Report of Independent Auditors and Combined Financial Statements The Fine Arts Museums of San Francisco June 30, 2018 (with comparative totals for the year ended June 30, 2017) Table of Contents REPORT OF INDEPENDENT AUDITORS ................................................................................................................ 1 COMBINED FINANCIAL STATEMENT Combined Statement of Financial Position .......................................................................................................... 4 Combined Statement of Unrestricted Revenues, Expenses, and Other Changes in Unrestricted Net Assets ............................................................................................................................................................ 5 Combined Statement of Changes in Net Assets.................................................................................................. 6 Combined Statement of Cash Flows ................................................................................................................... 7 Notes to Combined Financial Statements ............................................................................................................ 8 Report of Independent Auditors To the Boards of Trustees Corporation of the Fine Arts Museums and Fine Arts Museums Foundation Report on the Combined Financial Statements We have audited the accompanying combined financial statements of the Corporation of the Fine Arts Museums and the Fine Arts Museums Foundation (collectively the “Fine Arts Museums of San Francisco” or the “Organization”), which comprise the combined statements of financial position as of June 30, 2018, and the related combined statements of unrestricted revenues, expenses, and other changes in unrestricted net assets, changes in net assets, and cash flows for the year then ended, and the related notes to the combined financial statements. Management’s Responsibility for the Combined Financial Statements Management is responsible for the preparation and fair presentation of these combined 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 combined financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the combined 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 of the combined 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 combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1 Opinion In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Corporation of the Fine Arts Museums and the Fine Arts Museums Foundation as of June 30, 2018, and the combined changes in their net assets and their combined cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of a Matter As described in Note 17 to the combined financial statements, as of July 1, 2016, the Organization changed its accounting policy relating to capitalizing its art collection held by the Organization, to expense the collection rather than capitalize it. Our opinion is not modified with respect to this matter. Report on Summarized Comparative Information We have previously audited the combined financial statements of the Corporation of the Fine Arts Museums and the Fine Arts Museums Foundation for the year ended June 30, 2017, and we expressed an unmodified audit opinion on those audited combined financial statements in our report dated December 21, 2017. In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2017 is consistent, in all material respects, with the audited combined financial statements from which it has been derived. San Francisco, California December 11, 2018 2 Combined Financial Statement The Fine Arts Museums of San Francisco Combined Statement of Financial Position June 30, 2018 (with comparative totals as of June 30, 2017) New Operating de Young Endowment 2018 2017 Fund Fund Fund Total Total ASSETS Cash and cash equivalents$ 19,000,360 $ 468,256 $ 1,818,435 $ 21,287,051 $ 24,728,937 Interfund receivables (payables) (1,098,131) (78,148) 1,176,279 - - Short-term investments 799,586 14,069,422 - 14,869,008 64,197,907 Notes, accounts, and other receivables 1,902,109 1,145,201 32,482 3,079,792 3,094,634 Contributions receivable, net 9,041,913 - - 9,041,913 4,093,741 Prepaid expenses 362,917 - - 362,917 455,693 Inventories 1,115,125 - - 1,115,125 1,624,476 Furniture, fixtures, and equipment, net 2,976,538 - - 2,976,538 2,502,523 Pooled income funds 121,382 - - 121,382 124,629 Long-term investments - 8,992,145 127,246,979 136,239,124 140,408,693 Beneficial interest in perpetual trusts - - 2,425,906 2,425,906 2,427,339 Beneficial interest in de Young Museum building, net - 131,652,475 - 131,652,475 137,544,444 Total assets$ 34,221,799 $ 156,249,351 $ 132,700,081 $ 323,171,231 $ 381,203,016 LIABILITIES AND NET ASSETS Accounts payable$ 3,651,390 $ 26,618 $ 15,415 $ 3,693,423 $ 3,569,045 Accrued expenses 2,449,496 - - 2,449,496 2,349,132 Deferred revenue 1,266,727 - - 1,266,727 1,110,521 Capital lease obligations 12,235 - - 12,235 35,543 Bonds payable, net of debt issuance cost - - - - 58,556,308 Agency funds 1,103,496 - - 1,103,496 1,077,857 Accrued pension liability 6,701,282 - - 6,701,282 10,935,953 Total liabilities 15,184,626 26,618 15,415 15,226,659 77,634,359 Net (deficit) assets Unrestricted General (6,889,045) 156,222,733 - 149,333,688 147,701,928 Board designated - - 3,802,557 3,802,557 5,704,866 Total unrestricted (6,889,045) 156,222,733 3,802,557 153,136,245 153,406,794 Temporarily restricted 25,926,218 - 49,250,893 75,177,111 70,525,949 Permanently restricted - - 79,631,216 79,631,216 79,635,914 Total net assets 19,037,173 156,222,733 132,684,666 307,944,572 303,568,657 Total liabilities and net assets$ 34,221,799 $ 156,249,351 $ 132,700,081 $ 323,171,231 $ 381,203,016 4 See accompanying notes. The Fine Arts Museums of San Francisco Combined Statement of Unrestricted Revenues, Expenses, and Other Changes in Unrestricted Net Assets Year Ended June 30, 2018 (with comparative totals for the year ended June 30, 2017) New Operating de Young Endowment 2018 2017 Fund Fund Fund Total Total Operating revenues and gains (losses) Museum store sales$ 5,789,023 $ - $ - $ 5,789,023 $ 6,128,407 Cost of museum store sales (2,733,740) - - (2,733,740) (3,101,899) Gross profit on sales 3,055,283 - - 3,055,283 3,026,508 City appropriation 14,931,624 - - 14,931,624 14,021,024 Membership dues 10,749,280 - - 10,749,280 10,959,034 Annual contributions 5,204,057 - - 5,204,057 5,343,966 Bequests 846,929 - - 846,929 1,547,068 Special events 942,216 - - 942,216 1,061,582 Investment income 107,874 - - 107,874 14,699 Endowment distribution 3,582,478 - (190,664) 3,391,814 5,413,977 Admissions 8,136,924 - - 8,136,924 6,298,573 Facilities rental, net 320,423 - - 320,423 449,907 Other 939,011 30,396 - 969,407 724,168 Total operating revenues and gains (losses) 48,816,099 30,396 (190,664) 48,655,831 48,860,506 Net assets released from restrictions 14,054,932 1,509,254 (2,108,149) 13,456,037 15,705,427 Total unrestricted revenues 62,871,031 1,539,650 (2,298,813) 62,111,868 64,565,933 Operating expenses Exhibition program 10,774,308 - - 10,774,308 9,585,251 Curatorial, conservation, and education programs 23,657,238 - - 23,657,238 22,035,954 Art acquisitions 5,100,235 - - 5,100,235 3,019,127 Museum stores 2,735,222 - - 2,735,222 3,064,739 Membership 3,034,718 - - 3,034,718 3,133,875 Operations and administration 8,051,557 365,463 - 8,417,020 9,584,544 Development 3,620,659 - - 3,620,659 4,740,343 Marketing and communications 5,567,438 - - 5,567,438 5,228,327 Interest and remarketing bond costs - 1,134,480 - 1,134,480 1,037,946 Amortization of bond issuance costs - 2,218,692 - 2,218,692 147,913 Total operating expenses 62,541,375 3,718,635 - 66,260,010 61,578,019 Change in unrestricted net assets from operations 329,656 (2,178,985) (2,298,813) (4,148,142)