unrestricted assets which have been designated by management or the Board for 

 longterm investment. 



Temporarily restricted net assets 

 Net assets subject to donor-imposed stipulations on the use of the assets that may be 

 met by actions of the Smithsonian and/or the passage of time. Funds functioning as 

 endowments in this category represent donor-restricted contributions that have been 

 designated by management or the Board for longterm investment. Donor contribu- 

 tions represent unspent gifts and promises-to-give of cash and securities subject to 

 donor-imposed restrictions which have not yet been met. 



Permanently restricted net assets 

 Net assets subject to donor-imposed stipulations that the principal be maintained 

 permanently by the Smithsonian. Generally, the donors of these assets permit the 

 Smithsonian to use all or part of the income earned on investment of the assets for 

 either general or donor-specified purposes. 



(b) Federal Funds 



The Smithsonian receives federal appropriations to support the Smithsonian's operat- 

 ing salaries and expenses, repair and restoration of facilities, and construction. Federal 

 appropriation revenue is classified as unrestricted and recognized as an exchange trans- 

 action as expenditures are incurred. The liability reported as unexpended appropna- 

 tions represent either goods and services that have been ordered but not yet received 

 or appropriated funds that have not yet been obligated. 



The Smithsonian received appropriations for operations of $333,408,000 in fiscal 

 year 199S. Federal appropriations for operations are generally available for obligation 

 only in the year received. In accordance with Public Law 101-510, these annual ap- 

 propriations are maintained by the Smithsonian for five years following the year of 

 appropriation, after which the appropriation account is closed and any unexpended 

 balances are returned to the U.S. Treasury 7 . During fiscal year 1998, the Smithsonian 

 returned 52.193,000 to the U.S. Treasury which represents the unexpended balance for 

 fiscal year 1993. 



Federal appropriations for repair and restoration of facilities and construction are 

 generally available for obligation until expended. 



(c) Use of Estimates 



The preparation of financial statements in conformity with generally accepted 

 accounting principles requires management to make estimates and assumptions that 

 affect the reported amounts of assets and liabilities and disclosure of contingent assets 

 and liabilities at the date of the financial statements and the reported amounts of reve- 

 nues and expenses during the reporting period. Actual results could differ from those 

 estimates, however, management does not believe that actual results will be materially 

 different from those estimates. 



(d) Fair Value of Financial Instruments 



The carrying value of financial instruments in the financial statements approximates 

 fair value. 



(e) Cash and Balances with U.S. Treasury 



.Amounts represent cash deposited with financial institutions, balances held by the 

 U.S. Treasury that are available for disbursement, and a repurchase agreement totaling 

 S7,810,000 at September 30, 1998. 



(f) Investments 



The Smithsonian's marketable equity and debt securities are reported at fair value 

 based on quoted market pnces. Changes in fair value are recognized in the statement 

 of financial activity. Purchases and sales of investments are recorded on the trade date. 

 Investment income is recorded when earned, and realized gains and losses on the sale 

 of investments are recognized on the trade date basis using the average cost method. 

 As mandated by Congress, the Smithsonian maintains two $500,000 Treasury invest- 

 ments relating to the original James Smithson gift. 



(g) Contributions Receivable 



Contributions receivable that are expected to be collected within one year are reported 

 net of any estimated uncollectible amounts. Contributions expected to be collected 

 beyond one year are also discounted to present value. Conditional contributions 

 receivable are not recorded until material conditions have been met. 



(h) Inventories 



Inventories are reported at the lower of cost or market, and consist primarily of 

 merchandise inventory, books, recordings, and office supplies. Cost is determined 

 using the first-in, first-out method. 



(i) Deferred Revenue and Expense 



Revenue from subscriptions to Smithsonian magazine and Air & Space/Smithsonian 

 magazine is recognized over the period of the subscription, generally one year 



Promotion production expenses are recognized when related advertising materials 

 are released. Direct-response advertising relating to the magazines is deferred and 

 amortized over one year. At September 30. 1998, prepaid and defened expenses 

 include $5,403,000 of defened promotion costs, mostly related to the Smithsonian 

 magazine. Promotion expense totaled $15,475,000 in fiscal year 1998. 



(j) Split Interest Agreements and Perpetual Trusts 



Split interest agreements with donors consist pnmarily of irrevocable charitable 

 remainder trusts and charitable gift annuities. For the charitable remainder trusts, 

 contribution revenue and assets are recognized at fair value on the date the trusts are 

 established. Assets are adjusted during the term of the trusts for changes in the value 

 of the assets, accretion of discounts, and other changes in the estimated future bene- 

 fits. For the charitable gift annuities, assets are recognized at fair value on the date the 

 annuity agreements are established. An annuity liability is recognized at the present 

 value of future cash flows expected to be paid to the donor and contribution revenue 

 is recognized as the difference between the assets and liability. Liabilities are adjusted 

 during the term of the annuities for payments to donors, accretion of discounts and 

 changes in the life expectancy of the donor. 



The Smithsonian is also the beneficiary of certain perpetual trusts held and adminis- 

 tered by others. The present values of the estimated future cash receipts from the 

 trusts are recognized as assets and contribution revenue at the dates the trusts are 

 established. Distributions from the trusts are recorded as contributions and the carry- 

 ing value of the assets is adjusted for changes in the estimates of future receipts. 



(k) Property and Equipment 



Property and equipment purchased with federal or trust funds are capitalized at cost. 

 Property and equipment acquired through transfer from government agencies are 

 capitalized at net book value or fair value, whichever is more readily determinable. 

 Property and equipment acquired through donation are capitalized at appraised value 

 at the date of the gift. These assets are depreciated on a straight-line basis over their 

 estimated useful lives as follows: 



Buildings 



Major renovations 



Equipment 



30 years 

 15 years 

 3-10 years 



Certain lands occupied by the Smithsonian's buildings, primarily located in the 

 District of Columbia, Maryland and Virginia, were appropriated and reserved by 

 Congress for the Smithsonian's use. The Smithsonian serves as trustee of these lands 

 for as long as they are used to cany out the Smithsonian's mission. These lands are 

 titled in the name of the U.S. government and are not reflected in the accompanying 

 financial statements. 



(I) Collections 



The Smithsonian acquires its collections, which include works of art, library books, 

 photographic archives, objects and specimens, by purchase using federal or trust funds 

 or by donation. All collections are held for public exhibition, education, or research, 

 furthering the Smithsonian's mission to increase and diffuse knowledge to the public 

 The Smithsonian protects and preserves its collections, which total more than 140 

 million items. The Smithsonian's Collections Management policy includes guidance 

 on the preservation, care and maintenance of the collections and procedures relating 

 to the accession/deaccession of items within the collections. 



The Smithsonian's policy is to not capitalize its collections, therefore, no value is 

 assigned to the collections on the statement of financial position. Purchases of collec- 

 tion items are recorded as expense in the year in which the items are acquired. 

 Contributed collection items are not reflected in the financial statements. Proceeds 

 from deaccessions or insurance recoveries from lost or destroyed collection items are 

 reflected as increases in the appropnate net asset class, and are designated for future 

 collection acquisitions. 



Items that are acquired with the intent at the time of acquisition not to add them to 

 the collections but rather to sell, exchange, or otherwise use them for financial gain 

 are not considered collection items, and are recorded at fair market value at date of 

 acquisition as other assets in the statement of financial position. 



(m) Annual Leave 



The Smithsonian's civil service employees earn annual leave in accordance with federal 

 laws and regulations. Separate rules apply for trust employees. .Annual leave for all 

 employees is recognized as expense when earned. 



(n) Government Grants and Contracts 



The Smithsonian receives grants and enters into contracts with the U.S. government 

 and state and local governments, which primarily provide for cost reimbursement to 

 the Smithsonian. Revenue from governmental grants and contracts is classified as 

 unrestricted and is recognized as reimbursable expenditures are incurred. 



(o) Contributions 



The Smithsonian recognizes revenue from all contributions as revenue in the period 



unconditional promises are received- 

 Unrestricted contributions with payments due in future periods are initially recorded 



as temporarily restricted support, and are reclassified to unrestricted net assets when 



payments become due. 

 When donor restrictions are met on temporarily restricted contributions, the related 



net assets are reclassified as released from restrictions in the accompanying statement 



of financial activity. 

 Gifts of long-lived assets are recorded as unrestricted revenue in the period received. 



Contributions of cash and other assets restricted to the acquisition of longlived assets 



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