CONSOLIDATED FINANCIAL STATEMIENTS
`
`City of Hope and Affiliates
`Years Ended September 30, 2015 and 2014
`With Report of Independent Auditors
`
`Mylan v. Genentech
`Mylan V. Genentech
`IPR2016-00710
`IPR2016-00710
`Genentech Exhibit 2106
`Genentech Exhibit 2106
`
`Page 1
`Page 1
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`’
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`‘
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`

`
`City of Hope and Affiliates
`
`Conso1idated_Financial Statements
`
`Years Ended September 30, 2015 and 2014
`
`Contents
`
`Report of Independent Auditors..................................................................................................... ..1
`
`Consolidated Statements of Financial Position ............. .f. .........................................
`................... ..2
`Consolidated Statements of Activities ....... .; ...............................................................................
`Consolidated Statements of Cash Flows ........................................................................................ ..6
`Notes to Consolidated Financial_Staternents.....................................................................
`........... ..7 V
`
`Page 2
`Page 2
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`

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`
`
`I-Trnst & Young l._!._P
`‘suite 1700
`18101 Von Karman Avenue
`
`-
`
`Tel: +3. 949 794 ?..30()
`Fax: -+1 949 437 0590
`ey.<:om
`
`gugdjm; ,3 better
`working world
`
`irvine. CA 92612
`.
`
`Report of Independent Auditors
`
`The Board of Directors
`
`City of Hope
`
`Report on the Financial Statements
`
`.We have audited the accompanying consolidated financial statements of City of Hope and Affiliates, which
`comprise the consolidated statements of financial position as of September 30, 2015 and 2014, and the related
`consolidated statements of activities and cash flows for the years then ended, and the related notes to the
`consolidated financial statements.
`/
`
`Man,agement’s Responsibility for the Financial Statements
`
`Management is responsible for the preparation and fair presentation of these financial statements in conformity
`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 ‘financial statements that are fiee of
`material misstatement, whether due to fraud or error.
`
`Audi'tor’s Responsibility
`
`Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our
`audits in accordance with auditing standards generally accepted in the United States. Those standards require
`that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
`free of material misstatement.
`
`An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
`financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of
`the risks of material misstatement of the financial statements, whether due to fraud or error. In making those
`risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation
`ofthe 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 financial statements.
`We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our.
`audit opinion.
`‘
`
`Opinion
`
`the
`in all material respects,
`the financial statements referred to above present fairly,
`In our opinion,
`consolidated financial position of City of Hope and Affiliates at September 30, 2015 and 2014, and the
`consolidated results of their activities and their cash flows for the years then ended in conformity with U.S.
`generally accepted accounting principles.
`
`émwt +
`
`LL?
`
`December 18, 2015
`
`Page 3
`Page 3
`
`

`
`City of Hope and Affiliates
`
`9 Consolidated Statements of Financial Position —
`
`(In Thousands)
`
`z&ssets
`"Current assets:
`
`Cash and cash equivalents
`Investments
`.
`Self—insurance trust funds
`
`.
`
`I
`
`$
`
`$ _
`
`133,293
`811,802
`3,730
`
`126,607
`702,862
`3,324
`
`September 30
`2015
`2014
`
`Patient accounts receivable, less allowances for uncollectible
`accounts of $8,205 in 2015 and $12,932 in 2014
`‘Grants and other receivables
`Donor-restricted unconditional promises to give, net
`Prepaid and other
`Total current assets
`
`H
`
`_
`
`206,151
`49,084
`18,660
`23,512
`1,246,232
`
`181,568
`22,239
`18,199
`18,226
`1,073,025
`
`Property and equipment, net
`
`,
`
`_
`
`679,305
`
`_
`
`704,109
`
`Other assets:
`
`V
`Investments
`Board-designated assets
`Bond trust funds
`Donor—restricted assets:
`
`'
`
`Investments
`Unconditional promises to give, net
`Contributions receivable from annuity and split-interest
`agreements, net
`_
`Other
`Intangible assets
`Goodudfl
`I
`Other long—term assets
`Towloflwrawem
`Total assets
`
`,
`
`_
`
`-
`
`I
`
`V
`
`371,440
`653,354
`—
`
`311,710
`70,078
`
`379,648
`662,774
`35
`
`290,550
`53,145
`
`-
`
`8,027
`1,880
`4,020
`_.—
`42,206
`lA62fl15_
`$ 3,388,252
`
`‘
`
`10,294
`2,340
`5,270
`30J37
`32,754
`lA6&947
`$ 3,244,081
`
`*
`
`Page 4
`‘Page 4
`
`

`
`September 30
`2015
`2014
`
`-
`
`$
`
`'
`
`85,599
`53,673
`72,549
`13,990
`8,019
`293
`234,123
`
`630,176
`16,846
`57,915
`939,060
`
`$
`
`84,489
`55,837
`73,726
`7,923
`2,062
`_ 478
`224,515
`
`636,925
`17,574
`47,795
`926,809
`
`'
`
`2,054,965
`224,424
`169,803
`2,449,192
`$ 3,388,252
`
`1,960,318
`204,023
`152,931
`2,317,272
`;_'§ 3,244,081
`
`Liabilities and net assets
`
`V
`
`- Current liabilities:
`Accounts payable and accrued liabilities
`Accrued salaries, wages, and employee benefits
`Long—term debt, current portion
`Deferred revenue
`Due to third—party payors
`Other
`Total current liabilities
`
`Q
`
`'
`
`‘
`Long-term debt, net of current portion
`Annuity and split—interest agreement obligations
`. Other
`_
`’
`Total liabilities
`
`A
`
`‘
`
`Net assets:
`
`Unrestricted .
`Temporarily restricted
`Permanently restricted
`Total net assets
`Total liabilities and netwassets
`
`9
`
`See accompanying notes.
`
`Page 5
`Page 5
`
`

`
`City of Hope and Affiliates
`
`Consolidated Statements of Activities
`(In Thousands)
`
`9 Year Ended September 30, 2015
`
`Revenues:
`Contributions (including $28,263 of contributions
`from special events)
`Special event participation revenue
`Less: cost of direct benefits to donors
`Contributions and net revenues from special events
`
`Net patient service revenues
`Research grants
`Investment income
`Net unrealized loss on investments
`
`Royalty income
`Other
`Total revenues
`
`'
`
`Net assets released from restrictions
`Total revenues and other increases
`
`Expenses‘:
`Program services:
`Patient care
`Research
`
`Public information and education
`Total program services
`
`Supporting services:
`Administrative and general
`Fundraising
`Total supporting services
`Total expenses
`'
`
`Changes in net assets
`
`Net assets, beginning of year
`Net assets, end of year
`
`See accompanying notes.
`
`Temporarily Permanently
`Unrestricted Restricted Restricted
`
`Total
`
`$
`
`_
`
`$
`
`51,694
`5,537
`7,861
`49,370
`
`$
`
`58,640
`—
`—
`58,640
`
`16,675
`—
`—
`16,675
`
`$
`
`127,009
`5,537
`7,861
`124,685
`
`1,005,065
`71,703
`, 76,711 ,
`(123,516)
`290,887,
`21,878
`1,392,098
`
`——
`—
`9,755
`(12,920)
`—-
`130
`55,605
`
`— —~
`—
`197
`—_
`6 —
`—
`16,872
`
`1,005,065
`71,703
`86,663
`(136,436)
`290,887
`22,008
`1,464,575
`
`35,204
`1,427,302
`
`(35,204)
`20,401
`
`—
`16,872
`
`_ —
`1,464,575
`
`730,504
`321,556
`18,553
`1,070,613
`
`-—
`—
`-—
`—~
`
`’
`
`—
`—
`— H
`—
`
`7 730,504
`321,556
`18,553
`1,070,613 ,
`
`238,152
`—
`——
`238,152
`23,890
`, — ,
`—
`23,890
`262,042
`— ,
`_
`—
`262,042
`
`1,332 655 1,332,655 - ' ' —
`
`
`
`
`
`
`
`94,647
`
`20,401"
`
`16,872
`
`131,920
`
`2,317,272
`152,931
`204,023
`1,960,318
`
`
`
`169,803§$ 224,424$2,054,965 $2,449,192
`
`
`
`Page 6
`Page 6
`
`

`
`City of Hope and Affiliates ‘
`
`Consolidated Statements of Activities
`
`(In Thousands)
`
`Year Ended September 30, 2014
`
`Temporarily Permanently
`Unrestricted Restricted
`Restricted
`
`Total
`
`$
`
`47,269
`
`$
`
`9,384
`
`$
`
`47,269
`
`9,384
`
`11,021
`6,095
`
`70
`
`' 64,455
`
`265
`
`9,649
`
`45
`
`113,037
`5,439
`6,168
`112,308
`
`798,188
`72,874
`120,104
`58,272
`249,845
`16,560
`1,428,151
`
`$
`
`56,384
`5,439
`6,168
`55,655
`
`798,188
`72,874
`108,818
`' 52,177
`249,845
`16,490
`1,354,047
`
`Revenues:
`
`Contributions (including $25,231 of contributions
`from special events)
`Special event participation revenue
`Less: cost of direct benefits to donors
`
`Contributions and net revenues from special events
`
`Net patient service revenues
`Research grants
`Investment income
`
`Net unrealized gain on investments
`Royalty income
`Other
`
`Total revenues
`
`Net assets released from restrictions
`Total revenues and other increases
`
`Expenses:
`Program services:
`Patient care
`Research
`Public information and education
`Total program services
`
`Supporting services:
`Administrative and general
`Fundraising
`Total supporting services
`Total expenses
`
`Changes in net assets A
`
`Net assets, beginning of year"
`Net assets, end of year
`
`See accompanying notes.
`
`29,531
`1,383,578
`
`‘
`
`29,486
`34,969 '
`
`9,604
`
`1,428,151
`
`609,234
`609,234
`303,478
`303,478
`
`16,418 _
`16,418
`929,130
`929,130
`
`183,089
`183,089
`22,427
`‘22,427
`
` 205,516 , 205,516
` ~—.:.._:.——
`1,134,646
`—
`1,134,646
`
`248,932
`
`34,969
`
`9,604
`
`293,505
`
`-
`
`-
`
`1,711,386
`$1,960,318 '$
`
`169,054
`204,023
`
`143,327
`
`2,023,767
`
`$
`
`152,931
`
`$2,317,272
`
`Page 7
`Page 7
`
`

`
`City of Hope and Affiliates
`
`Consolidated Statements of Cash Flows
`
`(In Thousands)
`
`-
`
`'
`
`7
`
`'
`
`Year Ended September 30
`
`2015 _ 2014
`
`$
`
`131,920
`
`$
`
`293,505
`
`81,933
`(8)
`631
`30,137
`(171,866)
`136,436
`4,370
`(16,765)
`
`(24,583)
`(26,845)
`(17,394)
`2,267
`(1,650)
`(15,327)
`1,110
`(2,164)
`(728)
`15,812
`127,286
`
`259
`(55,355)
`2,322
`' —
`(77,413)
`(130,187)
`
`'
`
`—
`-
`(7,178)
`16,765
`9,587
`
`6,686
`126,607
`133,293 .$
`
`—
`33,169
`
`$
`
`830 .$
`
`‘
`
`'
`
`.
`
`—
`
`‘
`
`_
`
`68,795
`51
`22
`—
`135,688
`(58,272)
`4,088
`(8,930)
`
`(17,531)
`1,966
`(7,431)
`(1,176)
`(4,591)
`2,572
`6,900
`(250)
`229
`5,244
`420,879
`
`(750)
`(103,145)
`2,086
`8
`(327,915)
`(429,716)
`
`(3,464)
`3,464
`(2,870)
`8,930
`6,060
`
`(2,777)
`129,384
`126,607
`
`28,048
`
`36,207
`
`-
`
`,
`
`’
`
`.
`
`_
`
`_
`
`'
`
`S
`
`$.
`
`§
`
`Operating activities
`_
`Changes in net assets
`Adjustments to reconcile changes in net assets to net cash provided by
`operating activities:
`'
`Depreciation and amortization
`Net (gain) loss on sale of contributed real property held for sale
`Loss on disposal of fixed assets
`Loss on impainnent of intangible assets
`Net (increase) decrease in trading investments
`Net unrealized loss (gain) on investments
`Change in value of interest rate swap agreement
`Contribution proceeds restricted for endowment
`Changes in assets and liabilities:
`Patient accounts receivable, net
`Grants and other receivables
`Unconditional promises to give, net
`Contributions receivable from split-interest agreements
`Contributed real property held for sale
`Other assets
`Accounts payable and accrued liabilities
`Accrued salaries, wages, and employee benefits
`Annuity and split-interest agreement obligations
`Other liabilities
`Net cash provided by‘ operating activities
`
`I
`
`Investing activities
`Decrease (increase) in notes receivable
`Additions to property and equipment
`Proceeds from sale of contributed real property held for sale
`Proceeds from sale of property and equipment
`Net decrease (increase) in alternative investments
`Net cash used in investing activities
`
`Financing activities
`Repayments of line of credit
`Proceeds from line of credit
`Principal payments on long-term debt
`Contribution proceeds restricted for endowment
`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,
`
`» Supplemental disclosure of cash flow information:
`Interest paid during the year (net of capitalized interest)
`Supplemental disclosure of noncash financing activity:
`Capital lease obligation
`
`See accompanying notes.
`
`I
`
`.
`
`,
`
`Page 8
`Page 8
`
`

`
`City of Hope and Affiliates
`
`Notes to Consolidated Financial Statements
`
`September 30, 2015
`
`(1. Organization
`
`City of Hope, a California nonprofit public benefit corporation, with its principal office located
`in Los Angeles, California, was formed to be the development organization of City of Hope
`National‘ Medical Center (the Center), City of Hope Medical Foundation (the Foundation) and
`Beckman Research Institute .of the City of Hope (the Institute) (col1ectively,the Affiliates or
`Affiliated Group). City of Hope’s management and staff coordinate the fundraising activities of
`the many volunteers and donors needed to support the patient care and research mission of the
`Affiliated Group.
`
`The Center, located in Duarte, -California, is a California nonprofit public benefit corporation
`treating primarily cancer and other life~threatening diseases. The Center currently operates a
`186-bed tertiary referral center with a licensed capacity of 217 beds. City of Hope is the sole
`corporate memberof the Center.
`
`is a California nonprofit public benefit
`located in Duarte, California,
`The Foundation,
`corporation organized as part of a coordinated health care system to provide teaching, education,
`and researchservices in support of the Center and the Institute. The Foundation also owns and/or
`operates outpatient clinic facilities that provide an extensive range of medicalcare and treatment.
`City of Hope is the sole corporate member of the Foundation.
`
`_
`
`The Institute, located in Duarte, California, is a California nonprofit public benefit corporation
`that owns and operates a number of major research facilities on City of Hope's main campus.
`The Institute conducts basic scientific research in support of and in conjunction with the patient
`care activities of the Center and the Foundation. City of Hope is the sole corporate member of T
`the Institute.
`
`The accounts of City of Hope include the assets, liabilities and results of operations of the
`supporting auxiliaries of City of Hope (the Auxiliaries). The Auxiliaries, located throughout the
`United States, are nonprofit public benefit unincorporated associations
`that coordinate
`fundraising activities to support the mission of the Affiliated Group.
`
`Page 9
`Page 9
`
`

`
`City of Hope and Affiliates
`
`V
`
`’ Notes to Consolidated Financial Statements (continued)
`
`1. Organization (continued)
`
`Principles of Consolidation
`
`The accompanying. consolidated financial statements .of City of Hope and Affiliates include the
`accounts of the Affiliated Group and the _net assets and activities of the Auxiliaries. All
`significant intercompany accounts and transactions have been eliminated in the consolidated
`financial statements.
`
`Collective Bargaining Agreements
`
`The City of Hope and Affiliates are subject to six different collective bargaining agreements
`related to certain members of its labor force. The percentage of employees covered under all
`collective bargaining agreements as of September 30, 2015, was approximately 53%. Two of the
`six agreements will expire within one year of September 30, 2015, and the City of Hope
`anticipates these agreements will be renegotiated and renewed for one to three years, depending
`on the agreement.
`'
`
`2. Summary of Significant Accounting Policies
`
`Use of Estimates
`
`In conformity with accounting principles generally accepted in the United States, the preparation
`of the financial statements 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. Actual results could differ from those estimates and the
`amounts could be material to ‘the financial statements.
`
`Cash and Cash Equivalents
`
`Cash-and cash equivalents reflect all unrestricted cash and cash equivalents that include highly
`liquid investments with original or remaining maturities at purchase of three months or less. ’
`.
`
`Page 10
`Page 10
`
`

`
`City of Hope and Affiliates
`
`Notes to Consolidated Financial Statements (continued)
`
`2. Summary of Significant Accounting Policies (continued)
`\ K
`
`Contributions
`
`All contributions are considered available for the program services of City of Hope and for
`distribution to the Affiliates, unless specifically restricted by the donor. Amounts received that
`are designated for future periods or are restricted by the donor for specific purposes are reported
`as temporarily restricted or permanently restricted contributions.
`
`Temporarily restricted net assets consist of assets restricted by donors for specific purposes until
`time restrictions lapse and/or the purpose for the restriction is accomplished. These net assets are
`primarily available for use in future periods or for capital purposes. Permanently restricted net
`assets have been restricted by donors in perpetuity, the income from which is expendable to
`support patient care, research or other designated purposes. All other net assets are unrestricted.
`City of Hope holds restricted monetary gifts received that are specifically earmarked until such 1
`time as the restriction is met. When a donor restriction is met, a stipulated time restriction ends,
`or a purpose restriction is accomplished, temporarily restricted net assets are reclassified as
`unrestricted net assets and reported in the consolidated statements of activities as net assets
`released from restrictions. Donor-restricted contributions whose restrictions are met within the
`same fiscal period as the contributions are received are reflected as net assets released from
`restrictions in the accompanying consolidated statements of activities.
`
`City of Hope is the beneficiary under various wills and -trust agreements, the total realizable I
`amount of which is not readily determinable at the date of gift. For wills, such amounts are
`recognized as contributions when the will is declared valid by a probate court and the proceeds
`are measurable. For the years ended September 30, 2015 and 2014, valid will and trust
`agreement amounts that became measurable totaled $16,836,000 and $29,709,000, respectively,
`and are included in contributions in the accompanying consolidated statements of activities.
`
`City of Hope reports unconditional promises to give _as temporarily restricted contributions,
`unless otherwise restricted by the donor. Unconditional promises to give that are expected to be
`collected in future years are recorded at the present value of their estimated future. cash flows.
`The discounts on these amounts are computed using risk—free interest rates approximating a U.S.
`Treasury Note rate "during the year of gift receipt. The rates used in 2015 and 2014 were 1.55%
`and 1.73%, respectively.
`‘
`
`Page 11
`Page 11
`
`

`
`City of Hope and Affiliates
`
`Notes to Consolidated Financial ‘Statements (continued)
`
`2. Summary of Significant Accounting Policies (continued)
`
`City of Hope reports conditional promises to give as contribution revenue when the conditions
`stipulated by the donor are met, so the conditional promises become unconditional. There are no
`conditional promises to give as of September 30, 2015 and 2014.
`
`included in contribution revenue. Net unconditional
`Amortization of pledge discounts "is
`- promises to give in the accompanying consolidated statements of financial position consist of the
`following as of September 30 (amounts in thousands):
`
`Unconditional promises to give
`Less:
`-
`.
`'
`.
`Discounts
`Allowance for uncollectible promises to give
`Total unconditional promises to give, net
`Less current portion
`
`2015
`
`2014
`
`$
`
`101,867 $
`
`9
`
`93,222
`
`(4,450)
`(8,679)
`88,738
`(18,660)
`70,078 $
`
`(4,504)
`(17,374)
`71,344
`(18,199)
`53,145
`
`$
`
`The ‘allowances for uncollectible promises to‘ give have been determined based on the City of
`Hope’s historical collection experience.
`
`At September 30, 2015, future cash flows anticipated from unconditional promises to give, are as
`follows (amounts in thousands):
`
`2016
`2017
`2018
`2019
`2020
`Thereafter
`
`'
`
`'
`
`‘
`
`_
`
`‘
`
`A
`
`'
`
`’
`
`.
`Discounts
`Allowance for uncollectible promises to give
`1
`'
`
`.
`
`‘
`
`'
`
`.
`
`'$
`
`_
`
`’
`
`$
`
`20534
`19,989
`20,043
`18,912
`’ 4,368
`1 8,0211 _
`101,867
`(4,450)
`(8,679)
`88,738
`
`1
`
`10
`
`Page 12
`Page12
`
`

`
`City of Hope and Affiliates
`
`Notes to Consolidated Financial Statements (continued)
`
`2. Summary of Significant Accounting Policies (continued)
`
`Split—Interest’ Obligations
`
`City_of Hope receives contributions from various types of split—interest agreements, including
`charitable gift annuities, charitable remainder annuity trusts, and charitable remainder unitrusts.
`City of Hope may be named as trustee or as a co—trustee or a financial institution may be named
`as the trustee.
`\
`
`Under a charitable gift annuity arrangement, City of Hope recognizes the agreement in the period
`in which the contract is executed. The assets from the donor are recognized at fair value, and the
`liabilities designated by the donor to various beneficiaries are recognized at the present value of
`the estimated future payments to be distributed by City of Hope to such beneficiaries. The
`amount of the temporarily restricted contribution revenue is the difference between these assets
`and liabilities.
`
`Some states have laws that mandate requirements regarding gift annuity reserves. These laws can
`be based on where the nonprofit entity is located or where the gift annuity donor resides. As of
`September 30, 2015, City of Hope has state—mandated reserves above the actuarial annuity
`reserves in the amount of $338,000. Additionally, City of Hope has voluntary reserves in the
`amount of $3,359,000 that are to protect the reserve fund against unexpected actuarial losses.
`These voluntary reserves are included in unrestricted investments and net assets in the
`accompanying consolidated statements of financial position.
`0
`
`Under charitable remainder annuity trust and charitable remainder unitrust arrangements in
`which City of Hope is not the trustee, City of Hope recognizes temporarily restricted long-term
`receivables and contribution revenues at the present value of the estimated future benefits to be
`received when the trust assets are expected .to be distributed in the period the agreement is
`executed. Trust distributions are recorded as a reduction in receivables, while adjustments to the
`receivables to reflect amortization [of the discount and changes in actuarial assumptions during
`the term of the trust are recorded as temporarily restricted contributions in the accompanying
`consolidated statements of activities. The receivables as of September 30, 2015,
`totaling
`$8,027,000, are to be collected over the next 29.2 years and have an average remaining life of
`12.2 years.
`'
`
`Page 13
`Page 13
`
`11
`
`

`
`City of Hope and Affiliates
`l
`.
`
`Notes to Consolidated Financial Statements (continued)
`
`2. Summary of Significant Accounting Policies (continued)
`
`Under a charitable remainder annuity trust or a charitable’ remainder unitrust arrangement in
`which City of Hope is the trustee, City of Hope records the assets contributed to the trust by the
`donor at fair value when received and the liabilities designated by the donor to various
`beneficiaries are recognized at
`the present value of the estimated future payments to be
`distributed by City. of Hope to such beneficiaries. The amount of the temporarily restricted
`contribution revenue is the difference between these assets and liabilities.
`*
`
`In-Kind Contributions
`
`r
`
`In—kind contributions are reflected as contributions at their estimated fair market value on the
`date of the donation. City of Hope reports gifts of land, buildings, equipment and other
`nonmonetary contributions as unrestricted support, unless explicit donor stipulations specify how
`the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify
`how and how long the donated assets are to be used and gifts of cash or other assets that "must be
`used to acquire long-lived assets are reported as temporarily restricted. Absent explicit donor
`stipulations about how long those long-lived assets must be maintained, City of Hope reports
`expirations of donor restrictions as net assets released from restrictions when the donated or
`acquired long-lived assets are placed in service.
`'
`
`Supplies Inventory
`
`Inventories, consisting of materials, pharmaceuticals and medical supplies for use in program
`services provided by the Affiliates, are stated at the lower of cost or market using the f1rst—in,
`first-out method. Inventories are included in prepaid and other current assets in the consolidated
`statements of financial position and totaled $15,043,000 and $11,297,000 at September 30, 2015.
`and 2014, respectively.
`
`Property and Equipment
`
`Property and equipment is stated at cost when purchased or at fair market Value on the date of the
`donation. When property and equipment is sold or otherwise disposed of, the cost and related
`accumulated depreciation and amortization are removed from the accounts and any resulting gain
`or
`loss
`is
`included in administrative and general other expenses. The costs of normal
`maintenance, repairs and minor replacements are charged to expense when incurred.
`
`12
`
`Page 14
`Page 14
`
`

`
`City of Hope and Affiliates
`
`Notes to Conso1idated»Financia1 Statements (continued)
`
`2. Summary of Significant Accounting Policies (continued)
`
`The Affiliated Group provides for depreciation and amortization using the straight-line method
`over thefollowing estimated useful lives:
`7
`
`Buildings and improvements
`Equipment and furniture
`
`'
`
`0
`
`7
`
`7 to 40 years
`5 to 10 years
`
`Leasehold improvements are amortized on a straight-line basis over the term of the lease or
`estimated useful life, whichever is shorter. Leases that have been capitalized are amortized over
`_ the life of the lease. Capital lease amortization is included with depreciation and amortization
`CXp61’1S€.
`
`A summary of the cost and accumulated depreciation and amortization of property and
`equipment at September 30, is as follows (amounts in thousands):
`
`Land
`Buildings and improvements
`Equipment and furniture
`Capitalized software
`Construction in progress
`'
`Total property and equipment
`Accumulated depreciation and amortization
`Property and equipment, net
`
`V
`
`'
`
`V
`
`‘
`
`20.15
`
`2014 I
`
`$
`
`-
`
`$
`
`15,681 $
`. 659,234
`426,828
`157,004
`63,507
`‘ 1,322,254 .
`g6-12,949}
`679,305 $
`
`15,313
`644,163
`422,961
`139,968
`65,121
`' 1,287,526
`(583,417)
`704,109
`
`The Affiliated Group reviews long-lived assets for impairment when events or changes in
`business conditions indicate that their carrying value may not be recoverable. The Affiliated
`Group considers assets to be impaired and writes them down to fair value if expected associated
`undiscounted cash flows are less than the carrying amounts. Fair value is the present value of the
`associated cash flows. The Affiliated Group has determined that no long-lived assets are
`impaired at September 30, 2015.‘
`
`Page 15
`Page 15
`
`13
`
`

`
`City of Hope and Affiliates
`
`Notes to Consolidated Financial Statements (continued)
`
`. 2. Summary of Significant Accounting Policiestcontinued)
`
`‘
`
`Software Development Costs
`
`All software development costsincurred in the planning stage of developing the softwareare
`expensed as incurred, as are internal and external training costs and maintenance costs. Internal
`and external costs, excluding general and administrative costs and overhead costs,
`incurred
`during the applicable development stage of internally used software, are capitalized. Such costs
`include external direct costs of materials and services consumed in developing or obtaining the A
`software, payroll, and payroll—related costs for employees who are directly associated with and
`who devote time to developing the software. Development changes that result in significant
`enhanced functionality to the software are also capitalized.
`
`Capitalized internally used software development costs are amortized on a straight-line basis
`over an estimated useful life of five years. Amortization begins when all substantial testing of the
`software is completed and the software is ready for its intended use.
`A
`
`totaled
`Unamortized software development costs included within property and equipment
`$66,530,000 and $67,616,000 as of September 30, 2015 and 2014,
`respectively. Total
`amortization expense related to capitalized software development costs was $22,830,000 and
`$13,625,000 for
`the years ended September 30, 2015 and 2014,
`respectively. Software
`development costs included in construction in progress totaled $32,482,000 and $31,497,000 at
`September 30, 2015 and 2014, respectively.
`'
`
`Capitalized Interest
`
`Interest cost incurred on borrowed funds during the period of construction of capital assets is
`capitalized by the Affiliates as a component of the cost of acquiring those assets, net of
`investment income earned from the tax—exempt borrowed proceeds. Total interest cost incurred
`totaled $31,645,000 and $30,980,000 in 2015 and 2014, respectively. Interest cost capitalized .
`totaled $59,000 and $931,000 in 2015 and 2014, respectively.
`
`14
`
`Page 16
`Page 16
`
`

`
`city of Hope and Affiliates
`
`Notes to Consolidated Financial Statements (continued)
`
`2. Summary of Significant Accounting Policies (continued)
`
`Deferred Revenue
`
`City of Hope is the recipient of the proceeds of various fundraising events and other fundraising
`activities. City of Hope receives cash during the year for these fundraising events and defers
`recognition of the revenue received in advance of fundraising events held by certain Auxiliaries
`subsequent to the fiscal year-end. The Affiliates also defer recognition of certain unexpended
`grant and royalty monies received from various sources, including research grants and clinical
`trial agreements prior to the expenditures of funds for such research or prior to such funds being
`earned. The following is a summary of deferred revenue as of September 30 (amounts
`in thousands):
`
`Fundraising events and other efforts
`Royalty revenue
`Unexpended grants/agreements
`Total deferred revenue
`Amount included in.other long-term liabilities
`I
`,
`
`Income Taxes
`
`2015
`
`22014
`
`$
`
`A
`
`.
`
`$
`
`1,947 $
`7,733
`9,560
`19,240"
`(5,250)
`13,990
`
`2,192
`—
`' 5,731
`7,923
`— -
`7,923
`
`.
`
`The Affiliated Group is exempt from federal income tax under Section 501(c)(3) of the USS.
`Internal Revenue Code and is exempt from California state franchise and income tax under
`Section 23701d of the California Revenue and Taxation Code.
`
`Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740,
`Income Taxes, clarifies the accounting for income taxes by prescribing a minimum recognition
`threshold that a tax position is required to meet before being recognized in the financial
`statements. FASB ASC 740 also provides guidance on de-recognition, measurement,
`classification, interest and penalties, disclosure, and transition. The guidance contained in FASB
`ASC 740 is applicable to. pass-through entities and tax-exempt organizations. City of Hope has
`no significant uncertain tax positions or tax liability for tax benefits, interest or penalties accrued
`at September 30, 2015 and 2014.
`'
`’
`
`Page 17
`Page 17
`
`_15
`
`

`
`City of Hopeand Affiliates
`
`Notes to Consolidated Financial _Statements (continued)
`
`2. Summary of Significant Accounting Policies (continued)
`
`Workers’ Compensation Program
`
`The Affiliated Group has elected to self-insure its workers’ compensation liability. Reinsurance
`has been obtained for this program to cover claims that exceed $250,000 between 1991 and
`2002, $500,000 in 2003, and $1,000,000 per individual claim beginning in 2004. The Affiliates
`1 have recorded an estimated liability of $17,418,000 and $16,036,000 as of September 30, 2015
`and 2014, respectively. The estimated current portion of the liability, totaling $3,205,000,
`is
`included in accrued salaries, wages, and benefits. and the estimated long-term portion of the
`liability is included in other long-term liabilities in the consolidated statements of financial
`position. Accruals for uninsured claims and claims incurred but not reported are estimated by an
`actuary based on prior claims experience. The estimated liability was recorded using a 1.67%
`discount factor as of September 30, 2015. Workers’ » compensation expense charged to the
`Affiliated Group’s operations totaled $5,310,000 and $4,114,000 in 2015 and 2014, respectively.
`
`Accounting Standards Update (ASU) 2010-24, Healthcare Entities (Topic 954), Presentation of
`Insurance Claims and Related Insurance Recoveries, clarifies that a health care entity should not
`net
`insurance recoveries against a- related claim liability.‘ The Affiliated Group recorded
`insurance recoveries totaling $3,739,000 and $3,354,000, which have been reflected ‘in the
`accompanying consolidated statements of
`financial position in other
`liabilities
`as of
`September 30, 2015 and 2014,‘ respectively.
`
`Professional Liability Insurance
`
`The Affiliated Group maintains professional liability insurance under a claims—m