September 30, 2012 and 2011

NOTE A—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

The Corporation for Public Broadcasting (the Corporation) is a District of Columbia not-for-profit corporation authorized to receive federal appropriations under Title II of the Public Broadcasting Act of 1967, as amended. The Corporation is recognized as exempt from income taxes under Section 501 (c)(3) of the Internal Revenue Code, except on activities unrelated to its exempt purpose. In addition, the Corporation is an organization that is not a private foundation as defined in Section 509(a) of the Internal Revenue Code.

The primary source of funding to the Corporation is the federal government. Congress has approved future annual funding to the Corporation through fiscal year 2014. Annual funding for 2013 and 2014 are $445,000,000 and $445,000,000, respectively. For 2013 the Budget Control Act of 2011 (PL 112-25, dated August 2, 2011), includes a sequestration provision that would potentially reduce the Corporation's 2013 appropriation effective January 2, 2013. The preliminary percentage and total amount of the potential sequestration as calculated by the Office of Management and Budget are 8.2% and $36,490,000.

Basis of Combination

The combined financial statements are presented on an accrual basis and include the accounts of Literary Classics, Inc., a District of Columbia not-for-profit corporation exempt from income taxes under Section 501(c)(3) of the Internal Revenue Code, which was created in fiscal year 2003 to act as the custodian for certain classic films valuable to the public broadcasting industry. Combined financial statements are presented because of the common control of the Corporation and Literary Classics, Inc. All intercompany balances and transactions have been eliminated in the combination.

Basis of Presentation

The revenues, expenses, gains and losses and net assets of the Corporation are classified based on the existence or absence of donor-imposed restrictions. Accordingly, the net assets of the Corporation and changes therein are classified and reported as follows:

  • Unrestricted Net Assets—Net assets that are not subject to any donor-imposed stipulations. Unrestricted designated net assets represent Board-approved funds for specific purposes.
  • Temporarily Restricted Net Assets—Net assets subject to donor-imposed stipulations on the use of the assets that may be met either by the Corporation's actions and/ or the passage of time. There were no temporarily restricted net assets at September 30, 2012 and 2011.
  • Permanently Restricted Net Assets—Net assets subject to donor-imposed stipulations that the principal be maintained permanently by the Corporation but permit the use of the investment earnings for general or specific purposes. There were no permanently restricted net assets at September 30, 2012 and 2011.

Cash and Cash Equivalents

The Corporation considers all highly liquid debt instruments purchased with an original maturity date of three months or less to be cash equivalents. Cash equivalents may include United States Treasury bills, federal agency securities, commercial paper, and repurchase agreements. The carrying amount approximates fair value because of the short maturity of the instruments. The Corporation requires repurchase agreements to be collateralized by United States Treasury securities.

Short-Term Investments

The Corporation carries its short-term investments at fair value as per FASB Accounting Standards Codification 820 (ASC 820), Fair Value Measurement. These investments are used for the daily operations and mission of the Corporation. Short-term investments may include United States Treasury bills, federal agency securities, bank certificates of deposit and commercial paper.

Concentration of Risk

Financial instruments that potentially subject the Corporation to concentrations of credit risk are cash and cash equivalents and short-term investments. The Corporation places its cash and investments in various financial institutions that are federally insured under the Federal Depository Insurance Corporation Act (FDICA). At times these balances may exceed federally insured limits. The remaining balances in excess of FDICA insurance limits are collateralized. The Corporation has not experienced any losses on its cash and cash equivalents and investments to date.

Receivables

The Corporation's receivables consist primarily of returned grants, accrued interest and receivables from the U.S. Department of Education. The specific identification method is used to determine the uncollectible amounts. The Corporation records an allowance for doubtful accounts on its outstanding receivables based on specific identification of uncollectible accounts. Allowance for doubtful accounts for years ending September 30, 2012 and 2011 was $128,799.

Property and Equipment

The Corporation capitalizes property and equipment at cost and depreciates these assets using the straight-line method over their useful lives, generally three to fifteen years. Leasehold improvements are amortized over the remaining term of the lease, or the useful life of the improvement, whichever is shorter. The Corporation capitalizes property and equipment with an original cost of $1,500 or more.

Revenue and Expense Recognition

The general federal appropriation is an unconditional, nonreciprocal contribution of cash to the Corporation from Congress. The federal appropriation is recognized as revenue in the year received.

Grants awarded to the Corporation are considered to be unrestricted unless specifically restricted by the donor. The Corporation has adopted a policy of recording donor-restricted grants as unrestricted revenue when the restrictions are met in the same reporting period. Net assets released from restrictions (i.e., the donor-stipulated purpose has been met and/or the stipulated time period has elapsed) are reported as reclassifications between the applicable classes of net assets in the combined statements of activities.

Royalties and other income include royalty payments related to certain productions funded by the Corporation and are recognized as earned.

Unconditional grants and contracts awarded by the Corporation from its general federal appropriation are recognized as expenses and payables when the applicable agreements are executed. All unconditional grants that are expected to be paid beyond one year are discounted to their present values.

Grant and contract refunds are recorded as unrestricted revenue when the amount of refund due the Corporation becomes known, normally when a final accounting by the grantee is submitted. If grant and contract refunds become known in the same period in which the grant or contract was expensed, the refunds are offset against grant and contract expenses. Unexpended balances of grants awarded by the Corporation are required to be returned to the Corporation by grantees.

Use of Estimates

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

NOTE B—SHORT-TERM INVESTMENTS

Short term investments consist of the following at September 30:

  20122011
Federal agency discount notes and debentures $60,105,375 $73,727,348
Commercial paper 32,974,917 34,953,455
Bank certificates of deposit 23,000,000 10,000,000
  $116,080,292 $118,680,803

Fair Value Measurements

ASC 820 provides the framework for measuring fair value. That framework includes a fair value hierarchy that prioritizes the inputs to valuation techniques used to value fair value. The guidance maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available.

Observable inputs are inputs that market participants would use in pricing the asset or liability based on market: data obtained from independent sources. Unobservable inputs reflect assumptions that market participants would use in pricing the asset or liability based on the best information available in the circumstances.

Based upon the transparency of inputs, the three levels of the fair value hierarchy under ASC 820 are described as follows:

  • Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the report date. A quoted price for an identical asset or liability in an active market provides the most reliable fair value measurement because it is directly observable to the market.

  • Level 2 - Fair value is based on pricing inputs other than quoted prices in active markets and which are either directly or indirectly observable as of the report date. The nature of these securities includes investments for which quoted prices are available but traded less frequently than securities traded on what are deemed active markets.
  • Level 3-Pricing of securities are unobservable as of the report date. The inputs to the determination of fair value are not observable and require significant judgment or estimation.

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. The categorization of a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Corporation's perceived risk of that instrument.

The following tables set forth, by investment category and level within the fair value hierarchy, the Corporation's short-term investments as of September 30, 2012 and 2011:

2012        
  Level 1 Level 2 Level 3 Total
Federal agency discount notes and debentures $ — $60,105,375 $ — $60,105,375
Commercial paper  — 32,974,917 32,974,917
Certificates of deposit 23,000,000  —  — 23,000,000
  $23,000,000 $93,080,292 $ — $116,080,292

2011        
  Level 1 Level 2 Level 3 Total
Federal agency discount notes and debentures $39,937,600 $33,789,748 $ — $73,727,348
Commercial paper 34,953,455  — 34,953,455
Certificates of deposit 10,000,000  — 10,000,000
  $49,937,600 $68,743,203  $ — $118,680,803

NOTE C—RECEIVABLES

Receivables consist of the following at September 30:

  20122011
Grants and grant refunds receivable $2,798,770 $3,162,345
U.S. Department of Education receivable 10,132,079 7,900,998
Other 100,627 381,722
Receivables 13,031,476 11,445,065
 
Less: allowance for doubtful accounts (128,799) (128,799)
Receivables 12,902,677 11,316,266
 
Current receivables 11,336,613 9,961,182
Noncurrent receivables 1,566,064 1,355,084
Receivables, net $12,902,677 $11,316,266

NOTE D—PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following at September 30:

  2012 2011
Furniture and equipment $2,275,332 $2,263,020
Software 1,671,688 1,671,688
Leasehold improvements 715,199 703,222
  4,662,217 4,637,930
 
Less: accumulated depreciation and amortization (3,936,771) (3,534,589)
Total property and equipment, net $725,446 $1,103,341

Depreciation and amortization expense was $402,182 and $491,867 for the years ended September 30, 2012 and 2011, respectively.

NOTE E—ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Depreciation and amortization expense was $402,182 and $491,867 for the years ended September 30, 2012 and 2011, respectively. Accounts payable and accrued expenses consist of the following at September 30

  20122011
Trade accounts payable $850,192 $285,935
Accrued personnel and related costs 5,683,085 5,074,875
Deferred rent liability 339,018 222,393
Other accrued expenses 345,217 886,206
Total accounts payable and accrued expenses $7,217,512 $6,469,409

NOTE F—APPROPRIATED GRANTS AND CONTRACTS PAYABLE

At September 30, the amounts due for appropriated grants and contracts payable were as follows:

  20122011
Amount payable:    
Within one year $69,203,702 $102,434,427
In one to five years 36,137,069 53,010,774
Total appropriated grants and contracts payable $105,340,771 $155,445,201
 
Less:  Unamortized discount -337,492 -414,711
Appropriated grants  and contracts payable, net $105,003,279 $155,030,490

All grants are stated at present value. Discount rates for contracts payable are based upon one- to three-­year Treasury yield curve rates on September 30, depending on the estimated maturity of each contract. The discount rates ranged from 0.17% to 0.31% for 2012 and from 0.13% to 0.42% for 2011.

NOTE G—UNRESTRICTED-DESIGNATED NET ASSETS

Unrestricted net assets as of September 30, which have been designated by the Board for specific purposes, are summarized as follows:

  20122011
Project funding commitments    
Television support $40,993,526 $15,192,693
Radio support 5,235,766 4,320,854
Digital 23,360,237 31,209,014
Next generation TV interconnection system 3,993,212 3,959,435
Radio interconnection system 58,169  
Other system  support and corporate administration 15,439,356 7,379,985
Total designated net assets $89,080,266 $62,061,981

NOTE H—PROGRAM AND SUPPORTING SERVICES

Descriptions of programs and supporting services conducted by the Corporation are as follows:

  • New TV Program Development represents expenses for development and support of high quality national television programming and educational projects that might not otherwise be supported by the marketplace.
  • Radio Program Fund represents expenses for the development and production of high quality, new and innovative radio programs that might not otherwise be supported by the marketplace.
  • National Program Production and Acquisition Grants are restricted grants made to qualified public radio stations, which must be used for the production, acquisition, promotion, or distribution of national radio programs that are of high quality, creative, and reflect society's diversity.
  • Community Service Grants are unrestricted general operating grants made to qualified public television and radio stations.
  • Digital refers to grants and other expenses supporting public television and radio stations in their efforts to convert their broadcasts to a digital transmission method.
  • Next Generation TV Interconnection provides funding for the development and implementation of a new interconnection system to be used by public television stations to transmit and receive programming feeds.
  • Radio Interconnection provides funding for the development and implementation of a new interconnection system to be used by public radio stations to transmit and receive programming feeds.
  • Ready-to-Learn is a five-year grant program funded by the U.S. Department of Education for research and the production of educational programming targeted towards children.
  • Other System Support represents expenses for the general support and development of the public broadcasting system. Funded activities include grants to qualified public television stations to help operate their interconnection systems, music royalty fees paid on behalf of the public broadcasting system and various other system-wide activities and functions.
  • Corporate Administration and Other Expenses includes supporting service expenses for Corporation staff, consultants and professional services, travel, printing, publications, rent, communications and utilities, data processing, and other administrative support. These expenses are limited by federal statute to 5.0% of the general appropriation. The proportion of corporate administrative and other expenses to the general appropriation was 4.8% and 4.9%, respectively, for 2012 and 2011.

Total corporate administration expense for the fiscal years ended September 30 is summarized as follows:

  20122011
Personnel and related costs $15,481,086 $15,373,438
Consultants and professional services 913,737 914,158
Facility and related costs 3,358,170 3,231,941
Travel and related costs 837,947 858,096
Other 375,965 406,954
Total corporate administration expense $20,966,905 $20,784,587
 
Depreciation and amortization 167,435 252,816
Total corporate administration and other expenses $21,134,340 $21,037,403

NOTE I—PENSION PLAN

The Corporation has a defined contribution pension plan covering substantially all of its employees. Contributions are made as the costs are incurred and are determined by varying percentages of employees' salaries. The total pension expense for fiscal years 2012 and 2011 was approximately $1,904,422 and $1,804,000, respectively.

NOTE J—LEASE COMMITMENTS

The Corporation is obligated under a lease agreement for office space through April 2020. Rent expense of approximately $2,785,786 and $2,714,000 for fiscal years 2012 and 2011, respectively, is reflected in corporate administration and other expenses in the accompanying combined statements of activities. The future minimum, rental payments under this non-cancelable operating lease are as follows:

2013 $2,470,972
2014 $2,508,037
2015 $2,545,657
2016 $2,583,842
2017 $2,622,600
Thereafter $6,953,601
  $19,684,709

NOTE K—INCOME TAXES

The Corporation adopted the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes, on October 1, 2009. Under ASC 740-10, an organization must recognize the tax benefit associated with tax positions taken for tax return purposes when it is more-likely-than-not that the position will be sustained. The implementation of ASC 740-10 had no impact on the Corporation's combined financial statements. The Corporation's management believes it has no material uncertain tax positions and; accordingly, it will not recognize any liability for unrecognized tax benefits. For the year ended September 30, 2012, the Corporation did not recognize any interest or penalties.

The tax years ended September 30, 2009, 2010, and 2011, remain open to examination by the taxing jurisdictions to which the Corporation is subject, and they have not been extended beyond the applicable statute of limitations.

NOTE L—SUBSEQUENT EVENTS

The Corporation evaluated subsequent events through January 7, 2013, which is the date the combined financial statements were available to be issued. The American Taxpayer Relief Act of 2012 (the "Act") was signed by the President of the United States of America on January 2, 2013. The Act delays the effects of sequestration discussed in Note A until March 27, 2013. There were no other events noted that required adjustment to or disclosure in these combined financial statements.