GOODWILL INDUSTRIES OF THE INLAND NORTHWEST FINANCIAL STATEMENTS AND SINGLE AUDIT YEARS ENDED DECEMBER 31, 2016 AND 2015

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1 FINANCIAL STATEMENTS AND SINGLE AUDIT YEARS ENDED DECEMBER 31, 2016 AND 2015

2 TABLE OF CONTENTS YEARS ENDED DECEMBER 31, 2016 AND 2015 INDEPENDENT AUDITORS REPORT 1 FINANCIAL STATEMENTS STATEMENTS OF FINANCIAL POSITION 3 STATEMENTS OF ACTIVITIES 5 STATEMENTS OF FUNCTIONAL EXPENSES 7 STATEMENTS OF CASH FLOWS 11 NOTES TO FINANCIAL STATEMENTS 13 SINGLE AUDIT AUDITORS SECTION INDEPENDENT AUDITORS 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 26 INDEPENDENT AUDITORS REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR FEDERAL PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE 28 SCHEDULE OF FINDINGS AND QUESTIONED COSTS 30 AUDITEE S SECTION SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS 32 SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS 33

3 CliftonLarsonAllen LLP CLAconnect.com INDEPENDENT AUDITORS REPORT Board of Directors Goodwill Industries of the Inland Northwest Spokane, Washington Report on the Financial Statements We have audited the accompanying financial statements of Goodwill Industries of the Inland Northwest (a nonprofit organization), which comprise the statements of financial position as of December 31, 2016 and 2015, and the related statements of activities, functional expenses, and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express opinions on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America 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 audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. (1)

4 Board of Directors Goodwill Industries of the Inland Northwest Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Goodwill Industries of the Inland Northwest as of December 31, 2016 and 2015, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 1 to the financial statements, Goodwill Industries of the Inland Northwest adopted a recently issued accounting standard related to the accounting for debt issuance costs. The new standard required entities to present debt issuance costs as a direct deduction from the face amount of the related borrowings, amortize debt issuance costs using the effective interest method over the life of the debt, and record the amortization as a component of interest expense. Our opinion is not modified with respect to this matter. Other Matters Other Information Schedule of Expenditures of Federal Awards Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is presented for purposes of additional analysis 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 schedule of expenditures of federal awards 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. Such information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated May 8, 2017, on our consideration of Goodwill Industries of the Inland Northwest s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Goodwill Industries of the Inland Northwest s internal control over financial reporting and compliance. CliftonLarsonAllen LLP Spokane, Washington May 8, 2017 (2)

5 STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 2016 AND 2015 ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 5,179,768 $ 4,243,126 Cash Held for Others 1,562,148 1,780,555 Receivables, Less Allowance for Doubtful Accounts of $18,400 at Each Date 702, ,742 Note Receivable 65,437 11,909 Inventories 901, ,945 Prepaid Expenses 99,986 51,995 Total Current Assets 8,511,219 7,543,272 LAND, BUILDINGS, EQUIPMENT, AND VEHICLES, at Cost Less Accumulated Depreciation 21,368,539 18,740,086 OTHER ASSETS Beneficial Interest in Assets Held by Inland Northwest Community Foundation 168, ,766 Contributions Receivable from Charitable Trusts 463, ,933 Total Other Assets 632, ,699 Total Assets $ 30,512,261 $ 26,870,057 See accompanying Notes to Financial Statements. (3)

6 LIABILITIES AND NET ASSETS CURRENT LIABILITIES Accounts Payable $ 779,345 $ 286,486 Accrued Payroll, Bonus, and Commissions 298, ,335 Accrued Vacation Pay 399, ,691 Accrued Payroll and Business Taxes 887, ,179 Other Accrued Liabilities 108,818 68,204 Funds Held for Others 1,562,148 1,780,555 Current Maturities of Long-Term Debt 327, ,733 Current Maturities of Capital Lease Obligations 87,621 73,222 Current Portion of Deferred Compensation 23,927 23,927 Total Current Liabilities 4,474,481 3,855,332 LONG-TERM LIABILITIES, Less Current Maturities Long-Term Debt 1,846, ,843 Capital Lease Obligations 126,528 71,707 1,973, ,550 OTHER LIABILITIES Deferred Compensation, Net of Current Portion 145, ,573 Total Liabilities 6,593,659 4,845,455 NET ASSETS Unrestricted 23,319,227 21,454,661 Temporarily Restricted 599, ,941 Total Net Assets 23,918,602 22,024,602 Total Liabilities and Net Assets $ 30,512,261 $ 26,870,057 (4)

7 STATEMENT OF ACTIVITIES YEAR ENDED DECEMBER 31, 2016 Temporarily Unrestricted Restricted Total PUBLIC SUPPORT Contributions $ 29,443 $ 98,913 $ 128,356 Change in Split-Interest Agreements - 18,783 18,783 FEES AND GRANTS FROM GOVERNMENTAL AGENCIES 6,667,882-6,667,882 OTHER REVENUE Estimated Value of Donated Goods 4,018,486-4,018,486 Retail Sales of Donated Goods, Net 14,705,098-14,705,098 Salvage 2,220,060-2,220,060 Contract Printing 64,758-64,758 Food Service 85,560-85,560 Fundraising 5,474-5,474 Gain on Disposal of Fixed Assets 332, ,736 Online Sales of Donated Goods 2,798,736-2,798,736 Other 106, ,659 Total Public Support and Revenues 31,034, ,696 31,152,588 NET ASSETS RELEASED FROM RESTRICTIONS 88,262 (88,262) - EXPENSES Program Services: Donated Goods 18,443,377-18,443,377 Printing Services 75,783-75,783 Vocational Services 7,604,183-7,604,183 Food Services 100, ,882 Management and General 3,034,363-3,034,363 Total Expenses 29,258,588-29,258,588 CHANGES IN NET ASSETS 1,864,566 29,434 1,894,000 Net Assets - Beginning of Year 21,454, ,941 22,024,602 NET ASSETS - END OF YEAR $ 23,319,227 $ 599,375 $ 23,918,602 See accompanying Notes to Financial Statements. (5)

8 STATEMENT OF ACTIVITIES YEAR ENDED DECEMBER 31, 2015 Temporarily Unrestricted Restricted Total PUBLIC SUPPORT Contributions $ 42,314 $ 108,425 $ 150,739 Change in Split-Interest Agreements - (21,339) (21,339) FEES AND GRANTS FROM GOVERNMENTAL AGENCIES 5,138,050-5,138,050 OTHER REVENUE Estimated Value of Donated Goods 4,558,148-4,558,148 Retail Sales of Donated Goods, Net 13,633,321-13,633,321 Salvage 2,265,416-2,265,416 Contract Printing 73,186-73,186 Food Service 78,999-78,999 Fundraising 4,367-4,367 Gain on Disposal of Fixed Assets Online Sales of Donated Goods 2,335,916-2,335,916 Other 166, ,974 Total Public Support and Revenues 28,296,991 87,086 28,384,077 NET ASSETS RELEASED FROM RESTRICTIONS 42,056 (42,056) - EXPENSES Program Services: Donated Goods 17,114,048-17,114,048 Printing Services 76,737-76,737 Vocational Services 5,873,822-5,873,822 Food Services 92,572-92,572 Management and General 2,942,259-2,942,259 Total Expenses 26,099,438-26,099,438 CHANGES IN NET ASSETS 2,239,609 45,030 2,284,639 Net Assets - Beginning of Year 19,215, ,911 19,739,963 NET ASSETS - END OF YEAR $ 21,454,661 $ 569,941 $ 22,024,602 See accompanying Notes to Financial Statements. (6)

9 STATEMENT OF FUNCTIONAL EXPENSES YEAR ENDED DECEMBER 31, 2016 Donated Goods Contributed Total Goods Retail Donated Production Stores Salvage Goods Salaries and Wages $ 5,666,746 $ 3,877,011 $ 248,747 $ 9,792,504 Benefits 406, ,433 32, ,047 Payroll Taxes 648, ,358 29,572 1,112,477 Professional Fees 12,651 57, ,811 Supplies 836, , ,135 1,379,844 Telephone 32, , ,918 Postage and Freight , ,934 Occupancy 419,163 1,131,553 9,897 1,560,613 Equipment 107, ,679 3, ,433 Advertising and Promotion 2, , ,665 Travel and Vehicles 673,210 12, ,986 Trash Disposal 577, , ,702 Conferences, Conventions, and Meetings 2,379 2,138-4,517 Memberships and Dues Awards, Assistance, and Other 2, , ,584 Depreciation 291, , ,117 Total Functional Expenses $ 9,680,662 $ 8,147,510 $ 615,205 $ 18,443,377 See accompanying Notes to Financial Statements. (7)

10 Other Services Vocational Food Management Printing Services Services and Services Program Program General Totals $ 38,046 $ 3,718,088 $ 49,265 $ 1,590,622 $ 15,188,525 5, , ,463 1,240,097 3, ,956 5, ,692 1,777, ,486, ,072 2,627,884 11,260 94,515 39,465 88,752 1,613, , , ,892-29,841-5, , , ,426 1,848,316 10,206 41,089 3,673 24, ,194 1,493 12, , , ,755-23, , , ,567-5,437 16, , , ,460 1,350 84, ,701 4,500 91, ,553 1,325,116 $ 75,783 $ 7,604,183 $ 100,882 $ 3,034,363 $ 29,258,588 (8)

11 STATEMENT OF FUNCTIONAL EXPENSES YEAR ENDED DECEMBER 31, 2015 Donated Goods Contributed Total Goods Retail Donated Production Stores Salvage Goods Salaries and Wages $ 5,201,586 $ 3,617,567 $ 325,878 $ 9,145,031 Benefits 294, ,642 35, ,407 Payroll Taxes 597, ,514 38,396 1,044,871 Professional Fees 12,278 50, ,485 Supplies 681, , ,968 1,139,473 Telephone 31, , ,926 Postage and Freight , ,610 Occupancy 344,875 1,063,153 10,245 1,418,273 Equipment 82, ,633 4, ,233 Advertising and Promotion 2, , ,855 Travel and Vehicles 592,713 27, ,056 Trash Disposal 469,548 4,601 6, ,329 Conferences, Conventions, and Meetings 1,105 2,089-3,194 Memberships and Dues Awards, Assistance, and Other 2, , ,016 Depreciation 334, ,347-1,005,869 Total Functional Expenses $ 8,649,712 $ 7,824,775 $ 639,561 $ 17,114,048 See accompanying Notes to Financial Statements. (9)

12 Other Services Vocational Food Management Printing Services Services and Services Program Program General Totals $ 35,097 $ 3,442,556 $ 44,415 $ 1,501,253 $ 14,168,352 4, , ,744 1,077,089 3, ,574 5, ,362 1,683, ,115, ,650 1,257,030 11,877 79,329 37,378 80,240 1,348, , , ,453-29, , , , ,227 1,716,541 10,219 21,653 2,262 26, ,156 3,313 19, , , ,405-21, , , ,867-6,855 15,186-1, , ,408 2,049 32,531 1,725 53, ,053 5, , ,589 1,363,355 $ 76,737 $ 5,873,822 $ 92,572 $ 2,942,259 $ 26,099,438 (10)

13 STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2016 AND CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Contributions and Cash Provided by Sales and Services $ 31,008,783 $ 28,281,586 Cash Paid to Suppliers and Employees (27,378,246) (24,677,557) Interest Received 12,555 3,676 Interest Paid (74,115) (124,397) Taxes Paid (54,937) (67,075) Net Cash Provided by Operating Activities 3,514,040 3,416,233 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sale of Assets 536, Purchase of Land, Buildings, Equipment, and Vehicles (2,236,020) (2,016,383) Payments Received on Notes Receivable 1,553 68,212 Borrowings on Notes Receivable (55,081) (73,250) Net Cash Used by Investing Activities (1,753,408) (2,021,121) CASH FLOWS FROM FINANCING ACTIVITIES Payments Made for Loan Fees (28,540) (2,901) Principal Payments on Long-Term Debt (702,142) (1,104,163) Principal Payments on Capital Leases (93,308) (196,193) Net Cash Used by Financing Activities (823,990) (1,303,257) NET INCREASE IN CASH AND CASH EQUIVALENTS 936,642 91,855 Cash and Cash Equivalents - Beginning of Year 4,243,126 4,151,271 CASH AND CASH EQUIVALENTS - END OF YEAR $ 5,179,768 $ 4,243,126 NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of Land, Buildings, and Equipment through Long-Term Debt $ 1,758,425 $ - Acquisition of Equipment through Capital Lease $ 162,528 $ 33,354 See accompanying Notes to Financial Statements. (11)

14 STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 2016 AND RECONCILIATION OF CHANGES IN NET ASSETS TO NET CASH PROVIDED BY OPERATING ACTIVITIES Changes in Net Assets $ 1,894,000 $ 2,284,639 Adjustments to Reconcile Changes in Net Assets to Net Cash Provided by Operating Activities: Depreciation 1,325,116 1,363,355 Loan Fees Amortized 14,068 13,009 Gain on Sale of Assets (332,736) (300) Change in Value of Beneficial Interest in Assets Held by Inland Northwest Community Foundation (27,021) (34,452) Change in Value of Receivable From Charitable Trusts (18,783) 21,339 Increase in Assets: Receivables (85,446) (85,702) Inventories (62,747) (15,035) Prepaid Expenses (47,991) (6,421) Increase (Decrease) in Liabilities: Accounts Payable 492, ,247 Accrued Payroll, Bonus, and Commissions 34,023 (401,043) Accrued Vacation Pay 25,525 16,398 Accrued Payroll and Business Taxes 266, ,256 Other Accrued Liabilities 40,614 36,386 Deferred Compensation (3,891) (31,443) Net Cash Provided by Operating Activities $ 3,514,040 $ 3,416,233 See accompanying Notes to Financial Statements. (12)

15 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations The primary purpose of Goodwill Industries of the Inland Northwest (the Organization) is to provide an opportunity for individuals with disabling and disadvantaging conditions to demonstrate their abilities and reach their maximum potential within the community by providing vocational rehabilitation, training, and services. The Organization seeks to place persons with disabilities and/or disadvantaging conditions in competitive business fields or in alternative employment offered by the Organization so that they may realize their full vocational potential. Major Programs Donated Goods Program is the collection, processing, and sales of donated goods in retail facilities to provide revenue, training, and work assessment to support vocational programs. Vocational Evaluation and Rehabilitation Services Program identifies individuals unique work interests, ability, and any competitive employment barriers related to communication, mobility, work skills, work tolerances, and self-direction through a paid employment assessment or other realistic work setting. Food Service Program is provided to all employees located at corporate headquarters. Financial Statement Presentation The Organization s financial statements are presented in accordance with the provisions of Statement of Financial Accounting Standards, Financial Statements of Not-for-Profit Organizations. Under this statement, the Organization is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. There were no permanently restricted net assets at December 31, 2016 and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. Contributions Donor-restricted gifts are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the statements of activities as net assets released from restrictions. Donor-restricted contributions whose restrictions are met within the same year as received are reflected as unrestricted contributions in the accompanying statements of activities. (13)

16 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash and Cash Equivalents For purposes of the statements of cash flows, the Organization considers all highly liquid investments with original maturity dates of three months or less to be cash equivalents as well as money market funds. Receivables Trade receivables are carried at original invoice amount less an estimate made for doubtful accounts. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Management considers the allowance to be adequate. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. Note Receivables Balances in notes receivable represent a line of credit to Good Works, Inc., an affiliated organization. Based on management s historical experience, management considers all notes receivable to be fully collectible; therefore, no allowance for doubtful accounts has been reflected in the financial statements. Inventories Inventories of purchased goods and supplies are recorded at the lower of cost (first-in, firstout) or market. The Organization considers the costs (store expenses, processing, transportation, and retail management) associated with bringing the donated goods inventory to sale in its estimate of the fair value of the inventory. The estimate of the donated goods inventory value is based on a calculation of donated goods turnover rate multiplied by the percent of sales in excess of cost of goods sold. Land, Buildings, Equipment, and Vehicles Acquisitions of land, buildings, equipment, and vehicles in excess of $1,500 have been capitalized and are recorded at cost. Depreciation is provided over the estimated useful life of each class of depreciable asset and is computed using the straight-line method. Depreciation expense for the years ended December 31, 2016 and 2015 was $1,325,116 and $1,363,355, respectively. Gifts of long-lived assets such as land, buildings, or equipment are reported as unrestricted support unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, expirations of donor restrictions are reported when the donated or acquired long-lived assets are placed in service. Donated assets are recorded at fair market value at the time of donation. (14)

17 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Contributions Receivable from Charitable Trusts The Organization is the remainderman of two charitable remainder annuity trusts. The Organization is not the trustee of either trust. A contribution receivable is presented for each estimated remainderman amount the Organization will receive. For one trust, the contribution receivable is computed based on actuarial assumptions of the trust s life, beneficiary s estimated life expectancy, and current interest rates. For the second trust, the contribution receivable will be received in the year This contribution receivable is computed based on current interest rates. Accrued Vacation Pay The Organization accrues a liability for vacation pay when earned. Self-Insured Health Plan Effective January 1, 2014, the Organization self-insures for health benefits provided to employees. At year-end, the Organization accrues a provision for unpaid and unreported claims that is based on actual claims adjudicated prior to December 31, but paid after December 31. Such liability was $342,826 and $132,478 at December 31, 2016 and 2015, respectively, and is included in accrued payroll and business taxes in the statements of financial position. Temporarily Restricted Net Assets Temporarily restricted net assets are those whose use has been limited by donors to a specific time period or purpose. Contributed Revenue, Donated Goods Financial Statements of Not-for-Profit Organizations requires that contributions be recognized as revenue when received. During 2016 and 2015, the Organization recognized donated goods with an estimated fair value of $4,018,486 and $4,558,148, respectively, as revenue. This merchandise requires program-related expenses/processes accomplished by people with disabling and other disadvantaging conditions before it reaches its point of sale. Retail sales of donated goods are presented net of the estimated value of donated goods. Revenue is recognized at the time of the transaction. Revenue Recognition Revenue related to vocational programs is recognized at the time the service is provided. Advertising and Promotion Advertising costs are charged to expense as they are incurred. Advertising expense was $271,876 and $400,788 for the years ended December 31, 2016 and 2015, respectively. Presentation of Sales Tax The state of Washington (and certain other states in which the Organization does business) imposes a retail state and local sales tax on gross revenues. To the extent that it applies to sales, the Organization collects that sales tax from customers and remits the entire amount to the state. The Organization s accounting policy is to exclude the tax collected and remitted to the state from revenues and cost of sales. (15)

18 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes The Organization is exempt from federal income tax under Section 501(c)(3) of the U.S. Internal Revenue Code and is not a private foundation. Management evaluated the Organization s tax positions and concluded that the Organization had taken no uncertain tax positions that require adjustment to the financial statements. Change in Accounting Principle The Organization has adopted the accounting guidance in FASB Accounting Standards Update (ASU) No , Interest Imputation of Interest (Subtopic ): Simplifying the Presentation of Debt Issuance Costs. ASU requires organizations to present debt issuance costs as a direct deduction from the face amount of the related borrowings, amortize debt issuance costs using the effective interest method over the life of the debt, and record the amortization as a component of interest expense. The effect of adopting the new standard decreased the debt issuance cost asset to zero and decreased the debt liability by $114,021 as of January 1, The adoption of the standard had no effect on previously reported net assets. The ASU is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. The ASU is retrospectively applied. The Organization has elected to adopt this change in accounting principle as of January 1, Reclassifications Certain amounts in the 2015 financial statements have been reclassified to conform to the 2016 financial statement presentation with no effect on previously reported change in net assets or net asset amounts. Subsequent Events Subsequent events have been evaluated through May 8, 2017, which is the date the financial statements were available to be issued. NOTE 2 INVENTORIES Inventories are recorded at the lower of cost (first-in, first-out) or market and consisted of the following at December 31: Donated Goods $ 611,885 $ 646,428 New Goods Inventory 227, ,775 Supplies 62,331 67,742 Total Inventories $ 901,692 $ 838,945 (16)

19 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 3 LAND, BUILDINGS, EQUIPMENT, AND VEHICLES Land, buildings, equipment, and vehicles consisted of the following at December 31: Land $ 3,962,258 $ 4,163,762 Buildings and Improvements 20,859,730 19,819,801 Equipment and Furniture 6,544,221 6,272,433 Vehicles 1,947,151 1,497,330 Construction in Progress 2,743, ,902 Total 36,056,721 32,146,228 Less: Accumulated Depreciation 14,688,182 13,406,142 Total $ 21,368,539 $ 18,740,086 At December 31, 2016, the Organization had a construction project in process to build a new store in Post Falls. The estimated cost to complete the project is approximately $1 million, and the estimated completion date is March Retainage payable in connection with this project is $112,652 and is included in accounts payable at December 31, NOTE 4 BENEFICIAL INTEREST IN ASSETS HELD BY INLAND NORTHWEST COMMUNITY FOUNDATION In August 2010, the Organization established the Goodwill Foundation fund (the Fund) with Inland Northwest Community Foundation, Spokane, Washington (INWCF), a nonprofit corporation, by the transfer of $31,777 to that foundation. The Fund is considered an agency endowment fund of INWCF and the Organization is the Fund s designated beneficiary. Accordingly, the Organization has a beneficial interest in the Fund s assets held by INWCF. The distributable income of the Fund is subject to assessment for the costs of fund administration by INWCF and will be distributed to the Organization, to be used for its charitable purposes, provided that at the time of such distribution the Organization has retained its nonprofit tax status. Upon majority approval of the boards of directors of the Organization and INWCF, any part of the investment earnings, or any portion not restricted by the original donor of the gift, in excess of $5,000 may be distributed to the Organization to be used to support the Organization s charitable mission, provided any permanently restricted endowed funds are protected. The Organization has granted variance power to INWCF; therefore, INWCF has the power to modify gift restrictions that are no longer practicable or capable of fulfillment. The investment is reported in the statements of financial position and is described as a beneficial interest in assets held by INWCF in the amount of $168,787 and $141,766 as of December 31, 2016 and 2015, respectively. (17)

20 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 5 LONG-TERM DEBT Long-term debt consisted of the following at December 31: Note payable to Washington Trust Bank, due in monthly installments of $17,503, including interest of 2.89%, maturing in October 2016; collateralized by land and buildings $ - $ 164,502 Commercial real estate reducing revolving term loan to Washington Trust Bank, due in monthly installments of $10,938, including interest of 4.08%, maturing in July 2026; collateralized by land and building The agreement requires, among other provisions, that the Organization maintain a minimum specified debt service coverage ratio. 1,758,425 - Mortgage payable to U.S. Bank, due in monthly installments of $12,150, including interest of 4.86%, maturing in June 2029; collateralized by land and building. In June 2019, the bank has the option to call the loan or reset the rate for remaining term. The agreement requires, among other provisions, that the Organization maintain a minimum specified fixed charge coverage ratio. 287, ,733 Mortgage payable to U.S. Bank, due in monthly installments of $8,926, including interest at 5.89%, maturing in May 2032; collateralized by land and building. In May 2022, the bank has the option to call the loan or reset the rate for the remaining term. The agreement requires, among other provisions, that the Organization maintain a minimum specified fixed charge coverage ratio. 256, ,362 Total Notes Payable 2,302,880 1,246,597 Less: Unamortized Debt Issuance Costs 128, ,021 Total Notes Payable, Net Unamortized Debt Issuance Costs 2,174,387 1,132,576 Less: Current Maturities 327, ,733 Total $ 1,846,968 $ 768,843 (18)

21 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 5 LONG-TERM DEBT (CONTINUED) Principal maturities of long-term debt are expected to be as follows: Year Ending December 31, Amount 2017 $ 327, , , , ,250 Thereafter 1,134,987 Total $ 2,302,880 NOTE 6 CAPITAL LEASE OBLIGATIONS The Organization acquired equipment under various capital lease obligations. The lease payments relating to the equipment have been capitalized and included in equipment in the accompanying financial statements. As of December 31, 2016 and 2015 the leased equipment has a cost of $503,650 and $341,122, respectively and accumulated depreciation of $216,395 and $161,246, respectively. Future minimum lease payments under the capital leases are as follows: Year Ending December 31, Amount 2017 $ 87, , , , ,200 Thereafter 2,849 Less: Amount Representing Interest (34,840) Present Value of Minimum Lease Payments 214,149 Less: Current Portion of Capital Lease Obligations 87,621 Total $ 126,528 (19)

22 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 7 LEASE COMMITMENTS The following is a schedule by years of future minimum lease payments under operating leases that have initial or remaining lease terms in excess of one year: Year Ending December 31, Amount 2017 $ 488, , , , ,746 Thereafter 1,579,762 Total $ 3,869,819 Minimum rental payments on noncancelable operating leases were approximately $648,000 and $597,000 for 2016 and 2015, respectively. Total rental expense was $793,318 and $741,718 for 2016 and 2015, respectively. NOTE 8 LEASING ARRANGEMENTS In 2013, the Organization acquired a sublease with Sky High Sports Spokane when they purchased the Outlet building. The lease commenced on May 10, 2010, and had a five year term. In 2015, the lease was extended for twelve months and terminated in NOTE 9 PROTECTIVE PAYEE PROGRAM The Organization participates in a money management training service in conjunction with the state of Washington and is paid $20 $50 per month for each participant depending on the participant s payee status and the services provided. The Department of Social and Health Services sends the clients checks to the Organization on behalf of the payees. The Organization holds the money in a separate checking account and pays the participants bills as they become due. At December 31, 2016 and 2015, the Organization was holding $1,562,148 and $1,780,555, respectively, in this account. The Organization is not able to use the money in its normal course of business and acts only in a fiduciary capacity. (20)

23 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 10 TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets consisted of the following at December 31: Spokane Operations $ 463,718 $ 444,937 Office Equipment 1,344 1,344 Hearing Impaired Telephone Vocational Programs 28,969 44,796 Daycare Program Working-Poor Training Veterans Forum Program ,987 Homeless Kenneth King Award Fund Culinary Program New Contracts 1,375 1,375 Moses Lake Programs Moving Forward - 2,785 Round Up Program - Veterans Programs 67,050 40,463 SSVF Program 4,669 2,665 Henry Treed Trust - Spokane Programs 7,212 4,276 Carl Hansen - Good Guides Program 4,950 5,000 Lloyd Madison Poor and Hungry 2,500 2,500 Lloyd Madison WFS Services - 3,178 BEET 10,000 - Pride Foundation 5,000 - Total $ 599,375 $ 569,941 Net assets released from restrictions were as follows for the years ended December 31: Vocational Programs $ 14,809 $ 15,008 Culinary Program - 5,251 Working-Poor Training Veterans Forum Program 17,836 7,373 Homeless Kenneth King Award Fund Moses Lake Programs Henry Treed Trust - Spokane Programs 4,891 3,401 Moving Forward 2,785 2,215 Employee Award Event 3,500 4,010 Lloyd Madison WFS Services 3,179 1,821 Roundup Program 40,465 - Carl Hansen - Good Guides Program 50 - SSVF Program 100 2,481 Total $ 88,262 $ 42,056 (21)

24 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 11 INTEREST EXPENSE Interest expense for the years ended December 31, 2016 and 2015 was $88,183 and $133,456, respectively, and is included with occupancy and equipment expenses in the statements of functional expenses. NOTE 12 CONCENTRATIONS The Organization s cash balances are maintained in several commercial banks as well as in an insured savings account with a brokerage firm. Cash balances are in excess of coverage provided by the Federal Deposit Insurance Corporation. The Organization receives a significant portion of its revenues through grants from various state and local agencies. Were such agencies to reduce future funding, it could impact the Organization s results of operations, cash flows, and financial position. NOTE 13 EMPLOYEE BENEFIT PLANS Employee Retirement Plan The Organization sponsors a defined contribution 401(k) retirement plan. Eligible employees must be 21 years of age or older, have been employed for at least one year, and work a minimum of 1,000 hours annually. Employees may contribute up to 15% of compensation not to exceed federal maximum contribution limitations. Employer contributions are discretionary. The Organization elected to contribute $73,594 and $70,019 and in 2016 and 2015, respectively. This was 30% in 2016 and 2015 of qualified employee contributions. Executive Retirement Plan The Organization established a nonqualified Executive Retirement Plan (the Plan) for the chief executive officer that was effective January 1, Under the Plan, the Organization will contribute 6% of the chief executive officer s base compensation each year. The Plan provides for interest to be accrued on the account balance at a rate equal to the annual investment rate of return earned by the Goodwill Foundation fund as of the last day of the applicable Plan year. Payments of distributable or vested benefits are made upon termination, retirement, death, or disability. The Plan also allows for certain in-service withdrawals of the vested account balance provided that certain minimum criteria are met. Benefits will be paid in the form of a lump sum within 60 days after the vested account matures. Employer contributions were $11,781 and $11,220 in 2016 and 2015, respectively. The liability was $88,182 and $70,741 at December 31, 2016 and 2015, respectively. (22)

25 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 14 AFFILIATED ORGANIZATION Good Works, Inc., a nonprofit organization incorporated under Section 501(c)(3) of the Internal Revenue Code, administers an NISH grant which provides employment opportunities for the severely disabled. The Organization established a line of credit due as able to pay for Good Works, Inc., 6.5% uncollateralized, interest is accrued on any outstanding balance. The balance was $65,437 and $11,909 at December 31, 2016 and 2015, respectively. The Organization provides contract management and accounting services for Good Works, Inc., at a cost of $400 and $200 per month, respectively. NOTE 15 DEFERRED COMPENSATION A deferred compensation arrangement exists between the Organization and the former President/CEO. Beginning in June 2008 (retirement date), the Organization began paying on this agreement. The Organization is obligated to pay one month s salary for each year of service, payable in monthly installments over a 10-year period with no interest. The liability has been discounted using the Internal Revenue Service s Applicable Federal Rate of 2.08%. The discount is being amortized over the term of the agreement. Beginning in 2016 the Organization reduced the monthly payment by 50% at the request of the former President/CEO. The term will now expire in December 2020 instead of June 2018 as stated in the original agreement. NOTE 16 FAIR VALUE MEASUREMENTS Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820 provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy defined by FASB ASC 820 are as follows: Level 1 Quoted prices are available in active markets for identical assets or liabilities. Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. (23)

26 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 16 FAIR VALUE MEASUREMENTS (CONTINUED) Level 2 Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Level 3 Pricing inputs include significant inputs that are generally unobservable from objective sources. These inputs may be used with internally developed methodologies that result in management s best estimate of fair value. Level 3 instruments include those that may be more structured or otherwise tailored to the Organization s needs. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Organization s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2016 and Contributions Receivable from Charitable Trusts Valued at fair value of the underlying assets discounted using actuarial assumptions of the trust s life, beneficiary s estimated life expectancy, and current interest rates (see Note 1). Beneficial Interest in Assets Held by Inland Northwest Community Foundation Valued at fair value based on unadjusted quoted market prices of the underlying investments. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Organization believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different fair value measurement at the reporting date. (24)

27 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015 NOTE 16 FAIR VALUE MEASUREMENTS (CONTINUED) The following tables disclose, by level within the fair value hierarchy, the Organization s assets measured and reported on the statements of financial position at fair value on a recurring basis as of December 31: 2016 Level 1 Level 2 Level 3 Total Contributions Receivable from Charitable Trusts $ - $ - $ 463,716 $ 463,716 Beneficial Interest in Assets Held by Inland Northwest Community Foundation , ,787 Total $ - $ - $ 632,503 $ 632, Level 1 Level 2 Level 3 Total Contributions Receivable from Charitable Trusts $ - $ - $ 444,933 $ 444,933 Beneficial Interest in Assets Held by Inland Northwest Community Foundation , ,766 Total $ - $ - $ 586,699 $ 586,699 The following sets forth a summary for the years ended December 31 of changes in the fair value of contributions receivable from charitable trusts and beneficial interest in assets held by Inland Northwest Community Foundation, the Organization s Level 3 assets: Balance - Beginning of Year $ 586,699 $ 573,586 Contributions 16,854 40,082 Change in Value, Net 28,950 (26,969) Balance - End of Year $ 632,503 $ 586,699 NOTE 17 SUBSEQUENT EVENT In January 2017 Goodwill entered into a construction contract to renovate the Northwest Boulevard store. The contract amount was approximately $485,000. (25)

28 CliftonLarsonAllen LLP CLAconnect.com INDEPENDENT AUDITORS 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 Board of Directors Goodwill Industries of the Inland Northwest Spokane, Washington 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 Goodwill Industries of the Inland Northwest (the Organization), which comprise the statement of financial position as of December 31, 2016, and the related statements of activities, functional expenses, and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated May 8, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the Organization 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 Organization s internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization 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. (26)

29 Board of Directors Goodwill Industries of the Inland Northwest 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. We did identify a deficiency in internal control, described in the accompanying Schedule of Findings and Questioned Costs as that we consider to be a significant deficiency. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Organization 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. Goodwill Industries of the Inland Northwest s Response to Findings Goodwill Industries of the Inland Northwest s response to the findings identified in our audit are described in the accompanying Schedule of Findings and Questioned Costs. Goodwill Industries of the Inland Northwest s response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. 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. CliftonLarsonAllen LLP Spokane, Washington May 8, 2017 (27)

30 CliftonLarsonAllen LLP CLAconnect.com INDEPENDENT AUDITORS REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE Board of Directors Goodwill Industries of the Inland Northwest Spokane, Washington Report on Compliance for Each Major Federal Program We have audited Goodwill Industries of the Inland Northwest s (the Organization) compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of the Organization s major federal programs for the year ended December 31, The Organization s major federal programs are identified in the summary of auditors 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 for each of the Organization s major federal programs 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 Organization 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 Organization s compliance. (28)