2. Summary of Significant Accounting Policies
The accompanying financial statements are prepared on the accrual basis and in conformity with accounting principles generally accepted in the United States of America.
Cash and cash equivalents represent cash and short term, liquid investments with an original maturity of three months or less, or amounts invested in registered money market funds.
Marketable securities are reported on the basis of quoted market value as reported on the last business day of the year on securities exchanges throughout the world. Purchases and sales of securities are recorded on a trade date basis. Realized gains and losses on investments in securities are calculated based on the first-in, first-out method, and are reflected in the statement of activities. Dividend income is recorded on the ex-dividend date and interest income is recorded on an accrual basis.
Effective January 1, 2008 the Foundation adopted Statement of Financial Accounting Standards SFAS No. 157 “Fair Value Measurements” (“SFAS 157”), which establishes a framework for measuring fair value and expanded disclosures about fair value measurements. Under SFAS 157, fair value is defined as the price that would be received to sell an asset or paid to trans- fer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on the ability to observe pricing inputs that market participants would use in pricing an asset or liability.
SFAS 157 also establishes a fair value hierarchy based on the inputs to valuation techniques used to measure the fair value. The three levels of the fair value hierarchy under SFAS 157 are as follows:
| Level 1 | Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Foundation has the ability to access at the measurement date. |
|---|---|
| Level 2 | Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active. |
| Level 3 | Inputs that are unobservable. |
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions. Inputs may include price information, credit data, liquidity statistics and other factors. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value mea- surement. The Foundation considers observable data to be that market data which is readily available and reliable and provided by independent sources. The categorization of a financial instrument within the hierarchy is therefore based upon the pricing transparency of the instrument and does not necessarily correspond to the Foundation’s perceived risk of that instrument.
Investments whose values are based on quoted market prices in active markets are classified as Level 1 and include active listed equities. The Foundation does not adjust the quoted price for such instruments, even in situations where the Foundation holds a large position and a sale of all its holdings could reasonably impact the quoted price.
Investments that trade in markets that are not considered to be active, but are valued based on quoted market prices, dealer quotations, or alternative pricing sources are classified as Level 2. These include certain corporate bonds, asset-backed securities, registered money market funds and less liquid equity securities.
Investments classified as Level 3 have significant unobservable inputs, as they trade infrequently or not at all. The inputs into the determination of fair value are based upon the best information in the circumstance and may require management judg- ment. These investments, which include interest in hedge funds and private entity limited partnerships, are primarily made under agreements to participate in investment vehicles and are generally subject to certain withdrawal restrictions. Values for these investment vehicles, which may include investments in both nonmarketable and market-traded securities, are provided by the general partner or fund manager and may be based on recent transactions, cash flow forecasts, appraisals and other factors. Market values may be discounted for concentration of ownership. Because of the inherent uncertainty of valuing these invest- ments and certain of the underlying investments held by them, the Foundation’s estimate of fair value may differ significantly from the values that would have been used had a ready market for the investments existed. The financial statements of these investment vehicles are audited annually by independent auditing firms. These investments may be illiquid, and thus there can be no assurance that the Foundation will be able to realize the value of such investments in a timely manner. For partnership interests, gains and losses are dependent upon the general partners’ distributions during the life of each partnership.
Assets and liabilities denominated in foreign currencies are translated into U.S. dollar equivalents using year-end spot foreign currency exchange rates. Purchases and sales of financial instruments, and their related income and expenses, are translated at the rate of exchange on the respective date of such transactions. Realized and unrealized gains and losses resulting from foreign currency changes are reflected in the statement of activities as a component of realized gain and unrealized depreciation on the respective investments.
Property and equipment are capitalized and carried at cost. Maintenance and repairs are charged to expense as incurred. Depreciation of approximately $5.7 million in 2008 and $5.1 million in 2007 was calculated using the straight-line method over the estimated useful lives of the depreciable assets.
The Internal Revenue Service requires the Foundation to distribute within 12 months of the end of each year approximately 5% of the average fair value of its assets not used in carrying out the charitable purpose of the Foundation. The distribution requirement for 2008 and 2007 has been met.
Deferred federal excise taxes are the result of unrealized appreciation on investments being reported for financial statement purposes in different periods than for tax purposes.
Net Assets Accounting—The Foundation reports information regarding its financial position and activities according to the following two classes of net assets:
- Unrestricted net assets are not subject to donor-imposed stipulations or the restrictions have expired.
- Temporarily restricted net assets are subject to donor-imposed stipulations that can be fulfilled by actions of the Foundation or that expire by the passage of time. Temporarily restricted net assets at December 31, 2008 and 2007, were solely related to a charitable remainder trust.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Foundation makes significant estimates regarding the value of alternative invest- ments, discounts for contributions receivable and unpaid grants, and useful lives of property and equipment. Actual results could differ from these estimates.