Fair Value Measurement of Financial Instruments

The assignment content is about the financial statements of a Foundation that invests in short-term instruments and provides healthcare services. The Foundation has a contract with Siemens and affiliated companies, which exceeded purchase commitments totaling $137,400,000. Additionally, the Foundation sold approximately $10 million in MGMTMatrix commercial paper before maturity, but later learned that the bankruptcy counsel filed to nullify redemption of certain MGMTMatrix commercial papers, resulting in a settlement payment of $3,900,000. The financial statements also include information about fair value measurements for assets and liabilities, which are based on observable inputs such as quoted prices and market rates, and unobservable inputs such as model-based techniques using significant assumptions not observable in the market.

Harris Memorial Hospital and Harris Community Foundation
Years Ended December 31, 20X7 and 20X6
Contents
Report of Independent Auditors 225
Combined Financial Statements
Combined Balance Sheets 226
Combined Statements of Operations 227
Combined Statements of Changes in Net Assets 228
Combined Statements of Cash Flows 229
Notes to Combined Financial Statements 231
Report of Independent Auditors—Pennypacker & Vandelay, LLC
The Board of Trustees
Harris Memorial Hospital and Harris Community Foundation
We have audited the accompanying combined balance sheets of Harris
Memorial Hospital and Harris Community Foundation and subsidiaries (the
Foundation) as of December 31, 20X7 and 20X6, and the related combined
statements of operations, changes in net assets, and cash flows for the years
then ended.
Management is responsible for the preparation and fair presentation of the
consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America; 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.

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 consolidated financial statements. The
procedures selected depend on our judgment, including the assessment of
the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making this risk assessment, we consider
internal control relevant to the Foundation’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 Foundation’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.
In our opinion, the financial statements referred to above present fairly, in all
material respects, the combined financial position of Harris Memorial
Hospital and Harris Community Foundation and subsidiaries at December 31,
20X7 and 20X6, and the combined changes in their net assets and their cash
flows for the years then ended in conformity with U.S. generally accepted
accounting principles.
TABLE 9A-1 Harris Memorial Hospital and Harris Community
Foundation Combined Balance Sheets (in Thousands)
December 31,
20X7
December 31,
20X6
Assets
Current assets

TABLE 9A-1 Harris Memorial Hospital and Harris Community
Foundation Combined Balance Sheets (in Thousands)
December 31,
20X7
December 31,
20X6
Cash and cash equivalents $82,815 $59,696
Assets limited as to use, current portion 5,327 5,088
Accounts receivable
Patients, less allowance for doubtful accounts
($25,302 in 20X7 and $23,014 in 20X6)
70,025 59,939
Other 28,990 24,995
Supplies 7,078 6,663
Total current assets 194,235 156,381
Assets limited as to use
For donor-restricted purposes 84,440 67,826
Board designated for specific purposes 382,835 378,413
Held by trustees under bond agreements 51,038 25,937
518,313 472,176
Less current portion 5,327 5,088
512,986 467,088
Property and equipment, net 563,349 458,829
Other assets 34,476 34,302
Total assets $1,305,046 $1,116,600
Liabilities and net assets

TABLE 9A-1 Harris Memorial Hospital and Harris Community
Foundation Combined Balance Sheets (in Thousands)
December 31,
20X7
December 31,
20X6
Current liabilities
Accounts payable $32,572 $24,631
Accrued expenses and other liabilities 58,878 53,725
Due to third-party payers 7,380 12,633
Current maturities of long-term debt 4,692 5,908
Total current liabilities 103,522 96,897
Long-term debt, less current maturities 439,597 332,354
Contingent professional liabilities 33,260 48,487
Due to broker 15,128 19,608
Other liabilities 20,713 5,298
Postretirement benefit obligation, other than pensions 8,207 7,694
Total liabilities 620,427 510,338
Net assets
Unrestricted 600,179 538,436
Temporarily restricted 55,213 40,393
Permanently restricted 29,227 27,433
Total net assets 684,619 606,262
Total liabilities and net assets $1,305,046 $1,116,600

TABLE 9A-2 Harris Memorial Hospital and Harris Community
Foundation Combined Statements of Operations (in Thousands)
December 31,
20X7
December 31,
20X6
Operating revenues and other support
Net patient service revenue $829,005 $774,662
Provision for doubtful accounts (55,851) (57,975)
Net patient service revenue less provision for
doubtful accounts
773,154 716,687
Other operating revenue 27,055 29,334
Total operating revenue 800,209 746,021
Operating expenses
Salaries and wages $371,449 $329,668
Employee benefits 81,532 77,231
Supplies and purchased services 228,244 225,497
Advertising 3,072 2,376
Staff enrichment 10,767 8,591
Occupancy cost 14,346 13,442
Depreciation 44,392 41,627
Interest 10,974 6,145
Operating expenses 764,776 704,577
Excess of revenue over expenses 35,433 41,444
Nonoperating gains (losses)

TABLE 9A-2 Harris Memorial Hospital and Harris Community
Foundation Combined Statements of Operations (in Thousands)
December 31,
20X7
December 31,
20X6
Contributions, gifts, and bequests 3,189 1,318
Net assets released from restrictions for
research expenditures
14,070 14,474
Research, education, and other nonoperating
expenses
(22,980) (24,773)
Change in interest rate swap value and put
agreements
1,578 9,397
Investment income 30,453 18,402
26,310 18,818
Excess of revenues and gains over expenses and
losses
$61,743 $60,262
TABLE 9A-3 Harris Memorial Hospital and Harris Community
Foundation Combined Statements of Changes in Net Assets (in
Thousands)
December 31,
20X7
December 31,
20X6
Unrestricted net assets
Excess of revenues and gains over expenses
and losses
$61,743 $60,262
Net assets released from restrictions for capital
expenditures
— 119
Cumulative effect of change in accounting
principle
— (3,943)
Increase in unrestricted net assets 61,743 56,438

TABLE 9A-3 Harris Memorial Hospital and Harris Community
Foundation Combined Statements of Changes in Net Assets (in
Thousands)
December 31,
20X7
December 31,
20X6
Temporarily restricted net assets
Contributions, gifts, and bequests 20,435 15,512
Investment income 8,455 3,972
Net assets released from restrictions for
research expenditures
(14,070) (14,474)
Net assets released from restrictions for capital
expenditures
— (119)
Increase in temporarily restricted net assets 14,820 4,891
Permanently restricted net assets
Contributions, gifts, and bequests 1,794 3,218
Increase in permanently restricted net assets 1,794 3,218
Net assets at beginning of year 606,262 541,715
Net assets at end of year $684,619 $606,262
TABLE 9A-4 Harris Memorial Hospital and Harris Community
Foundation Combined Statements of Cash Flows (in Thousands)
December 31,
20X7
December 31,
20X6
Operating activities
Increase in net assets $78,357 $64,547
Adjustments to reconcile increase in net assets to net
cash provided by operating activities

TABLE 9A-4 Harris Memorial Hospital and Harris Community
Foundation Combined Statements of Cash Flows (in Thousands)
December 31,
20X7
December 31,
20X6
Change in net unrealized gains and losses on
investment securities
(26,358) 11,432
Cumulative effect of change in accounting principle — (3,943)
Depreciation 44,392 41,627
Gain on sale or disposal of assets, net (6,119) —
Provision for bad debts 55,851 57,975
Change in interest rate swap value and put
agreements
(1,578) (9,397)
Changes in operating assets and liabilities
Assets limited as to use (19,779) (14,274)
Accounts receivable (65,937) (51,251)
Other assets (7,071) (43)
Supplies (415) 840
Accounts payable 7,941 10,613
Accrued expenses and other liabilities 20,568 8,430
Due to third-party payers (5,253) (4,877)
Contingent professional liabilities (15,227) 3,743
Postretirement benefit obligation, other than
pensions
513 456
Net cash provided by operating activities 59,885 115,878

TABLE 9A-4 Harris Memorial Hospital and Harris Community
Foundation Combined Statements of Cash Flows (in Thousands)
December 31,
20X7
December 31,
20X6
Investing activities
Property and equipment acquired (142,793) (159,943)
Cash used in investing activities (142,793) (159,943)
Financing activities
Repayment of long-term debt (177,294) (5,545)
Proceeds from borrowing 283,321 57,614
Net cash provided by financing activities 106,027 52,069
Net increase in cash and cash equivalents 23,119 8,004
Cash and cash equivalents at beginning of year 59,696 51,692
Cash and cash equivalents at end of year $82,815 $59,696
Harris Memorial Hospital and Harris Community Foundation
Notes to Combined Financial Statements
December 31, 20X7
1. Organization and Significant Accounting Policies
Organization and Basis of Combination
Harris Memorial Hospital (the Hospital) and Harris Community Foundation (the
Foundation) are a hospital and charitable foundation located in Jersey, Ohio. The
Hospital and Foundation are exempt from federal income taxes under Section
501(c)(3) of the Internal Revenue Code (IRC). The Hospital and Foundation are
collectively referred to herein as the Foundation.
The Foundation owns and operates the Renee Center, which has 27 skilled nursing
beds; Harris Assurance, Ltd. (Assurance), a for-profit, wholly owned insurance
subsidiary; and Harris Properties (Condit Inn), a for-profit, wholly owned subsidiary.
During 20X6, the Foundation formed the Harris Community Hospital Corporation
(dba Harris Hospital) located in Oldstone, Ohio and the Harris Long Term Acute Care
Hospital Corporation (dba Harris Continuing Care Hospital) located in Jersey, Ohio.

The 60-bed Harris Continuing Care Hospital opened in May 20X7. Harris Hospital,
with 92 beds, opened in late July 20X7. At December 31, 20X7, the Foundation has
remaining commitments totaling approximately $7,360,000 under construction
contracts for these and other capital projects.
The Foundation is affiliated with the Harris Health Plan (the Health Plan). The Health
Plan’s financial statements are not included in these combined financial statements.
The Foundation provides healthcare services in the central Ohio region. All
appropriate intercompany accounts have been eliminated in combination.
Cash Equivalents
The Foundation considers all undesignated highly liquid investments with maturities
of 3 months or less when purchased to be cash equivalents.
Supplies
Supplies are stated at cost (first-in, first-out method), which is not in excess of
market value.
Patient Accounts Receivable
Patient accounts receivable are stated at estimated net realizable value. Significant
concentrations of patient accounts receivable were 20% and 19% at December 31,
20X7 and 20X6, respectively, from government-related programs. Patient accounts
receivable from the Health Plan were 25% and 29% at December 31, 20X7 and
20X6, respectively.
The Foundation maintains allowances for uncollectable accounts for estimated
losses resulting from a payer’s inability to make payments on accounts. The
Foundation uses a balance sheet approach to value the allowance account based on
historical write-offs, payer type, and the aging of the accounts. Accounts are written
off when collection efforts have been exhausted. Management continually monitors
and adjusts, as necessary, allowances associated with its receivables. The majority
of uncollectable accounts are from uninsured and the patient portion of accounts
receivable.
Assets Limited as to Use
Assets limited as to use at December 31, 20X7, include 76% and 9% held under
master trust agreements with Liberty Eagle Trust and Highbanks, respectively, and
15% held in government-insured time deposits and other financial instruments.
Assets limited as to use at December 31, 20X6, include 78% and 5% held under
master trust agreements with Liberty Eagle Trust and Highbanks, respectively, and
17% held in government-insured time deposits and other financial instruments. The
investments held under the master trust agreements are diversified among equity,
debt, and money market instruments and are reported at estimated fair value. The
fair value of these investments is generally based on quoted market prices on
national exchanges.
Property and Equipment
Property and equipment are recorded at cost at the date of acquisition or estimated
fair value at the date of donation. Depreciation is computed on the straight-line
method using the estimated economic lives of the depreciable assets, generally
ranging from 3 to 40 years. Expenditures that materially increase values, change
capacities, or extend useful lives are capitalized. Routine maintenance and repair
items are charged to operating expenses.
The Foundation evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long-lived assets may warrant
revision or that the remaining balance of an asset may not be recoverable. The
assessment of possible impairment is based on whether the carrying amount of the
asset exceeds the expected total undiscounted value of cash flows expected to
result from the use of the assets and their eventual disposition. No amounts were
recognized in 20X6.

In 20X7, the Foundation recorded a charge of $4,000,000, net of reimbursement, for
unrecoverable costs incurred in connection with repair and maintenance costs of
the Condit Inn.
Derivative Financial Instruments
The Foundation accounts for its derivatives under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, or
SFAS No. 133. SFAS No. 133 requires that all derivative financial instruments that
qualify for hedge accounting be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair value of derivative financial instruments are recognized
periodically either in operations or in changes in unrestricted net assets. The
Foundation’s policy is to not hold or issue derivatives for trading purposes and to
avoid derivatives with leverage features.
Restricted Support
The Foundation records unconditional promises of cash or other assets at estimated
fair value on the date the promises are received. The Foundation reports gifts of
cash and other assets as restricted support if they are received with donor
stipulations that limit the use of the donated assets. When a donor restriction
expires, that is, when a stipulated time restriction ends or a purpose of restriction is
accomplished, temporarily restricted net assets are reclassified to unrestricted net
assets and reported in the combined statements of operations or combined
statements of changes in net assets (based on nature of restriction) as net assets
released from restrictions.
The Foundation reports gifts of land, buildings, and equipment 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 the assets
are to be used and gifts of cash or other assets that must be used to acquire long-
lived assets are reported as restricted support. The Foundation reports expirations
of donor restrictions when the donated or acquired long-lived assets are placed in
service.
Permanently restricted net assets have been restricted by donors to be maintained
by the Foundation in perpetuity. The income from permanently restricted net assets
is recorded as unrestricted unless explicitly restricted by donors. Donor-restricted
income on permanently restricted net assets is generally available to support
research and education and is reported as temporarily restricted.
The Foundation’s temporarily restricted net assets are restricted primarily for
research, education, capital projects, and medical care programs and its
permanently restricted net assets are primarily restricted for endowment purposes.
Net Patient Service Revenue
Net patient service revenue is reported at estimated net realizable amounts from
patients, third-party payers, and others for services rendered and includes
estimated retroactive revenue adjustments due to future audits, reviews, and
investigations. Retroactive adjustments are considered in the recognition of
revenue on an estimated basis in the period the related services are rendered, and
such amounts are adjusted in future periods as adjustments become known or as
years are no longer subject to such audits, reviews, and investigations.
Charity Care
The Foundation provides care without charge or at amounts less than its
established rates to patients who meet certain criteria under its charity policy.
Because the Foundation does not pursue collection of amounts determined to
qualify as charity care, they are not reported as revenue. Hospital charges foregone
for charity care, based on established rates, were approximately $35,200,000 in
20X7, prior to application of disproportionate share funds of approximately
$4,800,000 received from the State of Ohio, and $35,300,000 in 20X6, prior to
application of disproportionate share funds of approximately $5,800,000 received

from the State of Ohio. Clinic charges forgone for charity care, based on established
rates, were $12,525,000 and $10,216,000 in 20X7 and 20X6, respectively.
Health Insurance Program Reimbursement
Revenue from the Medicare and Medicaid programs accounted for approximately
45% and 8%, respectively, of the Foundation’s net patient service revenue for the
year ended December 31, 20X7, and 51% and 11%, respectively, for the year ended
December 31, 20X6. Laws and regulations governing the Medicare and Medicaid
programs are extremely complex and are subject to interpretation. Federal
regulations require the submission of annual cost reports covering medical costs
and expenses associated with services provided to program beneficiaries. Medicare
and Medicaid cost report settlements are estimated in the period services are
provided to beneficiaries. As a result, there is at least a reasonable possibility that
recorded estimates will change by a material amount in the near term. The 20X7
and 20X6 net patient service revenue increased (decreased) approximately
$10,340,000 and $(1,332,000), respectively, due to changes in allowances
previously estimated as a result of the final settlements for years that are no longer
subject to audits, reviews, and investigations. The Foundation believes that it is in
compliance with all applicable laws and regulations and is not aware of any pending
or threatened investigations involving allegations of potential wrongdoing.
Medicare cost reports filed by the Hospital for all years before 20X4 have been
audited and settled as of December 31, 20X7. Medicare cost reports filed by the
Clinic for all years before 20X0 have been audited and settled as of December 31,
20X7. Amounts due to the Medicare and Medicaid programs totaled approximately
$7,380,000 and $12,633,000 at December 31, 20X7 and 20X6, respectively, and
are included in due to third-party payers in the accompanying combined balance
sheets.
Nonoperating Gains and Losses
Nonoperating gains and losses include unrestricted contributions, gifts and
bequests, interest earnings on investments, net assets released from restrictions for
research and education expenditures (net of contributions for such expenditures),
change in interest rate swap value and put agreements, and other gains and losses
unrelated to the Foundation’s primary operations.
Excess of Revenues and Gains over Expenses and Losses
Included in excess of revenues and gains over expenses and losses in the
accompanying combined statements of operations are all changes in unrestricted
net assets other than net assets released from restrictions for capital expenditures,
unrealized gains and losses on investments other than trading investment
securities, and investment returns restricted by donors.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
Other
Certain reclassifications of donor trust liabilities, previously included in assets
limited as to use, were made to the 20X6 combined financial statements to conform
to the 20X7 presentation.
Additionally, in previous years, the Foundation’s investment portfolio (see Note 7)
was classified as other than trading. As such, unrealized gains and losses that were
considered temporary were excluded from excess of revenues and gains over
expenses and losses. During fiscal year 20X7, the Foundation determined that
substantially all of its investment portfolio was more accurately classified as trading
with unrealized gains and losses included in excess of revenues and gains over
expenses and losses. Therefore, a reclassification was made in the accompanying

20X6 combined financial statements to reflect this change in classification. A net
unrealized loss of approximately $9,183,000 was reclassified from change in net
unrealized gains and losses on investment securities to investment income.
2. Contingent Professional Liabilities
The Foundation self-insures substantially all of its professional liability risk through
its wholly owned insurance subsidiary. A commercial insurance policy is maintained
to insure claims exceeding $7,000,000 individually or $35,000,000 in the aggregate
in 20X7 on a claims-made basis. Contingent professional liabilities are recorded for
incurred but not reported claims and reported claims based on estimates by
independent actuaries. Management established a fund for the purpose of setting
aside assets based on estimates made by independent actuaries, and these funds
are reported in the combined balance sheets as assets limited as to use.
3. Property and Equipment
TABLE 9A-5 Property and Equipment and Related Accumulated
Depreciation (in Thousands)
December 31,
20X7
December 31,
20X6
Land and improvements $26,945 $26,610
Buildings and improvements
expenditures
447,897 265,965
Fixed and movable equipment 469,441 427,882
Construction-in-progress 112,880 189,807
1,057,163 910,264
Less accumulated depreciation 493,814 451,435
$563,349 $458,829
4. Long-Term Debt
In July 20X7, the Foundation issued the Series 20X7 LTACH Revenue Bonds totaling
$15,700,000. The Series 20X7 LTACH Revenue Bonds are due July 20X2 with
principal and interest payments due monthly. Interest accrues at 65% of LIBOR plus
100 basis points. Effective with the issuance of the bonds, the Foundation entered
into a fixed rate swap agreement for the amount of the bonds by which the
Foundation pays a fixed rate of interest of 4.55%. The change in fair value for the
period ended December 31, 20X7 was not significant to the increase in net assets.
In November 20X6, the Foundation issued Series 20X6 Revenue Bonds with a par
amount of $233,350,000. Proceeds were used to advance refund $31,280,000 of
the Series 20X0A Revenue Bonds, current refund $58,410,000 of the Series 20X1
Revenue Bonds, and finance and/or refinance expansion projects. The Series 20X6
Bonds were issued as Auction Rate Securities and generally bear interest for
successive 7-day auction periods at interest rates determined through Dutch
auctions on the business day preceding the auction period. Any series or subseries
of the Series 20X6 Revenue Bonds may be converted at the option of the

Foundation, subject to certain restrictions, to bonds that bear interest in different
rate periods, including daily, weekly, flexible, term, or fixed rate periods. The Series
20X6 Revenue Bonds contain certain restrictive covenants, including minimum
levels of debt service coverage. Management believes the Foundation is in
compliance with all covenants.
TABLE 9A-6 Long-Term Debt (in Thousands)
December
31, 20X7
December
31, 20X6
Revenue bonds, LTACH Series 20X7; interest at 65% of
LIBOR plus100 basis points (4.647% at December 31,
20X7); principal and interest payable monthly through July
20X2
$15,679 $—
Revenue bonds, Series 20X6A-1; interest accrues for
successive7-day auction periods at interest rates
determined through Dutch auctions (3.800% at December
31, 20X7)
42,375 —
Revenue bonds, Series 20X6A-2; interest accrues for
successive7-day auction periods at interest rates
determined through Dutch auctions (3.800% at December
31, 20X7)
42,400 —
Revenue bonds, Series 20X6B; interest accrues for
successive 7-day auction periods at interest rates
determined through Dutch auctions (3.850% at December
31, 20X7)
56,550 —
Revenue bonds, Series 20X6C; interest accrues for
successive 7-day auction periods at interest rates
determined through Dutch auctions (3.850% at December
31, 20X7)
55,275 —
Revenue bonds, Series 20X6D; interest accrues for
successive 7-day auction periods at interest rates
determined through Dutch auctions (3.900% at December
31, 20X7)
36,750 —
Revenue bonds, Series 20X1; interest accrues at a daily
rate determined by the remarketing agent (3.960% at
December 31, 20X7); interest and principal payable
annually through 20X1 (principal payments began in
20X6)
90,360 151,800
Revenue bonds, Series 20X0A; interest at 5.375%;
interest and principal payable annually through 20X9
2,700 35,230

TABLE 9A-6 Long-Term Debt (in Thousands)
December
31, 20X7
December
31, 20X6
Revenue bonds, Series 20X0B; interest accrues at a daily
rate determined by the remarketing agent (3.960% at
December 31, 20X7); interest and principal payable
annually through 20X9
83,200 84,500
Line of credit 19,000 46,686
Interim construction loan — 7,000
Other — 13,046
444,289 338,262
Less current maturities 4,692 5,908
$439,597 $332,354
In January 20X6, the Foundation entered into a revolving line of credit with Bank of
Central Ohio to fund interim construction costs and provide for liquidity and other
short-term needs. In accordance with terms of the loan agreement, the total
available for borrowing was decreased from $70,000,000 to $30,000,000 30 days
following the issuance of the Series 20X6 Revenue Bonds. The total amount drawn
as of December 31, 20X7 was $19,000,000. Interest is payable quarterly at a rate
equal to the lesser of the maximum lawful rate or LIBOR plus 15 basis points (5.71%
at December 31, 20X7). Amounts drawn are due in full June 25, 20X9.
The Foundation issued Series 20X1 Revenue Bonds with a par amount of
$158,000,000 that were partially refunded in November 20X6. The net proceeds
were used to fund expansion projects.
The Foundation issued Series 20X0A Revenue Bonds with a par amount of
$42,025,000 that were partially refunded in November 20X6 and Series 20X0B
Revenue Bonds with a par amount of $91,200,000. The majority of the proceeds
from the Series 20X0A and Series 20X0B Revenue Bonds were used to refund the
current Series 19X8 Revenue Bonds with an outstanding balance of $19,147,000
and a note payable with an outstanding par amount of $88,000,000.
The Series 20X0A and Series 20X0B Revenue Bonds and the Series 20X1 Revenue
Bonds contain certain restrictive covenants, including minimum levels of debt
service coverage. Management believes the Foundation is in compliance with all
covenants.
1. The Series 20X0B Revenue Bonds and the Series 20X1 Revenue Bonds are variable
rate bonds in a daily mode and can be tendered by holders upon demand. A
remarketing agent selected by the Foundation determines the interest rates and
remarkets both series of bonds. The Series 20X0B Revenue Bonds and the Series
20X1 Revenue Bonds are supported by Standby Bond Purchase Agreements (the
Agreements) with liquidity providers pursuant to which the providers will purchase
any bonds the remarketing agent is unable to market. The termination date of the

two Agreements related to the Series 20X0B Revenue Bonds was December 6,
20X7. On October 18, 20X7, these Agreements were extended to December 4,
20X8. There are also two Agreements associated with the Series 20X1 Revenue
Bonds. The termination date of the first Agreement related to the Series 20X1
Revenue Bonds was December 6, 20X7, and on October 18, 20X7, was extended to
December 4, 20X8. The termination date of the second Agreement related to the
Series 20X1 Revenue Bonds is December 15, 20X5, as extended in November 20X4.
All Agreements include covenants that are customary in credit agreements of this
nature. Repayment of bonds purchased under the Agreements is subject to a 5-year
payout beginning July 20X6, if other liquidity facilities, as defined in the bond
agreements, are not executed. The maturities of long-term debt, net of unamortized
premium, as of December 31, 20X7, are shown below (in thousands):
20X8 $4,692
20X9 23,902
20X0 5,136
20X1 5,353
20X2 19,896
Thereafter 385,310
$444,289
2. Total interest costs incurred during fiscal 20X7 and 20X6 were $16,779,140 and
$9,339,000 respectively, including $5,805,140 and $3,194,000 of capitalized
interest costs in 20X7 and 20X6, respectively. Interest paid during fiscal 20X7 and
20X6 was $16,937,249 and $9,084,500, respectively, net of amounts capitalized.
3. Concentrations of Credit Risk
Harris Memorial grants credit without collateral to its patients, most of whom are
local residents and are insured under third-party payer agreements. The mix of
receivables from patients and third-party payers was as follows:
TABLE 9A-7 Mix of Receivables
December 31, 20X7 December 31, 20X6
Medicare 21% 19%
Medicaid 2 2
Major payer 1 15 15
Major payer 2 11 11

TABLE 9A-7 Mix of Receivables
December 31, 20X7 December 31, 20X6
Major payer 3 11 13
Other third-party payers 28 28
Private pay 12 12
Total 100% 100%
4. Interest Rate Swap Agreements
Effective December 20X1, the Foundation entered into an interest rate swap
agreement with an initial notional amount of $150,000,000. The interest rate swap
agreement converts a notional amount of $150,000,000 of floating rate borrowings
to fixed rate borrowings. The Foundation pays a fixed rate of interest (5.17%) and
receives, from the counterparty, a variable rate of interest based on the SIFMA
Municipal Swap Index (SIFMA Index) on the outstanding principal balance of the
Series 20X1 Revenue Bonds until 2031. The Foundation has elected not to apply
hedge accounting; therefore, the change in fair value is included in nonoperating
(gains) losses. The fair value of the interest rate swap at December 31, 20X7 and
20X6, is a liability of approximately $9,498,000 and $16,530,000, respectively, and
is included in due to broker in the accompanying combined balance sheets. The
change in the fair value of the interest rate swap is included in nonoperating gains
(losses) and totaled approximately $(7,032,000) and $(6,885,000) for the years
ended December 31, 20X7 and 20X6, respectively. The change in fair value for the
year ended December 31, 20X7 includes the amendment fee paid to the
counterparty of $7,037,000, realized as a part of the Series 20X1 Revenue Bond
refunding.
Simultaneous with entering into the interest rate swap agreement, the Foundation
also entered into a put agreement with the counterparty. The counterparty may
exercise this put agreement if the daily weighted average of the SIFMA Index is
greater than 7.00% for the 180-day period ending on the day the counterparty
exercises the put option. Under this agreement, the Foundation pays a variable rate
of interest, based on the SIFMA Index, on the outstanding principal balance of the
proposed bonds until 2031. For this put agreement, the counterparty pays the
Foundation an annual premium of 77.30 basis points on an initial notional amount of
$150,000,000 over the term of the put agreement, for a net effective combined
annual payment by the Foundation to the counterparty for the swap agreement and
the put agreement of approximately 4.39%. The premium payment, however, will
cease upon exercise of the put agreement. This put agreement, if exercised, will
offset the cash flows of the interest rate swap agreement noted above. The fair
value of the put agreement at December 31, 20X7 and 20X6, is an asset of
$4,200,000 and $7,016,000, respectively, and has been included in other assets.
The change in the fair value of $(2,816,000) and $(552,000) for the years ended
December 31, 20X7 and 20X6, respectively, has been included in nonoperating
gains (losses) since the put agreement is not a hedge and must be adjusted to fair
value through the performance indicator. A portion of the change in fair value for
the year ended December 31, 20X7 includes the amount related to the partial
refunding of the Series 20X1 Revenue Bonds. The amendment fee received from
the counterparty was $2,005,000.

On October 30, 20X2, the Foundation entered into an interest rate swap agreement
with an initial notional amount of $96,400,000 ($88,400,000 Series 20X0A and
Series 20X0B and $8,000,000 Series 20X1). The interest rate swap agreement
converts a notional amount of $96,400,000 of floating rate borrowings to fixed rate
borrowings. The Foundation pays a fixed rate of interest (4.34)% and receives, from
the counterparty, a variable rate of interest based on the SIFMA Index on the
outstanding principal balance of the Revenue Bonds until 2031. The Foundation has
elected not to apply hedge accounting; therefore, the change in fair value is
included in nonoperating (gains) losses. The fair value of the interest rate swap at
December 31, 20X7 and 20X6, is a liability of approximately $3,020,000 and
$3,078,000, respectively, and is included in due to broker in the accompanying
combined balance sheets. The change in the fair value of the interest rate swap is
included in nonoperating gains (losses) and totaled approximately $(58,000) and
$(3,639,000) for the years ended December 31, 20X7 and 20X6, respectively. The
change in fair value includes the amendment fee of $176,000 paid to the
counterparty to terminate the portion of the interest rate swap agreement
associated with the Series 20X1 Revenue Bonds. Simultaneous with entering into
the interest rate swap agreement, the Foundation also entered into a put
agreement with the counterparty. The counterparty may exercise this put
agreement if the daily weighted-average of the SIFMA Index is greater than 6.00%
for the 180-day period ending on the day the counterparty exercises the put option.
Under this agreement, the Foundation pays a variable rate of interest, based on the
SIFMA Index, on the outstanding principal balance of the related bonds until 2031.
For this put agreement, the counterparty pays the Foundation an annual premium
of 110.10 basis points on an initial notional amount $96,400,000 over the term of
the put agreement, for a net effective combined annual payment by the Foundation
to the counterparty for the swap agreement and the put agreement of
approximately 3.24%. The premium payment, however, will cease upon exercise of
the put agreement. This put agreement, if exercised, will offset the cash flows of the
interest rate swap agreement noted above. The fair value of the put agreement at
December 31, 20X7 and 20X6, is an asset of approximately $4,970,000 and
$5,056,000, respectively, and has been included in other assets. This change in fair
value of $(86,000) and $(575,000) for the years ended December 31, 20X7 and
20X6, respectively, has been included in nonoperating gains (losses) since the put
agreement is not a hedge and must be adjusted to fair value through the
performance indicator. The change in fair value includes the amendment fee of
$198,000 received from the counterparty to terminate the portion of the put
agreement associated with the Series 20X1 Revenue Bonds.
In anticipation of the issuance of the Series 20X6 Bonds, the Foundation entered
into five interest rate swap transactions in October 20X6 with an initial notional
amount totaling $233,350,000.
The swap transactions serve to substantially fix the expected net interest expense
associated with the Series 20X6 Bonds by converting floating rate borrowings with a
notional amount of $233,350,000 to fixed rate borrowings. For the swaps related to
the Series 20X6A and 20X6B Bonds, the Foundation pays a fixed rate of 3.502% per
annum, and the counterparty pays a variable rate of interest at a rate equal to
57.4% of the 1-month LIBOR rate plus a spread of 0.33%. For the swaps related to
the Series 20X6C Bonds and 20X6D Bonds, the Foundation pays a fixed rate of
3.496% per annum, and the counterparty pays a variable rate of interest at a rate
equal to 57.4% of the 1-month LIBOR rate plus a spread of 0.33%.
The Foundation has elected not to apply hedge accounting; therefore, the change in
fair value is included in nonoperating (gains) losses. The fair value of the interest
rate swaps at December 31, 20X7 is a liability of approximately $2,610,000, which
equates to the change in fair value from inception of the swaps through the year
ended December 31, 20X7.

The Foundation can terminate any of these agreements at any time at current
market value. The Foundation would make or receive a payment depending on
market value on the date of termination.
The Foundation is exposed to credit losses in the event of nonperformance by the
counterparty to the agreements. The counterparty is a creditworthy financial
institution, and the Foundation anticipates that the counterparty will be able to fully
satisfy its obligation under the agreements.
5. Pension Plans
The Foundation implemented a 401(a) defined contribution plan and a 403(b)
voluntary savings plan covering substantially all employees. The Foundation
contributes from 6% to 13% of participating employees’ compensation. Prior to
January 1, 20X6, the Foundation’s contributions were based on participating
employees’ age. The plan was amended January 1, 20X6 and these contributions
are now based on years of service. The Foundation’s contribution expense was
approximately $28,495,000 and $26,121,000 in 20X7 and 20X6, respectively.
The Foundation sponsors a defined benefit postretirement plan that provides
medical and dental benefits to retirees who meet specific eligibility requirements
upon termination of active service. The plan is unfunded and requires covered
retirees to contribute a portion of the cost of benefits. The Foundation uses an
incremental cost approach in estimating the annual accrued cost related to
postretirement benefits other than pensions, which is based on estimates by
independent actuaries. Such an approach is considered appropriate since
substantially all of the healthcare benefits are provided by the Foundation to
retirees, using the Health Plan to manage the care provided. Plan expenses incurred
by the Foundation were $880,000 and $822,000 for the years ended December 31,
20X7 and 20X6, respectively.
6. Assets Limited as to Use
Certain cash and investments, where their use is limited due to board designations
or other purposes as set forth below, are reported as assets limited as to use. The
carrying values (in thousands) are at estimated fair values, which are summarized
in TABLE 9A-8.
TABLE 9A-8 Assets Limited as to Use
December
31, 20X7
December
31, 20X6
Assets limited as to use and long-term investments
For donor-restricted purposes, such as
research,lectureships, and capital projects
$84,440 $67,826
Board designated for specific purposes
Funded depreciation 133,028 118,618
Contingent professional liabilities 33,357 46,566
Institutional research 18,072 16,241

TABLE 9A-8 Assets Limited as to Use
December
31, 20X7
December
31, 20X6
Investments held by subsidiary 19,925 16,019
Other board designated 178,453 180,969
382,835 378,413
Held by trustees under bond agreements 51,038 25,937
518,313 472,176
Less current portion of assets limited as to use 5,327 5,088
$512,986 $467,088
Investment income or loss is included in the excess of revenues and gains over
expenses and losses, and includes realized and unrealized gains and losses,
interest, and dividends.
TABLE 9A-9 The Foundation’s Assets Limited as to Use at
December 31 (in Thousands)
December 31,
20X7
December 31,
20X6
Carried at fair value
Money market accounts $83,900 $58,833
Certificates of deposit 1,651 2,151
U.S. Treasury securities 74,896 75,195
Corporate debt securities 53,412 82,657
Equity securities 304,454 253,340
518,313 472,176
Less current portion of assets limited as 5,327 5,088

TABLE 9A-9 The Foundation’s Assets Limited as to Use at
December 31 (in Thousands)
December 31,
20X7
December 31,
20X6
to use
$512,986 $467,088
7. Commitments and Contingencies
The Foundation leases equipment and a medical office building under operating
leases. These payments are due monthly through December 2012. Rent expense
totaled approximately $7,426,000 and $8,715,000 in 20X7 and 20X6, respectively.
Future minimum lease commitments under operating leases that have initial or
remaining lease terms in excess of 1 year are as follows as of December 31, 20X7
(in thousands):
20X8 $3,410
20X9 3,544
20X0 3,252
20X1 2,886
20X2 2,287
$15,379
Sale of Medical Office Building
On December 29, 20X7, the Foundation sold a medical office building to Ross
Acquisition of Alexandria (RA) for approximately $22,200,000. The building had a
book value of approximately $10,900,000. The transaction included a ground lease
with a term of 50 years and HR prepaid the rent totaling approximately $900,000.
The Foundation entered into lease-back agreements for space within the building.
The Foundation recognized an immediate gain of approximately $6,100,000 and a
deferred gain of approximately $4,300,000 to be recognized over a period equal to
the operating lease term.
Other
The Foundation is a defendant in various legal proceedings arising in the ordinary
course of business. Although the results of litigation cannot be predicted with
certainty, management believes the outcome of pending litigation will not have a
material adverse effect on the Foundation’s combined financial statements.
On February 21, 20X3, the Foundation entered into a 10-year Master Customer
Agreement with COTC, for the provision of services, supplies, and equipment. The
agreement provides a platform for the development of the Zuber Center as a fully
integrated, all-digital facility. COTC will support the Foundation in five core areas:
healthcare information technology applications and infrastructure, medical
equipment, telecommunications power, and “smart” building technologies. The

agreement provides for a commitment of approximately $200,000,000 from the
Foundation to purchase certain goods and services at favorable prices. The
Foundation has certain minimum yearly purchase commitments ranging from
$10,000,000 to $25,000,000 over the 10-year term of the agreement. For the years
ended December 31, 20X7 and 20X6, the Foundation purchased approximately
$22,353,000 and $26,372,000, respectively, in goods and services from Siemens
and affiliated companies, which exceeded the purchase commitments in those
years. Goods and services purchased under the contract total approximately
$137,400,000.
The Foundation invests in short-term instruments as part of its money management
program. These instruments include short-term government securities and
investment grade commercial paper. Generally, an investment firm on behalf of the
Foundation manages these investments, and the Foundation has invested in a
number of short-term investment grade commercial papers over the years. On
October 29, 20X1, the Foundation sold approximately $10,000,000 in MGMTMatrix
commercial paper prior to maturity. MGMTMatrix filed a voluntary petition for relief
under Chapter 11 on February 17, 20X1. On October 6, 20X3, the Foundation
learned that the bankruptcy counsel for MGMTMatrix filed, in U.S. Bankruptcy Court
in the District of New York, an attempt to nullify the redemption of certain
MGMTMatrix commercial paper including that divested by the Foundation. The case
was settled in December 20X7 for approximately $3,900,000 and is included in
accrued expenses and other liabilities in the accompanying combined balance
sheets. The Foundation paid the settlement amount in October 20X7.
8. Fair Values of Financial Instruments
Generally accepted accounting principles established a framework for measuring
fair value that provides a fair value hierarchy that prioritizes the inputs to valuation
techniques 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
measurements) and the lowest priority to unobservable inputs (Level 3
measurements).
The three levels of the fair value hierarchy under Accounting Standards Codification
(ASC) 820-10-50, Fair Value Measurement—Overall, are described here:
 Level 1: Valuation is based on quoted prices for identical instruments traded in active
markets. Level 1 securities include primarily overnight repurchase agreements, money
market funds, and mutual funds.
 Level 2: Valuation is based on quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not active, and
model-based valuation techniques for which all significant assumptions are observable in
the market. At Level 2 securities include an unregistered mutual fund.
 Level 3: Valuation is generated from model-based techniques that use significant
assumptions not observable in the market. These unobservable assumptions reflect the
Hospital’s estimates of assumptions that market participants would use in pricing the asset
or liability. Valuation techniques include use of discounted cash flow models and similar
techniques. Level 3 securities include an equity fund limited partnership.
Fair value is based on the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date. The Hospital maximizes the use of observable inputs and
minimizes the use of unobservable inputs when developing fair value
measurements.
Fair value measurements for assets and liabilities where there is limited or no
observable market data and, therefore, are based primarily on estimates calculated
by the Hospital, are based on the economic and competitive environment, the
characteristics of the asset or liability and other factors. Therefore, the results
cannot be determined with precision and may not be realized upon an actual
settlement of the asset or liability. There may be inherent weaknesses in any
calculation technique, and changes in the underlying assumptions used, including

discount rates and estimates of future cash flows that could significantly affect the
results of the current or future values.
The following methods and assumptions were used by the Foundation in estimating
the fair value of its financial instruments:
Cash and cash equivalents: The carrying amount reported in the combined balance
sheet for cash and cash equivalents approximates its fair value.
Investments: Fair values, which are the amounts reported in the combined balance
sheet, are based on quoted market prices.
Interest rate swap agreements: Fair values, which are the amounts reported in the
combined balance sheet as due to broker and other assets, are based on market
rates.
Long-term debt: The carrying amount of the Foundation’s borrowings under its
revolving line of credit and auction rate security bond issues approximates fair
value. The fair value of the Foundation’s other long-term debt is estimated using
discounted cash flow analyses, based on the Foundation’s current incremental
borrowing rates for similar types of borrowing arrangements.
9. Functional ExpensesThe Foundation provides healthcare services to residents
within its geographical service area.
TABLE 9A-10 The Carrying Amounts and Fair Values of the
Foundation’s Financial Instruments in the Combined Balance
Sheets at December 31 (in Thousands)
Carrying Amount Fair Value
20X7
Cash and cash equivalents $82,815 $82,815
Assets limited as to use 518,313 518,313
Due to broker 15,128 15,128
Long-term debt 444,289 444,349
20X6
Cash and cash equivalents $59,696 $59,696
Assets limited as to use 472,176 472,176
Due to broker 19,608 19,608
Long-term debt 338,262 340,809

TABLE 9A-11 Expenses Related to Providing These Services for
the Years Ended December 31, 20X7 and 20X6 (in Thousands)
December 31, 20X7 December 31, 20X6
Healthcare services $619,596 562,186
General and administrative 143,293 140,546
Fundraising 1,887 1,845
Total operating expenses $764,776 704,577