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1 January 7, 2019 Council of Administration Veterans of Foreign Wars of the United States Auxiliary We have audited the financial statements of Veterans of Foreign Wars of the United States Auxiliary (the Auxiliary) for the year ended August 31, 2018, and have issued our report thereon dated January 7, Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards, as well as certain information related to the planned scope and timing of our audit. We have communicated such information in our letter to you dated September 6, Professional standards also require that we communicate to you the following information related to our audit. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the Auxiliary are described in Note 1 to the financial statements. No new accounting policies were adopted and the application of existing policies was not changed during We noted no transactions entered into by the Organization during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Accounting estimates are an integral part of the financial statements prepared by management and are based on management s knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The financial statement disclosures are neutral, consistent, and clear. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all misstatements identified during the audit, other than those that are clearly trivial, and communicate them to the appropriate level of management. No material misstatements were noted. Disagreements with Management For purposes of this letter, a disagreement with management is a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor s report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated January 7, Madison Ave., Suite G, Kansas City, Missouri EmerickCPA.com

2 Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a second opinion on certain situations. If a consultation involves application of an accounting principle to the Organization s financial statements or a determination of the type of auditor s opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the Organization s auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. Other Matters This information is intended solely for the use of the council and management of the Auxiliary and is not intended to be, and should not be, used by anyone other than these specified parties. Very truly yours,

3 Veterans of Foreign Wars of the United States Auxiliary National Headquarters Summary of Audit Review Meeting For Fiscal Year Ended August 31, 2018 The audit review meeting was held on Thursday, January 31, 2019, at 11:00 AM Central time. The following individuals were present: Jan Owens, Interim National Secretary Treasurer Cortina Barnes, Audit Committee Chairman (via telephone) David Emerick, Emerick and Company Owner / Manager Jonathan McKinzie, Emerick and Company Lead Auditor George Martin, Director of Accounting Jonathan started the meeting out by explaining that pages 1 and 2 of the report are known as the Independent Auditor s Report. This is the auditor s opinion of the financial statements. The last paragraph on page 1 of the report expresses a clean opinion for the audit. There were not any findings that would question the accuracy of the financial statements. On page 3 of the audit report, Jonathan spoke about the Statement of Financial Position. The statement of financial position is equal to a balance sheet. He pointed out that total assets increased by about $7M. This is primarily related to investments activity. Prepaid expenses dropped by about $636K due to the MALTA system going live. Thus taking the funds paid for MALTA from prepaid expenses to property and equipment. The liabilities remained steady at roughly $28M. A majority of the liabilities are from life memberships. On page 4, Statement of Activities, Jonathan stated that this is similar to an income statement. He mentioned revenues were up about $1M due mostly to investments. Expenses were consistent with last year. The change in net assets which is net income is very influenced by investment performance. Daily operations do not have much effect on the net income. This means that operations are performing at a balanced level. Page 1 of 3

4 On pages 5 and 6, Statement of Functional Expenses, Jonathan highlighted that this statement categorizes expenses into their program and natural classifications. Jonathan then referenced page 7, the Statement of Cash Flows, and pointed out that even though there was a net decrease of cash for the organization. This is due to timing of expenses and keeping cash in investments where the money can work for the organization. Jonathan then communicated that the Notes to Financial Statements begin on page 8 and go to page 21. Note 1 is an explanation of the general accounting policies and procedures used. No changes in this note except for amounts. On pages 10 and 11, Jonathan spoke about how Note 2 summarizes the Investments and Investment Returns and breaks out the categories of investment revenues. The auditors conveyed that investment holdings are consistent with prior years. As many of the notes are similar to prior years, Jonathan jumped to page 16, Note 7: Life Membership Fund. Jonathan stated that this note discloses the activity in the life membership fund. The life membership fund ended this fiscal year with roughly $30M in assets. On Pages 18 through 20, Jonathan spoke about Note 8 that discloses the different levels of Fair Value Measurement used for investments. He noted that a majority of the Auxiliary s investments are in level 1, indicating they are traded on the stock market on a daily basis and a stated price is easily achieved. Level 2 items are corporate debt holdings and mortgage backed security holdings. The VFW Auxiliary did not have any level 3 investments. Level 3 investments are investments that do not have an easily to determine market value such as fine art or antiques and typically carry more risk. On Page 20, Jonathan described Note 9: Significant Estimates and Uncertainties that are included in these financial statements. This item has been in the notes for a number of years. Among the significant estimates are Page 2 of 3

5 life member liabilities and how these figures are affected by actuarial projections. Jonathan then stated that Note 10: Litigation that the VFW Auxiliary has been named as a defendant in a lawsuit out of Pennsylvania. The law firm hired by insurance carrier of the VFW Auxiliary is confident that the VFW Auxiliary will be removed as a defendant. Should this not come to fruition, then the VFW Auxiliary has insurance to cover such situations. Cortina Barnes concluded the audit review by thanking the audit firm for all their hard work and commended them on an excellent job. Page 3 of 3

6 INDEPENDENT AUDITOR S REPORT AND FINANCIAL STATEMENTS

7 CONTENTS PAGE INDEPENDENT AUDITOR S REPORT 1-2 FINANCIAL STATEMENTS Statement of Financial Position 3 Statement of Activities and Changes in Net Assets 4 Statement of Functional Expenses 5 Statement of Cash Flows 7 NOTES TO FINANCIAL STATEMENTS 8-21

8 INDEPENDENT AUDITOR S REPORT Council of Administration Veterans of Foreign Wars of the United States Auxiliary Kansas City, Missouri We have audited the accompanying financial statements of Veterans of Foreign Wars of the United States Auxiliary (the Auxiliary), which comprise the statement of financial position as of August 31, 2018, and the related statements of activities and changes in net assets, functional expenses and cash flows for the year 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 audit. We conducted our audit 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 Auxiliary as of August 31, 2018, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America Madison Avenue, Suite G, Kansas City, Missouri EmerickCPA.com

9 Report on Summarized Comparative Information We have previously audited the Auxiliary s 2017 financial statements, and we expressed an unmodified audit opinion on those audited financial statements in our report dated January 4, In our opinion, the summarized comparative information presented herein as of and for the year ended August 31, 2017, is consistent, in all material respects, with the audited financial statements from which it has been derived. Kansas City, Missouri January 7,

10 Veterans of Foreign Wars of the United States Auxiliary Statement of Financial Position August 31, 2018 (with Comparative Totals for 2017) Unrestricted Temporarily Restricted Total National Life Scholarship Total Cancer Aid & National Scholarship Temporarily Comparative Headquarters Membership Escrow Unrestricted Research Home Escrow Restricted Total Totals for ASSETS Fund Fund Funds Funds Fund Fund Funds Funds Cash and Cash Equivalents $ 196,156 $ 40,085 $ - $ 236,241 $ 8,936 $ 9,584 $ - $ 18,520 $ 254,761 $ 560,147 Investments, At Fair Value 16,347,424 30,634, ,547 47,174,551 55,867,733 1,392, ,474 58,199, ,374,395 97,346,970 Receivables Amounts due (to) / from other funds (39,263) 98,356 (2,000) 57,093 (36,697) (5,700) (14,696) (57,093) - - Accounts receivable 58, , ,877 65,415 Accrued interest receivable 34,384 56, , ,920 1, , , ,768 Total receivables 53, ,197 (1,921) 207,274 75,223 (4,433) (14,295) 56, , ,183 Prepaid Expenses 461, , ,483 1,098,363 Property and Equipment - Less accumulated depreciation of $406,404 at August 31, , , , ,028 Total Assets $ 17,600,998 $ 30,829,862 $ 190,626 $ 48,621,486 $ 55,951,892 $ 1,397,788 $ 925,179 $ 58,274,859 $ 106,896,345 $ 99,359,691 LIABILITIES AND NET ASSETS Liabilities Accounts payable $ 249,967 $ - $ - $ 249,967 $ - $ - $ - $ - $ 249,967 $ 162,958 Scholarships payable 10,873-1,000 11, ,812 83,812 95, ,517 Deferred revenues 735,850 9,399,240-10,135, ,135,090 9,979,182 Other liabilities 35,025 17,951,960-17,986, ,986,985 17,510,643 Accrued pension liabilities 329, , , ,533 Total liabilities 1,361,469 27,351,200 1,000 28,713, ,812 83,812 28,797,481 28,571,833 Net Assets Unrestricted 16,239,529 3,478, ,626 19,907, ,907,817 16,740,311 Temporarily restricted ,951,892 1,397, ,367 58,191,047 58,191,047 54,047,547 Total net assets 16,239,529 3,478, ,626 19,907,817 55,951,892 1,397, ,367 58,191,047 78,098,864 70,787,858 Total Liabilities and Net Assets $ 17,600,998 $ 30,829,862 $ 190,626 $ 48,621,486 $ 55,951,892 $ 1,397,788 $ 925,179 $ 58,274,859 $ 106,896,345 $ 99,359,691 See Notes to Financial Statements -3-

11 Veterans of Foreign Wars of the United States Auxiliary Statement of Activities and Changes in Net Assets For the Year Ended August 31, 2018 (with Comparative Totals for 2017) Unrestricted Temporarily Restricted Total National Life Scholarship Total Cancer Aid & National Scholarship Temporarily Comparative Headquarters Membership Escrow Unrestricted Research Home Escrow Restricted Total Totals for Fund Fund Funds Funds Fund Fund Funds Funds SUPPORT AND REVENUE Contributions $ - $ - $ 100 $ 100 $ 429,997 $ 117,991 $ 1,709 $ 549,697 $ 549,797 $ 721,243 Investment income 1,641,744 2,479,025 15,526 4,136,295 5,200, ,997 73,618 5,410,735 9,547,030 8,994,724 Membership dues 958,734 1,713,778-2,672, ,672,512 2,399,517 National bonding 179, , , ,196 National convention 108, , , ,835 National insurance program 56, , ,979 62,553 Royalties 556, , , ,939 Other revenues 169,113 5, , , ,733 Net assets released from restriction 1,797,888-19,044 1,816,932 (1,584,220) (208,626) (24,086) (1,816,932) - - Total revenues, gains and other support 5,468,348 4,198,578 34,670 9,701,596 4,045,897 46,362 51,241 4,143,500 13,845,096 12,970,740 EXPENSES Program Services Cancer aid and research program 1,323, ,323, ,323,268 1,281,130 VFW National Home for Children 198, , , ,293 VFW Auxiliary Magazine 991, , , ,329 Other community service activities 154,357-23, , , ,095 Department and local Auxiliary activities 851,787 1,472,353-2,324, ,324,140 2,483,447 Support of Veterans of Foreign Wars and related joint programs 348, , , ,947 Supporting services Management and general 520, , , , ,173 Membership maintenance and promotion 891, , , ,414 Total expenses 5,280,017 1,629,166 23,483 6,932, ,932,666 7,015,828 Change in Net Assets from Operations 188,331 2,569,412 11,187 2,768,930 4,045,897 46,362 51,241 4,143,500 6,912,430 5,954,912 Other Gains and Losses Change in pension related liabilities 398, , , ,326 Change in accounting estimate (Note 11) (2,681,486) Transfer between funds (Note 7) 532,313 (532,313) Change in Net Assets 1,119,220 2,037,099 11,187 3,167,506 4,045,897 46,362 51,241 4,143,500 7,311,006 3,641,752 Net Assets, Beginning of Year 15,120,309 1,441, ,439 16,740,311 51,905,995 1,351, ,126 54,047,547 70,787,858 67,146,106 Net Assets, End of Year $ 16,239,529 $ 3,478,662 $ 189,626 $ 19,907,817 $ 55,951,892 $ 1,397,788 $ 841,367 $ 58,191,047 $ 78,098,864 $ 70,787,858 See Notes to Financial Statements -4-

12 Veterans of Foreign Wars of the United States Auxiliary Statement of Functional Expenses For the Year Ended August 31, 2018 (with Comparative Totals for 2017) Program Services Other Department Support of VFW Cancer Aid National VFW Auxiliary Community and Local and Joint and Research Home Magazine Service Auxiliary Progams Total Banking and investment fees $ 125,315 $ 3,571 $ - $ 2,554 $ - $ - $ 131,440 Building occupancy ,589 41,918 72,507 Cancer aid and research 1,184, ,184,300 Community service , ,088 Depreciation Event costs ,053 83, ,648 Information technology 3,690 3,690 17,713-14,761 11,809 51,663 Management and general Marketing and promotions Miscellaneous Office supplies Life member payments ,472,353-1,472,353 Personnel costs ,081 21, , , ,861 Postage 1, ,597-9,116 Printing 1, ,494 6, ,958 Professional services 6,886 6, ,431-48,203 Program awards and expenses , ,738 Scholarships , ,929 Supply department ,313-16,313 Travel , ,266 96, ,009 VFW auxiliary magazine , ,406 VFW national home - 184, ,353 Total Expenses $ 1,323,268 $ 198,817 $ 991,200 $ 177,840 $ 2,324,140 $ 348,620 $ 5,363,885 See Notes to Financial Statements -5-

13 Veterans of Foreign Wars of the United States Auxiliary Statement of Functional Expenses (Continued) For the Year Ended August 31, 2018 (with Comparative Totals for 2017) Supporting Services Membership Comparative Management Maintenance Total Totals for and General and Promotion Total Banking and investment fees $ 56,910 $ 67,284 $ 124,194 $ 255,634 $ 246,917 Building occupancy 131,420 22, , , ,285 Cancer aid and research ,184,300 1,141,740 Community service ,088 78,648 Depreciation 23, , , ,652 42,356 Event costs , ,103 Information technology 44,284 51,664 95, ,611 83,297 Management and general 7,092-7,092 7,092 8,242 Marketing and promotions - 32,306 32,306 32,306 58,016 Miscellaneous ,261 Office supplies 7,994-7,994 7,994 13,290 Life member payments ,472,353 1,380,247 Personnel costs 211, , , ,333 1,108,581 Postage 6,078 6,512 12,590 21,706 91,844 Printing 2,990 5,977 8,967 19,925 28,669 Professional services 175, , , , ,629 Program awards and expenses , ,421 Scholarships ,929 24,000 Supply department ,313 17,206 Travel 10, , , , ,389 VFW auxiliary magazine , ,800 VFW national home , ,887 Total Expenses $ 677,725 $ 891,056 $ 1,568,781 $ 6,932,666 $ 7,015,828 See Notes to Financial Statements -6-

14 Veterans of Foreign Wars of the United States Auxiliary Statement of Cash Flows For the Year Ended August 31, 2018 (with Comparative Totals for 2017) Comparative Totals for Operating Activities Change in net assets $ 7,311,006 $ 3,641,752 Adjustments to reconcile change in net assets to net cash provided by operating activities: Net realized and unrealized gains on investments (7,087,201) (6,950,851) Depreciation 261,652 42,356 Change in defined benefit pension gains and losses (398,576) (368,326) Amortization of life membership dues (1,713,778) (1,384,907) Changes in Accounts receivable 6,538 22,336 Accrued interest receivable (16,124) 13,553 Prepaid and deferred expenses 636,880 (299,677) Accounts payable 87,009 70,790 Scholarships payable (9,832) 7,193 Deferred revenues 155,908 9,979,182 Other liabilities 476,342 (3,741,571) Accrued pension liabilities (483,779) (253,351) Net cash (used) provided by operating activities (773,955) 778,479 Investing Activities Net purchases and sales of investments 495,791 (392,928) Net purchases and disposals of property and equipment (27,222) (39,363) Net cash provided by (used) in investing activities 468,569 (432,291) Net Increase / (Decrease) in Cash and Cash Equivalents (305,386) 346,188 Cash and Cash Equivalents, Beginning of Year 560, ,959 Cash and Cash Equivalents, End of Year $ 254,761 $ 560,147 See Notes to Financial Statements -7-

15 NOTE 1: NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Activities The Veterans of Foreign Wars of the United States Auxiliary (the Auxiliary ) is a not-for-profit organization whose purpose is fraternal, patriotic, historical, and educational. The Auxiliary was chartered by the Veterans of Foreign Wars of the United States in Effective September 6, 1996, the Auxiliary became a General Not-for-Profit Corporation of the State of Missouri. The Auxiliary was formerly the Ladies Auxiliary to the Veterans of Foreign Wars of the United States. In August of 2015, the Auxiliary amended its by-laws to include male members and changed the name of the organization. The Auxiliary s objectives include assisting the Posts and members of the Veterans of Foreign Wars and maintaining true allegiance to the United States of America. The Auxiliary is generally exempt from income taxes under Section 501(c)(19) of the Internal Revenue Code (IRC) of the United States. The financial statements of the Auxiliary exclude the financial statements of the various State Departments and Local Auxiliaries, as the Auxiliary neither controls nor has an economic interest in such entities. Basis of Accounting The financial statements of the Auxiliary have been prepared on the accrual basis of accounting and, accordingly, reflect all significant receivables, payables and other liabilities. Prior Year Comparative Totals The financial statements include certain prior year summarized comparative information in total. Such information does not include sufficient detail to constitute a complete presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the Auxiliary s 2017 financial statements from which the information was derived. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, gains, losses and other changes in net assets during the reported period. Actual results could differ from those estimates. See Note 9 for a description of significant estimates. Cash and Cash Equivalents The Auxiliary considers cash and cash equivalents to include bank accounts as well as highly liquid investments with maturities of three months or less. At August 31, 2018 and 2017, cash consists of money in interest bearing checking accounts. Investment and Investment Return Investments in equity securities having a readily determinable fair value and all debt securities are carried at fair value. Investment return includes dividend, interest, and other investment income and realized and unrealized gains and losses on investments carried at fair value. Gains and losses on investments, which are available for current operations, are included in the statement of activities (see Note 7 regarding interest, dividends, gains and losses on investments held in the Life Membership Fund). Investment return that is initially restricted by donor stipulation and for which the restriction will be satisfied in the same year is included in unrestricted net assets

16 NOTE 1: NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Investment and Investment Return (Continued) Other investment return is reflected in the statement of activities as unrestricted, temporarily restricted or permanently restricted based upon the existence and nature of any donor or legally imposed restrictions. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful life of each asset ranging from three to ten years. Assets under leasehold improvements are depreciated over the shorter of the lease term or their respective estimated useful lives, ranging from three to ten years, using the straight-line method. Member Dues and Deferred Revenue A portion of the Auxiliary s revenue is derived from dues paid by its annual and life members. Annual dues are collected on a calendar year basis and are reflected in revenue ratably over the year. Life member dues are received and recognized over the estimated life spans of the members at inception of their life membership. Unearned portions of membership dues are deferred and recognized in the period to which the dues relate. As discussed in Note 7, life membership annual dues allocable to the National Headquarters are transferred from the Life Membership Fund annually on a per capita basis. Such amounts are reflected as transferred between funds within the revenue section of the statement of activities and changes in net assets. Contributions Gifts of cash and other assets received without donor stipulations are reported as unrestricted revenue and net assets. Gifts received with a donor stipulation that limits their use are reported as temporarily or permanently restricted net assets. When a donor 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. Gifts and investment income that are originally restricted by the donor and for which the restriction is met in the same time period are recorded as temporarily restricted and then released from restriction. Temporarily Restricted Net Assets Temporarily restricted net assets are those whose use by the Auxiliary has been limited by donors to a specific time period or purpose. Temporarily restricted net assets are restricted for the purpose of cancer aid and research grants, national home expenses, and scholarships. Scholarship Escrow Funds Funds designated for the Young American Creative Patriotic Art Scholarship Fund and the Continuing Education Scholarship Fund are presented as Scholarship Escrow Funds. These funds represent amounts externally restricted by donors as well as amounts internally designated by the Council of Administration and are therefore reported within the temporarily restricted net asset and unrestricted net asset categories accordingly

17 NOTE 1: NATURE OF ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Scholarship Escrow Funds at August 31 are available for the following purposes: Young American Creative Patriotic Art Scholarship Fund $ 841,367 $ 790,126 Continuing Education Scholarship Fund 189, ,439 $ 1,030,993 $ 968,565 Income Taxes The Auxiliary is exempt from income taxes under Section 501 of the IRC and a similar provision of state law. The Auxiliary is required to file Form 990, Return of Organization Exempt from Income tax yearly. The information in this return is used by the IRS to substantiate the Organization s continuing tax exempt status. Functional Allocation of Expenses The costs of supporting the various programs and other activities have been summarized on a functional basis in the statements of activities. Certain costs have been allocated among the program, management and general and membership maintenance categories based on the time spent on each program and other methods. Subsequent Events Subsequent events have been evaluated through January 7, 2019, which is the date the financial statements were available to be issued. NOTE 2: INVESTMENTS AND INVESTMENT RETURN Investments at August 31 consists of the following: Equity securities $ 25,180,231 $ 20,627,876 Equity and fixed income mutual funds 49,945,299 48,183,358 U.S. Treasury securities 8,053,891 6,031,739 Corporate debt securities 14,493,041 14,159,863 Mortgage-backed securities 2,224,577 3,011,588 Money markets 3,377,433 3,086,259 Hedge funds 2,099,923 2,246,287 $ 105,374,395 $ 97,346,

18 NOTE 2: INVESTMENTS AND INVESTMENT RETURN (CONTINUED) Investments by fund at August 31 consists of the following: Unrestricted funds National Headquarters $ 16,347,424 $ 15,444,846 Life Membership Scholarship Escrow 30,634, ,547 27,849, ,434 Total unrestricted funds 47,174,551 43,476,987 Temporarily restricted funds Cancer Aid and Research 55,867,733 51,651,283 VFW National Home for Children Scholarship Escrow 1,392, ,474 1,339, ,894 Total temporarily restricted funds 58,199,844 53,869,983 $ 105,374,395 $ 97,346,970 Total investment return is comprised of the following for the years ended August 31, 2018 and 2017: Interest and dividend income $ 2,459,829 $ 2,043,873 Net realized gains 1,026,130 1,506,057 Total interest, dividends and net realized gains 3,485,959 3,549,930 Net change in unrealized gains 6,061,071 5,444,794 NOTE 3: PROPERTY AND EQUIPMENT Property and equipment at August 31 consists of: $ 9,547,030 $ 8,994,724 Furniture, fixtures and equipment $ 114,197 $ 111,879 Computer equipment and software 764, ,391 Leasehold improvements 69,898 78, , ,532 Less accumulated deprecation 406, ,504 $ 541,937 $ 100,

19 NOTE 4: RELATED PARTY TRANSACTIONS During 2018 and 2017, the Auxiliary paid the following amounts to the Veterans of Foreign Wars of the United States (the VFW), an affiliated organization: Office rent, utilities, maintenance and leasehold improvements $ 181,307 $ 179,931 Contributions to VFW joint programs 50,000 50,000 Pension, long-term disability and life insurance 128, ,817 National Convention expenses 30,206 59,098 Emblems, supplies and services 15,072 7,592 Program awards 5,746 26,829 Other 17,197 26,576 Total $ 427,724 $ 471,843 NOTE 5: OPERATING LEASE The Auxiliary leases office space, supply room space, and parking from the VFW, an affiliated organization, in an operating lease agreement through August The lease contains a renewal option for a period of five years and requires the Auxiliary to pay all executor costs (property taxes, maintenance, and insurance). Future minimum lease payments at August 31, 2018 consists of: For year ended August 31, 2019 $ 186,440 Rental expense for the operating lease was $181,307 and $178,093 for 2018 and 2017, respectively. NOTE 6: RETIREMENT PLANS The Auxiliary participates in the VFW Employees Retirement Plan, a defined benefit pension plan covering substantially all employees who have completed certain minimum service requirements. The Auxiliary s funding policy is to make the minimum annual contribution that is required by applicable regulations, plus such amounts as the Auxiliary may determine to be appropriate from time to time. The Auxiliary is required to make a contribution of $57,899 in The Auxiliary used an August 31, 2018 measurement date for the plan. Information about the plan s funded status follows: Benefit obligation $ 2,596,421 $ 3,052,410 Fair value of plan assets 2,266,667 2,238,877 Funded status, net amount recognized $ (329,754) $ (813,533)

20 NOTE 6: RETIREMENT PLANS (CONTINUED) Change in benefit obligation Benefit obligation at beginning of year $ 3,052,410 $ 3,660,478 Service cost 20,733 23,374 Interest cost 105, ,717 Actuarial loss (351,817) (89,875) Settlements - (405,293) Benefits paid (230,205) (252,991) Benefit obligation at end of year $ 2,596,421 $ 3,052,410 Change in plan assets Fair value of plan assets at beginning of year $ 2,238,877 $ 2,593,594 Actual return on plan assets 147, ,152 Employer contribution 110,342 97,702 Settlements - (333,580) Benefits paid (230,205) (252,991) Fair value of plan assets at end of year $ 2,266,667 $ 2,238,877 Accrued pension liabilities $ (329,754) $ (813,533) Amounts not yet reflected in net periodic benefit cost and included in unrestricted net assets consists of: Net actuarial loss $ 807,663 $ 1,226,314 Prior service credit (10,239) (30,314) Total $ 797,424 $ 1,196,000 The accumulated benefit obligation for the defined benefit pension plan was $2,596,421 and $3,052,410 at August 31, 2018 and 2017, respectively. Other changes in plan assets and benefit obligations included in unrestricted net assets during the year: Current year actuarial (gain) / loss $ (339,792) $ (41,332) Gain from settlement - (71,713) Amortization of actuarial loss (78,859) (275,356) Amortization of prior service credit 20,075 20,075 Total $ (398,576) $ (368,326)

21 NOTE 6: RETIREMENT PLANS (CONTINUED) Components of net periodic pension cost Service cost $ 20,733 $ 23,374 Interest cost 105, ,717 Expected return on plan assets (159,678) (182,695) Amortization of transitional (asset)/obligation - - Amortization of prior service cost (20,075) (20,075) Recognized net actuarial loss 78, ,910 Total $ 25,139 $ 55,231 Other significant balances and costs for the years ended August 31, 2018 and 2017 were: Employer contributions $ 110,342 $ 97,702 Benefits paid (230,205) (252,991) Benefit costs 25,139 55,231 Cumulative employer contributions in excess of net periodic benefit cost were $467,670 and $382,467 at August 31, 2018 and 2017, respectively. The estimated net loss and prior service credit for the defined benefit pension plan that will be amortized from unrestricted net assets into net periodic benefit cost over the next fiscal year is $113,735 and $126,033, respectively. Significant assumptions include: Weighted-average assumptions used to determine benefit obligations Discount rate 4.08% 3.58% Rate of compensation increase Varies 4.25% Weighted-average assumptions used to determine net periodic pension costs Discount rate 3.58% 3.31% Expected return on plan assets 7.50% 7.50% Rate of compensation increase 4.25% 4.25% The Auxiliary has estimated the long-term rate of return on plan assets based primarily on historical returns on plan assets, adjusted for changes in target portfolio allocations and recent changes in longterm interest rates based on publicly available information. Asset allocation is primarily based on a strategy to provide stable earnings while still permitting the plans to recognize potentially higher returns through a limited investment in equity securities. The target asset allocation percentage for 2018 and 2017 were as follows: Equity securities 25% to 75% Debt securities 25% to 55% Alternate investments 5% to 15%

22 NOTE 6: RETIREMENT PLANS (CONTINUED) Pension Plan Assets Following is a description of the valuation methodologies used for pension plan assets measured at fair value on a recurring basis and recognized in the accompanying statement of financial position, as well as the general classification of pension plan assets pursuant to the valuation hierarchy. Where quoted market prices are available in an active market, plan assets are classified within Level 1 of the valuation hierarchy. Level 1 plan assets include money market accounts, equity securities and mutual funds. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of plan assets with similar characteristics or discounted cash flows and are classified as Level 2. Level 2 plan assets included fixed income securities and commingled funds. In certain cases where Level 1 or Level 2 inputs are not available, plan assets are classified within Level 3 of the hierarchy and include limited partnership investments. See Note 8 for explanation of fair value hierarchy. The fair values of the Auxiliary s pension plan assets at August 31, 2018 and 2017, by asset class, were as follows: 2018 Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs Fair Value (Level 1) (Level 2) (Level 3) Money market accounts $ (7,586) $ (7,586) $ - $ - Equity securities 956, , Mutual funds 289, , Fixed income Governmental and agency securities 608, ,737 - Corporate bonds 181, ,764 - Other nongovernmental obligations 7,199-7,199 - Limited partnership investments 230, ,224 $ 2,266,667 $ 1,238,743 $ 797,700 $ 230,

23 NOTE 6: RETIREMENT PLANS (CONTINUED) Pension Plan Assets (Continued) 2017 Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs Fair Value (Level 1) (Level 2) (Level 3) Money market accounts $ 42,777 $ 42,777 $ - $ - Equity securities 887, , Mutual funds 325, , Fixed income Governmental and agency securities 591, ,254 - Corporate bonds 209, ,763 - Other nongovernmental obligations 8,683-8,683 - Limited partnership investments 173, ,335 $ 2,238,877 $ 1,255,842 $ 809,700 $ 173,335 Plan assets are held by a bank-administrated trust fund, which invests the plan assets in accordance with the provision of the plan agreement. The plan agreements permit investment in common stocks, corporate bond and debentures, U.S. Government securities, certain insurance contracts, real estate and other specified investments, based on certain target allocation percentages. At August 31, 2018, the following benefit payments, which reflect expected future service, as appropriate, are expected to be paid in future years ending August 31,: NOTE 7: LIFE MEMBERSHIP FUND 2019 $ 267, , , , , ,489 The Life Membership Fund includes investment income and fees received from life members of the Auxiliary for future distribution of membership benefit payments. All life member fees and all income earned from investment of such fees are to be used solely for the payment of annual amounts to National Headquarters, State Departments and Local Auxiliaries for benefit payments for the life members and for the administrative expenses of the Life Membership Fund. Accordingly, a significant portion of the Life Membership Fund is ultimately an obligation to the State Departments and Local Auxiliaries whose financial statements and operations are not controlled by or reflected in the financial statements of the Auxiliary and, accordingly, such amounts are included in liabilities in the accompanying statement of financial position as deferred revenue for unearned life membership dues

24 NOTE 7: LIFE MEMBERSHIP FUND (CONTINUED) An actuarially determined amount, using a discount rate of 6.00% and the Retirement Plans Headcount RPH 2014 Mortality Table with projections to 2016 using Scale MP- 2016, required to fund the current annual dues payout, set by the Life Membership Committee of $2.90 for the fiscal year 2018 and years thereafter, per member to each of the National Headquarters, State Departments and Local Auxiliaries for life members determined as of August 31, 2018 was $27,114,541. An actuarially determined amount, using a discount rate of 6.00% and the Retirement Plans Headcount RPH 2014 Mortality Table with projections to 2016 using Scale MP- 2016, required to fund the current annual dues payout, set by the Life Membership Committee of $2.45 for the fiscal year 2017 and years thereafter, per member to each of the National Headquarters, State Departments and Local Auxiliaries for life members determined as of August 31, 2017 was $22,585,174. Generally, in the earlier years of a life membership agreement, the amounts recognized as income from the amortization of the life membership dues and investment income on such funds by National Headquarters will exceed the amount of cash which may be transferred to National Headquarters in accordance with the bylaws of the Auxiliary. This may result in the creation of net assets attributable to National Headquarters within the Life Membership Fund. As shown below, life membership fees are allocated to deferred revenue and are not included in the Statement of Activities. This allocation is based on the membership benefit payments for the current year to National Headquarters and the State Departments and Local Auxiliaries. Major activity within the Life Membership Funds is as follows: Life Membership State Departments Headquarters Net And Local Deferred Assets Total Auxiliaries Revenue National Balance, August 31, 2017 $ 28,217,253 $ 17,463,373 $ 9,312,317 $ 1,441,563 Additions: Membership dues received 2,289,288 1,490, ,390 - Amortization of life membership dues - (1,002,311) (711,467) 1,713,778 Net investment appreciation 2,479, ,479,025 Other income 5, ,775 Transfer from operating fund 256, ,144 Total additions 5,030, ,587 86,923 4,454,722 Distributions and expenses: Distribution of membership dues: National Headquarters 788, ,457 State Departments 783, ,441 Local Auxiliaries 688, ,912 Management and general expenses 156, ,813 Total distributions and expenses 2,417, ,417,623 Balance, August 31, 2018 $ 30,829,862 $ 17,951,960 $ 9,399,240 $ 3,478,

25 NOTE 7: LIFE MEMBERSHIP FUND (CONTINUED) Life Membership State Departments Headquarters Net And Local Deferred Assets Total Auxiliaries Revenue National Balance, August 31, 2016 $23,117,062 $ 13,301,987 $ 7,084,550 $ 2,730,525 Additions: Membership dues received 5,092,574 3,321,430 1,771,144 - Amortization of life membership dues - (903,251) (481,656) 1,384,907 Net investment appreciation 2,333, ,333,142 Other income 9, ,340 Change in accounting estimate - 1,743, ,279 (2,681,486) Total additions 7,435,056 4,161,386 2,227,767 1,045,903 Distributions and expenses: Distribution of membership dues: National Headquarters 736, ,750 State Departments 733, ,867 Local Auxiliaries 646, ,381 Management and general expenses 217, ,867 Total distributions and expenses 2,334, ,334,865 Balance, August 31, 2017 $ 28,217,253 $ 17,463,373 $ 9,312,317 $ 1,441,563 NOTE 8: FAIR VALUE MEASUREMENTS FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value and establishes a consistent framework for measuring fair value. These provisions establish a fair value hierarchy that prioritizes the inputs used to measure fair value. An asset s or liability s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 Level 2 Level 3 Quoted prices (unadjusted) in active markets for identical assets or liabilities. Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Following is a description of the inputs and valuation methodologies used for investments measured at fair value on a recurring basis and recognized in the accompanying statement of financial position, as well as the general classification of such investments pursuant to the valuation hierarchy

26 NOTE 8: FAIR VALUE MEASUREMENTS (CONTINUED) Investments Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include money market funds, equity securities, mutual funds, hedge funds and U.S. Treasury securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows and are classified as Level 2. Level 2 securities include corporate debt an mortgage-back securities. In certain cases, where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The hedge funds listed on the following table are used to pursue multiple strategies to diversify risks and reduce volatility. These funds, like the mutual funds shown, are listed on publicly traded stock exchanges at the net asset value as determined by the underlying securities. These are immediately redeemable and have no unfunded commitments. The following tables present the fair value measurements of assets recognized in the accompanying statement of financial position measured at fair value on a recurring basis and level within the fair value hierarchy in which the fair value measurements fall at August 31, 2018 and 2017: 2018 Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs Fair Value (Level 1) (Level 2) (Level 3) Investments Money market accounts $ 3,377,433 $ 3,377,433 $ - $ - Equity and fixed income mutual funds 49,945,299 49,945, Equity securities 25,180,231 25,180, U.S. Treasury securities 8,053,891 8,053, Corporate debt securities 14,493,041-14,493,041 - Mortgage-backed securities 2,224,577-2,224,577 - Hedge funds 2,099,923 2,099, $ 105,374,395 $88,656,777 $ 16,717,618 $

27 NOTE 8: FAIR VALUE MEASUREMENTS (CONTINUED) Fair Value Measurements Using Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs Fair Value (Level 1) (Level 2) (Level 3) Investments Money market accounts $ 3,086,259 $ 3,086,259 $ - $ - Equity and fixed income mutual funds 48,183,358 48,183, Equity securities 20,627,876 20,627, U.S. Treasury securities 6,031,739 6,031, Corporate debt securities 14,159,863-14,159,863 - Mortgage-backed securities 3,011,588-3,011,588 - Hedge funds 2,246,287 2,246, NOTE 9: SIGNIFICANT ESTIMATES AND UNCERTAINTIES $ 97,346,970 $80,175,519 $ 17,171,451 $ - GAAP requires disclosure of certain significant estimates and current vulnerabilities due to uncertainness. Those matters include the following: Deferred Revenue Life Member Dues As described in Note 7, the amount of deferred revenues accrued and revenue recognized for the life membership dues relating to the National Headquarters is based upon the collection of life membership fees and amortizing those collections over the estimated life spans of the members at inception of their life membership. It is reasonably possible that these estimates could change materially in the future depending upon the estimated life spans of the members. Pension Costs As described in Note 6, the funding and funding status of the defined pension plan is based on actuarial projections and assumptions about future earnings and compensation. Actual results could differ. Investments The Auxiliary invests in various investment securities. 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 at least reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the accompanying statement of financial position. NOTE 10: LITIGATION In December of 2017, the Auxiliary received notification that they were listed as defendants in a lawsuit. The lawsuit is currently in the discovery phase and a motion has been made by the Auxiliary to be dismissed. The amount of liability, if any, cannot be determined with certainty. Management is of the opinion the disposition or ultimate resolution of such claims will not have a material adverse impact on the Auxiliary s financial position.

28 NOTE 11: CHANGE IN ACCOUNTING ESTIMATE During 2017, the Auxiliary changed the process for estimating the liability related to the Life Membership Fund and amortizing the life membership fees revenue. In prior years, the Auxiliary recorded the estimated liability by using estimated future payments of life membership benefits based upon actuarial calculations. The Auxiliary determined that the estimation of liability would be better determined based upon the collection of Life Membership fees and amortizing those collections over the estimated life spans of the members at inception of their life membership. The change in methodology resulted in a change in estimate of the liability of $2,681,486, which was recorded as a loss in the statement of activities and changes in net assets