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SMITHSONIAN INSTITUTION 



Notes to Financial Statements 



September 30, 2000 



($ millions) 



(f) Deferred Revenues and Expenses 



Revenues from subscriptions to Smithsonian and Air & Space/Smithsonian magazines are 

 deferred and 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, 2000, prepaid and deferred expenses include $6.6 of deferred promotion costs, 

 related primarily to the Smithsonian magazine. Promotion expense totaled $18.4 in fiscal 

 year 2000 and is included in business activities expenses in the statement of financial activity. 



(g) 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. 



(h) Investments 



Investments in marketable equity and debt securities are reported at fair value based on quoted 

 market prices. 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. As mandated by Congress, the Smithsonian maintains two U.S. Treasury 

 investments totaling $1.0 relating in part to the original gift from James Smithson. 



The Smithsonian uses the "'total return" approach to management of investments of pooled true 

 endowment funds and quasi-endowment funds (referred to collectively as the endowment). 

 Under this approach, the endowment pays out an amount for annual support of operations based 

 upon a number of factors evaluated and approved by the Board of Regents; however, if the 

 market value of any endowment fund is less than 1 10 percent of its historical value, the payout is 

 limited to the actual interest and dividends allocable to that fund. The difference between the 

 total return (i.e., dividends, interest and net gain or loss) and the payout is reported as 

 nonoperating income or loss in the statement of financial activity. 



(i) Split Interest Agreements and Perpetual Trusts 



Split interest agreements with donors consist primarily of irrevocable charitable remainder trusts 

 and charitable gift annuities. For .the charitable remainder trusts, assets are included in 

 investments. Contribution revenues are recognized at the date the trusts are established after 

 recording liabilities for the present value of the estimated future payments to be made to the 

 donors and/or other beneficiaries. The liabilities are adjusted during the terms of the trusts for 

 changes in the value of the assets, accretion of discounts, and other changes in the estimated 

 future benefits. For the charitable gift annuities, assets are recognized at fair value on the date of 

 the annuity agreements. An annuity liability is recognized at the present value of future cash 

 flows expected to be paid to the donor and contribution revenues are 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 expectancies of the donors. 



