Notes to Consolidating Financial Statements
December 31, 2015 (With Summarized Comparative Information for December 31, 2014)
Note A - Nature of Activities
The Institute of Internal Auditors, Inc. (“the Institute”) was formed in 1941 as a not-for-profit corporation to cultivate, promote, and disseminate knowledge and information concerning internal auditing and related subjects. The Institute’s primary program activities include conducting seminars and conferences to educate and train internal auditors; publishing and selling periodicals and materials which inform internal auditors and members of the Institute of current professional issues, standards, and practices; offering examinations and certifications to internal auditors; and evaluating the performance of internal audit departments.
In conformity with accounting principles generally accepted in the United States of America (“GAAP”), the Institute’s consolidated financial statements include the accounts of the following organizations, which are separate legal entities:
- Institute of Internal Auditors - Research Foundation, Inc. (“the Foundation”), a not-for-profit corporation formed to expand knowledge and understanding of internal auditing by providing relevant research and educational products to advance the profession globally. The Institute’s Board of Directors has the authority to appoint the members of the Foundation’s governing body.
- Internal Auditing Academic Advancement Fund, Inc. (“the Fund”), a not-for-profit corporation formed to support the teaching of internal auditing, establish standards for internal auditing education at post-secondary educational institutions, and other related purposes. Certain of the Institute’s employees and board members serve as ex-officio directors and corporate officers of the Fund. Additionally, the Fund is a supporting organization of the Institute. Subsequent to December 31, 2015, the Fund was dissolved. All assets, liabilities, and net assets of the Fund were transferred to the Foundation at the time of dissolution.
- IIA Quality Services, LLC (“Quality Services”), a Florida limited liability company organized in 2013 for the purpose of conducting external quality assessments and related activities. The Institute is the sole member of Quality Services.
- Canadian Institute of Internal Auditors (“the Canadian Institute”), a not-for-profit Canadian corporation formed to cultivate, promote, and disseminate knowledge and information concerning internal auditing and related subjects in Canada. The Institute controls the Canadian Institute by virtue of provisions contained in the Canadian Institute’s governing documents. Due to the immateriality of the amounts involved, the activities and balances of the Canadian Institute are included in the financial statements of the Institute.
- IIA Properties, LLC (“IIA Properties”), a Florida limited liability company organized on May 20, 2008 for the purpose of owning real property and carrying on various real estate-related transactions. The Institute is the sole member of IIA Properties. Due to the immateriality of the amounts involved, the activities and balances of IIA Properties are included in the financial statements of the Institute.
- All significant interorganization balances and transactions have been eliminated in consolidation.
Note B - Summary of Significant Accounting Policies
Revenue recognition and operating activities
The Institute recognizes revenue and incurs expenses in its operation of the following activities:
Membership dues are recognized as income ratably throughout the year. Membership application fees are nonrefundable and are recognized as income when received. Expenses include the direct and indirect costs of delivering member benefits, as well as costs associated with recruiting new members and servicing and retaining existing members worldwide.
Certification fees are recognized as income in the period in which the exams are taken. Exam registration fees are nonrefundable and are recognized as income when received. Expenses include the direct and indirect costs of conducting exams.
Seminars and conferences
Seminar and conference fees are recognized as income in the period in which the event is completed. Expenses include the direct and indirect costs of conducting seminars and conferences.
Publishing and educational products
Subscriptions and print advertising revenue are recognized as income in the period in which the related publications are issued. Website advertising revenue is recognized as income ratably over the length of the advertising contract. Educational product sales are recognized as income when the related inventory is shipped. Expenses include the direct and indirect costs of producing and delivering publications and educational products, as well as website maintenance. Advertising costs are expensed as incurred.
North American services
Global Auditing Information Network (“GAIN”) subscription fees are recognized as income when the product is shipped. Expenses include fulfillment of GAIN subscriptions. GAIN is a knowledge exchange forum available to member organizations of the Institute. Audit Executive Center (“AEC”) membership dues are recognized ratably throughout the year. Membership application fees are nonrefundable and are recognized as income when received. Expenses include the direct and indirect costs of delivering member benefits, as well as costs associated with recruiting new members and servicing and retaining existing members worldwide.
Quality assessment service fees are recognized as income in the period in which the engagement is completed. Expenses include the direct and indirect costs of conducting quality assessments.
Webinar revenue is recognized as income in the period in which the webinar is completed, or ratably throughout the year for annual subscriptions to certain online offerings. Expenses include the direct and indirect costs of creating and conducting the webinars.
Expenses include the direct and indirect costs of creating and maintaining authoritative guidance organized in the International Professional Practices Framework.
During 2015 and 2014, the Foundation reimbursed the Institute for certain personnel-related costs and certain shared costs. Such reimbursements are reflected as expenses of the Foundation based on the nature of the specific expenses.
Additionally, the Institute absorbs certain overhead costs of the Foundation and the Fund, for which reimbursement is not required. Further, the Foundation provides certain personnel-related costs to the Fund, for which reimbursement is not required. These activities are reflected within “grants to/from affiliates” in the accompanying consolidating statement of activities.
Revenue received in advance of the recognition period is included in “deferred revenue” in the accompanying statement of financial position.
Restricted and unrestricted revenue and support
Contributions received are recorded as unrestricted, temporarily restricted, or permanently restricted support, depending on the existence and/or nature of any donor restrictions. Donor-restricted support is reported as an increase in temporarily or permanently restricted net assets, depending on the nature of the restriction. When a restriction expires (that is, when a stipulated time restriction ends or purpose restriction is accomplished), temporarily restricted net assets are reclassified to unrestricted net assets and reported in the accompanyingconsolidating statement of activities as “net assets released from use restrictions.”
Cash and cash equivalents
Investment instruments purchased with original maturities of three months or less are considered to be cash equivalents.
Investments are carried at estimated fair value.
Allowance for doubtful accounts
Accounts receivable are stated net of an allowance for doubtful accounts. The allowance for doubtful accounts is estimated based on an analysis of specific accounts, taking into consideration the age of the past due account and an assessment of the member’s or customer’s ability to pay. Accounts are considered past due when payments are not made in accordance with specified terms. Accounts are written off when management determines the amounts are uncollectible.
Property and equipment
Property and equipment are stated at cost and are depreciated using the straight-line method.
Deferred project costs
Costs related to seminars, website development and design, technology improvements, trademark registration, and educational product development or revision are deferred until the related projects are completed. Seminar costs are amortized over three or four years using the straight-line method, website costs over three years using the straight-line method, and educational product development or revision costs over three years at 60% the first year, 30% the second year, and 10% the third year.
Restricted investments consist of mutual funds held for an endowment fund of the Foundation, the distributions from which are to be used for scholarships for internal auditing students.
Restrictions on net assets
Temporarily restricted net assets consist primarily of amounts held by the Institute restricted for technological developments, amounts held by the Foundation restricted for the William G. Bishop Memorial Fund to be used for the Common Body of Knowledge program, and amounts held by the Fund restricted for educational activities. Permanently restricted net assets consist of an endowment fund held by the Foundation, the distributions from which are to be used for scholarships for internal auditing students.
The Institute is exempt from federal income tax under Internal Revenue Code Section 501(a) as an organization described in Section 501(c)(6) and from state income tax pursuant to state law. The Foundation and the Fund are exempt from federal income tax under Internal Revenue Code Section 501(a) as organizations described in Section 501(c)(3) and from state income tax pursuant to state law. Quality Services and IIA Properties are treated as disregarded entities for federal tax purposes. The Canadian Institute is exempt from taxation under applicable Canadian law. The Institute and Foundation engage in certain activities which are “unrelated business activities” as defined by the Internal Revenue Code, and which are subject to taxation. Income taxes on unrelated business income are recognized as expenses as incurred. The Fund, Quality Services, and IIA Properties have not incurred unrelated business income taxes. None of the organizations included in the consolidating financial statements have taken any material uncertain tax positions for which the associated tax benefits may not be recognized under GAAP.
Use of estimates
Management uses estimates and assumptions in preparing consolidating financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported revenues and expenses. Significant estimates used in preparing the accompanying consolidating financial statements include those used in estimating the fair value of investments, assessing the collectibility of accounts receivable, and determining the useful lives of property and equipment. Actual results could differ from the estimates.
Certain amounts included in the 2014 consolidated financial statements have been reclassified to conform to classifications adopted during 2015. The reclassifications had no material effect on the accompanying consolidated financial statements.
The organizations have evaluated for possible financial reporting and disclosure subsequent events through May 5, 2016, the date as of which the consolidating financial statements were available to be issued.
Note C - Concentration of Credit Risk
Each organization maintains its cash and cash equivalents in deposit accounts and money market funds which may not be federally insured, may exceed federally insured limits, or may be insured by an entity other than an agency of the federal government. The organizations have not experienced any losses in such accounts and believe they are not exposed to any significant credit risk related to cash and cash equivalents.
Note D - Investments
Investments consist of mutual funds and fixed income securities. The Institute and the Foundation consider all dividends and interest from investments as operating revenues and all gains and losses on investments as non-operating activities for purposes of the accompanying consolidating statement of activities.
Net (loss) gain on investments (included in “Non-Operating Activities” in the accompanying consolidating statement of activities) consisted of the following:
GAAP defines fair value for an investment generally as the price an organization would receive upon selling the investment in an orderly transaction to an independent buyer in the principal or most advantageous market for the investment. The information available to measure fair value varies depending on the nature of each investment and its market or markets. Accordingly, GAAP recognizes a hierarchy of “inputs” an organization may use in determining or estimating fair value. The inputs are categorized into “levels” that relate to the extent to which an input is objectively observable and the extent to which markets exist for identical or comparable investments. In determining or estimating fair value, an organization is required to maximize the use of observable market data (to the extent available) and minimize the use of unobservable inputs. The hierarchy assigns the highest priority to unadjusted quoted prices in active markets for identical items (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs). 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.
Following is a description of each of the three levels of input within the fair value hierarchy:
Level 1 – unadjusted quoted market prices in active markets for identical items
Level 2 – other significant observable inputs (such as quoted prices for similar items)
Level 3 – significant unobservable inputs
Note E - Property and Equipment
Depreciation expense for 2015 for the Institute and the Foundation amounted to $786,667 and $21,580, respectively. Depreciation expense for 2014 amounted to $700,544. As of December 31, 2014, “Land” includes property with a book value of $1,125,000, which was previously held for possible future development. The Institute sold the land for $1,200,000 during 2015.
Note F - Operating Leases
The Institute leases office space and office equipment under operating leases expiring through 2025. Approximate future lease payments related to such leases are as follows:
Total rent expense related to all leases and additional amounts for short-term rentals and related charges amounted to approximately $1,614,000 and $1,024,000 for 2015 and 2014, respectively.
Note G - Retirement Plans
The Institute maintains a Section 401(k) retirement plan. The Institute contributes a certain percentage of the total salary of eligible employees to the plan. During 2015 and 2014, the Institute contributed approximately $1,318,000 and $1,141,000, respectively, to this retirement plan.
The Institute maintains Section 457 deferred compensation plans for the benefit of certain employees. One plan permits employee salary deferral contributions, while another plan permits discretionary employer contributions. Employer contributions were $375,000 and $285,000 during 2015 and 2014, respectively. The Institute held $1,659,353 and $1,785,967 in the plans as of December 31, 2015 and 2014, respectively, which is reflected in the consolidating statement of financial position as “employee savings plans” and “deferred employee compensation.”
Note H - Commitments
The Foundation has entered into contracts and agreements with various parties for research projects. Unpaid commitments related to these contracts and agreements totaled approximately $236,000 as of December 31, 2015.
The Institute delivers certain of its examinations in a computer-based testing environment (referred to by the Institute as the “CBT” initiative). In connection with CBT, the Institute entered into an agreement with a third-party (“the hosting service”) which licenses application software for the management, operation, and administration of testing, certification, and licensure programs and maintains database functions related to such programs, all of which are offered as a hosted service. In connection with the agreement, the Institute agrees to pay the hosting service an annual license fee of $103,000 plus certain incremental fees based on actual volume as described in the agreement. In connection with CBT, the Institute has also entered into a test delivery services agreement with another third-party (“the test provider”). Pursuant to the terms of the agreement, the test provider is responsible for various tasks related to administering tests to participants. The test provider will be paid per test fees and various other fees pursuant to the terms of the agreement. The agreement expires during 2018, unless terminated earlier by one of the parties subject to the terms of the agreement. The test provider was paid approximately $1,969,000 and $1,863,000 during 2015 and 2014, respectively.
Note I - Expense Allocations
Total 2015 expenses for the Institute include approximately $34,499,000 of program expenses and $13,076,000 of administrative expenses.
Total 2015 expenses for the Foundation include approximately $2,057,000 of program expenses, $1,177,000 of administrative expenses, and $13,000 of fundraising expenses.
Total 2015 expenses for the Fund include approximately $339,000 of program expenses, $24,000 of administrative expenses, and $14,000 of fundraising expenses.
Total 2015 expenses for Quality Services include approximately $1,132,000 of program expenses and $383,000 of administrative expenses.
Total expenses for 2014 include approximately $31,684,000 of program expenses, $12,951,000 of administrative expenses, and $21,000 of fundraising expenses.