Financial Statements

Statements of Financial Position Statements of Activities Statements of Cash Flows Notes to Financial Statements Independent Auditors’ Report

The accompanying notes are an integral part of the financial statements.

The accompanying notes are an integral part of the financial statements.

The accompanying notes are an integral part of the financial statements.

Notes to Financial Statements – December 31, 2012 and 2011

NOTE 1 – Summary of Significant Accounting Policies

Nature of operations The George Gund Foundation (“the Foundation”) is a private foundation which makes grants to educational, community service, and philanthropic organizations, basically located in Greater Cleveland.

Basis of accounting The Foundation’s financial statements are presented on the accrual basis of accounting. Accordingly, revenues are recorded when earned, and expenses are recognized when incurred. The Foundation has only unrestricted net assets.

Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents Cash and cash equivalents consist of highly-liquid investments with maturity dates of three months or less which are readily convertible into cash and a common trust fund that is readily convertible into cash.

Investments Marketable and U.S. Government securities are reported at their market values. Securities traded on a national securities exchange are valued at the last reported trading price on the last business day of the year. Realized gains or losses are determined by comparison of asset cost to net proceeds received. Unrealized gains or losses are determined by comparison of asset cost to market values at the end of the year.

Investments include notes receivable which are due from various not-for-profit organizations valued at $9,510,667 and $9,971,109 at December 31, 2012 and 2011, respectively. The notes receivable are due at various dates, from 2015 through 2038. The loans carry interest rates between 1% and 3%; principal and interest payment arrangements vary by note.

The Foundation invests in certain alternative investments which include investments in limited partnerships. Market values represent the Foundation’s pro rata interest in the net assets of each limited partnership as of December 31, 2012 and 2011, as provided by the fund managers. Market values as of December 31, 2012 and 2011 are not based on audited financial information supplied by the general partner or manager of the funds. Audited information is only available annually based on the partnerships’ or funds’ year end. Management reviews monthly valuations provided by the general partner or manager of the funds and assesses the reasonableness of the fair values provided at the interim dates and included in the financial statements. As of December 31, 2012 and 2011, the Foundation had total unfunded capital commitments to alternative investments of $3,595,445 and $4,539,158, respectively. Because of the inherent uncertainty of the valuation of alternative investments, the market values reflected in the accompanying financial statements may differ significantly from realizable values.

Furniture, equipment, and leasehold improvements Furniture, equipment, and leasehold improvements are stated at cost. Amortization and depreciation is recorded using both straight-line and accelerated methods over the estimated useful lives of the assets. Depreciation and amortization expense amounted to $71,836 and $70,132 for the years ended December 31, 2012 and 2011, respectively.

Fair value measurement-definition and hierarchy The Foundation follows FASB ASC 820-10, “Fair Value Measurements.” Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

In determining fair value, the Foundation uses various valuation approaches, including market, income, and / or cost approaches. FASB ASC 820-10 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Foundation. Unobservable inputs reflect the Foundation’s assumptions used in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

• Level 1 Valuations based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the Foundation has the ability to access.
• Assets and liabilities utilizing Level 1 inputs include exchange-traded equity securities that are actively traded.
• Level 2 Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
• Assets and liabilities utilizing Level 2 inputs include: government bonds, corporate bonds, foreign bonds, private equity investments in mutual funds, common trust funds, and program related compensating balances.
• Level 3 Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
• Assets and liabilities utilizing Level 3 inputs include: equity securities that are not actively traded, private equity investments, and program related investments held in loans and private equity investments.

NOTE 2 – Investments

Cost and market value of investments were as follows:

Market values of investments are based on December 31, 2012 and 2011 published quotations, except that estimates are used when quotations are not available. Fixed income securities consist of U.S. government securities, U.S. government guaranteed securities, and corporate securities. Common stocks and alternative investments consist principally of U.S. and international equity securities, investments in equity mutual funds, program-related investments, and investments in limited partnerships.

Published market quotations do not necessarily represent realizable values, particularly where sizable holdings of a company’s stock exist, as in the case of the Foundation’s holding of the Kellogg Company common stock.

NOTE 3 – Fair Value Disclosure and Measurement

The Foundation’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with FASB ASC 820-10. See Note 1 for a discussion of the Foundation’s policies regarding this hierarchy.

The following fair value hierarchy tables present information about the Foundation’s assets and liabilities measured at fair value on a recurring basis:

Note 7 – Net Assets

Net assets include two board-designated funds (principal and income) both of which consist entirely of unrestricted net assets. The principal fund consists of investments in securities and receives the realized and unrealized gains or losses on those assets. The income fund receives interest and dividends on the principal fund investments which are used for grants and administrative expenses. The statements of financial position included the following income fund accounts:

The following is a summary of the changes in total net assets:

The change in individual funds includes transfers by the Foundation of $20,258,568 in 2012 and $18,593,560 in 2011 from the principal fund to the income fund.

Note 8 – Employee Benefit Plan

The Foundation has an employee’s tax-sheltered annuity plan for all eligible employees. Such a plan is intended to comply with the requirements of Section 403(b) of the Internal Revenue Code (IRC). Employer contributions are required at 9% of the participants’ compensation up to the social security wage base for the year and 14.7% of the participant’s compensation in excess of this wage base, with a limit of $250,000 and $245,000 of compensation for the years ended December 31, 2012 and 2011, respectively. Employer contributions to the plan for the years ended December 31, 2012 and 2011 amounted to $119,974 and $124,110, respectively. Participants are also permitted to make salary reduction contributions to the plan.

Note 9 – Excise Taxes

The Foundation is exempt from Federal income taxes under Section 501(c)(3) of the IRC, but is subject to a 2% (1% if certain criteria are met) Federal excise tax on net investment income, including net realized gains, as defined by the IRC.

Deferred Federal excise taxes are provided on the unrealized appreciation or depreciation of investments and interest and dividend income and certain expenses being reported for financial statement purposes in different periods than for tax purposes.

Current excise taxes were provided at 1% and 2% for 2012 and 2011, respectively, and deferred excise taxes were provided at 2% for 2012 and 2011. The current and deferred portions of the excise tax provisions were $428,626 and $480,029 respectively, netting to $908,655 in 2012. The current and deferred portions of the excise tax provisions were $506,692 and $(622,737), respectively, netting to $(116,045) in 2011.

The Organization follows the provisions of FASB ASC 740-10, “Accounting for Uncertainty in Income Taxes,” which provides guidance on the recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition issues. Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the accompanying financial statements.

Accrued interest relating to uncertain tax positions would be recorded as a component of interest expense and penalties relating to uncertain tax positions would be recorded as a component of general and administrative expenses.

The Federal tax returns of the Organization for 2010, 2011, and 2012 are subject to examination by the IRS, generally for three years after they were filed.

Note 10 – Subsequent Events

The Organization has evaluated subsequent events from the statement of financial position date through April 10, 2013.

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