The Barnes Foundation. Financial Report December 31, 2016

Transcription

1 Financial Report December 31, 2016

2 Contents Independent auditor s report 1 Financial statements Statements of financial position 2 Statements of activities 3-4 Statements of cash flows 5 Notes to financial statements 6-17

3 Independent Auditor s Report To the Board of Trustees The Barnes Foundation Philadelphia, Pennsylvania Report on the Financial Statements We have audited the accompanying financial statements of The Barnes Foundation, which comprise the statements of financial position as of December 31, 2016 and 2015, the related statements of activities 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. Auditor s Responsibility Our responsibility is to express an opinion 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s 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 opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Barnes Foundation as of December 31, 2016 and 2015, and the changes in net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Blue Bell, Pennsylvania June 7,

4 Statements of Financial Position December 31, 2016 and 2015 Assets Cash and cash equivalents: Parkway project $ 5,286,710 $ 4,367,497 Other 1,146, ,574 Accounts receivable 29, ,809 Contributions receivable (Note 3): Parkway project 1,479,258 1,984,205 Other 1,292, ,058 Accrued interest receivable 36,326 39,215 Inventory 1,260,682 1,299,559 Prepaid expenses 550,201 1,277,139 Beneficial interest in lead trust (Note 4) 561, ,000 Investments (Note 5): Parkway project 2,793,902 2,806,262 Endowment 61,593,601 61,940,348 Court restricted 5,924,983 5,609,115 Property and equipment, net (Note 7) 108,253, ,727,251 Objects of art 5,775,387 5,775,387 Total assets $ 195,984,708 $ 199,487,419 Liabilities and Net Assets Liabilities: Accounts payable: $ 409,351 $ 274,159 Accrued expenses 954,925 1,350,061 Deferred revenue 563, ,838 Total liabilities 1,927,692 1,761,058 Net assets: Unrestricted 113,990, ,891,283 Temporarily restricted (Note 8) 17,005,986 15,749,114 Permanently restricted (Note 9) 63,060,078 63,085,964 Total net assets 194,057, ,726,361 Total liabilities and net assets $ 195,984,708 $ 199,487,419 See notes to financial statements. 2

5 Statement of Activities Year Ended December 31, 2016 Temporarily Restricted Court Parkway Permanently Unrestricted Operating Restricted Project Total Restricted Total Revenues: Contributions $ 7,247,951 $ 2,343,755 $ - $ 1,689,698 $ 4,033,453 $ 12,864 $ 11,294,268 In kind contributions 2,864, ,864,374 Admissions revenue 3,857, ,857,725 Retail sales 1,688, ,688,507 Event revenue 707, ,276 Education revenue 244, ,046 Licensing and merchandising revenue 34, ,962 Publications revenue 46, ,710 Miscellaneous earned revenue 1, ,418 Investment return, net of fees (Note 5) (491) - 313,534 2,811,930 3,125,464-3,124,973 16,692,478 2,343, ,534 4,501,628 7,158,917 12,864 23,864,259 Operating net assets released from restrictions 2,457,384 (2,457,384) - - (2,457,384) - - Total revenues 19,149,862 (113,629) 313,534 4,501,628 4,701,533 12,864 23,864,259 Operating expenses: Salaries and benefits 9,012, ,012,808 In kind advertising and other 2,864, ,864,374 Depreciation 5,037, ,037,438 Security 1,431, ,431,561 Facility costs 2,589, ,589,762 Administrative expenses 1,921, ,921,038 Gift shop cost of goods sold 779, ,265 Professional and consulting fees 2,245, ,245,961 Other 1,393, ,393,848 Total operating expenses 27,276, ,276,055 Operating income (deficit) before parkway project net assets released (8,126,193) (113,629) 313,534 4,501,628 4,701,533 12,864 (3,411,796) Parkway project net assets released from restrictions 3,444, (3,444,661) (3,444,661) - - Changes in net assets before parkway project expenses (4,681,532) (113,629) 313,534 1,056,967 1,256,872 12,864 (3,411,796) Parkway project expenses: Professional and consulting fees 191, ,274 Administrative expenses 2, ,226 Facility cost 25, ,299 Total parkway project expenses 218, ,799 Other decreases, reserve on beneficial interest in lead trust ,750 38,750 Change in net assets (4,900,331) (113,629) 313,534 1,056,967 1,256,872 (25,886) (3,669,345) Net assets: Beginning 118,891, ,005 5,618,276 9,310,833 15,749,114 63,085, ,726,361 Ending $ 113,990,952 $ 706,376 $ 5,931,810 $ 10,367,800 $ 17,005,986 $ 63,060,078 $ 194,057,016 See notes to financial statements. 3

6 Statement of Activities Year Ended December 31, 2015 Temporarily Restricted Court Parkway Permanently Unrestricted Operating Restricted Project Total Restricted Total Revenues: Contributions $ 6,779,605 $ 1,137,200 $ - $ 1,180,339 $ 2,317,539 $ 7,169,556 $ 16,266,700 In kind contributions 2,303, ,303,215 Admissions revenue 3,894, ,894,635 Retail sales 1,691, ,691,976 Event revenue 573, ,429 Education revenue 251, ,254 Licensing and merchandising revenue 22, ,133 Publications revenue 267, ,807 Miscellaneous earned revenue 17, ,352 Investment return, net of fees (Note 5) (5,562) - (21,295) (2,320,539) (2,341,834) - (2,347,396) 15,795,844 1,137,200 (21,295) (1,140,200) (24,295) 7,169,556 22,941,105 Operating net assets released from restrictions 1,367,930 (1,367,930) - - (1,367,930) - - Total revenues 17,163,774 (230,730) (21,295) (1,140,200) (1,392,225) 7,169,556 22,941,105 Operating expenses: Salaries and benefits 8,367, ,367,592 In kind advertising and other 2,303, ,303,215 Depreciation 5,324, ,324,608 Security 1,421, ,421,204 Facility costs 2,251, ,251,154 Administrative expenses 1,874, ,874,166 Gift shop cost of goods sold 722, ,735 Professional and consulting fees 2,060, ,060,668 Other 1,304, ,304,923 Total operating expenses 25,630, ,630,265 Operating income (deficit) before parkway project net assets released (8,466,491) (230,730) (21,295) (1,140,200) (1,392,225) 7,169,556 (2,689,160) Parkway project net assets released from restrictions 2,415, (2,415,889) (2,415,889) - - Parkway project net assets transferred to endowment (3,000,000) (3,000,000) 3,000,000 - Changes in net assets before parkway project expenses (6,050,602) (230,730) (21,295) (6,556,089) (6,808,114) 10,169,556 (2,689,160) Parkway project expenses: Administrative expenses 1, ,107 Facility cost 98, ,857 Other (61,597) (61,597) Total parkway project expenses 38, ,367 Change in net assets (6,088,969) (230,730) (21,295) (6,556,089) (6,808,114) 10,169,556 (2,727,527) Net assets: Beginning 124,980,252 1,050,735 5,639,571 15,866,922 22,557,228 52,916, ,453,888 Ending $ 118,891,283 $ 820,005 $ 5,618,276 $ 9,310,833 $ 15,749,114 $ 63,085,964 $ 197,726,361 See notes to financial statements. 4

7 Statements of Cash Flows Years Ended December 31, 2016 and 2015 Cash flows from operating activities: Change in net assets $ (3,669,345) $ (2,727,527) Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation 5,037,438 5,324,608 Amortization 81,031 52,189 Inventory reserve 15,000 13,000 Reserve on beneficial interest in lead trust 38,750 - Net unrealized (gain) loss on investments (1,258,413) 8,431,653 Gain on sale of investments (813,584) (5,048,922) Change in discount on contributions receivable 2,602 (128,099) Contributions, permanently restricted (12,864) (7,169,556) Contributions of marketable securities - (7,919,530) (Increase) decrease in assets: Accounts receivable 105,135 (73,329) Contributions receivable (593,113) 5,584,860 Accrued interest receivable 2,889 9,393 Inventory (57,154) (552,413) Prepaid expenses 726,938 (581,989) Increase (decrease) in liabilities: Accounts payable 135,192 (340,686) Accrued expenses (395,136) 469,881 Deferred revenue 426,578 (863,162) Net cash used in operating activities (228,056) (5,519,629) Cash flows from investing activities: Proceeds from sale of investments 31,026,142 66,948,855 Purchases of investments (28,910,906) (67,308,374) Purchase of property and equipment (563,539) (144,036) Net cash provided by (used in) investing activities 1,551,697 (503,555) Cash flows from financing activities: Collection of permanently restricted contributions 12,864 7,169,556 Net increase in cash and cash equivalents 1,336,505 1,146,372 Cash and cash equivalents: Beginning 5,097,071 3,950,699 Ending $ 6,433,576 $ 5,097,071 See notes to financial statements. 5

8 Note 1. Nature of Operations and Summary of Significant Accounting Policies Nature of operations: The Barnes Foundation (the Foundation) was chartered by the Commonwealth of Pennsylvania in 1922, as a privately-endowed, nonprofit educational institution, for the purpose of conducting classes in art appreciation and horticulture. The Foundation includes a gallery located in Philadelphia and an arboretum located in Merion, Pennsylvania, which are open to the public at designated times, along with a country estate located in Chester Springs, Pennsylvania, that is not generally open to the public. A summary of the Foundation s significant accounting policies is as follows: Contributions: Contributions received are recorded as unrestricted, temporarily-restricted, or permanently-restricted support, depending on the existence and/or nature of any donor restrictions. All donor-restricted support is reported as an increase in temporarily- or permanently-restricted net assets, depending on the nature of the restriction. When a restriction expires (when a stipulated time restriction ends or purpose for restriction is accomplished), temporarily-restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Cash and cash equivalents: The Foundation considers all short-term securities purchased with a maturity of three months or less to be cash equivalents. Investments: Investments in equity securities with readily determinable fair values and all investments in debt securities are measured and stated at fair value (as more fully described in Note 6). Interest and dividend income is recognized when earned. Any unrealized or realized gains or losses are reported in the statements of activities as a change in unrestricted net assets, unless explicit donor intent or law restricts their use, in which case unrealized gains or losses are reported in the statement of activities as a change in temporarily-restricted net assets. The fair value of each investment is determined at the statement of financial position date in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures. Accordingly, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. Fair value measurements are separately disclosed by level within the fair value hierarchy. Investments measured and reported at fair value are classified and disclosed in one of the following categories: Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities. Level 2: Observable inputs other than Level 1 prices such as quoted market prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3: Unobservable inputs that are supported by little or no market activity that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or other valuation techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. 6

9 Note 1. Nature of Operations and Summary of Significant Accounting Policies (Continued) The following is a description of the valuation methodologies used for instruments measured at fair value. These valuation methodologies were applied to all of the Foundation s financial assets and liabilities that are carried at fair value as of December 31, 2016 and 2015, respectively. The fair value of securities is the market value based on quoted market prices, when available, or market prices provided by recognized broker dealers (Level 1). When listed prices or quotes are not available, fair value is based upon quoted market prices for similar or identical assets or other observable inputs (Level 2) or significant management judgment or estimation based upon unobservable inputs due to limited or no market activity of the instrument (Level 3). Contributions receivable: Contributions receivable, which represent unconditional promises to give, are recognized as revenue in the period received and as assets, decreases of liabilities or expenses, depending on the form of the benefits received. Unconditional promises to give that are expected to be collected within one year are recorded at net realizable value. Unconditional promises to give that are expected to be collected over periods in excess of one year are recorded at fair value, which is measured as present value of the estimated cash flows beyond one year, using current market rates appropriate for the expected term of the promise to give. Conditional promises to give, which depend on the occurrence of a specified future and uncertain event to bind the promisor, are recorded when the conditions on which they depend are substantially met. Beneficial interest in lead trust: Contributions to charitable lead trusts are recorded using the current fair value of the underlying assets using observable market inputs, based on its beneficial interest in the trust, discounted to a single present value using current market rates at the date of the contribution. The initially-contributed assets are categorized as a Level 3 measurement in the fair value hierarchy, and reported as beneficial interest in lead trust, at fair value on the statements of financial position and as contribution revenue on the statements of activities. Subsequent-year valuations follow this same approach, with changes in fair value reported as an adjustment to the beneficial interest in lead trust asset at fair value on the statements of financial position. Inventory: Gallery shop inventory consists of purchased items and is stated at the lower of cost (determined by the first-in, first-out method) or market. Property and equipment and depreciation: Fixed assets are stated at cost. The cost of property and equipment is depreciated over the estimated useful lives of the related assets on a straight-line basis ranging from 3 to 30 years. Objects of art: The Foundation owns a collection of paintings, sculptures, antiques and other objects of art. The Foundation has capitalized collection items purchased directly by the Foundation at cost, and those contributed other than by it s Founder at the fair market value on the date of the gift. Substantially all of the collection objects were donated to the Foundation by its Founder and are recorded at a $1 nominal value, in accordance with a resolution of the Board of Trustees at the time of the gift. The Foundation has determined that it is not practical to establish a fair value of the Founder s original contribution as of the date of the gift because records relating to the fair value at the date of the contribution are unreliable or do not exist. Deferred revenue: Deferred revenue consists of amounts received where recognition of those amounts is conditioned upon the Foundation receiving matching contributions in future periods as set forth in the agreement with the donor or performing services in future periods. 7

10 Note 1. Nature of Operations and Summary of Significant Accounting Policies (Continued) Net assets: The Foundation classifies net assets into three categories: unrestricted, temporarily restricted and permanently restricted. All contributions are considered to be available for unrestricted use, unless specifically restricted by the donor. Temporarily-restricted net assets are contributions with temporary, donor-imposed time or purpose restrictions. Temporarily-restricted net assets become unrestricted when the time restrictions expire or the contributions are used for their restricted purpose, at which time they are reported in the statement of activities as net assets released from restrictions. Permanently-restricted net assets represent contributions received, subject to donor restrictions, that neither expire by the passage of time nor can be fulfilled or otherwise removed by actions of the Foundation. Income taxes: The Foundation is generally exempt from federal income taxes under the provisions of Section 501(c)(3) of the Internal Revenue Code. In addition, the Foundation qualifies for charitable contribution deductions and has been classified as an organization that is not a private foundation. Income, which is not related to exempt purposes, less applicable deductions, is subject to federal and state corporate income taxes. The Foundation paid net unrelated business income taxes of $-0- in 2016 and $13,958 in Management has evaluated the Foundation s tax positions and concluded that the Foundation had taken no material uncertain tax positions that require adjustment to the financial statements. Consequently, no accrual for interest and penalties was deemed necessary for the years ended December 31, 2016 or The Foundation files income tax returns in the United States federal jurisdiction. Generally, the Foundation is no longer subject to income tax examinations by the United States federal, state or local tax authorities for years before Functional expense allocation: The costs of providing various programs and other activities have been summarized on a functional basis in the schedule of functional allocation of expenses in Note 12. Accordingly, certain costs have been allocated among the programs and supporting services benefited. Use of 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 the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent Accounting Pronouncements: In May 2014, the FASB issued Accounting Standards Update (ASU) , Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU which defers the effective date of ASU one year making it effective for annual reporting periods beginning after December 15, The Foundation has not yet selected a transition method and is currently evaluating the effect that the standard will have on its financial statements. 8

11 Note 1. Nature of Operations and Summary of Significant Accounting Policies (Continued) In February 2016, the FASB issued ASU , Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of activities. The new standard is effective for fiscal years beginning after December 15, The Foundation is currently evaluating the impact of the adoption of this new standard on its financial statements. In August 2016, the FASB issued ASU , Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, which simplifies and improves how a not-for-profit organization classifies its net assets, as well as the information it presents in financial statements and notes about its liquidity, financial performance, and cash flows. Among other changes, the ASU replaces the three current classes of net assets with two new classes, net assets with donor restrictions and net assets without donor restrictions, and expands disclosures about the nature and amount of any donor restrictions. ASU is effective for annual periods beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018, with early adoption permitted. The Foundation is currently evaluating the impact the adoption of this guidance will have on its financial statements. In November 2016, the FASB issued ASU , Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force), which provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. ASU will be effective for the Foundation beginning on January 1, ASU must be applied using a retrospective transition method with early adoption permitted. The Foundation is currently evaluating the impact of the adoption of this guidance on its financial statements. Reclassification: Certain amounts in the 2015 financial statements have been reclassified to conform to 2016 presentation. Subsequent events: The Foundation has evaluated events occurring after December 31, 2016 through June 7, 2017, (the date of issuance of these financial statements), and determined that there were no material subsequent events requiring adjustment to, or disclosure in, the financial statements for the year ended December 31, Note 2. Credit and Financial Risk The Foundation has deposits with major financial institutions which exceed Federal Depository Insurance limits. The Foundation believes it limits any significant credit risk on cash and cash equivalents by placing its deposits with high credit quality financial institutions. The Foundation s contributions receivable are unsecured. The Foundation periodically reminds donors of their commitments. The Foundation s investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the statements of financial position. 9

12 Note 3. Contributions Receivable Contributions receivable consist of the following: Parkway project $ 1,479,258 $ 1,984,205 Other 1,292, ,058 $ 2,771,774 $ 2,181,263 The Foundation recorded contributions receivable for funding from various sources that are due to be received as follows: Due within: Less than one year $ 1,845,266 $ 949,403 One to five years 302, ,250 More than five years 875, ,000 Gross unconditional contributions receivable 3,022,766 2,429,653 Less unamortized discount 250, ,390 $ 2,771,774 $ 2,181,263 The discount to net present value represents a discount for funding to be received in future years. This discount rate was approximately 4% at both December 31, 2016 and All contributions receivable at December 31, 2016 are considered collectible. At December 31, 2016, three donors accounted for 91% of gross contributions receivable. At December 31, 2015, three donors accounted for 85% of gross contributions receivable. Note 4. Beneficial Interest in Lead Trust In August 2011, a donor established a trust naming the Foundation as the lead beneficiary of an irrevocable charitable lead annuity trust (the Trust). Under the terms of the Trust, a third-party trustee has investment authority over the assets in the Trust. Based on the terms of the Trust and a 3.8% discount rate, the present value of future benefits expected to be received by the Foundation was calculated to be $1,000,000, which was recorded as a permanently-restricted contribution. Under the terms of the Trust, the Foundation is to receive the following remaining payments on each anniversary date of the Trust: Years ending December 31: 2017 $ 22, , ,600 Less discount to net present value 45,600 Less valuation reserve $ 38, ,250 A final payment of $600,000 is planned to be distributed in August, 2018 along with the annual payment. The Trust will terminate at this time and any remaining funds will be distributed to other beneficiaries, as set forth in the Trust. 10

13 Note 4. Beneficial Interest in Lead Trust (Continued) Distributions to be received from the Trust are subject to availability of funds within the Trust. The fair market value of the assets in the Trust at December 31, 2016 and 2015 was approximately $484,000 and $468,000, respectively. In 2016, the Foundation established a valuation reserve of $38,750 against the amount expected from the Trust, based on the current fair market value of the assets in the Trust. Note 5. Investments Investments, at fair value, consist of the following: Parkway project: Money market funds $ 2,793,902 $ 2,806,262 Endowment: Money market funds 1,069,558 1,228,419 Equity securities 8,405,228 11,160,048 U.S. Government and Agency notes and bonds 2,695,511 2,386,302 Other Government Notes and Bonds 57,565 56,728 Corporate fixed income bonds and notes 1,873,905 1,807,163 Fixed income mutual funds 4,909,846 8,227,762 Equity mutual funds 14,511,584 10,734,383 Commodity mutual funds - 323,489 Real estate investment trusts 1,880,838 1,776,561 Alternative Investments 12,072,030 10,212,585 International equity securities 2,561,461 2,449,770 International mutual funds 11,556,075 11,577,138 61,593,601 61,940,348 Court restricted: Money market funds and certificates of deposit 790, ,702 U.S. Government and Agency notes and bonds 651, ,298 Corporate fixed income bonds and notes 167, ,222 Fixed income mutual funds 557, ,215 Equity mutual funds 2,382,989 2,140,223 Commodity mutual funds 254, ,533 International mutual funds 1,120,145 1,175,922 5,924,983 5,609,115 $ 70,312,486 $ 70,355,725 Investment return, net of fees, for the years ended December 31, 2016 and 2015 is as follows: Interest and dividends $ 1,139,056 $ 1,260,923 Unrealized gain (loss) on investments 1,258,413 (8,431,653) Realized gain on sale of investments 813,584 5,048,922 Capital gain distributions 206, ,654 Investment fees (292,137) (383,242) $ 3,124,973 $ (2,347,396) 11

14 Note 6. Fair Value of Financial Instruments Fair value on a recurring basis: The table below presents the balance of assets measured at fair value on a recurring basis as of December 31, 2016 and 2015, respectively. Fair Value Measurements at December 31, 2016 Using Quoted Prices Significant Significant Total in Active Other Other Assets Markets for Observable Unobservable Measured at Identical Assets Inputs Inputs Fair Value (Level 1) (Level 2) (Level 3) Assets: Money market funds and certificates of deposits $ 4,654,351 $ 4,654,351 $ - $ - U.S. Equity securities 8,405,228 8,405, U.S. Government and Agency notes and bonds 3,347,422 3,347, Other Government and Agency notes and bonds 57,565-57,565 - Other Government notes 2,041,086-2,041,086 - Corporate Fixed Income 5,466,929-5,466,929 - Fixed Income Mutual Funds 16,894,573 16,894, Equity Mutual Funds 254, , Commodity mutual funds 12,676,220 12,676, International equity securities 2,561,461 2,561, Real Estate Investment Trusts 1,880,838-1,880,838 - Alternative investments 12,072, ,072,030 Total investments 70,312,486 48,794,038 9,446,418 12,072,030 Beneficial interest in lead trust 561, ,250 Total assets measured at fair value $ 70,873,736 $ 48,794,038 $ 9,446,418 $ 12,633,280 Fair Value Measurements at December 31, 2015 Using Quoted Prices Significant Significant Total in Active Other Other Assets Markets for Observable Unobservable Measured at Identical Assets Inputs Inputs Fair Value (Level 1) (Level 2) (Level 3) Assets: Money market funds and certificates of deposits $ 4,708,383 $ 4,708,383 $ - $ - U.S Equity securities 11,160,048 11,160, U.S. Government and Agency notes and bonds 3,174,600 3,174, Other Government and Agency notes and bonds 56,728-56,728 - Other Government notes 2,113,385-2,113,385 - Corporate Fixed Income 8,477,977-8,477,977 - Fixed Income Mutual Funds 12,874,606 12,874, Equity Mutual Funds 598, , Commodity mutual funds 12,753,060 12,753, International equity securities 2,449,770 2,449, Real Estate Investment Trusts 1,776,561-1,776,561 - Alternative investments 10,212, ,212,585 Total investments 70,355,725 47,718,489 12,424,651 10,212,585 Beneficial interest in lead trust 600, ,000 Total assets measured at fair value $ 70,955,725 $ 47,718,489 $ 12,424,651 $ 10,812,585 12

15 Note 6. Fair Value of Financial Instruments (Continued) At December 31, 2016 and 2015, the Foundation did not have any financial instruments that are recorded at fair value on a non-recurring basis. In addition, there was no change in valuation techniques used to measure fair value of the assets. The following table presents additional information about assets measured at fair value under Level 3 of the fair value hierarchy: Level 3 Balance, January 1, 2015 $ 600,000 Purchases of alternative investments 11,210,000 Unrealized loss on alternative investments (997,415) Balance, December 31, ,812,585 Purchases of alternative investments 5,100,000 Sales of alternative investments (3,417,662) Realized loss on sales of alternative investments (430,265) Unrealized gain on alternative investments 568,622 Balance, December 31, 2016 $ 12,633,280 Note 7. Property and Equipment Property and equipment consist of the following: Merion and Chester Springs: Land $ 176,389 $ 176,389 Building and improvements 15,109,313 15,043,857 Furniture and fixtures 23,404 23,404 Equipment 261, ,890 Technology equipment / software 49,940 49,940 15,620,936 15,555,480 Less accumulated depreciation 11,053,583 10,542,659 4,567,353 5,012,821 Philadelphia: Buildings and improvements 121,076, ,063,758 Furniture and fixtures 2,264,801 2,144,799 Equipment 612, ,805 Technology equipment / software 1,753,004 1,739,768 Construction in progress - Parkway project 610, , ,316, ,819,316 Less accumulated depreciation 22,630,802 18,104, ,685, ,714,430 $ 108,253,352 $ 112,727,251 13

16 Note 8. Temporarily-Restricted Net Assets Temporarily-restricted net assets are available for the following purposes or periods and consist of the following categories: Parkway project $ 10,367,800 $ 9,310,833 Court restricted funds 5,931,810 5,618,276 Program support for future periods 706, ,005 $ 17,005,986 $ 15,749,114 Funds restricted for the Parkway project are more fully described in Note 13. By court order in 1992, the Foundation received approval for an international tour to exhibit works in its collection in order to raise the necessary funds to renovate the gallery, adjacent buildings and related structures. The amounts remaining from these exhibitions have been so restricted by the court and are identified above as court-restricted funds. These amounts include investment gains and losses and are included in accrued interest receivable and investments on the statements of financial position. Note 9. Permanently-Restricted Net Assets Permanently-restricted net assets have been contributed to the Foundation for the following purposes and consist of the following categories: General Operating Support $ 32,427,599 $ 32,422,599 Scholarly Activities 22,055,084 22,093,834 Education 8,577,395 8,569,531 $ 63,060,078 $ 63,085,964 Scholarly activities of the Foundation include the curatorial, conservation, archives, registration, publication and special exhibition functions. The Foundation used a 5% spending rate in 2016 and 2015 to determine the amount of endowment earnings to be allocated to operations. The spending rate is subject to review annually by the Foundation s Board of Trustees. The Board of Trustees intends to apply the spending rate to the average quarterly endowment balances in the prior three years, once the assets have been invested in the endowment for that time. In 2016, the Board of Trustees elected to apply the spending rate to the average of quarterly endowment balances in 2015 and In 2015, the Board of Trustees elected to apply the spending rate to the average of quarterly endowment balances in In addition, distributions from outside trusts are available to be credited to operations. The value of endowment earnings credited to operations from unrestricted and temporarily-restricted net assets was $3,176,815 in 2016 and $3,188,434 in Dividends, interest and changes in investment value on these permanently-restricted net assets are recorded as increases or decreases in temporarilyrestricted net assets. 14

17 Note 10. Leases The Foundation leases equipment under leases expiring through September At December 31, 2016, the Foundation was obligated to pay the following amounts under no cancelable operating lease arrangements: Years ending December 31: 2017 $ 37, $ 25,024 62,854 On January 8, 2008, the Foundation executed a Ground Sublease with The Philadelphia Authority for Industrial Development (PAID) for a parcel of land located on the Benjamin Franklin Parkway in Philadelphia. The land, which is owned by the City of Philadelphia, was leased to PAID under a Master Lease on the same date. The lease is a 99-year lease, commencing with the completion of certain conditions. The Foundation paid a base rent of $10 for the term of the lease, and was obligated under the lease to pay additional costs, including costs for the demolition and environmental remediation of the Youth Study Center (the Premises), which was located on the site covered by the lease. The initial term of the lease commenced in October of 2008, when the City had vacated the Premises. Note 11. Pension Plan The Foundation has a 403(b) Elective Deferral Plan (the Plan) where eligible employees may elect to defer up to 6% of base salary. The Foundation will match 50% of amounts deferred by employees, up to 3% of the employee s base salary. The Foundation contributed $142,277 in 2016 and $121,253 in 2015 to the Plan. Note 12. Functional Allocation of Expenses Expenses related to the Foundation s operations were as follows: Program $ 20,697,050 $ 19,511,858 Management and general 2,917,812 2,786,399 Fundraising 2,769,653 2,303,482 Cost of goods sold 1,110,339 1,066,893 $ 27,494,854 $ 25,668,632 The functional allocation of expenses includes expenditures related to some ongoing projects associated with the Foundation s Parkway facility. Total expenses related to the Project were approximately $219,000 in 2016 and $38,000 in Note 13. Parkway Project Since 2002, the Foundation has been engaged in a capital campaign to obtain financial support with respect to the construction of its new facility in Philadelphia and to create an endowment for the purpose of ensuring the future financial viability of the Foundation (the Project). Supporters of the Project have made commitments totaling approximately $202,200,

18 Note 13. Parkway Project (Continued) The Foundation has recorded $201,600,000 in commitments as contribution revenues since inception. Of this amount, contributions receivable at December 31, 2016 are approximately $1,500,000, after giving effect to a present value discount. The expected timing of collection of the remaining campaign pledges is included in amounts disclosed in Note 3. Contributions receivable do not include the funds related to the beneficial-interest agreement disclosed in Note 4. Total costs incurred in connection with the Project since inception of the Project through December 31, 2016 were approximately $144,400,000, excluding distributions made for unrestricted operating support. The Foundation is holding approximately $8,100,000 in cash and cash equivalents and investments restricted for expenditures related to the Project at December 31, The Foundation s endowment at December 31, 2016 is more fully described in Note 14. The Foundation undertook an expansion to its facility in 2016, to provide additional education space and to enhance its food service operations. The estimated cost of the expansion is approximately $6.0 million and expected to be completed in Contributions of $2.6 million have been received and recorded as contribution revenues to support this expansion. The balance of the cost of the expansion will be paid for from funds raised for the initial Parkway Project. Costs incurred related to the expansion were $480,000 in Note 14. Endowments The Foundation follows the standard which provides guidance on the net asset classification of donorrestricted endowment funds for a not-for-profit organization that is subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA) and also require disclosures about endowment funds, both donor-restricted endowment funds and board-designated endowment funds. The Foundation s endowment consists of three donor-restricted funds (Scholarly Activity Endowment, Education Endowment and General Endowment), that were established for activities related to the care of and research about the collection, support of the Foundation s education programs and general support of the Foundation s operations. Endowment assets include a managed pool of investments and the beneficial interest in lead trust, as set forth in the statements of financial position. As required by accounting principles generally accepted in the United States of America, net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. Interpretation of relevant law: The Commonwealth of Pennsylvania has not adopted UPMIFA. State law allows non-profit organizations to make an election to adopt a total return investment policy as provided by Act 141 (1988) of Pennsylvania legislature, 15 Pa.C.S.A Section (total return election). In 2010, the Foundation made a total return election. The Foundation is free to adopt any prudent investment policy and make withdrawals consistent with its goals of preserving the endowment funds, while making funds available for continued operations. The Foundation reviewed its donor agreements and has determined that none of the agreements contain any explicit limitations on withdrawals. Spending policy, return objectives and risk parameters: The Foundation has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to the program supported by its endowment, while seeking to maintain the purchasing power of the endowment assets. Corpus of the endowment assets are held in perpetuity for Scholarly Activities, Education Program Support and General Operating Support based on donor-restriction. At December 31, 2016 and 2015, endowment assets are invested primarily in a diversified portfolio of marketable securities. Funds awaiting investment are held in a savings account at an FDIC-insured financial institution. 16

19 Note 14. Endowments (Continued) Funds with deficiencies: From time to time, the fair value of assets associated with individual donorrestricted endowment funds may fall below the original gift amount maintained as permanently restricted net assets. These deficiencies resulted from lower investment earnings available to fund appropriations, due to unfavorable market fluctuations that occur after the investment of permanently restricted contributions, in comparison to the Foundation s spending policy, as deemed prudent by the Board of Trustees. In accordance with generally accepted accounting principles, deficiencies of this nature reported in unrestricted net assets were $1,175,878 and $821,888 as of December 31, 2016 and 2015, respectively. Endowment funds as of December 31, 2016 consisted of the following: Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ (1,175,878) $ - $ 63,060,078 $ 61,884,200 Changes in endowment funds for the year ended December 31, 2016 were as follows: Temporarily Permanently Unrestricted Restricted Restricted Total Endowments net assets, beginning of the year $ (821,888) $ - $ 63,085,964 $ 62,264,076 Contributions ,864 12,864 Investment return: Investment income - 985, ,207 Valuation Reserve - - (38,750) (38,750) Net appreciation (realized and unrealized) - 1,837,618-1,837,618 Appropriation of endowment assets for expenditure (353,990) (2,822,825) - (3,176,815) Endowment net assets, end of year $ (1,175,878) $ - $ 63,060,078 $ 61,884,200 Endowment funds as of December 31, 2015 consisted of the following: Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ (821,888) $ - $ 63,085,964 $ 62,264,076 Changes in endowment funds for the year ended December 31, 2015 were as follows: Temporarily Permanently Unrestricted Restricted Restricted Total Endowments net assets, beginning of the year $ - $ 4,672,975 $ 52,916,408 $ 57,589,383 Contributions - - 7,169,556 7,169,556 Reclassification of net assets - - 3,000,000 3,000,000 Investment return: Investment income - 821, ,579 Net appreciation (realized and unrealized) - (3,128,008) - (3,128,008) Appropriation of endowment assets for expenditure (821,888) (2,366,546) - (3,188,434) Endowment net assets, end of year $ (821,888) $ - $ 63,085,964 $ 62,264,076 17