Policies (continued) c. Restricted Use Cash Certain cash is restricted to specific donor use and is required to be held in a separate account. As of June 30, 2016 and June 30, 2015, respectively, the Organization held approximately $781,000 and $1,835,000 of donor restricted cash classified in the accompanying consolidated statement of financial position as Restricted Use Cash. d. Grants and Contracts Receivable and Allowance for Doubtful Accounts Grants and contracts receivable consist primarily of noninterest-bearing amounts due from funders. Grants and contracts receivable are expected to be collected within one year and are recorded at net realizable value. Accounts receivable are written off when deemed uncollectible. Amounts due on contracts were reviewed by management and they have determined that there was no requirement for an allowance for doubtful accounts as of June 30, 2016 or June 30, Revenue recognized on grants and contracts but not yet invoiced is classified in the accompanying consolidated statement of financial position as Services Performed but Not Yet Invoiced. e. Employee Advances and Other Receivables The Organization advances monies to employees to cover the cost of travel and certain programmatic activities incurred on the Organization s behalf. These advances are generally cleared within 30 days or upon conclusion of employee travel. f. Property and Equipment Property and equipment additions over $5,000 individually, or $50,000 in the aggregate, are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets ranging from 3-5 years or, in the case of capitalized leasehold improvements, the lesser of the useful life of the asset or the lease term: Type of asset class Useful lives Furniture and equipment 5 years Leasehold improvements Lesser of 10 years or lease duration Computer and software 3 years When assets are sold or otherwise disposed of, the cost and related depreciation or amortization are removed from the accounts, and any remaining gain or loss is included in the statement of activities. Costs of maintenance and repairs that do not improve or extend the useful lives of the respective assets are expensed currently. The Organization 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 June 30, 2016 or June 30,

13 Notes to Consolidated Financial Statements For the Years Ended June 30, 2016 and Summary of Significant Accounting Policies (continued) g. Net Assets The classification of a not-for-profit organization s net assets and its support, revenue and expenses is 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 available for use in general operations. Temporarily Restricted Net assets subject to donor restrictions that may or will be met by expenditures or actions of the Organization and/or the passage of time. Permanently Restricted 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 action of the Organization. Generally, the donors of these assets permit the Organization to use all or part of the income earned on related investments for general or specific purposes, primarily program services. The Organization had no permanently restricted net assets at June 30, 2016 or June 30, The Organization reports contributions as temporarily restricted support if they are received with donor stipulations that limit the use of the donated assets, including those with restrictions met in the same fiscal year. 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 statement of activities as net assets released from restrictions. h. Revenue Recognition Grants and Contract Revenue - Grants and contract revenue include revenues derived from contracts, cooperative agreements, and grants with U.S. government agencies, primarily the U.S. Agency for International Development ("USAID"). The percentage of revenue earned from U.S. government agencies was 92% in the year ended June 30, 2016 and 95% in the year ended June 30, Revenues are recognized when the Organization incurs qualifying expenditures that are reimbursable under the terms of the Organization-held contracts, agreements or grants, or in accordance with the grantor's restrictions. Program service fees and payments under cost-type contracts received in advance are deferred to the applicable period in which the related services are performed or expenditures are incurred, respectively. The Organization negotiates its indirect cost rate with USAID on an annual basis. The actual indirect cost rates for the year ended June 30, 2014 through June 30, 2016, have been approved by USAID. Based on favorable past experience, management believes the effects of changes to the overhead rates, if any, would not be material to the consolidated financial statements. Revenue from U.S. government agencies is subject to independent audit under the Code of Federal Regulations Title 2 Subtitle A Chapter II Part 200 Subpart F and review by grantor agencies. 12

14 Notes to Consolidated Financial Statements For the Years Ended June 30, 2016 and Summary of Significant Accounting Policies (continued) h. Revenue Recognition (continued) Contributions - Contributions are recognized when cash, securities or other assets, an unconditional promise to give, or notification of a beneficial interest is received. Contributions received, including unconditional promises to give, if any, are reported at their net realizable values. Gifts of cash and other assets are reported as temporarily restricted support if they are received with donor stipulations that limit their use or if they are intended to support activities in future periods. Contributions with donor-imposed restrictions that are met in the same accounting period are recorded as unrestricted income. Contributions of donated noncash assets are recorded at their fair values in the period received. Contributions of services are recognized if the services received (a) create or enhance non-financial assets or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. i. Unallowable Costs Expenditures which are considered to be unallowable or non-allocable costs under the terms of the Organization's cost-type contracts and cooperative agreements are not reimbursable under the terms of such contracts and agreements. Total non-allowable expenses, inclusive of reimbursed insurance proceeds, amounted to approximately $2,450,000 and $2,465,000 for the years ended June 30, 2016 and June 30, 2015, respectively. j. Cost Share Some of the Organization's agreements, primarily those funded by the U.S. government, include cost share requirements which require the Organization to match funding from agencies. The requirements are typically based on a percentage of amounts expended. k. Foreign Currency Foreign currency is translated in accordance with the provisions of Financial Accounting Standards Board ( FASB ) Accounting Standards Codification ( ASC ) 830, Foreign Currency Matters. Under the provisions of ASC 830, the U.S. dollar (USD) is considered to be the functional currency of the Organization s worldwide operations, except for the Organization s branch operations in Gabon and its affiliate operations in Peru, where the local currency used in MSH s foreign operations is considered to be the functional currency of these operations. Transactions in currencies other than USD have been translated into USD at the applicable exchange rates. For assets and liabilities, this is the rate in effect at the statement of financial position date, with the exception of fixed assets which are measured at the historical rate. For revenue and expense items, translation is performed monthly using the average rate for the month. Net transaction and currency conversion gains and losses are included in the accompanying consolidated statement of activities in the non-operating section as foreign exchange gains or losses. The cumulative translation gain is included in unrestricted net assets. 13

15 Notes to Consolidated Financial Statements For the Years Ended June 30, 2016 and Summary of Significant Accounting Policies (continued) l. Functional Allocation of Expenses The costs of program and supporting services activities have been summarized on a functional basis in the consolidated statement of activities. The consolidated statement of functional expenses presents the natural classification detail of expenses by function. Accordingly, certain costs have been allocated among the programs and supporting services benefited. The costs of delivering MSH's mission are allocated according to their functional characteristics: program and program support, management and general, and fundraising. Direct program and direct program support expenses are directly allocated based on the technical, project management or project support activities that are required to ensure delivery of program and project results. Management and general consists of corporate and senior management costs to oversee and support the cumulative efforts of the Organization's programs and to promote the Organization's mission. Fundraising constitutes those costs incurred to raise private gifts. MSH utilizes standard job costing methods to allocate functional expenses. m. Uncertain Tax Positions Under ASC 740, "Accounting for Uncertainty in Income Taxes", an organization must recognize the financial statement effects associated with tax positions taken for tax return purposes when it is more likely than not the position will not be sustained upon examination by a taxing authority. The Organization does not believe it has taken any material uncertain tax positions and, accordingly, it has not recorded any liability for unrecognized tax positions. The Organization has filed for and received income tax exemptions in the jurisdictions where it is required to do so. Additionally, the Organization has filed IRS Form 990 information returns, as required, and all other applicable returns in jurisdictions where so required. For the years ended June 30, 2016 and June 30, 2015, there were no material interest or penalties recorded or included in the consolidated statement of activities related to uncertain tax positions. The Organization is subject to routine audit by taxing authorities in the U.S. and in other jurisdictions where it operates and, as of June 30, 2016, varying years remain subject to examination by the taxing authorities depending on country of operation. n. Fair Value Measurement of Financial Instruments The Organization estimates fair value based on a valuation framework that uses a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of fair value hierarchy, as defined by ASC 820, Fair Value Measurements are described below: Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for assets or liabilities. Level 2 - Prices other than quoted prices in active markets that are either directly or indirectly observable as of the date of measurement. Level 3 - Prices or valuation techniques that are both significant to the fair value measurement and unobservable. 14

16 Notes to Consolidated Financial Statements For the Years Ended June 30, 2016 and Summary of Significant Accounting Policies (continued) o. Concentration of Credit Risk Financial instruments which subject the Organization to concentrations of credit risk consist principally of temporary cash investments. The Organization manages deposit concentration risk by placing cash, money market accounts, and certificates of deposit with financial institutions believed by management to be creditworthy. The Organization has concentrated its credit risk for cash by maintaining bank deposits in the U.S. that exceed federal insurance levels, and cash in foreign financial institutions. To date, the Organization has not experienced losses in these accounts. The maximum loss that would have resulted from bank account risk was $27,440,000 and $10,094,000 as of June 30, 2016 and June 30, 2015, respectively. As of June 30, 2016 and June 30, 2015, the Organization also had uninsured money market funds of approximately $4,600,000 and $9,900,000, respectively. Credit risk associated with accounts receivable is considered to be limited due to high historical collection rates and because outstanding amounts are due primarily from the U.S. government (94% of receivables as of June 2016), other government funders, and foundations supportive of the Organization s mission. p. Comparative Financial Information The consolidated financial statements include certain prior year summarized comparative information. With respect to the consolidated statement of functional expenses, the prior year expenses are presented by expense classification in total rather than functional category. Such information does not include sufficient detail to constitute a presentation in conformity with generally accepted accounting principles. Accordingly, such information should be read in conjunction with the Organization's consolidated financial statements for the year ended June 30, q. Estimates The preparation of consolidated financial statements in conformity with US GAAP requires the Organization s 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 revenue and expenses during the reporting period. Actual results could differ from those estimates and assumptions. r. Accounting Pronouncements Issued But Not Yet Adopted Revenue from Contracts with Customers (Topic 606) In May 2014, the FASB issued Accounting Standards Update ( ASU ) , Revenue from Contracts with Customers (Topic 606), which is a comprehensive new revenue recognition standard that will supersede existing revenue recognition guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB issued ASU that deferred the effective date for the Organization until annual periods beginning after December 15, Earlier adoption is permitted subject to certain limitations. The amendments in this update are required to be applied retrospectively to each prior reporting period presented or with the cumulative effect being recognized at the date of initial application. Management is currently evaluating the impact of this ASU on its consolidated financial statements. 15

17 Notes to Consolidated Financial Statements For the Years Ended June 30, 2016 and Summary of Significant Accounting Policies (continued) r. Accounting Pronouncements Issued But Not Yet Adopted (continued) Leases (Topic 842) In February 2016, the FASB issued ASU , Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the statement of financial position and disclosing key information about leasing arrangements for lessees and lessors. The new standard applies a right-of-use ( ROU ) model that requires, for all leases with a lease term of more than 12 months, an asset representing its ROU, the underlying asset for the lease term and a liability to make lease payments to be recorded. The ASU is effective for the Organization s fiscal years beginning after December 15, 2019, with early adoption permitted. Management is currently evaluating the impact of this ASU on its consolidated financial statements. Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954) Presentation of Financial Statements of Not-for-Profit Entities In August 2016, the FASB issued ASU , Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954) Presentation of Financial Statements of Not-for-Profit Entities. The ASU amends the current reporting model for nonprofit organizations and enhances their required disclosures. The major changes include: (a) requiring the presentation of only two classes of net assets now entitled net assets without donor restrictions and net assets with donor restrictions, (b) modifying the presentation of underwater endowment funds and related disclosures, (c) requiring the use of the placed in service approach to recognize the expirations of restrictions on gifts used to acquire or construct long-lived assets absent explicit donor stipulations otherwise, (d) requiring that all nonprofits present an analysis of expenses by function and nature in either the statement of activities, a separate statement, or in the notes and disclose a summary of the allocation methods used to allocate costs, (e) requiring the disclosure of quantitative and qualitative information regarding liquidity and availability of resources, (f) presenting investment return net of external and direct expenses, and (g) modifying other financial statement reporting requirements and disclosures intended to increase the usefulness of nonprofit financial statements. The ASU is effective for the Organization s consolidated financial statements for fiscal years beginning after December 15, Early adoption is permitted. The provisions of the ASU must be applied on a retrospective basis for all years presented although certain optional practical expedients are available for periods prior to adoption. Management is currently evaluating the impact of this ASU on its consolidated financial statements. 16

18 Notes to Consolidated Financial Statements For the Years Ended June 30, 2016 and Grants and Contracts Receivable Accounts receivable and unbilled revenue included the following: June 30, Grants and Contracts Receivable from: U.S. Government on billings with standing letters of credit $ 8,866,979 $ 15,035,788 Other U.S. Government receivables 8,649,245 2,825,500 Other funders 1,157, ,806 Grants and Contracts Receivable $ 18,673,773 $ 17,963,094 Services Performed but Not Yet Invoiced From: U.S. Government on billings with standing letters of credit $ 6,985,111 $ 4,146,386 Other U.S. Government receivables 12,269,481 4,622,954 Other funders 566,214 5,147,010 Services Performed but Not Yet Invoiced $ 19,820,806 $ 13,916,350 Related Party Receivables (Note 14) $ 3,290,434 $ 7,330, Fair Value Measurements Certain assets and liabilities are reported 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 or liabilities that the Organization 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 quote prices that are observable for the asset or liability, and marketcorroborated inputs. Level 3 Unobservable inputs for the asset or liability. In these situations, the Organization develops inputs using the best information available in the circumstances. 17

19 Notes to Consolidated Financial Statements For the Years Ended June 30, 2016 and Fair Value Measurements (continued) 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 the Organization s assessment of the quality, risk or liquidity profile of the asset or liability. The Organization s investments are held in money market funds. Funds are classified within Level 1 since fund shares have a readily determinable fair value based on daily redemption values. Money market funds held in the U.S. and abroad are classified in the accompanying consolidated statement of financial position as Cash and Cash Equivalents. The fair value of the Organization s other financial instruments, which include accounts receivable, accounts payable and certain accrued expenses, approximates their fair value due to their short maturities. 5. Employee Advances and Other Receivables The Organization advances monies to employees to cover the cost of travel and certain programmatic activities incurred on the Organization s behalf. Employee advances and other receivables consisted of the following: June 30, Employee advances - field offices $ 1,599,800 $ 1,301,810 Employee advances - U.S. 528, ,069 Other receivables 98,471 40,271 Total Employee Advances and Other Receivables $ 2,226,381 $ 2,264,150 18

20 Notes to Consolidated Financial Statements For the Years Ended June 30, 2016 and Property and Equipment, Net Property and equipment, net consisted of the following: June 30, Furniture and equipment $ 3,370,820 $ 3,289,734 Computer and software 334,975 - Leasehold improvements 877, ,655 Total property and equipment 4,583,450 4,167,389 Less accumulated depreciation (2,176,668) (1,407,272) Total Property and Equipment, Net $ 2,406,782 $ 2,760,117 Depreciation expense for the years ended June 30, 2016 and June 30, 2015 was $769,825 and $742,001, respectively. 7. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities were: June 30, Accrued expenses - U.S. $ 3,611,069 $ 1,973,209 Accrued expenses - Field Offices 7,441,644 4,412,546 Monies Due to Funders 464, ,202 Total Accrued Expenses and Other Current Liabilities $ 11,517,283 $ 6,497, Accrued Payroll and Payroll Related Liabilities The Organization accrues the expense for employee vacation as earned, based on the Organization s policy, or as required pursuant to local law. Other employee paid time off is expensed as paid, unless vested pursuant to local law. The Organization expenses termination payments required by local law based on local vesting schedules and requirements or as applied by local common practice. In countries where termination payments are not fully vested, expense is accrued based on estimates using historical payouts. 19

21 Notes to Consolidated Financial Statements For the Years Ended June 30, 2016 and Accrued Payroll and Payroll Related Liabilities (continued) Payroll and payroll related liabilities consisted of: June 30, Salaries, wages, and payroll taxes payable $ 3,014,364 $ 3,096,440 Accrued vacation and paid time off 5,583,970 6,032,336 Accrued termination payments 2,996,418 4,481,924 Employee benefits payable 1,242,856 1,332,952 Retirement plan contributions payable 676, ,541 Total Accrued Payroll and Payroll Related Liabilities $ 13,514,079 $ 15,339, Deferred Revenue Advances received from funders for work to be performed are reported as deferred revenue. Deferred revenue consisted of the following: June 30, U.S. Government on billings with standing letters of credit $ 407,763 $ 126,660 Other U.S. Government receivables 167,336 22,181 Other governments and agencies 4,499, ,047 Foundations and corporations 2,085,365 2,506,122 Total Deferred Revenue $ 7,160,277 $ 3,469, Net Assets On March 10, 2015, the Board of Directors of the Organization voted to establish two funds for the purposes of supporting responses to current and future epidemics. The Board established the Board Designated No More Epidemics Fund and voted to designate $1,000,000 of the Organization s general unrestricted funds as the principal of the fund, to be used to support responses to current and future epidemics, and epidemic preparedness and response in general, and such other purposes as the Board, in its sole discretion, shall deem reasonable or appropriate. The balance of the $1,000,000 Board Designated - No More Epidemics Fund was $139,294 at June 30, 2016 and $915,549 as of June 30, Temporarily restricted net assets are restricted for program purposes. During the years ended June 30, 2016 and June 30, 2015, the amount released in support of program purposes was $276,069 and $161,268, respectively. Balances as of June 30, 2016 and June 30, 2015 were $214,085 and $218,580, respectively. 20

22 Notes to Consolidated Financial Statements For the Years Ended June 30, 2016 and Employee Retirement Plans Section 401(k) Plan - The Organization sponsors a defined contribution plan ( the Plan ) that is taxqualified under Section 401(a) of the Code and that includes a qualified cash or deferred arrangement feature under Section 401(k) of the Code. The Plan covers substantially all full-time employees on U.S. payroll. Participants may elect to contribute into the Plan on a pre-tax basis by making elective salary-reduction contributions. In addition, participants may make after-tax contributions, or Roth contributions, to the Plan. The Organization is required to make a matching contribution to the Plan equal to 100% of the first 4% of compensation deferred by the participant. The Organization's total contributions to the Plan amounted to approximately $4,849,000 and $4,844,000 for the years ended June 30, 2016 and June 30, 2015, respectively. While the Organization expects to continue the Plan indefinitely, it has reserved the right to modify, amend or terminate the Plan. In the event of Plan termination, all participants will become 100% vested in their accounts and the net assets of the Plan will be set aside for the payments of benefits to the participants. Outside of the United States, most employees are citizens of the countries where the Organization maintains offices. These employees are generally not eligible for the Plan, but they are eligible for local government plans or plans sponsored by the Organization for that country. The locally sponsored plans generally require funding based on years of employment and payment upon termination. The Organization recently determined that certain of its non-u.s. employees were being included as participants in the Plan in violation of the Plan s terms. The Organization has retained counsel to prepare and file an application for voluntary correction under the IRS s Employee Plans Compliance Resolution System (IRS Rev. Proc ). Counsel anticipates that the correction will proceed as a matter of course. (See Note 15) Section 457(b) Plan - The Organization sponsors a deferred compensation plan ( the Deferred Plan ) intended to be an eligible deferred compensation plan within the meaning of Section 457(b) of the Code. The Deferred Plan is unfunded and maintained primarily for the purpose of providing deferred compensation for a select group of management or highly-compensated employees, and is exempt from The Employee Retirement Income Security Act ( ERISA ) under Sections 201(2), 301(a)(3), and 401(a)(1). Participants have a fully vested and non-forfeitable interest in the balance of the account at all times. The Organization does not contribute to this Deferred Plan. While the Organization expects to continue the Deferred Plan indefinitely, it has reserved the right to modify, amend or terminate the Deferred Plan. In the event of Plan termination, the net assets of the Deferred Plan will be set aside for the payments of benefits to the participants. 21

23 Notes to Consolidated Financial Statements For the Years Ended June 30, 2016 and Leases The Organization leases offices and program space under various lease arrangements in the U.S. and abroad. In the U.S., the Organization was subject to the following lease arrangements during the fiscal year: Cambridge, Massachusetts Lease - The Organization had a lease agreement for its former U.S. headquarters office in Cambridge, Massachusetts which expired during the year ended June 30, The Organization made payments of approximately $144,000 during the year ended June 30, Arlington, Virginia Lease - The Organization has two lease agreements for its Arlington, Virginia office space which both expire on October 31, The primary lease was renewed in November 2014 with a 3.0% annual increase provision through October Under the terms of the agreement, the Organization was not required to make lease payments for the three month period ended January 31, 2015 and has an early termination option on October 31, 2019 for approximately 13,900 square feet of the approximate 44,000 square feet under the lease. The Organization made monthly payments of approximately $167,000 and $162,000 during the years ended June 30, 2016 and June 30, 2015, respectively, which includes additional operating expenses. In accordance with US GAAP, rent expense has been amortized using the straight-line method over the entire term of the lease, including the rent-free period. The Organization recorded a liability of $672,988 and $642,776 for the amortized rent in excess of rent payments as of June 30, 2016 and June 30, 2015, respectively, which was included in the accompanying consolidated statement of financial position. The Organization also entered a second expansion lease in Arlington, Virginia in November 2014 with an annual increase provision of 2.75% through October 31, 2015, and 3.0% thereafter. The terms of the lease include a three month rent abatement period. In accordance with US GAAP, rent expense has been amortized using the straight-line method over the entire term of the lease, including the rent free period. The Organization recorded a liability of $200,530 and $204,178 for the amortized rent in excess of rent payments as of June 30, 2016 and June 30, 2015, respectively. Rent expense under the Arlington lease agreements, including payments for operating expenses, was approximately $2,570,000 and $3,693,000 for the years ended June 30, 2016 and June 30, 2015, respectively. Medford, Massachusetts Lease - The Organization has a lease agreement for its U.S. headquarters in Medford, Massachusetts with a lease term of May 31, 2013 through October 31, 2024, and annual rent escalation provisions starting at 2.5% in November 2015, and decreasing to 2.1% in November The terms of the lease included a rent abatement period through October 31, In accordance with US GAAP, rent expense has been amortized using the straight-line method over the entire term of the lease, including the abatement period. The Organization recorded a liability of $1,481,345 and $1,532,622 for the amortized rent in excess of rent payments as of June 30, 2016 and June 30, 2015, respectively. Rent expense under this lease agreement, including payments for operating expenses, was approximately $1,166,000 and $1,814,000 for the year ended June 30, 2016 and June 30, 2015, respectively. 22