COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Consolidated Financial Statements June 30, 2016 and 2015 (With Independent Auditors’ Report Thereon) COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Table of Contents Page(s) Independent Auditors’ Report 1 Consolidated Financial Statements: Consolidated Statements of Financial Position 2 Consolidated Statements of Activities 3 Consolidated Statements of Functional Expenses 4–5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7–22 KPMG LLP Suite 800 1225 17th Street Denver, CO 80202-5598 Independent Auditors’ Report The Board of Directors Compassion International, Incorporated: We have audited the accompanying consolidated financial statements of Compassion International, Incorporated and its affiliates, which comprise the consolidated statements of financial position as of June 30, 2016 and 2015, and the related consolidated statements of activities, functional expenses, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated 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 consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Compassion International, Incorporated and its affiliates as of June 30, 2016 and 2015, and the changes in their net assets and their cash flows for the years then ended, in accordance with U.S. generally accepted accounting principles. Denver, Colorado August 30, 2016 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity. COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Consolidated Statements of Financial Position June 30, 2016 and 2015 Assets 2016 2015 95,061,822 66,407,194 8,529,271 1,418,484 7,642,314 71,735 7,011,974 80,259,524 85,670,184 10,399,291 452,339 6,666,322 339,705 —     186,142,794 183,787,365 Noncurrent assets: Property, plant, and equipment, net Intangibles, net 100,720,785 1,585,133 89,142,194 1,790,567 Total noncurrent assets 102,305,918 90,932,761 2,772,874 10,468,802 2,601,085 10,151,055 Current assets: Cash and cash equivalents Investments Receivables from Global Partner Alliance Accounts receivable Prepaid expenses and supplies Gifts in-kind inventory, net Foreign exchange contracts, at fair value $ Total current assets Restricted assets: Investments restricted for trust and annuity obligations Investments restricted for long-term purposes Total restricted assets 13,241,676 12,752,140 $ 301,690,388 287,472,266 $ 22,388,989 58,293,856 210,253 31,491 19,084 13,733 3,134,429 24,472,561 46,448,528 1,390,260 35,508 26,556 69,238 358,722 84,091,835 72,801,373 368,565 381,524 2,263,675 763,601 825,924 316,163 15,674,569 773,179 443,391 325,997 Total long-term liabilities 4,537,928 17,598,660 Total liabilities 88,629,763 90,400,033 100,955,301 102,334,709 9,770,615 91,265,524 96,662,942 9,143,767 213,060,625 197,072,233 301,690,388 287,472,266 Total assets Liabilities and Net Assets Current liabilities: Accounts payable and accrued liabilities Funds committed to sponsorship projects Accrued severance/retirement benefits for national employees Trust obligations Gift annuities payable Revocable trust agreements Foreign exchange contracts, at fair value Total current liabilities Long-term liabilities: Funds committed to sponsorship projects, less current portion Accrued severance/retirement benefits for national employees, less current portion Trust obligations, less current portion Gift annuities payable, less current portion Custodial funds held Commitments and contingencies Net assets: Unrestricted Temporarily restricted Permanently restricted Total net assets Total liabilities and net assets $ See accompanying notes to consolidated financial statements. 2 COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Consolidated Statements of Activities Years ended June 30, 2016 and 2015 2016 Revenue, gains, and other support: Contributions Gifts in-kind Contributions from Global Partner Alliance Interest, dividends, and other income Net realized and unrealized (losses) gains on investments and disposition of assets Net unrealized gain (loss) on foreign exchange contracts Changes in value of split-interest agreements Net assets released from restrictions in satisfaction of program restrictions $ Total revenue, gains, and other support Expenses: Program services: Child development program Sponsor/donor ministries 2015 Unrestricted Temporarily restricted Permanently restricted Total Unrestricted Temporarily restricted 15,216,406 22,564 31,914,445 1,884,792 576,498,740 236,536 173,693,718 72,868 592,205,917 259,100 205,608,163 2,004,442 11,374,547 —     35,752,399 1,698,427 528,226,326 935,931 188,386,929 62,944 (911,968) (400,638) 470,378 4,236,267 (158,508) (358,722) (20,305) —     (177,889) (744,993,689) 490,771 —     —     46,782 —     89,295 —     —     —     —     —     (1,240,049) 238,786 4,236,267 (83,316) —     (75,192) 744,993,689 796,944,798 —     730,573,497 (730,573,497) 5,671,767 626,848 803,243,413 778,619,205 (12,668,878) Permanently restricted 341,433 —     —     41,937 49,797 —     —     —     433,167 Total 539,942,306 935,931 224,139,328 1,803,308 119,537 (358,722) (198,194) —     766,383,494 621,351,904 27,447,227 —     —     —     —     621,351,904 27,447,227 602,424,362 32,714,754 —     —     —     —     602,424,362 32,714,754 648,799,131 —     —     648,799,131 635,139,116 —     —     635,139,116 76,104,825 62,351,065 —     —     —     —     76,104,825 62,351,065 83,926,854 57,437,751 —     —     —     —     83,926,854 57,437,751 Total supporting activities 138,455,890 —     —     138,455,890 141,364,605 —     —     141,364,605 Total expenses 787,255,021 —     —     776,503,721 Total program services Supporting activities: Fund-raising Administration Change in net assets Net assets, beginning of year Net assets, end of year $ 787,255,021 776,503,721 —     9,689,777 5,671,767 —     626,848 15,988,392 2,115,484 (12,668,878) 433,167 (10,120,227) 91,265,524 96,662,942 9,143,767 197,072,233 89,150,040 109,331,820 8,710,600 207,192,460 100,955,301 102,334,709 9,770,615 213,060,625 91,265,524 96,662,942 9,143,767 197,072,233 See accompanying notes to consolidated financial statements. 3 COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Consolidated Statement of Functional Expenses Year ended June 30, 2016 Program grants Salaries and related taxes Employee benefits Professional services Travel and training Office and related expenses Occupancy Advertising and promotion Postage and printing Other Total Child development program Program services Sponsor/ donor ministries Total program expenses Supporting activities Fund-raising $ 536,595,394 39,817,354 8,023,725 11,967,403 11,373,714 7,588,447 4,922,942 4,632 540,435 517,858 24,500 9,746,128 2,263,935 6,242,600 858,627 2,665,608 320,844 27,292 5,261,361 36,332 536,619,894 49,563,482 10,287,660 18,210,003 12,232,341 10,254,055 5,243,786 31,924 5,801,796 554,190 $ 621,351,904 27,447,227 648,799,131 See accompanying notes to consolidated financial statements. 4 Administration Total supporting activities Total expenses —     26,037,335 5,571,284 16,028,736 4,987,319 5,587,060 1,356,747 11,708,798 3,799,488 1,028,058 —     28,514,655 8,417,836 8,297,538 1,493,256 6,088,357 2,338,266 115,229 2,288,890 4,797,038 —     54,551,990 13,989,120 24,326,274 6,480,575 11,675,417 3,695,013 11,824,027 6,088,378 5,825,096 536,619,894 104,115,472 24,276,780 42,536,277 18,712,916 21,929,472 8,938,799 11,855,951 11,890,174 6,379,286 76,104,825 62,351,065 138,455,890 787,255,021 COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Consolidated Statement of Functional Expenses Year ended June 30, 2015 Program grants Salaries and related taxes Employee benefits Professional services Travel and training Office and related expenses Occupancy Advertising and promotion Postage and printing Other Total Child development program Program services Sponsor/ donor ministries Total program expenses Supporting activities Fund-raising $ 513,328,156 41,011,559 9,641,050 12,703,906 13,207,229 6,729,007 4,453,223 54,359 768,648 527,225 —     11,377,510 3,217,725 8,120,692 1,034,587 2,700,077 567,337 138,809 5,456,316 101,701 513,328,156 52,389,069 12,858,775 20,824,598 14,241,816 9,429,084 5,020,560 193,168 6,224,964 628,926 $ 602,424,362 32,714,754 635,139,116 See accompanying notes to consolidated financial statements. 5 Administration Total supporting activities Total expenses —     28,744,004 6,759,161 16,454,735 5,676,066 4,434,741 1,203,642 14,386,673 4,519,120 1,748,712 —     26,534,917 7,942,953 8,609,533 1,410,429 3,974,763 2,010,519 123,120 2,284,717 4,546,800 —     55,278,921 14,702,114 25,064,268 7,086,495 8,409,504 3,214,161 14,509,793 6,803,837 6,295,512 513,328,156 107,667,990 27,560,889 45,888,866 21,328,311 17,838,588 8,234,721 14,702,961 13,028,801 6,924,438 83,926,854 57,437,751 141,364,605 776,503,721 COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Consolidated Statements of Cash Flows Years ended June 30, 2016 and 2015 Cash flows from operating activities: Change in net assets Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization Net loss (gain) on disposition of equipment Net realized and unrealized gain on investments Net loss on gifts in-kind inventory Change in gifts in-kind inventory, net Net unrealized (gain) loss on foreign exchange contracts Decrease in value of split-interest agreements Funds received restricted for endowments Changes in assets and liabilities: Decrease in receivables Increase in prepaid expenses and supplies (Decrease) increase in accounts payable and accrued liabilities Increase in funds committed to sponsorship projects (Decrease) increase in accrued severance/retirement benefits for national employees $ Net cash provided by operating activities Cash flows from investing activities: Purchases of investments Proceeds from sales of investments Proceeds from sales of property and equipment Purchases of intangibles Purchases of property and equipment Net cash used in investing activities Cash flows from financing activities: Funds received restricted for endowments Increase in gift annuities payable Decrease in revocable trust agreements Decrease in trust obligations Decrease in custodial funds held Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year $ See accompanying notes to consolidated financial statements. 6 2016 2015 15,988,392 (10,120,227) 11,278,813 968,060 (208,312) 152,220 115,750 (4,236,267) 158,508 (626,848) 6,772,747 (31,012) (88,525) —     (285,228) 358,722 198,194 (433,167) 903,875 (975,992) 845,661 (32,483) (2,083,572) 11,832,369 5,649,946 1,633,745 (14,590,901) 1,091,948 18,676,095 5,560,321 (23,928,977) 42,752,235 133,170 —     (23,753,200) (30,015,761) 28,875,085 157,879 —     (21,305,423) (4,796,772) (22,288,220) 626,848 375,061 (55,505) (13,595) (9,834) 433,167 29,276 (5,976) (159,200) (2,397) 922,975 294,870 14,802,298 (16,433,029) 80,259,524 96,692,553 95,061,822 80,259,524 COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (1) Organization (a) General Compassion International, Incorporated is a Christian organization that exists as an advocate for children to release them from their spiritual, economic, social, and physical poverty, and enable them to become responsible and fulfilled Christian adults. Compassion International, Incorporated’s principal services provide life-changing opportunities for education and skills training, social development, health and nutrition, and most importantly, to learn about Christ and develop a lifelong relationship with God. Compassion International, Incorporated’s program services are concentrated in certain countries of Africa, Asia, Central America, the Caribbean, and South America. (b) Consolidation The consolidated financial statements include the accounts of Compassion International, Incorporated, a not-for-profit corporation created under the laws of the state of Illinois, and its wholly owned and controlled affiliates (collectively, Compassion). All material interaffiliate accounts and transactions have been eliminated in the consolidated financial statements. Compassion is headquartered in Colorado Springs, Colorado and has international branch offices and affiliates (field offices) with child programs in 26 countries. Compassion’s international affiliates are consolidated based on the level of control exercised by the parent company and the presence of an economic interest. Compassion’s consolidated international affiliates include Compassion International Ghana, Compassion International Togo, Shohanobhuti Bangladesh Trust, Adhane Management Consultants Private Limited (India), Caruna Bal Vikas (India), Compassion East India, Yayasan Bantuan Kasih (Indonesia), Compassion International Lanka (Sri Lanka), Compassion (Darunatorn) Foundation (Thailand), Compassion do Brasil, Corporación Compassion International Filial Ecuador, Compassion de Mexico Asociacion Civil, Compassion International de Peru, Compassion International (East Asia) Limited, and Compassion International (Singapore) Limited. Compassion Productions, LLC (CP, LLC) is a limited liability company created under the laws of the state of Tennessee with Compassion International, Incorporated as its only member and is consolidated based on level of control exercised by the parent company and the presence of an economic interest. CP, LLC produces concert events, which serve as a platform for Compassion’s fund-raising activities. (2) Summary of Significant Accounting Policies (a) Basis of Presentation The accompanying consolidated financial statements have been prepared using the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (GAAP). The net assets, revenue, gains, and other support and expenses in the accompanying consolidated financial statements are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of Compassion and changes therein are classified and reported as follows: Unrestricted Net Assets – Net assets that are not subject to donor-imposed restrictions. Unrestricted net assets may be designated by the board of directors for specific purposes at any time. 7 (Continued) COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 Temporarily Restricted Net Assets – Net assets subject to donor-imposed restrictions that may or will be met with either actions of Compassion and/or the passage of time. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the consolidated statements of activities as net assets released from restrictions. Permanently Restricted Net Assets – Permanently restricted net assets represent resources subject to donor-imposed restrictions to be invested in perpetuity, and only the income may be available for program operations. The income realized from the permanently restricted net assets is temporarily restricted for use in the child development and leadership development programs. (b) Cash and Cash Equivalents Cash and short-term investments with maturities of three months or less from the date of acquisition are considered cash and cash equivalents. Compassion maintains cash accounts in the U.S. and internationally. Cash accounts in the U.S. may exceed federally insured amounts at times. Cash balances maintained internationally are not insured. Management believes no significant risk exists due to the size and financial wherewithal of the financial institutions where accounts are held. (c) Investments Investments are recorded at fair value. Gains or losses, whether realized or unrealized, are recognized when they occur. (d) Property, Plant, and Equipment Land, buildings and building improvements, furniture, equipment, software, and vehicles are recorded at cost when purchased or at estimated fair value if received by donation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, with no salvage value. Buildings and building improvements are depreciated over 5 to 30 years, furniture and equipment are depreciated over 3 to 10 years, vehicles are depreciated over 3 to 5 years, and software and other are amortized over 3 to 5 years. (e) Intangibles Intangibles are recorded at cost when purchased or at estimated fair value if received by donation. Amortization is computed using the straight-line method over the estimated useful lives of the related assets. Intangibles are amortized over 3 to 10 years. (f) Long-Lived Assets Long-lived assets are reviewed for impairment and, if such impairment is identified, written down to their fair value. Identified impairment losses are charged to operations in the consolidated statements of activities. 8 (Continued) COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (g) Gift Annuities Payable Under gift annuity contracts, Compassion receives irrevocable title to contributed assets and agrees to make fixed period payments to the donor(s) for life. Contributed assets are recorded at fair value at the date of receipt, and a liability is established for the present value of future annuity payments based on a discount rate of 5.6%. The excess of contributed assets over the annuity liability is recorded as unrestricted revenue. Any actuarial gain or loss resulting from the computation of the liability for the present value of future annuity payments is recorded as an unrestricted change in the value of split-interest agreements. Upon the donor’s death, the remaining liability is recognized as revenue. (h) Revocable Trust Agreements Assets received and held under revocable trust agreements are recorded at fair value at the date of receipt and as corresponding liabilities. Investment income is paid to the income beneficiaries and is not recorded as revenue or expense by Compassion. Upon the donor’s death, the assets are distributed to the beneficiaries of the trust, which may include Compassion. Assets of revocable trusts in which Compassion is named as a beneficiary but that are not held or controlled by Compassion are not recorded in the consolidated statements of financial position. (i) Irrevocable Trust Agreements Under irrevocable trust agreements, Compassion receives contributed investments and agrees to maintain the principal of the investment and make annual payments to the donor(s) or other named beneficiaries for life. The annual payments are based on a fixed rate of return or on related investment income, as stipulated in the trust agreement. Amounts received under irrevocable trust agreements, net of the present value of future payments to beneficiaries, are recorded as temporarily restricted support upon receipt. Investment income and payments made to donors in accordance with the terms of the trust agreements are recorded as increases and decreases to the liability for trust obligations, respectively. A liability for trust obligations is recorded for the present value of future payments to beneficiaries based on a rate of return appropriate for the expected term of the promise to give. Any actuarial gain or loss resulting from the computation of the liability for the present value of future payments to beneficiaries is recorded as temporarily restricted changes in the value of split-interest agreements. Upon the death of the donor, the assets are transferred from temporarily restricted net assets as designated by the trust agreement. Certain trusts name other charitable organizations as partial remaindermen. (j) Contributions and Contributed Services Contributions are recorded as received and pledged. Compassion reports contributions of cash and other assets as restricted support if they are received with donor-imposed restrictions that limit the use of the donated assets. The majority of Compassion’s contributions are received from individuals and the Global Partner Alliance (see note 4). 9 (Continued) COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 Contributed services for specialized skills are recognized at the fair value of the services received. Compassion received and recorded contributed services of $169,598 and $126,646 for the years ended June 30, 2016 and 2015, respectively, in the consolidated statements of activities. Additionally, a substantial number of volunteer workers have donated significant amounts of time to Compassion’s programs, administration, and fund-raising activities that are not reflected in the accompanying consolidated financial statements, as the services provided do not meet the required accounting criteria to be recognized. (k) Functional Expense Allocation The cost of providing the various programs and supporting services has been summarized on a functional basis in the consolidated statements of activities. Accordingly, certain costs have been allocated among the programs and supporting services benefited. The child development program represents costs to assist over 1,870,000 (unaudited) and 1,730,000 (unaudited) children in Compassion’s child survival, child sponsorship, and leadership development programs in 2016 and 2015, respectively. These programs are paid for through grants that engage children in activities to develop them spiritually, economically, socially, and physically. Other grants are provided to beneficiaries in the child development program for specific interventions such as, disaster relief, medical, and educational needs. Compassion also uses program funds to oversee and enhance the program effectiveness, develop and train church workers at new projects, and to extend its expertise in holistic child development to international churches and organizations that do not currently implement Compassion’s programs, but have a deep passion and concern for children. Sponsor/donor ministries represent costs used to enhance the sponsor/child relationship to challenge the U.S. Christian public to expand their activities to include ministry to children. Funds are used to gather and disseminate information to sponsors concerning their sponsored child, process correspondence between the sponsor and the child, and educate on the importance and challenges of child development. (l) Income Taxes Compassion has been recognized as exempt from federal income taxes on income related to its exempt purposes under Section 501(a) of the Internal Revenue Code of 1986 (IRC) as an organization described in Section 501(c)(3) of the IRC. Compassion generated no significant net unrelated business income during the years ended June 30, 2016 and 2015. As an Association of Churches, Compassion is classified as a public charity and not a private foundation under Section 509(a)(1) and 170(b)(1)(A)(i) of the IRC. 10 (Continued) COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (m) Self-Funded Medical Insurance As of January 1, 2008, Compassion established a plan for self-funding medical claims of employees in the United States of America. Through its broker, Compassion has contracted with a third party to administer the health plan. Compassion has also purchased stop loss coverage, which provides for an annual specific deductible per individual of $250,000 for the years ended June 30, 2016 and 2015. Compassion has estimated potential incurred, but unreported claims to be approximately $1,261,000 and $1,216,000 for the years ended June 30, 2016 and 2015, respectively, which have been accrued in the accompanying consolidated financial statements. (n) Foreign Currency Substantially all assets and liabilities of consolidated foreign field offices have been translated at foreign exchange rates in effect at June 30, 2016 and 2015. All foreign office revenue and expense amounts are converted at the rate in effect on the date of the transaction. Foreign currency transaction gains and losses are included in the determination of the change in net assets. (o) Fair Value Measurement Compassion evaluates fair value of assets and liabilities according to the following:  Cash and cash equivalents – Fair value is estimated to be the same as the carrying (book) value because of their short maturities.  Investments – Investments are recorded at fair value in accordance with the fair value hierarchy. See further discussion at note 3.  Receivables from Global Partner Alliance – Fair value is estimated to be the same as the carrying (book) value because of their short maturities.  Accounts receivable – Fair value is estimated to be the same as the carrying (book) value because of their short maturities.  Foreign exchange contracts – Foreign exchange contracts are recorded at fair value in accordance with the fair value hierarchy. See further discussion at note 3.  Accounts payable and accrued liabilities – Fair value is estimated to be the same as the carrying (book) value due to the short maturities of accounts payable; included in accrued liabilities is the present value of future obligations for gift annuities and trusts, which is adjusted annually. The carrying (book) value approximates fair value because of their short maturities.  Accrued severance/retirement benefits for national employees – Fair value is estimated to be the same as carrying (book) value.  Funds committed to sponsorship projects – Fair value is estimated to be the same as the carrying (book) value due to the majority of the funds committed to sponsorship projects having short maturities. 11 (Continued) COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (p) Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue, gains, and other support and expenses during the reporting period. Actual results could differ significantly from those estimates. (q) Reclassifications Certain amounts in the 2015 consolidated financial statements have been reclassified for comparative purposes to conform to the presentation in the 2016 consolidated financial statements. (3) Investments and Fair Value Measurements Compassion applies the fair value measurements of assets and liabilities that are recognized and disclosed at fair value in the consolidated financial statements on a recurring basis. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy that prioritizes the inputs to valuation techniques is used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1 – Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that Compassion 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 and supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, specific and broad 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 measurement. However, the determination of what constitutes “observable” requires significant judgment by Compassion. Compassion considers observable data to be that market data, which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to Compassion’s perceived risk of that instrument. 12 (Continued) COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 The following table represents investments that are measured at fair value on a recurring basis at June 30, 2016: Investments: Corporate bonds Government obligations Corporate stocks Other Total investments Restricted investments: Cash and cash equivalents Corporate bonds Government obligations Corporate stocks Mutual funds Exchange traded funds Total restricted investments Current assets: Foreign exchange contracts Current liabilities: Foreign exchange contracts Cost basis June 30, 2016 Fair value June 30, 2016 Level 1 Level 2 $ 30,326,149 28,394,606 5,594,231 105,922 30,653,469 28,801,618 6,846,185 105,922 — — 6,846,185 — 30,653,469 28,801,618 — 96,272 — — — 9,650 $ 64,420,908 66,407,194 6,846,185 59,551,359 9,650 $ 1,142,133 1,175,129 2,324,013 4,868,332 1,958,093 832,449 1,142,133 1,204,881 2,384,713 5,656,765 1,941,845 911,339 1,142,133 — — 5,656,765 1,941,845 911,339 — 1,204,881 2,384,713 — — — — — — — — — $ 12,300,149 13,241,676 9,652,082 3,589,594 — $ 7,011,974 7,011,974 — 7,011,974 — 3,134,429 3,134,429 — 3,134,429 — 13 Level 3 (Continued) COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 The following table represents investments that are measured at fair value on a recurring basis at June 30, 2015: Cost basis June 30, 2015 Fair value June 30, 2015 Level 1 Level 2 $ 37,919,297 39,859,362 5,030,962 347,480 90,696 38,162,577 40,022,603 6,869,852 524,456 90,696 — — 6,869,852 524,456 — 38,162,577 40,022,603 — — 90,696 — — — — — $ 83,247,797 85,670,184 7,394,308 78,275,876 — $ 986,519 1,091,953 2,496,459 4,432,682 1,955,851 509,312 986,519 1,079,013 2,510,962 5,611,166 2,016,658 547,822 986,519 — — 5,611,166 2,016,658 547,822 — 1,079,013 2,510,962 — — — — — — — — — Total restricted investments $ 11,472,776 12,752,140 9,162,165 3,589,975 — Current liabilities: Foreign exchange contracts $ 358,722 358,722 — 358,722 — Investments: Corporate bonds Government obligations Corporate stocks Mutual funds Other Total investments Restricted investments: Cash and cash equivalents Corporate bonds Government obligations Corporate stocks Mutual funds Exchange traded funds Level 3 Investments and restricted investments whose values are based on quoted market prices in active markets, and are, therefore, classified within Level 1, include actively listed equities, and certain mutual funds. Investments and restricted 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 supported by observable inputs are classified within Level 2. The majority of these include U.S. government obligations, primarily U.S. Treasury bills, and investment grade U.S. corporate bonds. As Level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect liquidity and/or nontransferability, which are generally based on available market information. Investments and restricted investments classified within Level 3 have significant unobservable inputs, as they trade infrequently or not at all. Level 3 instruments include privately held corporate stocks. Foreign exchange contracts (contracts) are negotiated over the counter. The contracts are valued by Compassion using available market pricing models and the value depends upon the contractual terms of the instrument. The model has observable inputs other than quoted prices that can be corroborated by market data. The contracts are, therefore, classified within Level 2. 14 (Continued) COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (4) Global Partner Alliance Compassion has entered into an alliance with unaffiliated international organizations to raise funds to release children from poverty. Together, Compassion and 11 unaffiliated international organizations form the Global Partner Alliance (GPA). Compassion maintains children’s files, selects and monitors projects, provides field supervision, and distributes funds on behalf of the international organizations for those activities that are jointly conducted. Compassion is reimbursed for the costs incurred in providing these services. Because Compassion has control over the ultimate distribution of amounts received from the international organizations, such amounts are included as revenue and related program payments are included as expenses in the accompanying consolidated financial statements. The unaffiliated international organizations have separate fund-raising and administrative expenses that are not reflected in the accompanying consolidated financial statements. Receivables from the GPA consist of trade receivables and are carried at original invoice amount less an estimate made for doubtful receivables. Receivables from the unaffiliated international organizations were $8,529,271 and $10,399,291 as of June 30, 2016 and 2015, respectively. Management believes there are no uncollectible accounts for the years ended June 30, 2016 and 2015, respectively. The GPA funded the start-up costs for Compassion Norden’s operations in fiscal years 2016 and 2015. Compassion’s share of the costs were recorded in the consolidated statements of activities as fund-raising expense in the amount of $516,493 and $986,983 for the years ended June 30, 2016 and 2015, respectively. Contributions from the unaffiliated international organizations were reported as follows for the years ended June 30: Compassion Korea (South Korea) Compassion United Kingdom Compassion Australia Compassion Canada Compassion Netherlands Compassion Deutschland (Germany) Compassion Italia Onlus (Italy) Tear Fund New Zealand Compassion Schweiz (Switzerland) Service d’Entraide et de Liaison (France) Compassion Norden (Nordic countries) 15 2016 2015 $ 48,840,651 42,804,425 42,024,828 36,280,715 15,305,471 5,279,423 4,000,453 3,746,662 3,534,806 2,968,153 822,576 54,420,647 44,228,793 46,499,392 43,016,864 16,207,688 4,579,378 3,984,249 4,395,257 3,459,544 2,816,021 531,495 $ 205,608,163 224,139,328 (Continued) COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (5) Property, Plant, and Equipment Property, plant, and equipment consist of the following as of June 30: Land Buildings and building improvements Furniture and equipment Vehicles Software and other Assets in progress $ Less accumulated depreciation Property, plant, and equipment, net $ 2016 2015 11,928,683 80,328,302 26,505,939 6,330,505 37,266,833 11,267,724 11,928,683 79,218,914 26,206,400 6,114,397 25,841,083 3,137,136 173,627,986 152,446,613 (72,907,201) (63,304,419) 100,720,785 89,142,194 Depreciation expense was $11,073,379 and $6,567,314 for the years ended June 30, 2016 and 2015, respectively. (6) Intangibles Intangibles consist of the following as of June 30: 2016 2015 Naming rights, noncompete, and customer list Less accumulated amortization $ 1,996,000 (410,867) 1,996,000 (205,433) Intangibles, net $ 1,585,133 1,790,567 Amortization expense was $205,434 and $205,433 for the years ended June 30, 2016 and 2015, respectively. The estimated amortization expense at June 30, 2016 is as follows: 2017 2018 2019 2020 2021 Thereafter 16 $ 205,433 197,100 197,100 197,100 197,100 591,300 $ 1,585,133 (Continued) COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (7) Foreign Exchange Contracts To assist in the management of foreign currency risk, Compassion may enter into foreign currency forward (FOREX) contracts, which provide for the future exchange of funds at agreed-upon rates. These contracts are recorded at fair value in the accompanying consolidated statements of financial position at June 30, 2016 and 2015 and unrealized gains and losses are recognized in the accompanying consolidated statements of activities for the years ended June 30, 2016 and 2015. For the years ended June 30, 2016 and 2015, Compassion recorded an unrealized gain of $4,236,267 and an unrealized loss of $358,722, respectively, on FOREX contracts. At June 30, 2016 and 2015, Compassion had in place foreign exchange contracts for purchases of U.S. dollars with notional amounts totaling $116,273,761 and $25,559,493, respectively, and sales of U.S. dollars with notional amounts totaling $146,228,908 and $798,000, respectively. (8) Funds Committed to Sponsorship Projects Funds committed to sponsorship projects represent grants that are payable in future periods to program beneficiaries who are unaffiliated church groups. The vast majority of these amounts are funds that were remitted to field offices at year-end (June) and distributed to sponsorship projects in July. These committed program funds are accrued at year-end in the consolidated statements of financial position in accordance with the social and moral obligation to transfer resources. Funds committed to sponsorship projects consist of the following amounts payable as of June 30: Funds committed to sponsorship projects: Year 1 Year 2 Year 3 Year 4 17 2016 2015 $ 58,293,856 276,232 91,333 1,000 46,448,528 177,258 133,758 70,508 $ 58,662,421 46,830,052 (Continued) COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (9) Net Assets Released from Restrictions Net assets were released from donor-imposed restrictions by meeting purpose restrictions for the years ended June 30: Purpose restrictions accomplished: Child sponsorship program Other child programs Gift in-kind donations used Child sponsorship endowment earnings used Leadership development endowment earnings used 2016 2015 $ 586,730,597 157,130,477 527,069 332,454 273,092 581,867,334 147,450,556 650,703 321,014 283,890 $ 744,993,689 730,573,497 (10) Temporarily Restricted Net Assets Temporarily restricted net assets are available for the following purposes as of June 30: Child development programs: Child sponsorship program Other child programs Irrevocable trust agreements 2016 2015 $ 68,615,220 32,916,611 802,878 59,194,257 36,541,470 927,215 $ 102,334,709 96,662,942 (11) Permanently Restricted Net Assets Permanently restricted net assets are restricted to the following as of June 30: Investments in perpetuity, the income from which is expendable to support: Child sponsorship endowments Leadership development endowments 2016 2015 $ 5,030,813 4,739,802 4,493,225 4,650,542 $ 9,770,615 9,143,767 (12) Endowment Funds Compassion has adopted the Uniform Prudent Management of Institutional Funds Act (UPMIFA or the Act) passed by the state of Colorado. In accordance with UPMIFA, Compassion appropriates for expenditure or accumulates as much of an endowment fund as Compassion determines is prudent for the uses, benefits, purposes, and duration for which the endowment fund is established, subject to the intent of the donor as expressed in the gift instrument. 18 (Continued) COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 As of June 30, 2016 and 2015, Compassion had two donor-restricted endowment funds. These permanently restricted endowment funds have donor-imposed restrictions, which classifies the original value of gifts donated as permanently restricted net assets. The net assets for child sponsorship and leadership development are invested to provide a long-term total return sufficient to support a number of sponsorships in third world countries. A portion of the earnings from the donor-restricted endowment funds may be used to keep the endowment principal at adequate levels to ensure perpetuity of funding. The remaining endowment earnings can be appropriated for expenditure in accordance with the donor’s stipulations. The child sponsorship endowment fund is established for the purpose of providing ongoing support for children participating in Compassion’s child sponsorship program. The leadership development endowment fund is established for the purpose of providing ongoing support for students participating in Compassion’s leadership development program. Compassion’s net asset classifications by type of endowment and changes in endowment net assets as of June 30, 2016 are as follows: Temporarily restricted Permanently restricted Total $ — 698,187 5,030,813 4,739,802 5,030,813 5,437,989 $ 698,187 9,770,615 10,468,802 $ 1,007,288 9,143,767 10,151,055 57,659 46,782 104,441 238,786 89,295 328,081 Total investment return 296,445 136,077 432,522 Contributions Appropriation of endowment assets — (605,546) 490,771 — 490,771 (605,546) 698,187 9,770,615 10,468,802 Donor-designated: Child sponsorship endowments Leadership development endowments Changes in endowment net assets: Endowment net assets, beginning of year Investment return: Investment income Net realized and unrealized appreciation Endowment net assets, end of year $ 19 (Continued) COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 Compassion’s net asset classifications by type of endowment and changes in endowment net assets as of June 30, 2015 are as follows: Temporarily restricted Permanently restricted Total $ — 1,007,288 4,493,225 4,650,542 4,493,225 5,657,830 $ 1,007,288 9,143,767 10,151,055 $ 1,091,662 8,710,600 9,802,262 50,152 41,937 92,089 470,378 49,797 520,175 Total investment return 520,530 91,734 612,264 Contributions Appropriation of endowment assets — (604,904) 341,433 — 341,433 (604,904) 1,007,288 9,143,767 10,151,055 Donor-designated: Child sponsorship endowments Leadership development endowments Changes in endowment net assets: Endowment net assets, beginning of year Investment return: Investment income Net realized and unrealized appreciation Endowment net assets, end of year $ (13) Commitments Compassion has commitments related to operating leases for building facilities and equipment at June 30, 2016. All operating leases are noncancelable and expire on various dates through 2022. Lease and rent expenses for the years ended June 30, 2016 and 2015 were $2,330,111 and $2,435,949, respectively. Future minimum lease payments under noncancelable operating leases with initial or remaining terms of one year or more at June 30, 2016 are as follows: 2017 2018 2019 2020 2021 Thereafter 20 $ 1,560,721 925,564 712,685 541,520 188,725 37,908 $ 3,967,123 (Continued) COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (14) Fund-raising Events Compassion’s fund-raising event activities include the Rock and Worship Roadshow and other concerts and Walk with Compassion events. The direct benefits to sponsors and donors are limited to the amount of revenue associated with exchange transaction at the events, and any excess direct benefits to sponsors and donors are recorded as fund-raising expense in the consolidated financial statements. Fund-raising event activities for the years ended June 30 are as follows: Gross receipts from fund-raising events Less contributions $ Gross income from fund-raising events Less direct benefits to sponsors and donors Net income from fund-raising events $ 2016 2015 11,447,020 (7,588,921) 5,413,456 (2,506,742) 3,858,099 2,906,714 (3,858,099) (2,906,714) — — (15) U.S. Pension Plan Compassion has a defined-contribution pension plan covering substantially all U.S. paid employees. The plan is noncontributory for employees and has a five-year vesting period. Contributions are equal to 10% of each covered employee’s qualifying compensation. Pension contribution expense was $6,489,079 and $6,626,043 for the years ended June 30, 2016 and 2015, respectively. (16) Severance/Retirement Benefits for National Employees For the year ended June 30, 2015, Compassion maintained a self-funded benefit plan for national employees, which are employees outside of the United States paid by field offices. The liability recognized in the June 30, 2015 consolidated statement of financial position is the undiscounted accumulation of the amount that was agreed to be paid to an employee who left the organization in good standing after three years of service. Compassion accrued the higher of one month’s salary for each year worked or the amount required by local laws. National severance/retirement contribution expense was $420,622 and $2,921,314 for the years ended June 30, 2016 and 2015, respectively. During the year ended June 30, 2016, Compassion terminated the self-funded benefit plan for national employees, and as a result Compassion made benefit payments of $13,346,938. In addition, Compassion established a benefit plan structure in 2016 that is individualized for each field office depending on local laws and regulations or common market practices, some of which are defined contribution plans. The defined contribution plans cover all employees in the local office with which the plan is associated, are noncontributory for employees and have a three- to six-month probationary period. Contributions to the plans range from four to eight percent of each covered employee’s qualifying compensation. Contribution expense for these defined contribution plans established in the fiscal year ended June 30, 2016 was $313,896. Compassion accrues for severance expense when benefits are to be provided for virtually all departures. When severance expense cannot be calculated until the specific circumstances of an employee’s departure are known, payments are expensed as incurred. 21 (Continued) COMPASSION INTERNATIONAL, INCORPORATED AND AFFILIATES Notes to Consolidated Financial Statements June 30, 2016 and 2015 (17) Subsequent Events Compassion has evaluated subsequent events through August 30, 2016, the date the consolidated financial statements were available to be issued, and there were none to be reported. 22
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