AMERICAN PSYCHOLOGICAL ASSOCIATION, INC. AND SUBSIDIARIES

Transcription

1 AUDITED CONSOLIDATED FINANCIAL STATEMENTS WITH SUPPLEMENTAL SCHEDULES AMERICAN PSYCHOLOGICAL ASSOCIATION, INC. AND SUBSIDIARIES DECEMBER 31, 2011 AND 2010

2 AMERICAN PSYCHOLOGICAL ASSOCIATION, INC. AND SUBSIDIARIES AUDITED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 AND 2010 CONTENTS Independent Auditor s Report 1 Consolidated Financial Statements Page Consolidated Statements of Financial Position 2 Consolidated Statements of Activities and Change in Unrestricted Net Assets 3 Consolidated Statements of Cash Flows 4 Notes to the Consolidated Financial Statements 5-22 Supplemental Schedules Consolidating Statement of Financial Position Consolidating Statement of Activities and Change in Unrestricted Net Assets Schedule of Unrestricted Designated Net Assets 28-29

3 INDEPENDENT AUDITOR S REPORT To the Board of Directors American Psychological Association, Inc. Washington, D.C. We have audited the accompanying consolidated statements of financial position of the American Psychological Association, Inc. and subsidiaries (collectively referred to as the Association) at December 31, 2011 and 2010, and the related consolidated statements of activities and change in unrestricted net assets, and of cash flows for the years then ended. These consolidated financial statements are the responsibility of the Association s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits of these consolidated statements 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the consolidated financial position of the American Psychological Association, Inc. and subsidiaries as of December 31, 2011 and 2010, and the changes in their unrestricted net assets and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Our audits were performed for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplemental schedules as of and for the year ended December 31, 2011 are presented for purposes of additional analysis and are not a required part of the basic consolidated financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. McLean, Virginia May 31, Greensboro Drive 7 th Floor McLean, VA Two Democracy Center 6903 Rockledge Drive Suite 310 Bethesda, Maryland Member of the Leading Edge Alliance

4 AMERICAN PSYCHOLOGICAL ASSOCIATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 2011 AND Current assets Cash and cash equivalents $ 38,886,187 $ 38,784,010 Cash and cash equivalents, divisions 6,952,695 6,376,420 Investments, divisions 1,247,055 1,335,738 Accounts receivable, net 19,332,713 17,696,479 Income taxes receivable 0 100,627 Publications inventory 5,600,000 4,680,000 Other current assets 1,986,768 1,555,719 Total current assets 74,005,418 70,528,993 Investments 74,014,287 77,499,908 Property and equipment, net 71,923,189 74,228,602 Deferred financing costs, net 693, ,744 Deferred leasing costs, net 4,679,222 4,054,921 Rental abatements 5,658,401 5,576,250 Other assets 3,863,637 2,596,935 Total assets $ 234,837,696 $ 235,343,353 Current liabilities ASSETS LIABILITIES AND UNRESTRICTED NET ASSETS Accounts payable and accrued expenses $ 13,773,502 $ 12,576,649 Income taxes payable 109,373 0 Current portion of long-term debt 3,371,701 3,189,959 Amounts collected/held for divisions and other groups 8,408,332 7,940,662 Deferred revenue 51,001,587 50,153,073 Total current liabilities 76,664,495 73,860,343 Deferred income taxes 193, ,000 Post retirement medical benefit obligation 2,009,416 2,271,733 Interest rate swap liabilities 18,651,081 11,225,895 Deferred compensation 2,153,636 2,198,757 Other liability 437, ,000 Long-term debt 102,151, ,523,334 Total liabilities 202,260, ,587,062 Unrestricted net assets APA Designated 15,119,494 11,874,263 APA Undesignated 15,361,290 25,635,601 APAPO Undesignated 2,096,157 2,246,427 Total unrestricted net assets 32,576,941 39,756,291 Total liabilities and unrestricted net assets $ 234,837,696 $ 235,343,353 The accompanying notes are an integral part of these consolidated financial statements. 2

5 AMERICAN PSYCHOLOGICAL ASSOCIATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF ACTIVITIES AND CHANGE IN UNRESTRICTED NET ASSETS YEARS ENDED DECEMBER 31, 2011 AND Operating revenue Licensing, royalties, and rights $ 51,017,957 $ 48,381,108 Member dues and fees 17,174,681 18,247,917 Rental income 16,960,557 17,065,034 Sales of publications 15,708,056 19,523,605 Journal subscriptions 13,108,611 13,778,692 Grants and contracts 3,262,611 3,376,169 Service and application fees 3,089,816 3,070,100 Convention and conference fees 3,016,449 2,868,786 Advertising 2,827,790 2,480,748 Pass-through expense reimbursements 1,646,629 2,329,900 Interest income 272, ,810 Mailing list rental 269, ,196 Contributions 227, ,500 Other revenue 1,456,998 1,590,340 Total operating revenue 130,039, ,053,905 Operating expenses Salaries 43,299,701 40,830,463 Consulting and contractual services 13,370,876 12,519,071 Benefits 10,039,731 10,299,820 Building operating expenses 9,968,721 10,291,722 Publication production expenses 8,557,010 9,446,540 Depreciation and amortization 8,064,046 9,087,358 Special projects 7,894,381 8,046,968 Board and committee expenses 3,057,733 2,738,468 Other office expenses 2,852,917 2,915,580 Telephone, printing and postage 2,834,633 2,684,193 Honoraria and stipends 2,226,675 1,854,044 Convention expenses 1,387,141 1,460,349 Editors' office expenses 1,101, ,968 Stipends, tuition and grants 901,933 1,028,965 Staff travel 873, ,394 Space occupancy 652, ,313 Professional practice grants 506, ,000 Other expenses 1,436,074 1,886,782 Total operating expenses 119,025, ,144,998 Increase in unrestricted net assets before non-operating items 11,013,730 15,908,907 Non-operating items Investment (loss) income Realized gains on investments, net of management fees 3,291,891 3,130,175 Unrealized (losses) gains on investments, net (8,590,251) 6,065,686 Interest income 1,569,118 0 Unrealized losses on interest rate swap liabilities (7,425,186) (3,188,961) Interest expense (6,050,652) (6,232,899) Provision for income taxes (988,000) (1,236,000) Total non-operating items (18,193,080) (1,461,999) Change in unrestricted net assets (7,179,350) 14,446,908 Unrestricted net assets, beginning of the year 39,756,291 25,309,383 Unrestricted net assets, end of the year $ 32,576,941 $ 39,756,291 The accompanying notes are an integral part of these financial statements. 3

6 AMERICAN PSYCHOLOGICAL ASSOCIATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2011 AND Cash flows from operating activities: Change in unrestricted net assets $ (7,179,350) $ 14,446,908 Adjustments to reconcile change in unrestricted net assets to net cash and cash equivalents provided by operating activities: Depreciation and amortization 8,064,046 9,087,358 Change in allowance for doubtful accounts (60,000) 0 Loss on disposal of property and equipment 7,691 75,343 Loss on write-off of deferred leasing costs 11,502 0 Net realized and unrealized losses (gains) on investments 5,298,360 (9,195,861) Unrealized losses on interest rate swap liabilities 7,425,186 3,188,961 Interest on deferred financing costs 164, ,907 Deferred income taxes (14,000) (6,000) Rent reduction in lieu of payments under notes payable - NASW (219,639) (203,027) Changes in operating assets and liabilities: Accounts receivable (1,576,234) 342,881 Income taxes receivable 100, ,053 Publications inventory (920,000) (90,000) Other current assets (431,049) 269,300 Rental abatements (82,151) (344,066) Other assets (1,266,702) (427,675) Accounts payable and accrued expenses 1,196,853 (1,521,233) Income taxes payable 109,373 0 Amounts collected/held for divisions and other groups 467,670 (967,163) Deferred revenue 848, ,851 Post retirement medical benefit obligation (262,317) 493,539 Deferred compensation (45,121) 419,568 Other liability 137,500 (40,000) Total adjustments 18,954,311 1,964,736 Net cash provided by operating activities 11,774,961 16,411,644 Cash flows from investing activities: Net (increase) decrease in money market instruments held in investments (1,297,002) 12,140,849 Purchases of investments (32,826,689) (49,259,371) Proceeds from sales and maturities of investments 32,399,635 27,256,857 Purchases of property and equipment (5,057,983) (2,742,888) Payments under deferred leasing costs (1,344,144) (142,292) Net cash used in investing activities (8,126,183) (12,746,845) Cash flows from financing activity: Principal payments under long-term debt (2,970,326) (2,830,695) Net cash used in financing activity (2,970,326) (2,830,695) Net increase in cash and cash equivalents and cash and cash equivalents, divisions 678, ,104 Cash and cash equivalents and cash and cash equivalents, divisions, beginning of the year 45,160,430 44,326,326 Cash and cash equivalents and cash and cash equivalents, divisions, end of the year $ 45,838,882 $ 45,160,430 Reconciliation of cash and cash equivalents and cash and cash equivalents, divisions to consolidated statements of financial position: Cash and cash equivalents $ 38,886,187 $ 38,784,010 Cash and cash equivalents, divisions 6,952,695 6,376,420 $ 45,838,882 $ 45,160,430 Supplemental disclosures of cash flow information: Cash paid for interest $ 5,906,943 $ 6,070,915 Cash paid for income taxes, net of refunds received $ 1,131,700 $ 228,091 The accompanying notes are an integral part of these consolidated financial statements. 4

7 AMERICAN PSYCHOLOGICAL ASSOCIATION, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2011 AND 2010 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES The American Psychological Association, Inc. (APA), a District of Columbia not-for-profit corporation, is a national membership organization created to advance psychology as a science and profession and as a means of promoting health, education and human welfare. APA s operations are supported primarily by membership dues, subscriptions, and other publication revenue. In addition to the accounts of APA, the consolidated financial statements include the accounts of the following entities: American Psychological Association Practice Organization The American Psychological Association Practice Organization (APAPO), a District of Columbia 501(c)(6) corporation, was created by APA to promote the mutual professional interests of practicing psychologists. APA 750 LLC APA 750 LLC (APA 750), a Delaware limited liability company formed on November 13, 2002, is wholly-owned by APA. APA 750 was formed to own and operate a 351,000 square foot commercial office building. APA Ten G LLC APA Ten G LLC (APA Ten G), a Delaware limited liability company formed on November 12, 2002, is 99% owned by APA and 1% owned by APA G Street Corporation (G Street), a Delaware corporation. G Street is the Managing Member of APA Ten G and is a wholly-owned subsidiary of APA. APA Ten G was formed to operate a 252,000 square foot commercial office building. All intercompany transactions, which consist primarily of contracted services, rent, and intercompany borrowings and advances, have been eliminated in consolidation. The significant accounting policies followed by APA and its consolidated subsidiaries (collectively referred to as the Association) are described below: Basis of accounting The consolidated financial statements of the Association have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. Use of estimates The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, upon settlement, actual results could differ from those estimates. Revenue recognition Member dues and fees, journal subscriptions and electronic licensing revenue are recorded as revenue in the period of the related membership, subscription or license. Deferred revenue represents unearned fees expected to be earned in the future. 5

8 Advertising revenue is recorded as revenue when the advertisement is published. Other publication sales are recorded as revenue when the publication is shipped to the customer. APA receives grant funding from federal agencies and private foundations. Revenue is recognized only to the extent of expenditures under the terms of the grants. Grant funds not yet received are accrued to the extent that unreimbursed expenses have been incurred for the purposes specified by an approved grant. Excess expenses incurred are borne by APA. Unexpended funds are returned to the grantors if required by the grant agreement. Some grant payments are received in advance of related expenditures. These amounts are reflected in the accompanying consolidated statements of financial position as deferred revenue. Fees for seminars, conferences, and meetings and sponsorship thereof are recognized as revenue in the period the related events are held. Fee and service revenue received in advance of the related event is reflected as deferred revenue in the accompanying consolidated statements of financial position. Registration and exhibit fees are recognized upon completion of the related event. Certain tenant leases contain rental abatement provisions and rental rate escalation clauses. The aggregate rent payments due over the lives of the leases are recognized as rental revenue on a straightline basis over the full term of the leases. The differences between cash rental revenues received and rental revenues due from tenants over the lives of the leases using a straight-line calculation are recorded as rental abatements with a corresponding offset to current period rental revenue. Other revenues are recognized when earned. Measure of operations APA s operating income includes all membership, journal subscriptions, publication sales, licensing/royalties, rental income and other revenues and expenses critical to APA s mission. Realized and unrealized investment gains and losses, unrealized gains and losses on interest rate swaps, interest expense related to long-term debt, provisions for income taxes, and certain other non-recurring transactions are considered to be non-operating items. Cash equivalents APA considers investments with original maturities of three months or less to be cash equivalents, and excludes cash equivalents held temporarily for long-term investment purposes by investment custodians. Cash equivalents consist primarily of commercial paper and money market funds. Accounts receivable Accounts receivable consists of amounts billed to customers for goods and services provided by yearend. Included in these amounts at December 31, 2011 and 2010 are billed invoices totaling $13,800,143 and $11,199,113, respectively, for annual licenses of electronic products for which the service period has commenced. The unearned revenue associated with these receivables at December 31, 2011 and 2010 totaled $13,363,836 and $9,667,963, respectively. APA provides an allowance for doubtful accounts based upon a review of outstanding receivables, historical collection information, and existing economic conditions. APA has determined that no allowance is necessary for APA recorded an allowance for doubtful accounts of $60,000 at December 31, Inventory Inventory consists primarily of books available for sale. Inventory items are recorded either at cost or at a value that approximates cost. Slow moving inventory is deemed to have no value, and therefore is not included in the valuation. 6

9 Investments The Association s investments are recorded at fair value. The Association s noncurrent investments consist of the following at December 31: Cost Fair Value Cost Fair Value Money market funds $ 2,940,287 $ 2,940,287 $ 2,045,037 $ 2,045,037 Mutual funds 42,087,795 37,696,066 29,085,919 28,939,742 Common stocks 35,470,208 33,377,934 43,266,355 45,453,321 Investment in limited partnership 0 0 1,000,000 1,061,808 $ 80,498,290 $ 74,014,287 $ 75,397,311 $ 77,499,908 Investments held on behalf of APA s divisions consist of the following at December 31: Cost Fair Value Cost Fair Value Mutual funds $ 1,174,662 $ 1,247,055 $ 1,195,551 $ 1,279,792 Certificates of deposit ,946 55,946 $ 1,174,662 $ 1,247,055 $ 1,251,497 $ 1,335,738 The interest earned on cash and investments is recorded as interest income in the accompanying consolidated statements of activities and change in unrestricted net assets. Management considers all interest earned on cash and short-term investments to be part of operating activities. Realized and unrealized gains and losses are considered non-operating activities. During 2010, interest income on long-term investments was included as part of operating activities. During 2011, interest income on longterm investments is included as part of non-operating activities. Realized gains are recorded net of management fees of $449,294 and $438,248 for the years ended December 31, 2011 and 2010, respectively. Certificates of deposit are recorded at cost, which approximates fair value. Property and equipment The Association s policy is to capitalize property and equipment purchases in excess of $5,000. Property and equipment is recorded at cost. Expenditures for major additions and improvements are capitalized, and minor replacements, maintenance, and repairs are charged to expense as incurred. When property and equipment is retired, or otherwise disposed of, the cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period. Buildings and improvements are amortized from the dates that the related buildings and improvements were substantially completed using the straight-line method over estimated useful lives not to exceed forty years. Tenant improvements are amortized over the term of the tenants leases. Furniture, fixtures, and equipment are depreciated on a straight-line basis over their estimated useful lives, which range from three to ten years. Valuation of long-lived assets The Association accounts for the valuation of long-lived assets under authoritative guidance issued by the Financial Accounting Standards Board (the FASB), which requires that long-lived assets be reviewed for impairment whenever events or circumstances indicate that their carrying amounts may not be recoverable. Recoverability of the long-lived assets is measured by a comparison of their carrying amounts to future undiscounted net cash flows they are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which their carrying amounts exceed their estimated fair values. Assets to be disposed of are reportable at the lower of the carrying amount or fair value, less costs to sell. No indicators of impairment were identified for the years ended December 31, 2011 and

10 When assets are sold or retired, the related cost and accumulated amortization and depreciation are removed. Any gains or losses resulting from disposition are credited or charged to operations. Expenditures for repairs and maintenance are expensed as incurred. Deferred financing costs Deferred financing costs consist of commissions, fees and costs incurred to obtain long-term financing and are amortized over the term of the related financing agreement using the effective interest method. The amortization of these costs is included in interest expense in the accompanying consolidated statements of activities and change in unrestricted net assets. Deferred financing costs of $693,542 and $857,744 are recorded net of accumulated amortization of $2,143,540 and $1,979,338 at December 31, 2011 and 2010, respectively. Interest expense related to deferred financing costs for the years ended December 31, 2011 and 2010 was $164,202 and $176,907, respectively. Deferred leasing costs Deferred leasing costs consist of fees and costs incurred in the successful negotiation of leases and are deferred and amortized on the straight-line basis over the terms of the respective leases. Deferred leasing costs of $4,679,222 and $4,054,921 are shown net of accumulated amortization of $8,927,553 and $10,457,492 as of December 31, 2011 and 2010, respectively. Amortization expense for the years ended December 31, 2011 and 2010 was $708,341 and $857,229, respectively. Classification of net assets APA groups net assets into the following two classes: Unrestricted net assets - undesignated APA s net assets are classified as unrestricted. APA s and APAPO s net assets result from revenues derived from providing goods and services, less expenses incurred in providing goods and services, and performing administrative functions. Unrestricted net assets - board-designated APA has Board-designated net assets for publications and databases R&D, accreditation stabilization, convention, web relaunch, investment in APA plan, and web and IT. The publications and databases R&D designation was established to broaden growth opportunities in the publications and databases programs. The accreditation stabilization designation was established to moderate fees charged for accreditation over time. The convention designation was established to enhance programming with the goal of augmenting the convention experience. The web relaunch designation was established in 2007 to redesign the APA website to better meet the needs of members and the public. The investment in APA plan designation was established in 2010 to fund the creation of new publication products, enhance IT support to facilitate the delivery of these new products, and expand marketing efforts. The web and IT designation was established in 2011 to fund mission critical work in the web and IT departments. Functional expenses APA is a national membership organization created to advance psychology as a science and profession and as a means of promoting health, education and human welfare. APAPO promotes the mutual professional interests of practicing psychologists. 8

11 In accordance with authoritative guidance issued by the FASB, the disclosure for gross operating expenses related to providing these services on a functional basis, prior to eliminations on a consolidated basis (excluding APA 750 and APA Ten G), are as follows for the years ended December 31: APA APAPO APA APAPO Member and program services $ 80,225,900 $ 3,870,599 $ 77,847,734 $ 4,106,197 Fund-raising 0 114, ,496 General and administrative 28,401, ,021 29,036, ,621 Derivative financial instruments $ 108,627,221 $ 4,510,097 $ 106,884,134 $ 4,732,314 APA and APA 750 have entered into interest rate swap agreements to mitigate changes in interest rates on their variable rate borrowings. The notional amounts of these agreements are used to measure the interest to be paid or received and do not represent the amount of exposure to loss. The Association s policies prohibit the use of derivative financial instruments for speculative purposes. The Association accounts for derivatives in accordance with authoritative guidance issued by the FASB, which requires not-for-profit entities to recognize all derivatives as either assets or liabilities in the consolidated statements of financial position and measure those instruments at their fair value. The guidance also requires that changes in the derivatives fair value be recognized in the consolidated statements of activities and change in unrestricted net assets. Management formally documents its derivative transactions, including identifying the hedge instruments and hedged items, as well as its risk management objectives, strategies for entering into the hedge transactions, and how the hedging instrument s effectiveness in hedging exposure to the hedge transaction s variability in cash flows attributable to the hedged risk will be assessed. The Association s interest rate swap liabilities are considered to be derivatives and are recognized as liabilities at fair value in the accompanying consolidated statements of financial position as of December 31, 2011 and Changes in the fair value of the interest rate swap liabilities are recorded as unrealized gains or losses in the accompanying consolidated statements of activities and change in unrestricted net assets. The Association recognized unrealized losses of $7,425,186 and $3,188,961 on the interest rate swap liabilities for the years ended December 31, 2011 and 2010, respectively. Income taxes APA is exempt from Federal income tax under Section 501 (c)(3) of the Internal Revenue Code (IRC) and from District of Columbia franchise tax under applicable tax regulations, except for income from activities not related to its tax-exempt purpose, which primarily includes its share of income from APA Ten G and a portion of its income from APA 750. APA is not a private foundation under Section 509(a)(1) of the IRC. APA accounts for unrelated business income taxes in accordance with authoritative guidance issued by the FASB. APA 750 and APA Ten G are not subject to federal income taxes. However, APA Ten G is subject to the District of Columbia (D.C.) franchise tax. Excluding the D.C. franchise income tax, APA Ten G is generally not subject to income taxes, and the income, deductions, credits, and other tax attributes generated by APA Ten G flow to its members. APA Ten G provides for deferred D.C. franchise income taxes on temporary differences that APA Ten G estimates will affect future taxable income in D.C. In accordance with authoritative guidance issued by the FASB, APA recognizes tax liabilities when, despite the management s belief that tax return positions are supportable, APA believes that certain positions may not be fully sustained upon review by tax authorities. Benefits from tax positions are measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued liabilities for potential tax assessments are included in income tax expense. With few exceptions, APA is no longer subject to income tax examinations by the U.S. federal, state or local tax authorities for years ended December 31, 2007 and prior. Management 9

12 has evaluated APA s tax positions and has concluded that APA has taken no material uncertain tax positions that require adjustment to the consolidated financial statements to comply with the provisions of this guidance. Fair value of financial instruments The fair value of the Association s cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses, and other accrued liabilities approximate their carrying amounts due to the relatively short maturity of these items. Concentrations of credit risk Financial instruments that potentially subject the Association to significant concentrations of credit risk principally consist of cash and cash equivalents, accounts receivable, investments and rental abatement. The Association places its cash and investments in various financial institutions that are federally insured under the Federal Depository Insurance Corporation Act (FDICA) and Securities Investor Protection Corporation (SIPC). However, at various times during the year, the aggregate balances were in excess of the insurance limits. The Association has not experienced any losses on its cash and cash equivalents nor its investments to date. Concentrations of credit risk with respect to rental abatements and accounts receivable are limited due to the majority of receivables being from tenants and widely diversified customers. Management does not believe significant risk exists in connection with the Association s concentrations of credit. Postretirement medical benefits Under authoritative guidance issued by the FASB, employers are required to fully recognize the overfunded or underfunded positions (the difference between the fair value of plan assets and the benefit obligation) of the postretirement medical benefit in the consolidated statements of financial position. The guidance also requires employers to recognize the actuarial gains and losses and the prior service costs and credits that arise during the period. Subsequent events The Association has evaluated its December 31, 2011 consolidated financial statements for subsequent events through May 31, 2012, the date the consolidated financial statements were available to be issued. The Association is not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements. Reclassifications Certain amounts in the 2010 consolidated financial statements have been reclassified to conform to the 2011 presentation, with no effect on the change in unrestricted net assets, as previously reported. NOTE 2 - PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31: Land $ 9,705,320 $ 9,705,320 Buildings and improvements 112,482, ,747,699 Furniture, fixtures and equipment 27,531,516 30,739, ,719, ,192,166 Less: accumulated depreciation and amortization (77,796,329) (79,963,564) $ 71,923,189 $ 74,228,602 Depreciation and amortization expense on property and equipment totaled $7,355,705 and $8,230,129 for the years ended December 31, 2011 and 2010, respectively. 10

13 NOTE 3 - RETIREMENT BENEFIT PLANS 401(k) plan APA provides a defined contribution retirement plan (the Plan) that is a savings plan operating under Section 401(k) of the IRC. The Plan became effective on January 1, The purpose of the Plan is to provide retirement benefits for participating employees. Under the Plan, APA makes contributions to an insurance company based on a percentage of the payroll of covered employees. The contributions, together with voluntary employee contributions, are used to purchase annuities and other investments, the rights to which immediately vest with the employees. APA recorded contributions to the Plan of $2,067,026 and $2,011,186 for the years ended December 31, 2011 and 2010, respectively. Postretirement medical benefit plan In 2004, APA established a postretirement medical benefit plan for employees with 15 years of service who retire at or after age 59 1/2. Spouses are eligible for coverage when the retiree obtains coverage. Retiree and spouse coverage ends when each becomes eligible for Medicare. APA accounts for these postretirement benefits in accordance with authoritative guidance issued by the FASB. Effective January 1, 2007, the postretirement medical benefit was modified to close this benefit to employees who were not hired prior to January 1, APA s postretirement medical benefit obligation was $2,009,416 and $2,271,733 as of December 31, 2011 and 2010, respectively. These amounts are reflected as liabilities in the accompanying consolidated statements of financial position. The postretirement medical benefit cost is included in benefits expense in the accompanying consolidated statements of activities and change in unrestricted net assets and is comprised of the following for the years ended December 31: Service cost $ 146,076 $ 118,777 Interest cost of the projected benefit obligation 126, ,232 Amortization of unrecognized prior service cost 47,107 37,494 $ 319,255 $ 264,503 For 2011 and 2010, the discount rate used in the calculation of the projected benefit obligation and cost was 4.75% and 5.25%, respectively. Assumed health care cost trend rates are as follows for the years ending December 31: Healthcare cost trend rate assumed for next year 9.50% 9.50% Rate to which the cost trend rate is assumed to decline 4.50% 5.00% Year that the rate reaches the ultimate trend rate Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effect as of and for the years ended: % increase 1% decrease 1% increase 1% decrease Effect on accumulated postretirement benefit obligation $ 193,656 $ (172,359) $ 227,754 $ (202,542) Effect on total service and interest cost components $ 31,622 $ (27,751) $ 27,111 $ (23,728) 11

14 As of December 31, 2011, the following postretirement medical benefit payments are expected to be paid: Years ending December 31, Section 457(b) plan 2012 $ 54, , , , , ,872,000 APA provides a defined contribution retirement plan (the 457(b) Plan) under Section 457(b) of the IRC. The 457(b) Plan became effective on September 1, To be eligible to participate, an employee must have an employment contract with APA and a base annual salary of $110,000 or greater. The 457(b) Plan allows eligible employees to contribute up to 25% of their gross earnings on a pretax basis, subject to Internal Revenue Code limitations. There are no employer matching contributions. Employee contributions are remitted to an insurance company and are used to purchase annuities and other investments. Until paid or made available to the participant or beneficiary, all deferred amounts and investments earnings related to deferral amounts are solely the property and rights of APA and are subject to claims of APA s general creditors. Participants rights under the 457(b) Plan are equal to those of a general creditor of APA. As of December 31, 2011 and 2010, the 457(b) Plan assets totaled $1,424,688 and $1,195,784, respectively, and are included in other assets and in deferred compensation in the accompanying consolidated statements of financial position. Executive supplemental compensation APA provides an executive supplemental compensation and termination benefit allowance to eligible employees. To be eligible, an employee must be an executive director and have been employed by APA for at least five years. The benefit is forfeited if the employee is terminated with cause, or voluntarily terminates prior to their employment contract expiration date. At December 31, 2011 and 2010, accrued supplemental compensation under this arrangement totaled $728,948 and $1,002,973, respectively, and are included in deferred compensation in the accompanying consolidated statements of financial position. APA recorded related expense totaling $248,045 and $205,231 in 2011 and 2010, respectively. Additionally, APA recorded payouts related to this benefit totaling $522,070 and $65,274 in 2011 and 2010, respectively. NOTE 4 - LONG-TERM DEBT Long-term debt consists of the following at December 31: Long-term loan; variable interest rate; collateralized by real property; maturing May 2018 $ 23,348,243 $ 23,997,027 Tax exempt bonds; variable interest rate; collateralized by real property; maturing May ,990,000 16,685,000 Long-term loan; variable interest rate; collateralized by real property; maturing May ,170,150 28,913,076 NASW promissory note; 8%; repaid through a monthly rent reduction 1,427,306 1,646,945 Note payable; 5.66%; collateralized by real property; maturing December 2012* 36,587,629 37,471, ,523, ,713,293 Less: current portion of long-term debt (3,371,701) (3,189,959) $ 102,151,627 $ 105,523,334 12

15 The following schedule shows principal payments due under long-term debt as of December 31, 2011: Years ending December 31, APA APA 750 APA Ten G Total 2012 $ 668,976 $ 1,730,331 $ 972,394 $ 3,371, ,320 1,816,291 N/A 2,525, ,989 1,911,139 N/A 2,651, ,685 1,996,501 N/A 2,766, ,831 2,095,721 N/A 2,896,552 Thereafter 19,659,442 36,037,473 N/A 55,696,915 23,348,243 45,587, ,394 69,908, ,615,235* 35,615,235 $ 23,348,243 $ 45,587,456 $ 36,587,629 $ 105,523,328 * As described on page 15, APA Ten G s note payable is expected to be refinanced in As the exact amount to be refinanced and the interest rate have not yet been finalized at this time, specific principal payments are not available by year. APA In August 1995, under a Note Purchase Agreement, APA issued $25,000,000 in 7.76% Series B Secured Notes (the Series B Notes), due July 1, Principal payments on the Series B Notes are due quarterly and scheduled to commence on October 1, Interest on the unpaid principal balance was due quarterly at the stated rate until maturity of the Series B Notes. APA pledged a letter of credit as collateral for this loan. In May 2008, APA refinanced the Series B Notes with a term loan in the amount of $25,501,167 at a rate of one-month LIBOR plus 0.85% and principal amortized over 25 years. The term loan is secured by a deed of trust on the commercial building owned by APA 750. Under the provisions of the term loan, principal and interest payments are due monthly, commencing on June 1, 2008 and continuing until May 21, 2018, the maturity date of the term loan. The debt agreement is subject to separate interest rate swap agreements (see Note 5). In addition, APA has a bank line-of-credit, under which the maximum borrowings available are $10,000,000. Interest payments on outstanding borrowings are due monthly at LIBOR plus 1.45% (1.72% at December 31, 2011). The line-of-credit agreement expires, if not renewed, on May 31, There are no outstanding balances due under the line-of-credit at December 31, 2011 and APA 750 LLC In November 2002, APA 750 repaid an existing financing loan, including principal of $45,780,142 and accrued interest of $581,424, with proceeds from a $52,000,000 note payable. The $52,000,000 note payable consisted of a note payable (long-term note) in the amount of $25,000,000 at a variable interest rate initially set at LIBOR plus 1.4% interest amortized over ten years. In addition, APA 750 entered into a short-term unamortized financing arrangement (bridge note) in the amount of $27,000,000 at the same interest rate. On March 27, 2003, the bridge loan of $27,000,000 was replaced by $21,100,000 in tax-exempt bonds from the District of Columbia which were backed by a letter of credit. The long-term note of $25,000,000 was increased to $30,900,000. On May 21, 2008, APA 750 renegotiated the terms of the long-term note and the tax-exempt bonds. The long-term note maturity was extended and the bank loan spread was reduced to LIBOR plus 0.85% plus a 0.60% letter of credit fee (1.72% at December 31, 2011). APA 750 borrowed an additional $3,598,833 under the long-term note to cover financing costs. The notes payable are collateralized by the property at 750 First Street and are guaranteed by APA. Under the terms of the long-term note payable, principal and interest installments are due monthly. The maturity date of both the tax-exempt debt and the long-term note is May 21, The debt agreements are subject to separate interest rate swap agreements (see Note 5). 13

16 APA 750 and APA are subject to various debt covenants, including leasing at least 170,000 square feet of space in the property, APA maintaining its 501(c)(3) status, and APA maintaining unencumbered liquid assets of at least $33 million, unless APA receives a credit rating of BBB minus (BBB-) or higher, in which case the liquid assets required to be maintained would be reduced to $25 million. On September 5, 2003, Standard & Poor s assigned APA a rating of BBB, thus reducing the liquid assets requirement to $25 million henceforth. In September 2006, Standard & Poor s upgraded APA s rating to BBB+ with a stable outlook. As of December 2011, Standard & Poor s reaffirmed the APA BBB+ rating with a stable outlook. APA 750 LLC - NASW Note Payable On September 6, 2002, G Place Limited Partnership (the Partnership), the predecessor of APA 750, purchased the National Association of Social Workers (NASW) 8% limited partnership interest through issuance of a $3,000,000 promissory note. The promissory note accrues interest at 8%, compounded annually. The payment terms of the note were made retroactive to February 1, 2002 in accordance with the purchase agreement. In conjunction with the purchase, NASW entered into a new 15-year lease. Under the terms of the purchase agreement, the promissory note will be repaid through a monthly rent reduction in the amount of $28,479 (comprised of interest and principal) over the 15-year lease term effective February 1, 2002 through January 31, For the years ended December 31, 2011 and 2010, interest expense of $122,114 and $138,725, respectively, was incurred and the principal on the note was reduced by $219,639 and $203,027, respectively. In conjunction with the NASW note payable, APA has guaranteed payment of the promissory note in the event the lease is terminated early under a non-default termination. The purchase agreement also provides for NASW s right to participate in the net proceeds of the sale or disposition realized by APA 750 in the event the property is sold during NASW s 15-year lease term. The percentage of participation declines ratably over the lease term. APA Ten G LLC On November 15, 2002, APA Ten G entered into a note with a third party lender in the amount of $43,000,000 at 5.66% interest amortized over 30 years. The note is secured by a deed of trust, assignment of leases and rents, and a security agreement and fixture filing that encumbers the real property and improvements thereon owned by APA Ten G and includes a blanket assignment of all rents and leases of the property. Certain agreements, permits, and contracts are also pledged as collateral. Under the terms of the note, principal and interest installments are due monthly, commencing on January 1, 2003, and continue until December 1, 2012, the maturity date of the note. APA Ten G may prepay the note in whole or in part after January 1, 2008, and is subject to a declining prepayment penalty, if prepaid at any time before maturity. In conjunction with the note, APA has guaranteed certain provisions of the note specific to payment of non-recourse carve-out obligations defined as loss, costs, or damage arising out of fraud or misrepresentation. APA has not guaranteed payment of any portion of the indebtedness or performance of any portion of the obligations under the terms of the note other than the non-recourse carve-out obligations. In addition, APA Ten G is subject to various debt covenants, primarily related to leasing transactions, including lender approval for all leases over 15,000 square feet, and quarterly and annual certification of tenant and rent occupancy as well as quarterly unaudited financial statements for APA Ten G. As of December 31, 2011, amounts totaling $36,587,629 are scheduled to mature during the year ending December 31, On November 14, 2011, APA Ten G entered into a forward rate lock agreement with the third party lender. Under this agreement, the existing loan will renew at a rate of 4.60%, a refinanced loan amount of $36,000,000, and a maturity of 20 years, at which time the loan will be fully repaid. It is expected that the new loan will close in September In accordance with authoritative guidance issued by the FASB, the Association has classified this obligation as long-term debt in the accompanying consolidated statements of financial position as it intends to refinance this obligation on a long-term basis, and it has the ability to consummate such refinancing. 14

17 NOTE 5 - INTEREST RATE SWAP AGREEMENTS APA APA has entered into an interest rate swap agreement to effectively exchange a variable interest rate to a fixed rate for a term loan with a notional value of $23,348,243 and a fixed rate of 4.50% through June 1, APA 750 APA 750 has entered into interest rate swap agreements to effectively exchange a variable interest rate to a fixed rate for tax-exempt debt with a notional value of $15,990,000 and a fixed interest rate through March 1, 2028 of 3.60% at December 31, 2011, a taxable term note with a notional value of $24,875,147 and a fixed interest rate of 4.96% through June 1, 2028, and an additional term loan with a notional value of $3,295,003 and a fixed interest rate of 4.50% through June 1, The interest rate swap provider has the right to terminate the taxable loan interest rate swaps beginning June 1, 2018 and the tax-exempt bond interest rate swap beginning May 1, Collateral for the swaps is a deed of trust. NOTE 6 - BOARD-DESIGNATED UNRESTRICTED NET ASSETS APA Board-designated unrestricted net assets consist of the following as of December 31: Publications and databases R&D $ 637,188 $ 666,552 Accreditation stabilization 991,889 1,406,976 Convention 483,710 1,034,160 Web and IT 400,000 0 Web relaunch 834,146 2,630,809 Investment in APA Plan 11,772,561 6,135,766 $ 15,119,494 $ 11,874,263 NOTE 7 - RELATED PARTIES APA is affiliated with 54 divisions that represent major scientific and professional interests. The divisions operate independently from APA. Upon request, APA will act as a collection agent for dues and assessments paid by the divisions members. Amounts collected and held by APA on behalf of the divisions are included in current assets and current liabilities in the accompanying consolidated statements of financial position. Cash and cash equivalents and investments held on behalf of the divisions totaled $8,199,750 and $7,712,158 as of December 31, 2011 and 2010, respectively. Consolidated division data is obtained annually upon completion and filing of the division group income tax return. Selected financial data for the divisions for the year ended December 31, 2010, the latest year available, is as follows: Unaudited Assets $ 16,070,108 Liabilities 1,560,256 Net assets 14,509,852 Revenues 5,874,649 Expenses 4,657,052 The American Psychological Foundation, Inc. (the Foundation), is a nonprofit corporation that provides scholarships, grants, and awards in order to advance psychology as a science and a profession and as a means of understanding behavior and promoting health and human welfare. The Foundation reimburses APA at cost for administrative expenses incurred on behalf of the Foundation. During 2011 and 2010, 15

18 APA incurred $557,930 and $482,610 of reimbursable expenses, respectively. As of December 31, 2011 and 2010, $90,682 and $66,896, respectively, was due from the Foundation for these expenses. The Federation of Associations in Behavioral and Brain Sciences, Inc. (FABBS), is a not-for-profit membership organization that promotes behavioral, psychological, and cognitive sciences. APA is a member of FABBS and provides administrative services that are reimbursed by FABBS at cost. During 2011 and 2010, APA incurred $335,822 and $341,973 of reimbursable expenses under this arrangement, respectively. As of December 31, 2011 and 2010, $44,949 and $38,466, respectively, was due from FABBS for these expenses. The accompanying consolidated financial statements exclude the accounts of the above organizations because APA has neither control nor ownership interest in them. In 2002, APA entered into a loan agreement with an officer of APA. The non-interest bearing loan of $300,000 is secured by a Deed of Trust that matures on December 31, As of December 31, 2011 and 2010, the balance outstanding on the loan was $208,500 and $215,000, respectively, and is included in other assets in the accompanying consolidated statements of financial position. NOTE 8 - TENANT LEASE AGREEMENTS APA 750 LLC At December 31, 2011, 100% of the space in APA 750 is rented to tenants under non-cancelable, multiyear leases that provide, in some instances, rental rate escalation clauses based on both the Consumer Price Index and increases in property operating expenses. These increases are generally payable in equal installments throughout the year, based on estimated increases, with any differences adjusted in the succeeding year. At December 31, 2011, approximate minimum future lease payments to be received are as follows: Elimination of APA Years ending December 31, Total Rent Net 2012 $ 14,511,000 $ (7,979,000) $ 6,532, ,811,000 (8,138,000) 6,673, ,622,000 (8,301,000) 5,321, ,211,000 (8,466,000) 3,745, ,459,000 (8,636,000) 3,823,000 Thereafter 9,882,000 (8,809,000) 1,073,000 $ 77,496,000 $ (50,329,000) $ 27,167,000 Minimum future lease payments are based on existing leases as of December 31, 2011, and do not include amounts that may be received under tenant leases for charges to recover certain operating costs, lease extensions or new tenancies upon expiration of existing leases. During the years ended December 31, 2011 and 2010, APA 750 had leases with two tenants (one of which is APA) that each comprised 10% or more of APA 750 s rental income. Rental income recorded from these tenants approximated $9,748,000 and $9,557,000 for the years ended December 31, 2011 and 2010, respectively. APA leases approximately 199,000 square feet of net rentable space, which represents approximately 57% of total rentable space. APA s lease commenced on January 10, 1992 and extends through December 31, Gross receipts recorded by APA 750 from APA during 2011 and 2010 were $8,473,980 and $8,346,239, respectively. In addition, APA 750 incurred asset management fees of $66,200 and $55,300 for services provided by APA during the years ended December 31, 2011 and 2010, respectively. APA and the District of Columbia entered into a tax abatement agreement effective August 1, 2006 which reduces the amount of real estate tax that APA 750 pays. In exchange for the tax abatement, APA is 16

19 required to host its annual convention in Washington, DC once every three years. The amount of real estate tax paid to the District of Columbia has been reduced by approximately $1,145,000 and $1,412,000 for the years ended December 31, 2011 and 2010, respectively. APA Ten G LLC At December 31, 2011, 100% of the space in APA Ten G is rented to tenants under non-cancelable, multi-year leases that provide, in some instances, rental rate escalation clauses based on both the Consumer Price Index and increases in property operating expenses. These increases are generally payable in equal installments throughout the year, based on estimated increases, with any differences adjusted in the succeeding year. At December 31, 2011, approximate minimum future lease payments to be received are as follows: Years ending December 31, 2012 $ 10,343, ,362, ,435, ,645, ,797,000 Thereafter 45,886,000 $ 94,468,000 Minimum future lease payments are based on existing leases as of December 31, 2011, and do not include amounts that may be received under tenant leases for charges to recover certain operating costs, lease extensions, or new tenancies upon expiration of existing leases. During the years ended December 31, 2011 and 2010, APA Ten G had leases with three tenants that each comprised 10% or more of rental income. Rental income recorded from these tenants approximated $7,838,000 and $7,432,000 for the years ended December 31, 2011 and 2010, respectively. NOTE 9 - INCOME TAXES The Association records deferred income tax assets for estimated future tax consequences. Deferred income tax assets are measured by applying enacted statutory rates applicable to the future years in which deferred income tax assets are expected to be settled or realized. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amounts expected to be realized. The provision for income taxes consists of the following for the years ended December 31: Current $ 1,002,000 $ 1,242,000 Deferred (14,000) (6,000) $ 988,000 $ 1,236,000 Deferred income taxes reflect temporary differences related to accelerated depreciation and amortization methods used for income tax purposes, as well as rental abatement receivables that are not taxable until received. NOTE 10 - FAIR VALUE MEASUREMENTS Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability between market participants in an orderly transaction on the measurement date. The market in which the 17

20 reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability is known as the principal market. When no principal market exists, the most advantageous market is used. This is the market in which the reporting entity would sell the asset or transfer the liability with the price that maximizes the amount that would be received or minimizes the amount that would be paid. Fair value is based on assumptions market participants would make in pricing the asset or liability. Generally, fair value is based on observable quoted market prices or derived from observable market data when such market prices or data are available. When such prices or inputs are not available, the reporting entity should use valuation models. The Association s assets and liabilities recorded at fair value are categorized based on the priority of the inputs used to measure fair value. The inputs used in measuring fair value are categorized into three levels, as follows: Level 1 - Inputs that are based upon quoted prices for identical instruments traded in active markets. Level 2 - Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar investments in markets that are not active, or models based on valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the investment. Level 3 - Inputs that are generally unobservable and typically reflect management s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. The following section describes the valuation methodologies the Association uses to measure its assets at fair value. Investments Investments include money market funds, mutual funds, common stocks, and an investment in a limited partnership and real estate trust. In general, and where applicable, the Association uses quoted prices in active markets for identical assets to determine fair value. This pricing methodology applies to Level 1 investments. If quoted prices in active markets for identical assets are not available to determine fair value, then the Association uses quoted prices for similar assets or inputs other than the quoted prices that are observable either directly or indirectly. These investments are included in Level 2. The Association s Level 3 assets primarily consist of annuity. The Association values the Level 3 investment using internally-developed valuation models, whose inputs include interest rate curves, credit spreads, stock prices, and volatilities. Unobservable inputs used in these models are significant to the fair value of the investment. 18