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American Psychological Foundation, Inc.

Audited Financial Statements And Related Communications

Years ended December 31, 2017 and 2016

with Report of Independent Auditors


Audited Financial Statements and Related Communications

For the Years ended December 31, 2017 and 2016

Contents

Tab

Audited Financial Statements 1

Communications with the Board of Trustees 2

Required Communications Letter

Internal Control Letter


Audited Financial Statements

Years ended December 31, 2017 and 2016with Report of Independent Auditors




Contents

Report of Independent Auditors....................................................................................................................................................1


Statements of Financial Position ...................................................................................................................................................2Statements of Activities......................................................................................................................................................................3Statements of Functional Expenses........................................................................................................................................4 - 5Statements of Cash Flows.................................................................................................................................................................6Notes to Financial Statements...............................................................................................................................................7 - 13

Report of Independent Auditors

Board of TrusteesAmerican Psychological Foundation, Inc.Washington, D.C.

We have audited the accompanying financial statements of American Psychological Foundation, Inc. ("theFoundation") which comprise the statements of financial position as of December 31, 2017 and 2016 and the relatedstatements of activities, functional expenses and cash flows for years then ended and the related notes to the financialstatements.

Management's Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in accordance withaccounting 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 arefree from material misstatement, whether due to fraud or error.

Auditor's ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audits. We conducted ouraudits in accordance with auditing standards generally accepted in the United States of America. Those standardsrequire that we plan and perform the audits to obtain reasonable assurance about whether the financial statementsare free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financialstatements. The procedures selected depend on the auditor's judgment, including the assessment of the risks ofmaterial 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 financialstatements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the entity's internal control over financial reporting. Accordingly, weexpress no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and thereasonableness of significant accounting estimates made by management, as well as evaluating the overallpresentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our auditopinion.

OpinionIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial positionof American Psychological Foundation, Inc. as of December 31, 2017 and 2016 and the changes in its net assets andits cash flows for the years then ended in accordance with accounting principles generally accepted in the UnitedStates of America.

Vienna, VirginiaApril 23, 2018


Statements of Financial Position

December 31,2017 2016

AssetsCash and cash equivalents $ 606,313 $ 350,575Investments 17,591,311 16,039,843Contributions receivable, net 736,944 845,054Fixed assets, net 7,307 722Other assets 4,774 9,711

Total assets $ 18,946,649 $ 17,245,905

Liabilities and net assetsLiabilities:Accounts payable and accrued liabilities $ 15,830 $ 51,026Grants, awards and scholarships payable 174,017 254,458Accounts payable to APA 381,786 348,672

Total liabilities 571,633 654,156

Net assets:Unrestricted 5,388,320 4,940,246Temporarily restricted 12,986,696 11,651,503Total net assets 18,375,016 16,591,749

Total liabilities and net assets $ 18,946,649 $ 17,245,905

See accompanying notes to the financial statements.

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Statements of Activities


2017 2016

UnrestrictedTemporarilyRestricted

PermanentlyRestricted Total Unrestricted

TemporarilyRestricted

PermanentlyRestricted Total

Revenue and supportContributions $ 376,312 $ 1,263,142 $ - $ 1,639,454 $ 433,570 $ 1,076,282 $ - $ 1,509,852Royalties and permissions 49,671 585 - 50,256 40,989 1,254 - 42,243Net investment income 706,199 1,544,892 - 2,251,091 356,397 794,890 - 1,151,287 Total revenue 1,132,182 2,808,619 - 3,940,801 830,956 1,872,426 - 2,703,382

Net assets released from restrictions: Scholarships, lectures, grants and other 1,473,426 (1,473,426) - - 1,331,652 (1,331,652) - -

Total revenue and support 2,605,608 1,335,193 - 3,940,801 2,162,608 540,774 - 2,703,382

ExpensesGrant expenses:Scholarships and other student funding 186,432 - - 186,432 218,722 - - 218,722Grants 628,657 - - 628,657 554,828 - - 554,828Lectures, awards and prizes for achievement 25,597 - - 25,597 70,500 - - 70,500Plaques and awards 8,829 - - 8,829 6,502 - - 6,502

Operating expenses:Staff costs 875,176 - - 875,176 697,581 - - 697,581In-kind donated employee support services 69,561 - - 69,561 62,407 - - 62,407Travel 31,555 - - 31,555 37,649 - - 37,649Office administration 205,199 - - 205,199 248,868 - - 248,868Communications and fundraising 95,252 - - 95,252 71,577 - - 71,577Meetings and events 31,276 - - 31,276 24,358 - - 24,358Total expenses 2,157,534 - - 2,157,534 1,992,992 - - 1,992,992

Change in net assets 448,074 1,335,193 - 1,783,267 169,616 540,774 - 710,390Net assets, beginning of year 4,940,246 11,651,503 - 16,591,749 4,770,630 11,110,729 - 15,881,359

Net assets, end of year $ 5,388,320 $ 12,986,696 $ - $ 18,375,016 $ 4,940,246 $ 11,651,503 $ - $ 16,591,749


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Statement of Functional Expenses

Year ended December 31, 2017

ProgramServices

General andAdministrative Fundraising Total

Grant expensesScholarships and other student funding $ 186,432 $ - $ - $ 186,432Grants 628,657 - - 628,657Lectures, awards and prizes for achievement 25,597 - - 25,597Plaques and awards 8,829 - - 8,829

Operating expensesStaff costs 434,121 126,811 314,244 875,176In-kind donated employee support services 34,569 10,061 24,931 69,561Travel 15,682 4,564 11,309 31,555Office administration 101,975 29,680 73,544 205,199Communications and outreach 47,337 13,776 34,139 95,252Meetings and events 15,542 4,524 11,210 31,276

Total expenses $ 1,498,741 $ 189,416 $ 469,377 $ 2,157,534


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Statement of Functional Expenses

Year ended December 31, 2016

ProgramServices

General andAdministrative Fundraising Total

Grant expensesScholarships and other student funding $ 218,722 $ - $ - $ 218,722Grants 554,828 - - 554,828Lectures, awards and prizes for achievement 70,500 - - 70,500Plaques and awards 6,502 - - 6,502

Operating expensesStaff costs 379,321 101,642 216,618 697,581In-kind donated employee support services 34,248 8,993 19,166 62,407Travel 20,660 5,426 11,563 37,649Office administration 136,574 35,863 76,431 248,868Communications and outreach 39,280 10,315 21,982 71,577Meetings and events 13,368 3,510 7,480 24,358

Total expenses $ 1,474,003 $ 165,749 $ 353,240 $ 1,992,992


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Statements of Cash Flows

Years ended December 31,2017 2016

Cash flow from operating activitiesChange in net assets $ 1,783,267 $ 710,390Adjustments to reconcile change in net assets to net cash (used in)

provided by operating activities:Net realized and unrealized gains on investments (1,926,519) (785,624)Change in allowance for doubtful accounts and discount to

present value (4,784) (932)Depreciation expense 1,040 2,167Changes in assets and liabilities:

Contributions receivable 112,894 (301,876)Other assets 4,937 (2,814)Accounts payable and accrued liabilities (35,195) 18,386Grants, awards and scholarships payable (80,441) 140,197Accounts payable to APA 33,114 234,795

Net cash (used in) provided by operating activities (111,687) 14,689

Cash flow from investing activitiesPurchase of fixed assets (7,626) -Purchase of investments (3,037,671) (2,426,582)Proceeds from sale of investments 3,412,722 2,519,064Net cash provided by investing activities 367,425 92,482

Net change in cash and cash equivalents 255,738 107,171Cash and cash equivalents, beginning of year 350,575 243,404

Cash and cash equivalents, end of year $ 606,313 $ 350,575


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Notes to Financial Statements


Note A - Organization

The American Psychological Foundation, Inc. (the Foundation) is a nonprofit, philanthropic organizationincorporated in Delaware that provides financial support for innovative research and programs thatenhance the power of psychology to elevate the human condition and advance human potential, bothnow and in generations to come. These activities are funded primarily through contributions andinvestment earnings. The Foundation is an independent organization separately incorporated from theAmerican Psychological Association (APA). APA makes an annual financial contribution to the Foundationand donates human resources, office space, technology, and other services. The Foundation’s offices arelocated in the APA headquarters building.

Note B - Significant Accounting Policies

Basis of AccountingThe Foundation prepares its financial statements on the accrual basis of accounting in accordance withaccounting principles generally accepted in the United States of America (GAAP). Accordingly, revenue isrecognized when earned, and expenses are recognized when obligations are incurred.

Use of EstimatesThe preparation of financial statements in conformity with GAAP requires management to make estimatesand assumptions that affect certain reported amounts and disclosures. Accordingly, actual results coulddiffer from those estimates.

Subsequent EventsThe Foundation has performed an evaluation of subsequent events through April 23, 2018, which is thedate the financial statements were available to be issued, and has considered any relevant matters in thepreparation of the financial statements and footnotes.

Income Tax StatusThe Foundation is exempt from the payment of income taxes on income other than unrelated businessincome under Section 501(c)(3) of the Internal Revenue Code (the Code) and has been designated by theInternal Revenue Service as a publicly supported organization under Section 509 (a)(1) of the Code. TheFoundation is not considered to be a “private foundation” within the meaning of Section 509(a) of theCode. The Foundation does not have any unrelated business income. Management has concluded thatthe Foundation has properly maintained its exempt status, and there are no uncertain tax positions as ofDecember 31, 2017.

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Notes to Financial Statements (Continued)

Note B - Significant Accounting Policies (Continued)

Cash and Cash EquivalentsFor financial reporting purposes, the Foundation considers investments with original maturities of threemonths or less to be cash equivalents except cash held by an investment custodian for investmentpurposes. The Federal Deposit Insurance Corporation (FDIC) insures amounts on deposit with eachfinancial institution up to limits as prescribed by law. The Foundation holds funds at various timesthroughout the year with financial institutions in excess of the FDIC insured amount, however, theFoundation has not experienced any losses in such accounts, and management believes it is not exposedto any significant credit risk on cash and cash equivalents.

Investments and Fair Value MeasurementsInvestments, consisting of equity securities, mutual funds and money market funds, are presented in thefinancial statements at fair value based on quoted market prices. Investments also include certificates ofdeposit, which are reported at cost and do not meet the definition of a security under GAAP. Gains andlosses arising from the sale, maturity or other disposition of investments are accounted for on a specificidentification basis calculated as of the trade date. Interest, dividends, unrealized and realized gains andlosses are reported as net investment income on the accompanying statements of activities.

Unrestricted and restricted funds are pooled together into common investment accounts and netinvestment income is allocated among unrestricted and temporarily restricted net assets based on theending individual net asset balances as a percentage of total net assets. In 2017 and 2016, the netinvestment income allocated to the temporarily restricted funds was $1,544,892 and $794,890,respectively, and is included within net investment income on the accompanying statements of activities.

The Foundation’s estimates of fair value are based on the framework established in the fair valuemeasurements and disclosures accounting guidance. The framework is based on the inputs used invaluation and requires that observable inputs be used in the valuations when available. The disclosure offair value estimates in the fair value accounting guidance includes a hierarchy based on whethersignificant valuation inputs are observable. In determining the level of the hierarchy in which the estimateis disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowestpriority to unobservable inputs that reflect the Foundation's significant market assumptions.

The three levels of the hierarchy are as follows:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets orliabilities traded in active markets that the Foundation has the ability to access.

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities inactive markets, quoted prices for identical or similar assets or liabilities in markets that are not active,inputs other than quoted prices that are observable for substantially the full period for the asset orliability and market-corroborated inputs.

Level 3 – Inputs to the valuation methodology are unobservable for the asset or liability and aresignificant to the fair value measurement.

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Market RiskThe Foundation invests in money market funds and professionally managed mutual funds that containvarious types of marketable securities. Such investments are exposed to various risks, such as fluctuationsin fair value and credit risk. Thus, it is at least reasonably possible that changes in these risks in the nearterm could materially affect the amounts reported in the statements of financial position.

Contributions ReceivableUnconditional promises to give are recorded as contributions in the period the promise is made.Contributions receivable that are expected to be collected within one year are reported net of anyestimated uncollectible amounts, which are determined based on management's analysis. Contributionsreceivable expected to be collected beyond one year are discounted to present value using the UnitedStates Treasury obligations risk-adjusted rates according to their corresponding terms.

Net AssetsThe Foundation's net assets have been grouped into the following three classes:

Unrestricted - Unrestricted net assets generally result from revenues derived from providing services andreceiving unrestricted contributions, less expenses incurred in providing services, raising contributionsand performing administrative functions.

Temporarily restricted - Temporarily restricted net assets generally result from contributions and otherinflows of assets whose use by the Foundation is limited by donor-imposed stipulations that either expireby passage of time or can be fulfilled by meeting the purpose of the donation.

Permanently restricted - Permanently restricted net assets are funds whose use is restricted by donors tocreate a permanent endowment. The Foundation had no permanently restricted net assets for the yearsended December 31, 2017 and 2016.

Revenue RecognitionThe Foundation's operations are supported primarily by contributions, including realized bequests.Additional sources include contributions received through a check-off option on the APA dues and dues-exempt statements, the assignment of royalties and a portion of the reprint revenue from the sale ofcertain APA copyrighted publications. The Foundation reports gifts of cash and other assets as restrictedrevenue if they are received with donor stipulations that limit the use of the donated assets. When adonor restriction expires, that is, when a stipulated time restriction ends or a purpose restriction isaccomplished, temporarily restricted net assets are released to unrestricted net assets. Wills are recordedas contribution revenue when the probate courts declare the wills valid and the proceeds are measurable.

In-Kind ContributionsIn-kind contributions represent non-cash contributions of skilled services or items that produce orenhance a physical asset. Revenues and expenses from in-kind contributions are recognized when thepromise to give is received.

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Grant, Award, and Scholarship ExpensesGrant, award, and scholarship expenses of the Foundation are recorded in the accompanying financialstatements as payables and as expenses at the time that the grant, award, or scholarship has been bothapproved by the Board of Trustees and accepted by the recipient.

Allocation of CostsThe Foundation allocates salaries and benefits to the various programs and supporting services benefitedbased on the amount of personnel time worked in each area.

ReclassificationsCertain prior year amounts have been reclassified to conform with the current year presentation.

Note C - Contributions Receivable

As of December 31, 2017 and 2016, the Foundation has received unconditional promises to give that aredue as follows:

2017 2016Less than one year $ 593,140 $ 653,446One to five years 175,211 227,799

Subtotal 768,351 881,245Less: present value discount (7,463) (12,566)Total contributions receivable 760,888 868,679Less: allowance for uncollectible receivables (23,944) (23,625)Contributions receivable, net $ 736,944 $ 845,054

Discount rates ranging from 3.25% to 3.52% were used to determine the present value discount.

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Note D - Investments and Fair Value Measurements

The following table is a summary of the Foundation's investments measured at fair value within the GAAPfair value hierarchy as of December 31:

2017 2016Fair ValueHierarchy

Equity mutual funds $ 7,333,535 $ 6,661,774 Level 1Fixed income mutual funds 5,162,597 5,155,527 Level 1Equities 3,543,541 3,199,253 Level 1Money market funds 1,451,805 773,730 Level 1Certificates of deposit 99,833 249,559 N/A

Total investments $ 17,591,311 $ 16,039,843

The Foundation's Level 1 securities are valued based on quoted market prices. The Foundation recognizestransfers between levels of the fair value hierarchy at the end of the period in which the events occurcausing changes in the availability of fair value inputs. There were no transfers in or out of Level 1 duringthe years ended December 31, 2017 and 2016.

Investment income, net consists of the following for the years ended December 31:

2017 2016Dividends and interest $ 324,572 $ 365,663Net unrealized and realized gains 1,926,519 785,624

2,251,091 1,151,287Investment fees (55,879) (61,300)Investment income, net $ 2,195,212 $ 1,089,987

Note E - Temporarily Restricted Net Assets

Temporarily restricted net assets consist of the following at December 31:

2017 2016Scholarships and other student funding $ 5,649,000 $ 5,337,058Lectures, awards, and prizes 418,262 409,115Grants 3,919,528 3,284,428Other 2,999,906 2,620,902Total temporarily restricted net assets $ 12,986,696 $ 11,651,503

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Note E - Temporarily Restricted Net Assets (Continued)

During 2017 and 2016, the following expenses were incurred once the time restrictions and/or purpose ofdonor-imposed restrictions on contributions were met. Accordingly, the related temporarily restricted netassets were released to unrestricted net assets in the accompanying statements of activities.

2017 2016Grant, award and scholarship expenses

Prizes and awards $ 13,000 $ 59,000Lectures 3,500 4,500Scholarships and fellowships 153,105 116,971Grants 478,904 435,643

Subtotal 648,509 616,114Operational expenses and release from time restrictions

Salaries and benefits 584,629 472,324Asset management fees 38,423 41,793Consulting/contractual services 9,647 17,505Other expenses and transfers, net 192,218 183,916

Subtotal 824,917 715,538Total net assets released from restrictions $ 1,473,426 $ 1,331,652

Certain investment earnings are allocated to temporarily restricted net assets when earned and releasedfrom temporarily restricted net assets when used in accordance with donor stipulations. During the yearsended December 31, 2017 and 2016, $1,544,892 and $794,890 in investment earnings, respectively, wereallocated to temporarily restricted net assets.

Note F - Related Party Transactions

APA provides shared resources and pays for certain expenses on behalf of the Foundation for which theFoundation reimburses APA in full. These amounts consist primarily of direct salaries and benefits andother general and administrative expenses of the Foundation. During 2017 and 2016, APA incurred$891,281 and $736,067, respectively, of reimbursable expenses on behalf of the Foundation. In addition,the Foundation receives an annual contribution from APA. The contribution was $0 and $50,000 in 2017and 2016, respectively, and is included in contributions in the accompanying statements of activities.

During the years 2017 and 2016, the Foundation received donated employee support services and officespace from APA totalling $106,017 and $97,627, respectively. The related revenue is recorded underunrestricted contributions and the related expenses are recorded under operating expenses on theaccompanying statements of activities.

As of December 31, 2017 and 2016, the net amount due from the Foundation to APA was $381,786 and$348,672, respectively.

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Note F - Related Party Transactions (Continued)

The total amount of contributions gifted from Foundation board members represents $28,625 and$31,450 for the years ended December 31, 2017 and 2016, respectively. Contributions receivable frommembers of the Board of Trustees at December 31, 2017 and 2016 represented 6% and 7%, respectively,of contributions receivable.

Note G - Line of Credit

During the year ended December 31, 2009, the Foundation obtained a $500,000 revolving line of creditwith a local bank for its use to finance short-term working capital needs. The line of credit is renewedannually, and the current line expires June 1, 2018. The line of credit is unsecured and has no collateralrequirements. Amounts drawn down are due on demand with interest payable monthly. The line ofcredit has an interest rate equal to the thirty-day LIBOR rate plus 2%, reset monthly, and not less than 3%per annum. There were no funds drawn on the line of credit as of or during the years ended December31, 2017 and 2016.

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2017 Audit Required Communications

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April 23, 2018 Board of Trustees American Psychological Foundation Washington, D.C. We have audited the financial statements of the American Psychological Foundation (the Foundation) as of and for the year ended December 31, 2017 and have issued our report thereon dated April 23, 2018. The auditor is responsible for forming and expressing an opinion about whether the financial statements, that have been prepared by management with the oversight of those charged with governance, are presented fairly in all material respects, in conformity with accounting principles generally accepted in the United States of America (GAAP). The auditor is also responsible for communicating significant matters related to the financial statement audit that are, in the auditor’s professional judgment, relevant to the responsibilities of those charged with governance in overseeing the financial reporting process. Auditing standards generally accepted in the United States of America do not require the auditor to design procedures for the purpose of identifying other matters to communicate with those charged with governance. In accordance with our professional standards we would like to share the following: Significant Accounting Policies and Their Application

Management is responsible for the selection and use of appropriate accounting policies. As is the case with most organizations, the Foundation has available alternative accounting principles from which to choose. The significant accounting policies followed by the Foundation are described in Note B to the financial statements. The accounting policies selected and applied by the Foundation are appropriate under the circumstances and are consistent with those used by other not-for-profit organizations. There were no new accounting policies adopted during the year ended December 31, 2017. The application of existing policies was not changed during the year ended December 31, 2017. We noted no transactions entered into by the Foundation during the year for which there is lack of authoritative guidance or consensus. We noted no significant transactions that have been recognized in the financial statements in a different period than when the transaction occurred.

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Management’s Judgments and Accounting Estimates

Accounting estimates are an integral part of the financial statements prepared by management and are based upon management’s current judgments. The financial statements contain the following significant estimates:

Allowance for doubtful accounts and discounts on contributions receivable

Functional expense allocation In-kind contributions

We reviewed management’s judgments relating to these areas and found them to be reasonable.

Related Party Relationships and Transactions

An objective of the audit is to obtain an understanding of such matters sufficient to be able to recognize fraud risk factors that are relevant to the identification and assessment of the risks of material misstatement due to fraud and conclude whether the financial statements, insofar as they are affected by those relationships and transactions, achieve fair presentation. Another objective of the audit is to obtain sufficient appropriate audit evidence about whether related party relationships and transactions have been appropriately identified, accounted for and disclosed in the financial statements. Note F of the financial statements includes the disclosure of significant related party transactions.

Significant Difficulties Performing the Audit

No significant difficulties were encountered in performing the audit.

Management Representations and Uncorrected Adjustments

We have requested certain representations from management that are included in the management representation letter, which is included as an exhibit to this document. We are not aware of any material uncorrected adjustments.

Audit Adjustments The Foundation recorded the following adjustment as a result of our

audit:

Adjustment to reclassify amounts (approximately $131,000) from accounts payable and accrued liabilities to accounts payable to APA. This had no effect on ending net assets.

Adjustment to reverse grants expenses incorrectly accrued in 2017 for three different funds. This increased net assets by a total of $28,500.

Disagreements with Management, Including Matters Discussed and Resolved

We are required to report any disagreements with management, whether or not satisfactorily resolved, about matters that individually or in the aggregate could be significant to the Foundation’s financial statements or the auditor’s report. There were no disagreements with management.

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Management’s Consultations with Other Accountants

We are not aware of any consultations with other accountants regarding accounting or auditing issues with the exception of the engagement of CliftonLarsonAllen to provide outsourced accounting services. Additionally, our engagement to perform the audit was not conditioned upon our willingness to allow certain accounting treatments.

Significant Issues Discussed or Subject to Correspondence with Management

There were no significant issues discussed with or subject to correspondence with management.

Financial Statements Included in a Client-Prepared Document

We are required to and have read the information contained in any client-prepared documents outside of the financial statements to determine if such information is materially consistent with the audited financial statements. We are not aware of any client-prepared document that will contain the audited financial statements.

Independence We are independent with respect to the Foundation in accordance with

the applicable independence rules. Upcoming Significant Accounting Pronouncement

Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, is effective for your organization as of and for the year ended December 31, 2018. The ASU changes the way all not-for-profits classify net assets and prepare financial statements. To assist you in the implementation of ASU 2016-14, we have attached a white paper detailing the new reporting model and disclosures and explanations behind the changes. We would be happy to discuss with your management team and/or the Board.

This letter is intended solely for the information and use of the Board of Trustees and management and is not intended and should not be used by anyone other than those specified parties. We appreciate the cooperation and courtesies extended to us by the Foundation’s personnel. Please do not hesitate to contact us if you would like clarification on these or any other matters.

Vienna, Virginia April 23, 2018

April 23, 2018

Johnson Lambert LLP 2650 Park Tower Drive, Suite 801 Vienna, Virginia 22180

Attn: Paul Preziotti

This representation letter is provided in connection with your audit of the financial statements of the American Psychological Foundation, Inc. (“the Foundation”) as of and for the years ended December 31, 2017 and 2016 for the purpose of expressing an opinion as to whether the financial statements present fairly, in all material respects, the financial position, activities, functional expenses, and cash flows of the Foundation in accordance with accounting principles generally accepted in the United States (U.S. GAAP).

Certain representations in this letter are described as being limited to matters that are material. Items are considered material, regardless of size, if they involve an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement.

We confirm that, to the best of our knowledge and belief, as of the date of this letter, having made such inquiries as we considered necessary for the purpose of appropriately informing ourselves that:

Financial Statements

• We have fulfilled our responsibilities, as set out in the terms of the audit engagement datedNovember 1, 2017, for the preparation and fair presentation of the financial statements inaccordance with U.S. GAAP.

• We acknowledge our responsibility for the design, implementation, and maintenance ofinternal controls and programs relevant to the preparation and fair presentation of financialstatements that are free from material misstatement, whether due to fraud or error.

• We acknowledge our responsibility to ensure that the Foundation’s operations are conductedin accordance with the provisions of laws and regulations, including compliance with theprovisions of laws and regulations that determine the reported amounts in the Foundation’sfinancial statements.

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• We acknowledge our responsibility for the design, implementation, and maintenance of internal control to prevent and detect fraud.

• Significant assumptions in making accounting estimates, including those measured at fair

value, are reasonable.

• All liabilities resulting from retirement obligations, deferred compensation agreements, and severance packages have been recorded in the financial statements and disclosed in the notes to the financial statements.

• Related party relationships and transactions have been appropriately accounted for and

disclosed in accordance with the requirements of U.S. GAAP. • All events subsequent to the date of the financial statements and for which U.S. GAAP requires

adjustment or disclosure have been adjusted or disclosed.

• You did not bring to our attention any uncorrected audit differences during this engagement.

• The effects of all known actual or possible litigation and claims have been accounted for and disclosed in accordance with U.S. GAAP.

• Arrangements with financial institutions involving compensating balances or other arrangements involving restrictions on cash balances, line of credit, or similar arrangements have been properly disclosed.

• The Foundation has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities.

• Guarantees, whether written or oral, under which the Foundation is contingently liable have been properly reported or disclosed in the financial statements.

• Material concentrations known to management have been properly disclosed in accordance with U.S. GAAP. Concentrations refer to volumes of business, revenues, available sources of supply, or markets or geographic areas for which events could occur that would significantly disrupt normal finances within the next year.

• The methods and significant assumptions as disclosed in the financial statements were used

to determine fair values of financial instruments and result in a measure of fair value appropriate for financial statement measurement and disclosure purposes. The categorization of the Foundation’s investments into the hierarchical levels as defined by ASC 820, Fair Value Measurements, is based on the lowest level of significant input to the securities’ valuation.

• In regard to the fact that your firm assisted us by drafting the financial statements, including

appropriate disclosures required by U.S. GAAP, we have: o Made all management decisions and performed all management functions.

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o Designated an individual, Idalia Ramos, who possesses suitable skill, knowledge or experience to oversee the services.

o Evaluated the adequacy and results of the draft preparation by reviewing and accepting the financial statements as complete and accurate.

o Accepted responsibility for the financial statements.

• The Foundation has satisfactory title to all owned assets, and there are no liens or encumbrances on such assets nor has any asset been pledged as collateral.

• The Foundation has complied with all aspects of contractual and debt covenant agreements

that would have a material effect on the financial statements in the event of non-compliance.

• The Foundation is an exempt organization under 501(c)(3) of the Internal Revenue Code. Any activities that we are aware that would jeopardize the organization’s tax exempt status and all activities subject to tax on unrelated business income or excise tax or other tax have been disclosed to you. All required filings with tax authorities are up to date. We have not been informed of any tax reviews by federal or state taxing authorities. There is no tax position considered to be uncertain if it was to undergo an inspection by the IRS or state authorities.

• We have complied with all donor restrictions on contributions and net assets. Our allocation of investment income is in compliance with donor restrictions.

Information Provided • We have provided you with:

o Access to all information, of which we are aware that is relevant to the preparation and fair presentation of the financial statements such as records, documentation, and other matters;

o Additional information that you have requested from us for the purpose of the audit; and o Unrestricted access to persons within the entity from whom you determined it necessary

to obtain audit evidence. • All transactions have been recorded in the accounting records and are reflected in the financial

statements. • We have disclosed to you the results of our risk assessment as to how and where the financial

statements may be materially misstated as a result of fraud. • We have no knowledge of any fraud or suspected fraud that affects the entity and involves:

o Management; o Employees who have significant roles in internal control; or o Others when the fraud could have a material effect on the financial statements.

• We have no knowledge of any allegations of fraud, or suspected fraud, affecting the entity’s

financial statements communicated by employees, former employees, analysts, regulators, or others.

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• We are not aware of any undisclosed known instances of non-compliance or suspected

noncompliance with laws and regulations whose effects should be considered when preparing financial statements.

• There have been no communications from regulatory agencies concerning noncompliance

with or deficiencies in financial reporting that could have a material effect on the financial statements.

• The balance, if any, on our line of credit with SunTrust is structured as a demand credit facility

and as such the maturity date is on demand.

• We are not aware of any pending or threatened litigation and claims whose effects should be

considered when preparing the financial statements. • We have disclosed to you the identity of the entity’s related parties and all the related party

relationships and transactions of which we are aware. • We have provided you information concerning monetary related party transactions and

amounts receivable or payable from related parties, including support for any assertion that a transaction with a related party was conducted on terms equivalent to those prevailing in an arms-length transaction. The American Psychological Association and members of the Board of Trustees are the related parties with whom we have had material transactions with during 2017.

____________________ Elisabeth R. Straus Executive Vice President/Executive Director ____________________ Idalia Ramos Deputy Director

Not-for-Profit Financial Reporting Guidelines

Introduction

Johnson Lambert LLP is dedicated to keeping you updated on the impact the Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities will have on your financial statements. This white paper presents the most significant changes, which are effective for annual financial statements issued for fiscal years after December 15, 2017.

Background

In 2009, the FASB formed the Not-for-Profit (NFP) Advisory Committee (NAC) to advise the FASB on NFP matters. Through its outreach, the NAC determined the existing financial reporting standards were sound and concluded that NFPs needed better options to present financial information and results and an opportunity to better communicate accomplishments to their members, donors and other stakeholders. To meet these goals, FASB decided to divide the improvements into two projects:

• Financial Reporting Model - ASU 2016-14• Financial Performance Reporting, to address

whether to require and how to define a measure of operations (project in progress)

Overview

In August 2016, the FASB issued ASU 2016-14. The amendments are required to be applied retrospectively in the year of adoption, except for the analysis of expenses by natural and functional classification and disclosures about the liquidity and availability of resources.

ASU 2016-14 improves and enhances the information provided in the financial statements and notes to the financial statements as follows:

• Simplifies the classification of net assets and enhances note disclosures

• Requires additional disclosures to provide insight into the management and liquidity of an NFP’s financial assets

• Makes expense information more comparable among NFPs

March 2018

1Johnson Lambert | Not-for-Profit Financial Reporting Guidelines

http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156316498

http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156316498

http://www.fasb.org/cs/ContentServer?c=FASBContent_C&cid=1176169433424&d=&pagename=FASB%2FFASBContent_C%2FProjectUpdatePage#FPR

Summary of Key Provisions

The ASU focuses on seven key provisions:

Net Asset Classification

• Net assets are classified as net assets without donor restrictions or net assets with donor restrictions

• Enhances disclosures for NFP-imposed limits on the use of net assets without donor restrictions

Liquidity and Availability of Resources

• Disclose qualitative and quantitative information regarding the management, liquidity and availability of an NFP’s financial assets to meet general expenditure needs within one year of the statement of financial position

Underwater Endowment Funds

• Reported net of deficiencies and classified as net assets with donor restrictions

• Disclose aggregate information regarding fair value, amount of deficiencies and amount of original endowment gift or level required to be maintained

Expenses

• Present and analyze all expenses by nature and function

Investment Return

• Investment returns are presented net of external and direct internal investment expenses

• Make certain disclosures regarding investment return optional

Statement of Cash Flows

• Eliminate the requirement to present the indirect reconciliation if using the direct method

Release of Restrictions on Capital Assets

• The “placed in service” approach should be used to report expirations of restrictions on gifts of long-lived assets and cash or other assets used to acquire or construct long-lived assets, absent explicit donor stipulations


ASU Implementation Details

Net Asset Classification

Net assets are now classified as net assets without donor restrictions or net assets with donor restrictions. Net assets previously classified as unrestricted net assets are classified as net assets without donor restrictions. Net assets previously classified as temporarily restricted or permanently restricted are classified as net assets with donor restrictions. The two-level classification intends to reduce complexity and confusion for financial statement users in understanding when temporarily restricted net assets become available for use by the NFP.

NFPs should disclose information regarding the purposes and periods of donor restricted net assets as well as information about how the restrictions affect the use of resources. This information may be disclosed in the notes to the financial statements, as seen in Exhibit A on the following page, or presented on the face of the statement of financial position.


Exhibit A: Net Assets with Donor Restrictions

Net assets with donor restrictions are restricted for the following purposes or periods:

6/30/20X1 (in thousands)

Subject to the expenditure for specified purpose:

Program A activities:

Purchase of equipment $ 3,060

Research 950

Educational seminars and publications 240

Program B activities:

Disaster relief 745

Educational seminars and publications 280

Program C activities: general 210

Building and equipment 2,150

Annuity trust agreements for research 2,815

10,450

Subject to the passage of time:

For periods after June 30, 20X1 3,140

Subject to NFP spending policy and appropriation:

Investment in perpetuity (including amounts above original gift amount of $122,337), which, once appropriated, is expendable to support:

Program A activities 33,300

Program B activities 15,820

Program C activities 16,480

Any activities of the organization 109,100

174,700

Subject to appropriation and expenditure when a specified event occurs:

Endowment requiring income to be added to original gift until fund’s value is $2,500 2,120

Paid-up life insurance policy that will provide proceeds upon death of insured for an endowment to support general activities 80

2,200

Not subject to appropriation or expenditure:

Land required to be used as a recreation area 3,000

Total net assets with donor restrictions $ 193,490


NFPs should also disclose the amounts and purposes of self-imposed limits on net assets without donor restrictions resulting from governing board designations, appropriations or other similar actions as seen in Exhibit B.

Exhibit B: Net Assets without Donor Restrictions

The governing board has designated, from net assets without donor restrictions totaling $92,600, net assets for the following purposes:


Quasi-endowment $ 36,600

Liquidity reserve 1,300

Total Board Designated Net Assets $ 37,900

Liquidity and Availability of Resources

The following information regarding the liquidity and availability of an NFP’s resources should be disclosed:

• Qualitative information regarding how the NFP manages its liquid resources to ensure it meets its general expenditure cash needs within one year of the date of the statement of financial position. If one does not exist, a formal liquidity management policy should be developed and disclosed.

• Quantitative information, and if necessary qualitative information, that discusses the availability of financial assets as of the date of the statement of financial position to meet general expenditure cash needs within one year of the date of the statement of financial position.

This information provides insight into:

• The effects of externally and internally imposed limits on the use of resources, resource availability and liquidity

• How an NFP manages liquidity to meet short term demands for cash• The types of resources used and how they are allocated in carrying out the NFP’s mission and exempt

purpose

ASU 2016-14 notes the availability of financial assets may be affected by three factors. The following table lists those factors and examples of financial assets that could be affected. NFPs should carefully assess whether their financial assets are affected by these factors, which will require judgment and consultation with third parties and NFP employees.

Factor Affected Financial Assets

Nature • Contributions receivable over 12 months• Accounts receivable• Illiquid investments

External limits imposed by donors, grantors, laws and contracts with others

• Perpetually restricted endowment financial assets• Donor imposed programmatic restrictions• Trust and life income funds• Contracts with legal restrictions

Internal limits imposed by governing board decisions

• Board designated net assets• Quasi endowments


The ASU provides flexibility in disclosing quantitative information. Quantitative information may be disclosed in a tabular format as either a reconciliation (Exhibit C) or listing (Exhibit D), or a narrative format (Exhibit E) showing the NFP’s financial assets available to meet operating expenditures within one year of the date of the statement of financial position. Additional qualitative information should be disclosed in the notes to the financial statements. In limited instances, a narrative disclosure may be sufficient to satisfy both the quantitative and qualitative requirements.

Exhibit C: Liquidity Disclosure - Option 1Financial Assets Unavailable

The following reflects financial assets as of the balance sheet date, reduced by amounts not available for general use because of contractual or donor-imposed restrictions within one year of the balance sheet date. Amounts not available include amounts set aside for long-term investing in the quasi-endowment that could be drawn upon if the governing board approves that action. However, amounts already appropriated from either the donor-restricted endowment or the quasi-endowment for general expenditures within one year of the balance sheet date have not been subtracted as unavailable:


Financial assets, at year-end $ 234,410

Less those unavailable for general expenditure within one year, due to:

Contractual or donor-imposed restrictions:

Restricted by donor with purpose restriction (10,450)

Subject to appropriation and satisfaction of donor restrictions (174,700)

Board designations:

Quasi-endowment fund, for long-term investing (36,600)

Amounts set aside for liquidity reserve (1,300)

Financial assets available to meet cash needs for general expenditures within one year $ 11,360

Qualitative Disclosure

The NFP is substantially supported by restricted contributions. Because a donor’s restriction requires resources to be used in a particular manner or in a future period, the NFP must maintain sufficient resources to meet those responsibilities to its donors. Thus, financial assets may not be available for general expenditure within one year. As part of the NFP’s liquidity management, it has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, the NFP invests cash in excess of daily requirements in short-term investments, including certificates of deposits and short term treasury instruments. Occasionally, the board designates a portion of any operating surplus to its liquidity reserve, which was $1,300 as of June 30, 20X1. There is a fund established by the governing board that may be drawn upon in the event of financial distress or an immediate liquidity need resulting from events outside the typical life cycle of converting financial assets to cash or settling financial liabilities. In the event of an unanticipated liquidity need, the NFP also could draw upon $10,000 of available lines of credit or its quasi-endowment fund.


Exhibit D: Liquidity Disclosure - Option 2Financial Assets Available

The NFP’s financial assets available within one year of the balance sheet date for general expenditures are as follows:


Current Assets:

Cash and cash equivalents $ 4,575

Accounts and interest receivable 2,130

Contributions receivable 1,825

Short-term investments 1,400

Long-term investments appropriated for current use 1,430

Financial assets available to meet cash needs for general expenditures within one year $ 11,360

Qualitative Disclosure

The NFP is substantially supported by restricted contributions. Because a donor’s restriction requires resources to be used in a particular manner or in a future period, the NFP must maintain sufficient resources to meet those responsibilities to its donors. Thus, financial assets may not be available for general expenditure within one year. As part of the NFP’s liquidity management, it has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, the NFP invests cash in excess of daily requirements in short-term investments, including certificates of deposits and short-term treasury instruments. Occasionally, the board designates a portion of any operating surplus to its liquidity reserve, which was $1,300 as of June 30, 20X1. There is a fund established by the governing board that may be drawn upon in the event of financial distress or an immediate liquidity need resulting from events outside the typical life cycle of converting financial assets to cash or settling financial liabilities. In the event of an unanticipated liquidity need, the NFP also could draw upon $10,000 of available lines of credit or its quasi-endowment fund.


Exhibit E: Liquidity Disclosure - Option 3Narrative Only

Quantitative and Qualitative Disclosure

The NFP has $11,360 of financial assets available within one year of the balance sheet date to meet cash needs for general expenditure consisting of cash of $4,575, contributions receivable of $1,825, accounts and interest receivable of $2,130, short-term investments of $1,400 and long-term investments appropriated for current use of $1,430. None of the financial assets are subject to donor or other contractual restrictions that make them unavailable for general expenditure within one year of the balance sheet date. The contributions receivable are subject to implied time restrictions but are expected to be collected within one year. The NFP has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, the NFP invests cash in excess of daily requirements in various short-term investments including, certificate of deposits and short term treasury instruments. Occasionally, the board designates a portion of any operating surplus to its liquidity reserve, which was $1,300 as of June 30, 20X1. There is a fund established by the governing board that may be drawn upon in the event of financial distress or an immediate liquidity need resulting from events outside the typical life cycle of converting financial assets to cash or settling financial liabilities. In the event of unanticipated liquidity needs the NFP also could draw upon $10,000 of available lines of credit or its quasi-endowment fund.

Underwater Endowment Funds

The FASB defines an underwater endowment fund as “a donor-restricted endowment fund for which the fair value of the fund at the reporting date is less than the original gift amount or the amount required to be maintained by the donor or by law that extends donor restrictions.” Such fund balances will be reduced by any deficits and reported as net assets with donor restrictions. The following disclosures are required to help financial statement users understand the impact of underwater endowment funds of the NFP:

• The governing board’s interpretation of the law(s) affecting the ability to spend from underwater endowment funds

• The NFP’s policy(s) for spending from underwater endowment funds and any appropriations from underwater endowment funds

• The aggregate fair value of underwater endowment funds• The original endowment gift amount or level required to be maintained by donor stipulations or by

law that extends donor restrictions, in the aggregate• The aggregate amount of the deficiencies of the underwater endowment funds

Expenses

All NFPs should provide an analysis of expenses by nature and function, which may be reported in:

• The statement of activities• The notes to the financial statements• A separate financial statement

Expenses should be reported by major classes of program services and supporting activities. ASU 2016-14 clarifies that payroll, employee benefits management and oversight, and contract administration and financial reporting are included within management and general activities. However, the standard specifies that activities representing direct conduct or supervision of program


and other supporting activities should be allocated from management and general activities to the program or support functions that receive a benefit. For example, if the Chief Executive Officer spends 25% of their time directly overseeing a specific research program or fundraising function, 25% of their compensation and benefits should be allocated directly to that research program or fundraising function. Conversely, the portion of compensation and benefits related to indirect supervision of program or support functions should remain in management and general activities.

Furthermore, costs that benefit multiple functions should be allocated amongst those functions. The allocation method used should be disclosed in the notes to the financial statements, either in a narrative or tabular format. Exhibit F is a sample illustration of the expense analysis by nature and function and disclosure of the expense allocation method.

Program Activities (in thousands)

A B CPrograms

Total

Salaries and benefits $ 7,400 $ 3,900 $ 1,725 $ 13,025

Grants to other organizations 2,075 750 1,925 4,750

Supplies and travel 890 1,013 499 2,402

Services and professional fees 160 1,490 600 2,250

Office and occupancy 1,160 600 450 2,210

Depreciation 1,440 800 570 2,810

Interest 171 96 68 335

Total Expenses $ 13,296 $ 8,649 $ 5,837 $ 27,782

Supporting Activities (in thousands)

Management & General

FundraisingSupporting

SubtotalTotal

Expenses

$ 1,130 $ 960 $ 2,090 $ 15,115

- - - 4,750

213 540 753 3,155

200 390 590 2,840

218 100 318 2,528

250 140 390 3,200

27 20 47 382

$ 2,038 $ 2,150 $ 4,188 $ 31,970

Exhibit F: Functional ExpensesNot-for-Profit Statement of Functional Expenses

June 30, 20X1

The financial statements report certain categories of expenses that are attributable to more than one program or supporting function. Therefore, these expenses require allocation on a reasonable basis that is consistently applied. The expenses that are allocated include depreciation, interest, and office and occupancy, which are allocated on a square-footage basis, as well as salaries and benefits, which are allocated on the basis of estimates of time and effort.

Investment Return

Investment returns should be presented net of external and direct internal investment expenses. Direct internal investment expenses include, but are not limited to, the salary and benefits of the officer and/or staff responsible for the NFP’s investment strategy and the selection and oversight of external investment management firms. Endowment management costs are specifically excluded from direct internal investment expenses. Investment expenses netted from investment returns should be excluded from the expense analysis described above.

The following disclosures regarding investment return, are now optional:

• Investment income separately from net appreciation or depreciation of investments• Composition of investment return • Reconciliation of investment return to amounts reported in the statement of activities if investment

return is presented separately between operating and nonoperating

Statement of Cash Flows

NFPs may continue to present the statement of cash flows using the direct or indirect method. NFPs using the direct method are no longer required to provide the reconciliation of the change in net assets to net cash flow from operating activities.

Release of Restrictions on Capital Assets

ASU 2016-14 eliminates the option to adopt a policy to imply a time restriction that expires over the useful life of donated long-lived asset. Absent donor restrictions stating otherwise, NFPs that receive gifts of cash or other assets to purchase or construct long-lived assets should use the “placed in service” approach to report the expiration of restrictions. In the year ASU 2016-14 is adopted, existing long-lived assets that were placed in service and recorded as temporarily or permanently restricted should be reclassified to net assets without donor restrictions.


The content contained herein should not be relied upon as accounting or tax advice because it does not take into account any specific organization’s facts and circumstances.

Portions of FASB publication reprinted with permission. Copyright Financial Accounting Standards Board.

This white paper is © 2018 Johnson Lambert LLP. All Rights Reserved.

Internal Control Letter

Board of TrusteesAmerican Psychological Foundation, Inc.Washington, D.C.

In planning and performing our audit of the financial statements of the American PsychologicalFoundation, Inc. (the Foundation) as of and for the year ended December 31, 2017, in accordance withauditing standards generally accepted in the United States of America, we considered its internal controlover financial reporting (internal control) as a basis for designing our auditing procedures for the purposeof expressing our opinion on the financial statements, but not for the purpose of expressing our opinionon the effectiveness of the Foundation’s internal control. Accordingly, we do not express an opinion onthe effectiveness of the Foundation’s internal control.

A deficiency in internal control exists when the design or operation of a control does not allowmanagement or employees, in the normal course of performing their assigned functions, to prevent, ordetect and correct misstatements on a timely basis. A material weakness is a deficiency, or combinationof deficiencies, in internal control, such that there is a reasonable possibility that a material misstatementof the entity's financial statements will not be prevented, or detected and corrected on a timely basis.

Our consideration of internal control was for the limited purpose described in the first paragraph and wasnot designed to identify all deficiencies in internal control that might be material weaknesses. Given theselimitations, during our audit we did not identify any deficiencies in internal control that we considermaterial weaknesses, as previously defined as of December 31, 2017. However, material weaknesses mayexist that were not identified.

_______________________

This communication is intended solely for the information and use of the Board of Trustees, management,and others within the organization and is not intended to be and should not be used by anyone otherthan these specified parties.

Vienna, VirginiaApril 23, 2018

american psychological foundation, inc. audited financial … · 2020-06-12 · american...

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