Assurance. MUELLEr & Co., LLP Certified Public Accountants ~ Business Advisors NORTHERN ILLINOIS DISTRICT OF THE LUTHERAN CHURCH - MISSOURI SYNOD

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1 MUELLEr & Co., LLP Certified Public Accountants ~ Business Advisors Assurance NORTHERN ILLINOIS DISTRICT OF THE AUDITED FINANCIAL STATEMENTS YEAR ENDED JANUARY 31, 2017 MUELLER Chicago & Elgin Phone Fax

2 CONTENTS PAGE Basic Financial Statements Independent Auditors Report Statements of Financial Position... 3 Statements of Activities... 4 Statements of Cash Flows... 5 Notes to Financial Statements

3 1707 N. Randall Rd., Suite 200 Elgin, Illinois Fax: INDEPENDENT AUDITORS REPORT Board of Directors Northern Illinois District of the Lutheran Church - Missouri Synod Hillside, Illinois Report on the Financial Statements We have audited the accompanying financial statements of Northern Illinois District of the Lutheran Church - Missouri Synod, which comprise the statements of financial position as of January 31, 2017 and 2016, and 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. Auditors 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 of 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. -1- Certified Public Accountants Business Advisors Offices in Elgin and Chicago

4 Auditors Responsibility, Continued 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 Northern Illinois District of the Lutheran Church Missouri Synod as of January 31, 2017 and 2016, and the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Elgin, Illinois June 15,

5 NORTHERN ILLINOIS DISTRICT OF THE STATEMENTS OF FINANCIAL POSITION JANUARY 31, 2017 AND 2016 ASSETS Cash and cash equivalents $ 1,995,537 2,129,843 Accounts receivable 3,972 2,676 Interest receivable 6,682 5,250 Prepaid expenses 50, ,893 Other receivables 35 20,721 Loans receivable 384, ,150 Properties held for sale 1,134,602 1,134,602 Advance sites 54,103 53,951 Property and equipment, net of accumulated depreciation of $824,041 in 2017 and $787,263 in , ,030 Investments 2,880,270 2,784,893 Asset held under split-interest agreement 7,182 7,312 Beneficial interest in funds held by third-party trustee 177, ,955 LIABILITIES AND NET ASSETS $ 7,063,436 7,190,276 Liabilities: Accounts payable and accrued expenses $ 167, ,634 Grants payable 238, ,236 Deferred revenue 5, ,378 Conference deposits 11,174 12,095 Capital lease obligations 43,681 64,196 Loans payable - Lutheran Church Extension Fund 235, , , ,345 Net assets: Unrestricted: Undesignated 3,327,783 3,509,220 Net investment in property and equipment 324, ,833 Board designated 1,698,835 1,649,647 5,350,661 5,506,700 Temporarily restricted 861, ,231 Permanently restricted 150, ,000 6,361,810 6,341,931 $ 7,063,436 7,190,276 The accompanying notes are an integral part of these financial statements. -3-

6 NORTHERN ILLINOIS DISTRICT OF THE STATEMENTS OF ACTIVITIES YEARS ENDED JANUARY 31, 2017 AND 2016 TEMPORARILY PERMANENTLY UNRESTRICTED RESTRICTED RESTRICTED TOTAL Support, revenues and other additions: Support: District congregations $ 1,732, ,732,337 Synod Individuals, foundations and other 288, , ,630 2,021, ,876-2,331,967 Revenues: Subscriptions 33, ,513 Conventions, conferences and workshops 211, ,946 Investment income (loss) 188,942 16, ,720 LCEF service agreement 200, ,300 School ministry 15, ,399 Other 1, , ,297 16, ,075 Other additions: Change in assets held under split-interest agreement - (130) - (130) Change in value of beneficial interest in funds held by third-party trustee - 3,449-3,449 Gain on sale of property and equipment Net assets released from restrictions 155,055 (155,055) ,055 (151,736) - 3, ,827, ,918-3,003,361 Expenses: Synodical budget 512, ,645 Program services: NID missions 602, ,527 Professional education 14, ,352 Congregational ministries 297, ,879 Support services: Ministry support services 800, ,050 Ecclesiastical and program administration 362, ,245 Development and communication 393, ,784 2,983, ,983,482 Change in net assets (156,039) 175,918-19,879 Net assets, beginning of year 5,506, , ,000 6,341,931 Net assets, end of year $ 5,350, , ,000 6,361,810 The accompanying notes are an integral part of these financial statements. -4-

7 2016 TEMPORARILY PERMANENTLY UNRESTRICTED RESTRICTED RESTRICTED TOTAL 1,854, ,854,466-22,979-22, , , ,861 2,170, ,160-2,442,306 28, , , ,373 (8,174) (18,307) - (26,481) 159, ,860 7, ,338 6, , ,937 (18,307) - 319,630 - (10,874) - (10,874) - (7,476) - (7,476) 6, , ,981 (139,981) ,972 (158,331) - (11,359) 2,655,055 95,522-2,750, , , , ,379 17, , , , , , , , , ,852 2,962, ,962,662 (307,607) 95,522 - (212,085) 5,814, , ,000 6,554,016 5,506, , ,000 6,341,931

8 NORTHERN ILLINOIS DISTRICT OF THE STATEMENTS OF CASH FLOWS YEARS ENDED JANUARY 31, 2017 AND Cash provided by (applied to) operating activities: Change in net assets $ 19,879 (212,085) Adjustments to reconcile change in net assets to net cash applied to operating activities: Depreciation 80,314 86,467 Gain on sale of property and equipment - (6,991) Change in value of asset held under split-interest agreement ,874 Change in value of beneficial interest in funds held by third-party trustee (3,449) 7,476 Unrealized (gain) loss on investments (94,379) 180,787 Realized gain on sale of investments (23,962) (60,500) Changes in: Accounts receivable (1,296) (557) Interest receivable (1,432) (141) Prepaid expenses 76,933 (86,680) Other receivables 20,686 79,297 Beneficial interest in funds held by third-party trustee (55,100) 1,654 Accounts payable and accrued expenses 11,092 (12,073) Grants payable 23,803 2,773 Deferred revenue (130,574) (4,704) Conference deposits (921) 920 (78,276) (13,483) Cash provided by (applied to) investing activities: Purchase of properties held for sale and advance sites (152) (7,143) Purchase of property and equipment (36,174) (20,114) Proceeds from sale of property and equipment Purchases of investments (377,010) (557,527) Proceeds from sale of investments 399, ,012 Advances on loans receivable (7,330) (7,454) Payments on loans receivable 14,781 44,451 (5,911) (8,325) Cash applied to financing activities: Payments on loans payable (29,604) (28,329) Payments on capital lease obligations (20,515) (19,910) (50,119) (48,239) Net decrease in cash and cash equivalents (134,306) (70,047) Cash and cash equivalents, beginning of year 2,129,843 2,199,890 Cash and cash equivalents, end of year $ 1,995,537 2,129,843 Non cash transactions - Loan receivable incurred as proceeds from sale of property and equipment $ - 12,050 Other cash flow information - Interest paid $ 10,453 12,106 The accompanying notes are an integral part of these financial statements. -5-

9 NORTHERN ILLINOIS DISTRICT OF THE NOTE 1 - NATURE OF OPERATIONS The Northern Illinois District of the Lutheran Church - Missouri Synod (District), a not-forprofit organization, is one of 33 geographic Districts and 2 non-geographic Districts of the Lutheran Church - Missouri Synod (Synod), encompassing 211 congregations in the northern section of the State of Illinois. The Synod established the 35 District offices to more effectively achieve its objectives and assist its congregations and their members in conserving and promoting the unity of the faith, and in carrying out their functions of worship, witness, teaching and nurture, service and support. The significant accounting policies followed by the District are described below. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES Support and Expenses Contributions received and unconditional promises to give are measured at their fair values and are reported as an increase in net assets. The District reports gifts of cash and other assets as restricted support if they are received with donor stipulations that limit the use of the donated assets, or if they are restricted as support for future periods. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. The District reports gifts of goods and equipment 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, the District reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service. The District relies on donations from its member congregations for a significant portion of its support. Refer to Note 22 - Affiliations. These donations are subject to fluctuations in the economic status of the area in which the congregations are located. No provisions have been made for changes in the economic environment. Expenses are recorded when incurred in accordance with the accrual basis of accounting and are classified in the statements of activities by major functions of the District as follows: NID Missions Includes, but is not limited to, the northern Illinois region new mission work, campus ministries, deaf ministries, ethnic ministries, urban ministries, congregational subsidies, and related conferences and events. -6-

10 NORTHERN ILLINOIS DISTRICT OF THE NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES, CONTINUED Support and Expenses, Continued Professional Education - Includes financial aid provided to students normally attending one of the ten colleges/universities or two seminaries of the Synod. Congregational Ministries - Supports District congregational ministry efforts and includes but is not limited to school activities, confirmation, family life, day care, adult education, outdoor ministry, singles ministry, elementary and secondary education, and related conferences and events. Ministry Support Services - Includes the District s communication efforts, financial and general service activities, the operation/maintenance of District office facilities, District/Synodical convention expenses, and the District s cooperation with the national Lutheran Church Extension Fund (LCEF) efforts as discussed in Note 19. Ecclesiastical and Program Administration - Includes activities of the president s office, vice-presidents, circuit counselors, reconcilers, and related conferences and events, as well as support of the District Board of Directors and its related committees. Development and Communication - Supports the District s efforts to effectively provide information and communicate to congregations and individuals through print and electronic media. The goal is to promote relationships and perception of the District. Donated Services A substantial number of volunteers have donated services to the District s program services and fundraising campaigns during the year; however, these donated services are not reflected in the financial statements since the services do not require specialized skills as defined by accounting principles generally accepted in the United States of America. Materials and other assets received as donations are recorded and reflected in the accompanying financial statements at their estimated fair values at the date of receipt. Cash and Cash Equivalents For purposes of the statements of cash flows, the District considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. -7-

11 NORTHERN ILLINOIS DISTRICT OF THE NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES, CONTINUED Property and Equipment Advance sites and properties held for sale are recorded at the lower of cost or estimated fair value. Advance sites include land purchased for future church sites or missions to be established by the District, as well as improvements and holding costs associated with the property. When the property is transferred to a congregation, the District will be reimbursed for these costs. Land, buildings, improvements and equipment are recorded at cost. Donated assets are capitalized at the estimated fair value at the date of the receipt. Buildings, improvements, equipment and vehicles are depreciated using the straight-line method over the following estimated useful lives: Buildings Building improvements Office furnishings and equipment Vehicles 40 years 10 years 3-10 years 4 years Investments Investments are recorded at fair market value. Fair market value is determined by using quoted market prices where available. Investment income or loss (including gains and losses on investments, interest and dividends) is included in the statement of activities as increases or decreases in unrestricted, temporarily restricted, or permanently restricted net assets. Endowments The Board of Directors has interpreted state law as requiring only the original value of an endowment gift to be maintained as the permanent endowment corpus. Realized gains, as well as the net appreciation of the permanent endowments, may be expended for the same purpose as the endowment was established, unless explicit donor restrictions specify other treatment. Accounting 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, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. -8-

12 NORTHERN ILLINOIS DISTRICT OF THE NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES, CONTINUED Concentration of Credit Risk The District maintains its cash balances at several financial institutions which are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. The District s uninsured cash balance was $1,723,306 and $1,857,616 at January 31, 2017 and 2016, respectively. Management does not believe that it is exposed to any significant credit risk on cash. The District maintains its investments at several financial institutions which are not insured by the Securities Investor Protection Corporation (SIPC). The District s uninsured investment balance was $2,880,270 and $2,784,893 at January 31, 2017 and 2016, respectively. Management does not believe that it is exposed to any significant credit risk on investments. Adoption of Accounting Policy Going Concern Evaluation In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No , Presentation of Financial Statements Going Concern (Subtopic ). ASU No is effective for the District for annual periods ending after December 15, In the 2016 financial statements, the District adopted ASU No , which requires management to assess, for each interim and annual reporting period, whether adverse conditions or events, considered in the aggregate, raise substantial doubt about the District s ability to continue as a going concern for the one-year period from the date the financial statements are available to be issued. In addition, management is required to consider whether it is probable that their plans intended to mitigate any adverse conditions or events that they identify will be effectively implemented and whether it is probable that, if implemented, their plans will mitigate the identified conditions or events that raised substantial doubt. ASU No also prescribes the disclosures required to be made in periods when substantial doubt is raised and certain disclosures are required in such periods irrespective of whether it is probable that substantial doubt is alleviated by the effective implementation of management s plans. Management s assessment did not identify any conditions or events raising substantial doubt about the District s ability to continue as a going concern for the period from June 15, 2017 to June 15,

13 NORTHERN ILLINOIS DISTRICT OF THE NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES, CONTINUED New Accounting Standard Leases In February 2016, the FASB issued ASU No , Leases, which is intended to improve financial reporting about leasing transactions. ASU No requires that leased assets be recognized as assets on the balance sheet and the liabilities for the obligations under the lease also be recognized on the balance sheet. ASU No requires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The required disclosures include qualitative and quantitative requirements. ASU No is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. ASU No must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The District is currently evaluating the methods of adoption allowed by ASU No and the effect that ASU No is expected to have on its financial position, results of operations, and cash flows and related disclosures. New Accounting Standard Presentation of Financial Statements In August 2016, the FASB issued ASU No , Presentation of Financial Statements of Not-for-Profit Entities (Topic 958). ASU No is intended to simplify how the District classifies its net assets, and also improve the information it presents in the financial statements and notes about liquidity, financial performance and cash flows. ASU No is effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods with fiscal years beginning after December 15, The District is currently evaluating the methods of adoption allowed by ASU No and the effect that ASU No is expected to have on its financial position, results of operations, and cash flows and related disclosures. Subsequent Events Subsequent events have been evaluated through June 15, 2017, the date that the financial statements were available for issue. -10-

14 NORTHERN ILLINOIS DISTRICT OF THE NOTE 3 - ASSET HELD UNDER SPLIT-INTEREST AGREEMENT At January 31, 2017 and 2016, the District had $7,182 and $7,312, respectively, held by the Lutheran Church - Missouri Synod Foundation (LCMS Foundation) as irrevocable deferred gifts, of which the District is the beneficiary and will receive the principal at some future date. The related asset is revalued annually based on actuarially computed present value. The resulting actuarial gain or loss is included in the statements of activities as a change in value of split-interest agreement. Amounts related to this agreement expected to be collected after one year have been discounted at 4% and are reflected in the financial statements at their net present value. Receivables related to split interest agreement are as follows: Amount receivable $ 12,106 12,768 Less: present value component ( 4,924) ( 5,456) $ 7,182 7,312 NOTE 4 - LOANS RECEIVABLE The District has loans receivable from individuals and member congregations. These loans are collateralized by a deed of trust or a registered mortgage. At January 31, 2017 and 2016, loans receivable consisted of the following: Loan to individual, earning interest at 2.5%, maturing October $ 9,038 12,796 Various District Congregations, earning interest between 2% and 3%, maturing from June 2020 through May There is one congregation who is in default on their loan payment with a total balance due of $54,205. This congregation is currently negotiating extended terms on this loan. 375, ,354 $ 384, ,

15 NOTE 4 - LOANS RECEIVABLE, CONTINUED NORTHERN ILLINOIS DISTRICT OF THE The future minimum principal payments expected to be received in the next five years are as follows: 2018 $ 80, , , , ,652 Thereafter 260,974 $ 384,699 NOTE 5 - PROPERTY AND EQUIPMENT Property and equipment held by the District at January 31, 2017 and 2016 consisted of the following: Land $ 105, ,000 Building and building improvements 816, ,676 Office furnishings and equipment 131, ,910 Vehicles 138, ,707 1,191,931 1,199,293 Less: accumulated depreciation 824, ,263 $ 367, ,030 Depreciation expense included in program and support services was $80,314 and $86,467 for the years ended January 31, 2017 and 2016, respectively. NOTE 6 - FAIR MARKET VALUE MEASUREMENTS Accounting standards generally accepted in the United States of America have established a 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 are described below: -12-

16 NORTHERN ILLINOIS DISTRICT OF THE NOTE 6 - FAIR MARKET VALUE MEASUREMENTS, CONTINUED Level 1 Level 2 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the District has the ability to access. Inputs to the valuation methodology include: Quoted prices for similar assets or liabilities in active markets; Quoted prices for identical or similar assets or liabilities in inactive markets; Inputs other than quoted prices that are observable for the asset or liability; Inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The asset s or liability s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. 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 January 31, 2017 and Mutual funds: Based on the net asset value (NAV) of shares held by the District at year end. Annuities and straight unitrust: Based on annual actuarial reports which compute present value. Beneficial interest: Based on discounting the related cash flows based on current yields of similar instruments with comparable durations. -13-

17 NORTHERN ILLINOIS DISTRICT OF THE NOTE 6 - FAIR MARKET VALUE MEASUREMENTS, CONTINUED 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 District believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The following table sets forth by level, within the fair value hierarchy, the District s assets at fair value as of January and 2016: Investments at Fair Value as of January 31, 2017 Level 1 Level 2 Level 3 Total Fixed income mutual funds $ 576,840 1,531,813-2,108,653 Equity mutual funds 771, ,617 Annuities Straight unitrust - - 6,665 6,665 Beneficial interest , ,504 $ 1,348,457 1,531, ,686 3,064,956 Investments at Fair Value as of January 31, 2016 Level 1 Level 2 Level 3 Total Fixed income mutual funds $ 560,569 1,507,467-2,068,036 Equity mutual funds 716, ,857 Annuities Straight unitrust - - 6,558 6,558 Beneficial interest , ,955 $ 1,277,426 1,507, ,267 2,911,

18 NORTHERN ILLINOIS DISTRICT OF THE NOTE 6 - FAIR MARKET VALUE MEASUREMENTS, CONTINUED The table below sets forth a summary of changes in fair values of the District s Level 3 assets for the year ended January 31, 2017 and 2016: Level 3 Assets Year Ended January 31, 2017 Straight Beneficial Annuities Unitrust Interest Total Balance, beginning of year $ 754 6, , ,267 Increase (decrease) in value ( 237) ,929 32,799 Contributions ,460 51,460 Balance, end of year $ 517 6, , ,526 Level 3 Assets Year Ended January 31, 2016 Straight Beneficial Annuities Unitrust Interest Total Balance, beginning of year $ 4,353 13, , ,271 Decrease in value ( 3,599) ( 7,275) ( 9,255) ( 20,129) Contributions , Balance, end of year $ 754 6, , ,267 Investment income (loss) for the years ended January 31, 2017 and 2016 consist of the following: January 31, Investment management fees $ ( 12,670) ( 15,348) Interest and dividends 100, ,154 Realized gain 23,962 60,500 Unrealized gain (loss) 94,379 ( 180,787) Total $ 205,720 ( 26,481) -15-

19 NORTHERN ILLINOIS DISTRICT OF THE NOTE 7 - BENEFICIAL INTEREST IN FUNDS HELD BY THIRD-PARTY TRUSTEE Funds held by third-party trustee consist of irrevocable trusts from which the District is to receive the income in perpetuity. The principal is held in trust by the LCMS Foundation and will never be transferred to the District. The perpetual stream of income is viewed by the District as promises to give by the individuals who established the trust and has been recorded at the fair value of the trusts at January 31, 2017 and 2016, which approximates the net present value of the perpetual income stream. Given the nature of the promises, the District has recorded these contributions as temporarily restricted net assets. Increases or decreases in the fair value of the trust assets are recorded in the statements of activities as changes in temporarily restricted net assets. William and Berta Ulmer Fund: Per the terms of the agreement, the District is to receive 25% of the annual net income and capital gains each year. The net income is distributed quarterly and the capital gains are distributed semi-annually. The District s share of the net income and capital gains is designated to be used for missions. Mabel Briescke Fund: Per the terms of the agreement, the District is to receive 50% of the annual net income and capital gains each year. The net income is distributed quarterly and the capital gains are distributed semi-annually. The District s share of the net income and capital gains is designated to be used for the Prison Ministries ( Voice of Hope ) at Statesville Prison in northern Illinois. Wilbert and Laura Rittmueller Fund: Per the terms of the agreement, the District is to receive 13.64% of 90% of the earnings on a quarterly basis. Additionally, realized capital gains, if any, will be distributed each year at the end of May. The District s share of the proceeds is designated for unrestricted purposes. Hispanic Ministry Fund: The District established the Hispanic Ministry Endowment Fund (Fund) with the Lutheran Legacy Foundation. The purpose of the Fund is to accelerate starting new Hispanic missions in northern Illinois primarily through the work of the missionary school at San Pablo, Aurora. Annual distributions from the Fund may be 2% of the net fair market value of the fund as of December 31. Additional distributions may be considered on an as needed basis. -16-

20 NOTE 8 - DEFERRED REVENUE NORTHERN ILLINOIS DISTRICT OF THE The District defers the recognition of revenue to the period in which the related services are rendered. Deferred revenue consisted of the following at January 31, 2017 and 2016: Synodical convention $ - 126,478 Ricoh incentive Senior high gathering 1,180 4,056 ECC events 2,054 2,054 Other 1,720 2,940 $ 5, ,378 NOTE 9 - GRANTS PAYABLE The Grant Program, formerly known as Ablaze Mission Outpost Grant Initiative, was started by the Northern Illinois District LCMS in 2006 to help congregations launch new starts that lead to sharing the Gospel with people a congregation is not currently serving. Grant money was available to district congregations and their partnerships through a selective application process. Grants payable are recorded as a payable and an expense at the time the grant is awarded. The grants are generally three years in duration (shorterterm requests may be considered on a case-by-case basis) and are paid within one year of the grant year. The grants were to be paid in full as of the year ending January 31, 2015 as long as the grant stipulations were met. There was a balance of $154,373 outstanding where stipulations were not met as of January 31, 2017 and It is the intention of the District to extend the time frame of these grants and make payments as the stipulations are met. The Board of Directors New Start Partnership Grant Program was started and part of the 2014 budget. It is funded by 10% of the monthly designated New Start New Believers receipts and with a $30,000 operating grant from LCEF. Small grants (granted to congregations on an as needed basis) are determined by District staff and reported to the Board for approval. Grants Payable for this program as of January 31, 2017 and 2016 was $83,666 and $59,863, respectively. NOTE 10 - OBLIGATIONS UNDER CAPITAL LEASE At January 31, 2016, the District was obligated under a capital lease requiring monthly payments of $1,796 (including interest at 2.185%) with a balloon payment of $8,638 due February

21 NORTHERN ILLINOIS DISTRICT OF THE NOTE 10 - OBLIGATIONS UNDER CAPITAL LEASE, CONTINUED The following is a schedule of future minimum lease payments under capital leases together with the present value of the net minimum payments as of January 31, 2017: 2018 $ 20, , ,257 Total minimum lease payments 52,319 Less: amount representing interest 8,638 Present value of net minimum lease payments $ 43,681 Property and equipment under capital lease have a cost of $101,979 at January 31, 2017 and 2016 and accumulated depreciation of $57,788 and $37,392 at January 31, 2017 and 2016, respectively. NOTE 11 - LOANS PAYABLE - LUTHERAN CHURCH EXTENSION FUND (LCEF) The District has loans outstanding, due to LCEF, for the financing of real estate purchased for advance site purchases. Loans payable at January 31, 2017 and 2016 consist of the following: Collateralized by real estate, due in monthly installments of $438 including interest at 5.5%, maturing June $ 9,972 14,896 Collateralized by real estate, due in monthly installments of $2,827 including interest at 6.0%, balloon payment due June , ,910 $ 235, ,

22 NORTHERN ILLINOIS DISTRICT OF THE NOTE 11 - LOANS PAYABLE - LUTHERAN CHURCH EXTENSION FUND, CONTINUED Principal payments due on long-term debt during each of the next five years are as follows: 2018 $ 23, , , , ,355 Thereafter 112,355 $ 235,202 The interest expense for the period ended January 31, 2017 and 2016 was $10,453 and $12,106, respectively. NOTE 12 - BOARD DESIGNATED NET ASSETS The Board of Directors designated unrestricted net assets as of January 31, 2017 and 2016 for the following specific purposes: World and National Missions $ 581, ,550 Professional education 120, ,139 Congregational ministry 53,476 57,170 Ministry support services 81,416 86,055 Ecclesiastical and program administration 862, ,733 $ 1,698,835 1,649,

23 NORTHERN ILLINOIS DISTRICT OF THE NOTE 13 - TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets contain donor-imposed restrictions that expire upon the passage of time or once specific actions are undertaken by the District. At January 31, 2017 and 2016, temporarily restricted net assets are available for the following purpose and time restrictions: Purpose restrictions: World and National Missions $ 482, ,593 Professional education 58,254 12,130 Congregational ministry 164, ,546 Ministry support services 4,293 4, , ,561 Time restrictions 151,471 98,670 $ 861, ,231 NOTE 14 - PERMANENTLY RESTRICTED NET ASSETS Permanently restricted net assets are subject to donor-imposed restrictions which stipulate principal be invested in perpetuity and the income from these funds be used for specific purposes. Permanently restricted net assets as of January 31, 2017 and 2016 consist of the following: Education $ 150, ,

24 NORTHERN ILLINOIS DISTRICT OF THE NOTE 15 - NET ASSETS RELEASED FROM RESTRICTION Net assets were released from donor restrictions when expenses were incurred to satisfy the restricted purposes or by the occurrence of events specified by the donors. For the years ended January 31, 2017 and 2016, temporarily restricted net assets were released as follows: Purpose restrictions: World and National Missions $ 143, ,188 Professional education - 1,737 Congregational ministry 4,998 1,024 Ministry support services Ecclesiastical and program administration 5,932 3,032 $ 155, ,981 NOTE 16 - ENDOWMENT The District s endowment consists of five individual funds established for a variety of purposes. Its endowment includes both donor-restricted endowment funds and funds designated by the Board of Directors to function as endowments. As required by accounting principles generally accepted in the United States of America, net assets associated with endowment funds, including funds designated by the Board of Directors to function as endowments, are classified and reported based on the existence or absence of donor-imposed restrictions. The Board of Directors has interpreted the Illinois Uniform Prudent Management of Institutional Funds Act as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment fund absent explicit donor stipulations to the contrary. As a result of this interpretation, the District classifies the original value of gifts donated to the permanent endowment, the original value of subsequent gifts to the permanent endowment, and accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund as permanently restricted net assets. The remaining portion of the donor-restricted endowment fund that is not classified as permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the District. In accordance with state law, the District considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: -21-

25 NOTE 16 - ENDOWMENT, CONTINUED NORTHERN ILLINOIS DISTRICT OF THE 1. The duration and preservation of the fund 2. The purposes of the District and the donor-restricted endowment fund 3. General economic conditions 4. The possible effect of inflation and deflation 5. The expected total return from income and the appreciation of investments 6. Other resources of the District 7. The investment policies of the District Changes in endowment net assets for the year ended January 31, 2017: Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, February 1, 2016 $ 1,034,335 58, ,000 1,242,882 Investment return: Interest and dividends 31,141 6,090-37,231 Investment management fees ( 10,103) ( 2,043) - ( 12,146) Realized gain 19,539 2,773-22,312 Unrealized loss 76,024 16,999-93,023 Total investment return 116,601 23, ,420 Appropriation of endowment assets for expenditure ( 26,742) ( 2,952) - ( 29,694) Endowment net assets, January 31, 2017 $ 1,124,194 79, ,000 1,353,608 Endowment net asset composition by type of fund as of the year ended January 31, 2017: Temporarily Permanently Unrestricted Restricted Restricted Total Donor restricted endowment funds $ - 79, , ,414 Board designated endowment funds 1,124, ,124,194 $ 1,124,194 79, ,000 1,353,

26 NOTE 16 - ENDOWMENT, CONTINUED NORTHERN ILLINOIS DISTRICT OF THE Changes in endowment net assets for the year ended January 31, 2016: Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, February 1, 2015 $ 1,128,975 73, ,000 1,352,363 Investment return: Interest and dividends 45,436 8,692-54,128 Investment management fees ( 12,007) ( 2,392) - ( 14,399) Realized gain 46,759 8,946-55,705 Unrealized loss ( 143,910) ( 26,897) - ( 170,807) Total investment return ( 63,722) ( 11,651) - ( 75,373) Appropriation of endowment assets for expenditure ( 30,918) ( 3,190) - ( 34,108) Endowment net assets, January 31, 2016 $ 1,034,335 58, ,000 1,242,882 Endowment net asset composition by type of fund as of the year ended January 31, 2016: Temporarily Permanently Unrestricted Restricted Restricted Total Donor restricted endowment funds $ - 58, , ,547 Board designated endowment funds 1,034, ,034,335 $ 1,034,335 58, ,000 1,242,882 Description of amounts classified as permanently restricted net assets and temporarily restricted net assets: Endowment funds classified as permanently restricted net assets - The portion of the perpetual endowment funds that is required to be retained permanently by explicit donor stipulations $ 150, ,

27 NOTE 16 - ENDOWMENT, CONTINUED Endowment funds classified as temporarily restricted net assets: NORTHERN ILLINOIS DISTRICT OF THE Portion of perpetual endowment funds subject to a time restriction - With purpose restrictions $ 79,414 58,547 Funds with Deficiencies From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or state law requires the District to retain as a fund of perpetual duration. There were no deficiencies as of January 31, 2017 and Return Objectives and Risk Parameters The District has adopted investment and spending polices for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment. Endowment assets include those assets of donor-restricted funds that the District must hold in perpetuity or for a donor-specified period as well as board-designated funds. Under this policy as approved by the Board of Directors, the endowment assets are invested in a manner as defined by the following risk profiles of Thrivent Financial Bank, the institution where all of the endowments are invested: NID Endowment NID Education Endowment NID Urban Endowment Coleman Endowment Kuehnert Endowment Moderate Risk Moderate Conservative Moderate Conservative Moderate Moderate Strategies Employed for Achieving Objectives To satisfy its long-term rate-of-return objectives, the District relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current earnings (interest and dividends). The District targets a diversified asset allocation. Spending Policy and How Investment Objectives Relate to Spending Policy The District has a policy of appropriating for distribution each year amounts as defined below that are consistent with the District s objectives of its endowments. -24-

28 NOTE 16 - ENDOWMENT, CONTINUED Board Designated: NORTHERN ILLINOIS DISTRICT OF THE NID Endowment: To disburse on an annual basis the interest, dividends and realized gains net of expenses and fees to the recipients of the competitive NID Endowment Grant Award Program. NID Urban Endowment: To disburse on an annual basis the interest, dividends and realized gains net of expenses and fees, plus principal, to eliminate the endowment within five years to the recipients of the competitive NID Urban Endowment Grant Award Program. During the year ended January 31, 2016, the endowment fund was fully released per the spending policy. NID Education Endowment: To disburse on an annual basis the interest, dividends and realized gains net of expenses and fees, plus 10% of the fiscal year end fair market value of the investment to the qualifying church worker scholarship applicants as verified by the financial aid officers of Concordia Universities or Concordia Seminaries. The distribution is to be made on a semester basis on July and January of each school year. Permanently Restricted: Coleman Endowment: To disburse on an annual basis the interest, dividends, and realized gains net of expenses and fees on a proportioned basis of 52% to Walther Lutheran High School for student aid as requested and 48% to Luther High School South for student aid as requested. NOTE 17 - DEFINED BENEFIT PLANS The District participates in the worker benefit plans (Plan) of the Synod. Substantially all full-time employees are covered by these retirement and disability/survivor programs. The District contributes a fixed percentage of each participant s salary to the Plans. Retirement and disability/survivor program expenses for the years ended January 31, 2017 and 2016, totaled $113,185 and $106,203, respectively. The funding level of the retirement benefit Plan is reported to be 105% as of February 1, In the event of Plan termination or employer withdrawal, there is no obligation on the part of the District to provide additional contributions. -25-

29 NOTE 18 - INCOME TAXES NORTHERN ILLINOIS DISTRICT OF THE The District has been determined to be exempt from income tax under Section 501(c)(3) of the Internal Revenue Code, and accordingly, no provision has been made for either federal or state income taxes. The District has evaluated its tax positions taken for all open tax years. Currently no tax years are open and subject to examination by the Internal Revenue Service due to no returns needing to be filed. Based on the evaluation of the District s tax positions, management believes all positions would be upheld under an examination; therefore, no provision for the effects of uncertain tax positions has been recorded for the years ended January 31, 2017 and NOTE 19 - SERVICE AGREEMENTS WITH THE LUTHERAN CHURCH EXTENSION FUND In accordance with certain agreements, which are subject to renegotiation each July, the Lutheran Church Extension Fund (LCEF) agreed to compensate the District for providing facilities and services to the LCEF, as well as for promotion and coordination of church extension program activities within the District. The agreements require LCEF to pay the District a fixed amount on a monthly basis. The amounts received by the District in connection with these agreements during the years ended January 31, 2017 and 2016 totaled $200,300 and $159,860, respectively. NOTE 20 - OPERATING LEASE The District leased certain office equipment under an operating lease. The lease was cancelled in February 2015, with no future payments due. NOTE 21 - RELATED PARTY TRANSACTIONS Lutheran Church Charities - One of the Board of Directors of the District is also a board member of Lutheran Church Charities. Funds received from Lutheran Church Charities were $7,014 and $5,702 and funds remitted to Lutheran Church Charities were $21,887 and $28,882 for the years ended January 31, 2017 and 2016, respectively. Concordia University Chicago - One of the Board of Directors of the District is also a board member of Concordia University Chicago. Funds received from Concordia University Chicago were $3,472 and $3,460 and funds remitted to Concordia University Chicago were $5,569 and $45,278 for the years ended January 31, 2017 and 2016, respectively. -26-

30 NORTHERN ILLINOIS DISTRICT OF THE NOTE 21 - RELATED PARTY TRANSACTIONS, CONTINUED The District s individual board members are required to be a member of one of the approximately 211 congregations. NOTE 22 - AFFILIATIONS Lutheran Church Missouri Synod - The District operates under the Lutheran Church Missouri Synod. Each congregation s actual amount owed to the Missouri Synod is based on the nature of the affiliation for the year; affiliations can vary from year to year. Funds received from Lutheran Church Missouri Synod were $19,143 and $29,912 and funds remitted to Lutheran Church Missouri Synod was $537,043 and $569,188 for the years ended January 31, 2017 and 2016, respectively. Congregations - There are approximately 220 congregations in the northern section of the State of Illinois. The District is one of the 35 nationwide District offices. The District assists the congregations to achieve its objectives and assists its congregations and their members in conserving and promoting the unity of faith, and in carrying out their functions of worship, witness, teaching and nature, service and support. Funds received from the congregations were $2,220,094 and $2,369,377 and funds remitted to the congregations were $150,885 and $144,979 for the years ended January 31, 2017 and 2016, respectively. -27-