Notes to Financial Statements

December 31, 2009 and 2008

(1)
ORGANIZATION AND RELATED ENTITIES
(a)
National Academy of Sciences

The National Academy of Sciences (NAS) was formed under a charter that was passed as an Act of Incorporation by the United States Congress and signed into law on March 3, 1863. NAS operates as a private cooperative society of distinguished scholars engaged in scientific or engineering research, dedicated to the furtherance of science and its use for the general welfare.

(b)
National Research Council

Most of the activities undertaken by NAS are carried out through the divisions and boards of the National Research Council (NRC). The NRC draws on a wide cross section of the nation’s leading scientists and engineers for advisory services to government agencies and Congress. To respond effectively to both the disciplinary concerns of the research community and the complex interdisciplinary problems facing American society, NRC is organized into the following five major divisions responsible for most study activities:

  • Behavioral and Social Sciences and Education

  • Earth and Life Studies

  • Engineering and Physical Sciences

  • Policy and Global Affairs

  • Transportation Research Board

NRC activities are under the control of the NAS governance structure, and therefore are included in the NAS financial statements.

(c)
Institute of Medicine

The Institute of Medicine (IOM), established in 1970, conducts studies of policy issues related to health and medicine. IOM issues position statements on these policies, cooperates with the major scientific and professional societies in the field, identifies qualified individuals to serve on study groups in other organizational units, and disseminates information to the public and the relevant professions. IOM was established as a separate membership organization within NAS. The financial activities and results of IOM are included in the NAS financial statements.

(d)
National Academy of Engineering

The National Academy of Engineering (NAE) was established in 1964 under the charter of NAS as a related parallel organization, autonomous in its governance, administration, and the selection of its members. NAE shares with NAS the responsibility for advising the federal government on scientific issues. The NAE conducts independent program activities and activities through the NRC. The results of both of these activities are included in the NAS financial statements.

(e)
National Academy of Engineering Fund

The National Academy of Engineering Fund (NAEF) is a separately incorporated not-for-profit organization established and controlled by NAE to raise funds to support its goals. The financial activities and results of NAEF are not included in the NAS financial statements.

(f)
The National Academies’ Corporation

The National Academies’ Corporation (TNAC) was separately incorporated in 1986 as a not-for-profit corporation for the purpose of constructing and maintaining a study and conference facility. This facility, the Arnold and Mabel Beckman Center, located in Irvine, California, operates to expand and support the general activities of NAS, NRC, IOM, and NAE. TNAC is controlled by NAS and NAEF. The financial position and results of TNAC are not consolidated in the NAS financial statements.


NAS manages the operations of the Beckman Center. TNAC contributed $510,000 to the NRC for the year ended December 31, 2008, towards the operation of the Beckman Center. There was no similar contribution from TNAC to the NRC during 2009. In addition, TNAC contributed $4,000 and $277,000 to the NRC for the years ending December 31, 2009 and 2008, respectively, to be spent on programs conducted in whole or in part at the Beckman Center.

(2)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Basis of Accounting

Net assets, revenues, gains, and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of NAS are classified and reported as follows:



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separate membership organization within NAS. The NATIONAL ACADEMY OF SCIENCES financial activities and results of IOM are included in the Notes to NAS financial statements. Financial Statements (d) National Academy of Engineering The National Academy of Engineering (NAE) was December 31, 2009 and 2008 established in 1964 under the charter of NAS as a related parallel organization, autonomous in its governance, administration, and the selection of its members. NAE (1) ORGANIZATION AND RELATED shares with NAS the responsibility for advising the federal government on scientific issues. The NAE ENTITIES conducts independent program activities and activities through the NRC. The results of both of these activities (a) National Academy of Sciences are included in the NAS financial statements. The National Academy of Sciences (NAS) was formed (e) National Academy of Engineering Fund under a charter that was passed as an Act of Incorporation by the United States Congress and signed into law on The National Academy of Engineering Fund (NAEF) is a March 3, 1863. NAS operates as a private cooperative separately incorporated not-for-profit organization society of distinguished scholars engaged in scientific or established and controlled by NAE to raise funds to engineering research, dedicated to the furtherance of support its goals. The financial activities and results of science and its use for the general welfare. NAEF are not included in the NAS financial statements. (b) National Research Council (f) The National Academies’ Corporation Most of the activities undertaken by NAS are carried out The National Academies’ Corporation (TNAC) was through the divisions and boards of the National Research separately incorporated in 1986 as a not-for-profit Council (NRC). The NRC draws on a wide cross section corporation for the purpose of constructing and maintain- of the nation’s leading scientists and engineers for ing a study and conference facility. This facility, the advisory services to government agencies and Congress. Arnold and Mabel Beckman Center, located in Irvine, To respond effectively to both the disciplinary concerns California, operates to expand and support the general of the research community and the complex interdiscipli- activities of NAS, NRC, IOM, and NAE. TNAC is nary problems facing American society, NRC is organ- controlled by NAS and NAEF. The financial position and ized into the following five major divisions responsible results of TNAC are not consolidated in the NAS for most study activities: financial statements.  Behavioral and Social Sciences and Education NAS manages the operations of the Beckman Center.  Earth and Life Studies TNAC contributed $510,000 to the NRC for the year  Engineering and Physical Sciences ended December 31, 2008, towards the operation of the  Policy and Global Affairs Beckman Center. There was no similar contribution from  Transportation Research Board TNAC to the NRC during 2009. In addition, TNAC contributed $4,000 and $277,000 to the NRC for the years NRC activities are under the control of the NAS govern- ending December 31, 2009 and 2008, respectively, to be ance structure, and therefore are included in the NAS spent on programs conducted in whole or in part at the financial statements. Beckman Center. (c) Institute of Medicine (2) SUMMARY OF SIGNIFICANT The Institute of Medicine (IOM), established in 1970, ACCOUNTING POLICIES conducts studies of policy issues related to health and medicine. IOM issues position statements on these (a) Basis of Accounting policies, cooperates with the major scientific and professional societies in the field, identifies qualified Net assets, revenues, gains, and losses are classified based individuals to serve on study groups in other organiza- on the existence or absence of donor-imposed restrictions. tional units, and disseminates information to the public Accordingly, net assets of NAS are classified and and the relevant professions. IOM was established as a reported as follows: 45

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Permanently restricted – Net assets subject to do- Amortization of the discount is recorded as additional nor-imposed stipulations that they be maintained in revenue and is used in accordance with donor-imposed perpetuity by NAS. Generally, the donors of these assets restrictions, if any, on the contributions. permit NAS to use all or part of the income earned on NAS performs certain fundraising activities on behalf of related investments for general or specific purposes. NAEF. NAS collected a total of $5.3 million and Temporarily restricted – Net assets subject to do- $2.5 million in 2009 and 2008, respectively, on behalf of nor-imposed stipulations that may or will be met either by NAEF. NAS disbursed $5.2 million and $2.6 million to actions of NAS and/or the passage of time. When a donor NAEF from these collected amounts in 2009 and 2008, restriction expires, temporarily restricted net assets are respectively. Amounts collected but not yet remitted to reclassified to unrestricted net assets. NAEF are reported as assets and liabilities in the NAS financial statements. Unrestricted – Net assets arising from exchange transac- (e) Contracts and Grants tions and contributions not subject to donor-imposed stipulations. The majority of NAS activities are performed under (b) Cash Equivalents cost-reimbursable contracts with the U.S. government. For the years ended December 31, 2009 and 2008, the NAS reports liquid, temporary investments purchased Department of Transportation provided 44% and 43%, with original maturities of three months or less as cash respectively, of NAS government grant and contract equivalents. revenue. (c) Investments NAS records federal contracts as exchange transactions, recognizing revenue as recoverable costs are incurred. Investments are stated at fair value. Changes in the fair value of investments are reported within investment Revenues from nonfederal grants qualifying as contribu- income in the statements of activities. tions are recorded by NAS upon notification of the grant award. Such grants are classified as temporarily restricted Certain investments are pooled for long-term investment net assets when use of the grant funds is limited to purposes. Investments in the pool are administered as an specific areas of study or is designated for use in future open-end investment trust, with shares of the pool funds periods. expressed in terms of participating capital units (PCUs). PCU values are used to determine equity in the allocation (f) Deferred Revenue of investment income among funds in the pool whenever For both federal and nonfederal grants and contracts that additional funds are contributed or withdrawn. are determined to be exchange transactions, revenue is (d) Contributions recognized as the related costs are incurred. Funds received in advance of being earned for these grants are Contributions, including unconditional promises to give, recorded as deferred revenue in the statements of financial are recognized as revenues in the period received. position. Conditional promises to give are not recognized until all conditions on which receipt depends are substantially (g) Inventories met. Inventories are stated at the lower of cost or net realizable Gifts of land, buildings, or equipment are reported as value and include both work in-process and finished unrestricted net assets unless explicit donor stipulations goods related to publication activities. The majority of specify how the donated assets must be used. Temporary NAS publication inventories and supplies reside with an restrictions on gifts that must be used to acquire NAS unit, the National Academy Press (NAP). NAP uses long-lived assets are released in the period in which the the full absorption costing methodology in pricing assets are acquired or placed in service. finished products. This methodology includes direct printing and related indirect costs. Inventories are Allowances are recorded for estimated uncollectible included in other current assets in the statements of contributions based upon management’s judgment and financial position. analysis of the credit worthiness of the donor, past collection experience, and other relevant factors. Contri- butions to be received after one year are discounted at an appropriate rate commensurate with risks involved. 46

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(h) Property and Equipment Effective January 1, 2008, NAS applied the enhanced disclosure provisions of FASB ASC Section 958-205-45, Depreciation of NAS buildings and equipment is Other Presentation Matters (FASB ASC 958-205-45), to computed on a straight-line basis using the following its endowment. FASB ASC 958-205-45 provides lives: guidance on the presentation and disclosure of do- nor-restricted endowment funds for a nonprofit organiza-  Buildings – 40 years tion. NAS recorded the effect of applying the provisions  Building and leasehold improvements – lesser of the of FASB ASC Section 958-205-45 as a reclassification of remaining life of the building or improvement unrestricted net assets to temporarily restricted net assets  Furniture and equipment – 4 to 10 years of $102.8 million as of January 1, 2008. The Einstein Memorial sculpture is valued at cost and is Effective December 31, 2009, NAS applied the guidance not depreciated. Construction-in-progress is not depreci- in FASB Accounting Standards Update 2009-12, Fair ated until the related assets are placed in service. Value Measurement and Disclosures – Investments in Certain Entities That Calculate Net Asset Value per Share (i) Split-Interest Agreements (or Its Equivalent), to its investments including hedge funds and private placement equity investments. This Charitable gift annuity agreements are classified as other guidance permits, as a practical expedient, the fair value assets in the statements of financial position. Periodically, of investments within its scope to be estimated using net NAS pays a fixed amount of the assets to the beneficiary asset value (NAV) per share or its equivalent. designated by the donor. Upon termination of an annuity, the remainder interest in the assets is available for use by Effective December 31, 2009, NAS applied the guidance NAS as restricted or unrestricted assets in accordance in FASB ASC Topic 855, Subsequent Events with the donor’s designation. At December 31, 2009 and (FASB ASC 855), which establishes general standards of 2008, NAS had charitable gift annuity assets of accounting for and disclosure of events that occur after $2.4 million and $2.1 million, respectively. NAS has the statement of financial position date but before the recorded a liability of $1.4 million and $1.5 million at financial statements are issued. FASB ASC 855 also December 31, 2009 and 2008, respectively, representing requires disclosure of the date through which an entity has the present value of estimated future cash payments to evaluated subsequent events. annuitants based on the annuitant’s life expectancy. (l) Use of Estimates (j) Income Taxes The preparation of these financial statements in confor- NAS is exempt from federal income taxes under Sec- mity with U.S. generally accepted accounting principles tion 501(c)(3) of the Internal Revenue Code, except for requires management to make certain estimates and unrelated business income. NAS recognizes the effect of assumptions. These estimates and assumptions may affect income tax positions only if those positions are more the reported amounts of assets and liabilities and disclo- likely than not of being sustained. NAS does not believe sures in the financial statements. Actual results could its financial statements include any uncertain tax posi- differ from those estimates. tions. (m) Reclassifications (k) Recently Adopted Accounting Pronouncements Certain amounts from the prior year have been reclassi- Effective January 1, 2008, NAS applied the enhanced fied to conform to the current year presentation. recognition and disclosure provisions of the Financial Accounting Standards Board’s Accounting Standards Codification (FASB ASC) Topic 820, Fair Value Measurements and Disclosures (FASB ASC 820), which defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. This pro- nouncement did not require any new fair value measure- ments and its adoption did not affect the results of operations or financial position of NAS. 47

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December 31, 2009 and 2008, respectively, is reported as (3) INVESTMENTS funds held on behalf of others in the statements of financial position. Investments, which are reported at fair value (except as noted), consisted of the following as of December 31, Investment income is reported net of investment expenses 2009 and 2008 (dollars in thousands): of approximately $691,000 and $856,000 for the years ended December 31, 2009 and 2008, respectively, and is 2009 2008 comprised of the following (dollars in thousands): Short-term investments: Cash equivalents $ 8,990 $ 5,762 Bonds and notes 29,561 26,026 2009 2008 Equity securities 10,562 11,668 Interest and dividends income $ 8,379 $ 19,779 Total short-term investments $ 49,113 $ 43,456 Net gain (loss) on investments 70,998 (165,904) Total investment income (loss) $ 79,377 $ (146,125) Long-term investments: Investment pool, including endowment assets: (4) FAIR VALUE MEASUREMENTS Cash equivalents $ 7,699 $ 13,479 Bonds and notes 39,998 50,145 Fair value is defined as the exchange price that would be Equity securities 239,112 147,431 received for an asset or paid to transfer a liability (an exit Hedge funds 45,536 65,283 price) in the principal or most advantageous market for Private equity 12,035 11,684 the asset or liability in an orderly transaction between 344,380 288,022 market participants on the measurement date. FASB ASC Topic 820 establishes a fair value hierarchy, Other long-term investments: which requires an entity to maximize the use of observ- Cash equivalents 1,291 687 able inputs and minimize the use of unobservable inputs Bonds and notes 13,583 7,649 when measuring fair value. The standard describes three Equity securities 16,909 13,382 levels of inputs that may be used to measure fair value: 31,783 21,718 Level 1: Quoted prices in active markets for identical Total long-term investments $ 376,163 $ 309,740 assets or liabilities. Level 2: Observable inputs other than Level 1 prices such Vanguard equity funds comprised approximately as quoted prices for similar assets or liabilities; quoted $85 million and $47 million of the total equity securities prices in markets that are not active; or other inputs that funds at December 31, 2009 and 2008, respectively. are observable or can be corroborated by observable NAS holds alternative investments, comprised of private market data for substantially the full term of the assets or equity securities and hedge funds, in its long-term liabilities. investment pool. At December 31, 2009 and 2008, these Level 3: Unobservable inputs that are supported by little funds had a fair value of approximately $57.6 million and or no market activity and that are significant to the fair $77.0 million, respectively. The unrealized gain or loss on value of the asset or liabilities. the hedge funds was approximately a $2.6 million gain and a $10.7 million loss for the years ended December 31, The following discussion describes the valuation method- 2009 and 2008, respectively, and is included as a ologies used for financial assets measured at fair value. component of investment income in the accompanying The techniques utilized in estimating the fair values are statements of activities. Private equity investments are affected by the assumptions used, including discount rates comprised of limited partnership interests. NAS had and estimates of the amount and timing of future cash remaining commitments at December 31, 2009 and 2008 flows. Care should be exercised in deriving conclusions to provide approximately $5.1 million and $5.9 million, about NAS’ business, its value or financial position based respectively, to these partnerships. on the fair value information of financial assets presented below. TNAC, a related entity, invests certain of its assets in the NAS long-term investment pool. TNAC investments Fair value estimates are made at a specific point in time, participate in the investment pool experience proportion- based on available market information and judgments ally with all other funds in this pool. The NAS obligation about the financial asset, including estimates of timing, to TNAC for these funds held in trust, which totaled amount of expected future cash flows and the credit approximately $8.8 million and $7.2 million as of 48

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standing of the issuer. In some cases, the fair value Fair value of alternative investments including private estimates cannot be substantiated by comparison to equity securities and hedge funds is based on the alterna- independent markets. In addition, the disclosed fair value tive investment fund managers’ NAV. Valuations may not be realized in the immediate settlement of the provided by alternative investment fund managers include financial asset. Furthermore, the disclosed fair values do estimates, appraisals, assumptions and methods that are not reflect any premium or discount that could result from reviewed by management. When necessary, NAS adjusts offering for sale at one time an entire holding of a NAV for contributions, distributions, or general market particular financial asset. Potential taxes and other conditions subsequent to the latest NAV valuation date expenses that would be incurred in an actual sale or when calculating fair value. Since the most significant settlement are not reflected in amounts disclosed. valuation inputs are not observable in the marketplace, the alternative investment valuations are disclosed in Level 2 The following methods and assumptions were used to or Level 3. The distinction is that those funds which are estimate the fair value of each class of financial instru- available for redemption in the near term at NAV are ments: included in Level 2. The carrying value of cash equivalents such as money Charitable gift annuity investments and deferred compen- market funds approximates the fair value because of the sation investments are held in debt and equity mutual short maturity of these investments. These amounts are funds along with some U.S. Treasury securities, all of disclosed in Level 1. which are included in Level 1. The deferred compensation obligation to employees is equal to the fair value of the NAS’ fixed maturity investments (bonds and notes), other investments held and is disclosed in the same levels as the than U.S. Treasury securities, generally do not trade on a investment assets. daily basis. The fair value estimates of such debt securi- ties are based on prices provided by NAS’ investment NAS has interest rate swap agreements covering the managers and custodian bank. Both the investment variable-rate bonds payable. The fair value of the swaps managers and the custodian bank use a variety of pricing are determined using pricing models based on observable sources to determine market valuations. Each designate market data such as prices of instruments with similar specific pricing services or indexes for each sector of the maturities and characteristics, interest rate yield curves, market based upon the provider’s expertise. NAS’ debt and measures of interest rate volatility. The value was securities portfolio is highly liquid, which allows for a determined after considering the potential impact of high percentage of the portfolio to be priced through collateralization and netting agreement, adjusted to reflect pricing services. Accordingly, the estimates of fair value nonperformance risk of both the counterparty and NAS. for such debt securities are included in Level 2 inputs. Accordingly, the interest rate swaps are included in The estimated values of U.S. Treasury securities are based Level 2. on actively traded market prices and are accordingly included in the bonds and notes amount in Level 1. The funds held on behalf of others liability approximates the investments held in NAS’ long-term investment pool Fair values of exchange-traded equity securities have on behalf of TNAC. Therefore, the liability is disclosed in been determined by NAS from observable market the same levels as the investment assets. quotations on major trade exchanges. Accordingly, such equity securities are disclosed in Level 1. NAS also invests in debt and equity mutual funds. The fair values of such mutual funds are based on observable market information from active markets. Accordingly, the estimates of fair value for such mutual funds are included in Level 1. 49

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The following table presents NAS’ fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis at December 31, 2009 (dollars in thousands): Fair value measurements at December 31 using: Fair Value Level 1 Level 2 Level 3 Financial Assets: Short-term and long-term investments: Cash equivalents $ 17,980 $ 17,980 $ - $ - Bonds and notes 83,142 54,903 28,239 - Equity securities 266,583 266,583 - - Hedge funds 45,536 - 34,255 11,281 Private equity 12,035 - - 12,035 Total investments 425,276 339,466 62,494 23,316 Charitable gift annuity assets: Cash equivalents 125 125 - - Bonds and notes 625 625 - - Equity securities 1,631 1,631 - - Total charitable gift annuity assets 2,381 2,381 - - Deferred compensation assets: Cash equivalents 24 24 - - Bonds and notes 427 427 - - Equity securities 1,938 1,938 - - Total deferred compensation assets 2,389 2,389 - - Total Financial Assets $ 430,046 $ 344,236 $ 62,494 $ 23,316 Financial Liabilities: Funds held on behalf of others $ 8,794 $ 7,324 $ 875 $ 595 Deferred compensation liability 2,389 2,389 - - Interest rate swaps 9,210 - 9,210 - Total Financial Liabilities $ 20,393 $ 9,713 $ 10,085 $ 595 50

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The following table presents NAS’ fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis at December 31, 2008 (dollars in thousands): Fair value measurements at December 31 using: Fair Value Level 1 Level 2 Level 3 Financial Assets: Short-term and long-term investments: Cash equivalents $ 19,928 $ 19,928 $ - $ - Bonds and notes 83,820 62,058 21,762 - Equity securities 172,481 172,481 - - Hedge funds 65,283 - - 65,283 Private equity 11,684 - - 11,684 Total investments 353,196 254,467 21,762 76,967 Charitable gift annuity assets: Cash equivalents 30 30 - - Bonds and notes 644 644 - - Equity securities 1,439 1,439 - - Total charitable gift annuity assets 2,113 2,113 - - Deferred compensation assets: Cash equivalents 31 31 - - Bonds and notes 339 339 - - Equity securities 1,835 1,835 - - Total deferred compensation assets 2,205 2,205 - - Interest rate swap 934 - 934 - Total Financial Assets $ 358,448 $ 258,785 $ 22,696 $ 76,967 Financial Liabilities: Funds held on behalf of others $ 7,186 $ 5,266 $ - $ 1,920 Deferred compensation liability 2,205 2,205 - - Interest rate swaption 12,543 - 12,543 - Total Financial Liabilities $ 21,934 $ 7,471 $ 12,543 $ 1,920 Level 3 assets comprised approximately 5% and 22% of NAS’ total investment portfolio fair value at December 31, 2009 and 2008, respectively. 51

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The following table presents the changes in Level 3 assets measured at fair value on a recurring basis for the year ended December 31, 2009 (dollars in thousands): Hedge Private Funds Equity Total Financial Assets: Beginning balance January 1, 2009 $ 65,283 $ 11,684 $ 76,967 Net gain (loss) on investments 3,698 (299) 3,399 Purchases and sales, net (23,445) 650 (22,795) Transfers in (out) of Level 3 (34,255) - (34,255) Ending balance December 31, 2009 $ 11,281 $ 12,035 $ 23,316 The following table presents the changes in Level 3 assets measured at fair value on a recurring basis for the year ended December 31, 2008 (dollars in thousands): Hedge Private Funds Equity Total Financial Assets Beginning balance January 1, 2008 $ 65,487 $ 13,622 $ 79,109 Net loss on investments (10,704) (2,253) (12,957) Purchases and sales, net 10,500 315 10,815 Transfers in (out) of Level 3 - - - Ending balance December 31, 2008 $ 65,283 $ 11,684 $ 76,967 The following table presents the nature and risk of assets with fair values estimated using NAV held at December 31, 2009 (dollars in thousands): Unfunded Redemption Fair Value Commitments Redemption Frequency Notice Period Fund of the hedge fund – multi-strategies (a) $ 34,255 N/A Quarterly 90 days Hedge fund – multi-strategies/multi-vehicle (b) 10,000 N/A Annually, but not currently eligible 365 days Hedge fund – fixed income single strategy (c) 1,281 N/A Quarterly, but not currently eligible 30 days Private equity – Asia (d) 4,990 4,368 N/A N/A Private equity – Global (e) 5,073 436 N/A N/A Private equity – Domestic (f) 1,972 303 N/A N/A Total $ 57,571 $ 5,107 (a) This category includes investments in funds of hedge (b) This category includes investments in a multi-strategy, funds that uses multiple strategies to obtain total returns multi-vehicle hedge fund with the objective of maximiz- on a leveraged basis. Direct and indirect investments are ing long-term, risk-adjusted returns and capital apprecia- made using equity long/short, event driven, relative value, tion by investing in securities, investment funds, discre- and tactical trading strategies. The funds have investments tionary accounts, and investment partnerships across a in multiple investees which may trade various financial broad range of marketable and alternative asset classes. instruments such as, but not limited to, securities sold Asset classes include domestic and international market- short, futures, forwards, swaps, and written options. The able equity securities, hedged equity, real estate, natural fair values of the investments in this category have been resource, fixed income, and private equity and absolute estimated using the NAV per share of the investments. A return strategies, primarily focused in the United States. pending total redemption of one of the funds in the The fair values of the investments in this category have amount of $9.7 million was receivable at December 31, been estimated using the NAV per share of the invest- 2009. ments. Currently, none of the investments in this category are redeemable because the fund includes restrictions that do not allow for redemption in the first 2 years after acquisition. The remaining restriction for these invest- ments is 2 years at December 31, 2009. 52

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(c) This category includes investments in a single strategy these investments have been estimated using the NAV of hedge fund focused on undervalued fixed income NAS’ ownership interest in partners’ capital. These securities. Investments held by this fund consist of U.S. investments can never be redeemed with the funds. government agency mortgage-backed securities and Instead, the nature of the investments in this category is derivatives, primarily in the form of collateralized that distributions are received through liquidation of the mortgage obligations. Securities are generally held in the underlying assets of the funds. It is estimated that the portfolio as long as interest rates and repayment rates are underlying assets of the funds will be liquidated over 1 to unfolding as anticipated. The majority of the investment 3 years return is expected to come from trading mortgage-backed securities in attempt to maximize interest income. The fair (5) PROPERTY AND EQUIPMENT values of the investments in this category have been estimated using the NAV per share of the investments. Property and equipment as of December 31, 2009 and Currently, none of the investments in this category are 2008, is comprised of the following (dollars redeemable because the fund includes restrictions that do in thousands): not allow for redemption in the first 12 months after acquisition. The remaining restriction for these invest- ments is seven months at December 31, 2009. 2009 2008 Land $ 29,689 $ 29,689 (d) This category includes several private equity funds Furniture and equipment 36,195 33,001 that invest in equity, debt or debt-oriented instruments, Buildings and improvements 109,396 109,199 primarily in privately held companies which own or Construction in progress 6,823 4,857 contractually control operating entities located in the Leasehold improvements 7,437 7,349 Peoples’ Republic of China and India. Investments held in 189,540 184,095 India primarily include equity securities of “early to early Less accumulated depreciation and growth stage” companies in multiple sectors, except real (62,064) (55,746) amortization estate. The fair values of these investments have been Total property and equipment, net $ 127,476 $ 128,349 estimated using the NAV of NAS’ ownership interest in partners’ capital. These investments can never be redeemed with the funds. Instead, the nature of the (6) CONTRIBUTIONS RECEIVABLE investments in this category is that distributions are received through liquidation of the underlying assets of Contributions not yet collected are included in contribu- the funds. It is estimated that the underlying assets of the tions and other receivables (current) and contributions funds will be liquidated over 1 to 7 years. receivable (long-term) in the statements of financial position, and mature as follows (dollars in thousands): (e) This category includes several global private equity funds with diverse portfolios consisting primarily of Years ending December 31: venture capital funds, leveraged buyout funds, mid-stage growth capital funds, and international private equity 2010 $ 12,393 funds. These investments are focused on several indus- 2011 8,885 tries including, but not limited to, insurance, services, and 2012 5,548 consumer-related industries. The fair values of these 2013 3,634 investments have been estimated using the NAV of NAS’ 2014 3,764 ownership interest in partners’ capital. These investments Thereafter 9,382 can never be redeemed with the funds. Instead, the nature 43,606 of the investments in this category is that distributions are Less discount at rates from 3% to 6% to estimated received through liquidation of the underlying assets of net present value (3,022) the funds. It is estimated that the underlying assets of the Less allowance for uncollectible contributions (453) funds will be liquidated over 1 to 6 years. 40,131 Less current portion (11,940) (f) This category includes several domestic private equity Total contributions receivable, long-term $ 28,191 funds which make investments in domestic equity securities, warrants or other securities that are generally not actively traded at the time of investment. These At December 31, 2008, the discount on contributions investments are focused on several industries including, receivable was approximately $4.0 million at rates but not limited to, insurance, financial services, con- ranging from 3% to 5% and the allowance for uncollect- sumer-related, and communications. The fair values of ible contributions was approximately $456,000. 53

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(7) DEFERRED REVENUE (10) ENDOWMENT Deferred revenue consisted of the following as of (a) Permanently Restricted Net Assets December 31, 2009 and 2008 (dollars in thousands): The income generated by permanently restricted net assets is available to support donor-specified programs. 2009 2008 Advances from private grants and contract As of December 31, 2009 and 2008, NAS held the sponsors $22,257 $24,537 following permanently restricted net assets, classified by Advances from U.S. government sponsors 4,692 6,958 the purpose for which the income is to be used (dollars Publication subscriptions and other 5,131 3,976 in thousands): Total deferred revenue $32,080 $35,471 2009 2008 (8) LINE OF CREDIT Sponsored research and advisory programs $110,122 $109,635 Prizes and awards 5,240 5,115 NAS is party to an $18 million unsecured line of credit Total permanently restricted net assets $115,362 $114,750 from Bank of America, which bears interest at LIBOR plus 0.40% and expires on August 30, 2010. Interest expense related to the line of credit for the years ended (b) Endowment Assets December 31, 2009 and 2008, was approximately $68,500 and $343,000, respectively. The NAS endowment consists of approximately 100 individual funds established to support general operations, sponsored research and advisory programs, prizes and (9) TEMPORARILY RESTRICTED NET awards, and the operations of the Woods Hole facility. ASSETS The endowment is comprised solely of donor-restricted endowment funds. The investments of the endowment are Temporarily restricted net assets were available for the included in the NAS long-term investment pool, as following purposes as of December 31, 2009 and 2008 described in note 3. (dollars in thousands): Interpretation of Relevant Law 2009 2008 NAS has interpreted the District of Columbia “Uniform Sponsored research and advisory programs $147,050 $126,835 Prudent Management of Institutional Funds Act of 2007” General endowment 69,107 54,157 (the Act) as requiring NAS, absent explicit donor Prizes and awards 22,784 17,903 stipulations to the contrary, to act in good faith and with Woods Hole facility 2,793 1,896 the care that an ordinarily prudent person in a like Total temporarily restricted net assets $241,734 $200,791 position would exercise under similar circumstances in making determinations to appropriate or accumulate endowment funds, taking into account both its obligation Temporarily restricted net assets were released from to preserve the value of the endowment and its obligation restriction for the following purposes during the years to use the endowment to achieve the purposes for which it ended December 31, 2009 and 2008 (dollars was donated. NAS classifies as permanently restricted net in thousands): assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subse- 2009 2008 quent gifts to the permanent endowment, and Sponsored research and advisory programs $ 30,788 $ 34,275 (c) accumulations to the permanent endowment required General endowment 5,732 6,219 by the applicable donor gift instrument. The remaining Prizes and awards 728 896 portion of donor-restricted endowment funds that are not Woods Hole facility 390 458 classified as permanently restricted are classified as temporarily restricted net assets until those amounts are Total temporarily restricted net assets released from restriction $ 37,638 $ 41,848 54

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appropriated for expenditure by NAS. In making a The asset allocation guidelines are as follows: determination to appropriate or accumulate, NAS adheres to the standard of prudence prescribed by the Act and Asset Category Guideline % considers the following factors: US Large Stocks 25% (1) The duration and preservation of the endowment US Small-Mid Stocks 12% fund; Non-US Stocks (Developed) 20% (2) The purposes of the institution and the endowment Non-US Stocks (Emerging) 8% fund; Real Estate Stocks 5% (3) General economic conditions; Total Stocks 70% (4) The possible effect of inflation or deflation; (5) The expected total return from income and the US Fixed/Cash 12% appreciation of investments; Non-US Fixed 3% (6) Other resources of the institution; and Total Fixed 15% (7) The investment policy of the institution. Hedge Funds 12% Return Objectives and Strategies Other Alternative 3% Total 100% NAS has adopted an investment and spending policy for NAS has adopted a spending policy that limits the annual endowment assets that is designed to provide a predict- spending to 5% of the three-year average fair value of the able stream of funding to programs supported by the participating funds in the endowment portfolio. This is endowment while seeking to protect the real purchasing consistent with NAS’ objective to maintain the purchas- power of the assets from inflation. Accordingly, NAS has ing power of the endowment assets held in perpetuity as adopted guidelines which feature a material commitment well as to provide additional real growth through new to equity and equity-like investments. gifts and investment return. Changes in endowment assets for the fiscal year ended December 31, 2009 are as follows (dollars in thousands): Temporarily Permanently Unrestricted Restricted Restricted Total Endowment assets, January 1, 2009 $ (2,412) $ 112,988 $ 108,524 $ 219,100 Investment return: Interest and dividend income - 4,822 - 4,822 Net gain on investments 2,198 46,101 - 48,299 Total investment return 2,198 50,923 - 53,121 Contributions - - 2,531 2,531 Amounts appropriated for expenditure - (11,089) - (11,089) Other changes: 2008 appropriation expended in 2009 - (3,044) - (3,044) Unspent purpose restricted appropriations - 2,022 - 2,022 Accrued expenses withdrawn in 2010 - 582 - 582 Endowment assets, December 31, 2009 $ (214) $ 152,382 $ 111,055 $ 263,223 55

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Changes in endowment assets for the fiscal year ended December 31, 2008 are as follows (dollars in thousands): Temporarily Permanently Unrestricted Total Restricted Restricted Endowment assets, January 1, 2008 $ 102,814 $ 124,459 $ 102,351 $ 329,624 Net asset reclassification based on change in law (102,814) 102,814 - - Endowment assets after reclassification - 227,273 102,351 329,624 Investment return: Interest and dividend income - 13,405 - 13,405 Net loss on investments (2,412) (116,711) - (119,123) Total investment return (2,412) (103,306) - (105,718) Contributions - - 6,173 6,173 Amounts appropriated for expenditure - (13,828) - (13,828) Other changes: 2007 appropriation expended in 2008 - (395) - (395) Unspent purpose restricted appropriations - 1,532 - 1,532 Accrued expenses withdrawn in 2009 - 1,712 - 1,712 Endowment assets, December 31, 2008 $ (2,412) $ 112,988 $ 108,524 $ 219,100 Funds with Deficiencies (11) PROGRAM EXPENSES From time to time, the fair value of assets associated with Program expenses for the years ended December 31, 2009 individual donor-restricted endowment funds may fall and 2008 are summarized as follows (dollars below the original value of the gift donated to the in thousands): permanent endowment. Deficiencies of this nature are reported as unrestricted net assets. At December 31, 2009 2009 2008 and 2008, NAS had deficiencies of $214,000 and Transportation Research Board $ 97,045 $ 91,742 $2.4 million, respectively, reported as unrestricted net Policy and Global Affairs 51,111 53,593 assets. These deficiencies were primarily a result of Institute of Medicine 27,519 23,154 unfavorable market fluctuations that occurred shortly after Earth and Life Sciences 22,123 19,319 the investment of new permanently restricted contribu- tions. Subsequent gains that restore the fair value of the Engineering and Physical Sciences 21,043 19,783 Behavioral and Social Sciences and assets of the endowment fund to the required level were 10,268 9,649 Education classified as an increase in unrestricted net assets. Proceedings of the National Academy of Sciences 13,425 12,477 National Academy Press 4,351 4,573 National Academy of Engineering 4,079 4,641 Koshland Science Museum 1,616 1,890 NAS and National Sciences Resource Center 8,129 6,605 Total program expenses $260,709 $247,426 56

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In April 2009, the District of Columbia issued Series (12) RECOVERY OF INDIRECT COSTS 2009A tax-exempt revenue bonds in the amount of $57,500,000 on behalf of NAS. The proceeds were used NAS receives indirect cost recovery on its federal to refund the Series 1999A revenue bonds, as well as pay contracts and grants. An overhead assessment is applied certain costs of issuing the bonds. to direct salaries, accrued leave, fringe benefits, and services provided by outside contractors (e.g., temporary NAS is obligated under the revenue bonds as follows personnel agencies, consultants) on NAS property. A (dollars in thousands): general and administrative assessment (G&A) is applied to direct costs and overhead less subcontract costs and stipends. Therefore, both the overhead and G&A rates are 2009 2008 Series 1999A revenue bonds, serial, applied to projects incurring direct salaries and other interest rate 5%, maturing at various direct costs such as travel. If a program does not require dates from January 1, 2009 through direct salaries, such as a travel grant program, a subcon- 2012 $ - $ 7,440 tract/flow-through administration rate is applied. Certain Series 1999A revenue bonds, term: Interest rate 5%, due January 1, 2019 - 17,085 off-site work (not performed on NAS property) is Interest rate 5%, due January 1, 2028 - 32,545 assessed reduced overhead rates. Series 2008A revenue bonds, term, at flexible rates (0.6% in 2009 and 2.1% NAS bills for indirect cost recovery throughout the year in 2008) maturing at various dates based on negotiated rates. At the end of each year, NAS from January 1, 2029 through 2039 66,325 66,325 Series 2009A revenue bonds, term, at compares actual expenses incurred in each of its cost variable rates (0.4% in 2009) maturing pools to the amounts recovered based on its billing rates. at various dates from January 1, 2010 The difference is recorded as its indirect cost carryfor- through 2028 57,500 - ward. If NAS overrecovers on its indirect costs during the Total bonds, at face value 123,825 123,395 Less unamortized discount and premium - (989) year, a liability is recorded. If NAS underrecovers, a receivable is recorded. Total bonds payable 123,825 122,406 Less current portion (included in other (1,280) (1,725) current liabilities) NAS has a cumulative net overrecovery of approximately Bonds payable, long-term $ 122,545 $ 120,681 $2.4 million as of December 31, 2009 and a cumulative net underrecovery of approximately $7.5 million as of December 31, 2008. The overrecovery is included in the The serial and term bonds represent unsecured general deferred revenue balance and the underrecovery is obligations of NAS. included in the contracts receivable balance in the statements of financial position. Interest on all Series 1999A revenue bonds was payable semiannually every January 1 and July 1. Interest on the 2008A and 2009A bonds is payable monthly. (13) BUILDING PROJECT AND FINANCING The carrying value of bonds payable in the financial statements was equal to their fair value on December 31, (a) Building Project Revenue Bonds 2009, and was less than their fair value by approximately $1.1 million on December 31, 2008. In January 1999, the District of Columbia issued Se- ries 1999A, Series 1999B, and Series 1999C tax-exempt Interest expense on the bonds payable for 2009 and 2008 revenue bonds in the total amount of $130,960,000 on totaled $1.5 million and $4.5 million, respectively. behalf of NAS. Proceeds from the sale of the revenue bonds financed the cost of the acquisition of (b) Interest Rate Swaps 44,250 square feet of land and related construction of an office building, as well as paid certain costs of issuing the In October 1999, NAS entered into a swap agreement, bonds. This building consolidates most of NAS’ program with an effective date of February 1, 2000, relating to the activities into one location. The facility was occupied in $66 million face amount of its Series 1999A revenue July 2002. bonds. The agreement provides for NAS to receive 4.97% in interest on a notional amount of $65 million and to pay In June 2008, the District of Columbia issued Se- interest at a floating rate option based on the weekly ries 2008A tax-exempt revenue bonds in the amount of interest rate resets of tax-exempt variable-rate issues per $66,325,000 on behalf of NAS. The proceeds were used the SIFMA Municipal Swap Index. NAS amended the to refund the Series 1999B and Series 1999C revenue agreement for the 2005 – 2020 period by agreeing to give bonds, as well as pay certain costs of issuing the bonds. up the benefit of any 30-day period during which the 57

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SIFMA index remains below 2.25% for the entire interest rate swap is recorded as a liability of $35,000 as 30 days. Each time this occurs, the rate on the swap of December 31, 2009, and is included in other long-term portfolio reverts to the fixed rate noted above for that liabilities on the statements of financial position. The fair month only. value of the interest rate swap was recorded as an asset of $934,000 as of December 31, 2008, and is included in NAS entered into this fixed-to-variable swap agreement contributions and other receivables and other assets on the to manage its exposure to interest rate changes. The statements of financial position. fixed-rate debt obligations exposed NAS to variability in the cost recovery stream due to changes in interest rates. Pertaining to the swaption and resultant variable-to-fixed NAS recovers the costs of borrowing through a capital interest rate swap, NAS recorded a gain on the change in investment incentive rate that is set by the the fair value of approximately $3.6 million for the year U.S. government and is tied to a variable index. If interest ended December 31, 2009, and a loss of approximately rates increase, the capital investment incentive recovery $8.3 million for the year ended December 31, 2008. The increases. gain and loss are included in other income in the state- ments of activities. The fair value of the swap is recorded Conversely, if interest rates decrease, the capital invest- as a liability of $9.2 million at December 31, 2009, and is ment incentive recovery decreases. Therefore, NAS included in other current liabilities and other long-term entered into a derivative instrument that ties the fixed-rate liabilities. At December 31, 2008, the fair value of the debt to a variable index to manage fluctuations in cash swaption was recorded as a liability of $12.5 million in flows resulting from interest rate risk. By using derivative other long-term liabilities. financial instruments to hedge exposures to changes in interest rates, NAS exposes itself to credit risk and market (14) NOTE PAYABLE risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When During 2006, NAS entered into a loan agreement with the fair value of a derivative contract is positive, the Bank of America for an amount up to $5 million. The counterparty owes NAS, which creates credit risk for principal balance of this note is payable in equal monthly NAS. When the fair value of a derivative contract is installments until January 1, 2012. On December 31, 2009 negative, NAS owes the counterparty, and therefore, it and 2008, the principal balance was approximately does not possess credit risk. NAS minimizes the credit $1.5 million and $2.3 million, respectively. The note risk in derivative instruments by entering into transactions bears interest at 30-day LIBOR plus 40 basis points. The with high-quality counterparties. interest rate at December 31, 2009 was 0.63%. NAS entered into a swaption agreement on August 21, 2007 that gave the counterparty the option to require NAS (15) EMPLOYEE BENEFITS to enter into an additional swap agreement related to the Series 1999A Revenue Bonds. The counterparty exercised (a) Retirement Plans the option in March 2009. The resultant variable-to-fixed swap became effective on May 1, 2009, and requires NAS NAS has a noncontributory defined contribution retire- to pay 5.00% on a notional amount of $55 million and to ment plan covering substantially all of its employees receive a floating rate equal to 67% of 1-month LIBOR (based on certain benefit eligibility requirements). The plus 0.41%. The counterparty paid NAS a premium of plan is intended to qualify under Section 401(a) of the $2.2 million in advance to enter into this agreement in Internal Revenue Code and uses Teachers Insurance and 2007 and $1.8 million upon execution of the swaption in Annuity Association/College Retirement Equities Fund 2009. (TIAA/CREF) group retirement annuity contracts as the investment vehicle. Participants in this plan vest immedi- As required by the Derivatives and Hedging topic of the ately. NAS has received a favorable determination letter FASB ASC, the fair value of the fixed-to-variable swap, from the IRS on the qualification of this plan under the swaption, and the resultant variable-to-fixed swap Section 401(a) of the Internal Revenue Code. must be recorded in the NAS financial statements. In addition, NAS has a voluntary employee contribution Accordingly, with regard to the fixed-to-variable interest retirement plan that is funded solely by employee rate swap, NAS recorded a loss on the change in the fair contributions made on a pretax salary-reduction basis value of its swap agreement of $902,000 and $803,000 for under Section 403(b) of the Internal Revenue Code. The the years ended December 31, 2009 and 2008, respec- investment vehicles under this voluntary plan are tively, which is included in other income in the accompa- retirement annuity contracts issued by TIAA/CREF and nying statements of activities. The fair value of the mutual funds offered by the Vanguard Group, Inc. 58

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Pension expense for the years ended December 31, 2009 NAS has elected to recognize the initial postretirement and 2008, amounted to approximately $11.2 million and benefit obligation over a period of 20 years. The accrued $10.3 million, respectively. The NAS policy is to fund postretirement benefit obligation is reported in accrued pension benefits as they are earned. The NAS normal employee benefits on the statements of financial position. retirement age is 60, but there is no mandatory age for Postretirement changes other than net periodic benefit retirement. cost are as follows (dollars in thousands): (b) Deferred Compensation 2009 2008 NAS holds long-term investments as part of a frozen Net actuarial (gain) loss $ (1,464) $ 6,555 deferred compensation arrangement for certain employ- Recognized actuarial gain (loss) (469) 18 ees. The fair value of these investments was approxi- Recognized prior service cost (210) (210) mately $2.4 million and $2.2 million as of December 31, 2009 and 2008, respectively, which is reported within Recognized net initial obligation (26) (26) other assets in the statements of financial position. The Total $ (2,169) $ 6,337 related obligation is included in accrued employee benefits in the statements of financial position. Items not yet recognized as a component of net periodic (c) Postretirement and Postemployment Benefits benefit cost at December 31, 2009 and 2008 are as follows (in thousands): NAS provides certain health and life insurance benefits for employees retired due to length of service. All 2009 2008 benefit-eligible employees may become eligible for Net actuarial loss $ 3,513 $ 5,447 service retiree benefits if they reach age 60 while working Prior service cost 1,142 1,352 for NAS and complete 5 years of service in a bene- fit-eligible status for medical and life insurance benefits. Unrecognized net initial obligation 117 142 In addition, certain health and life insurance benefits are Total $ 4,772 $ 6,941 provided for employees retired due to disability. A benefit-eligible employee may become eligible for disabled retiree benefits if deemed totally disabled under The estimated amounts, measured at year-end, that are NAS’ long-term disability insurance or if they are eligible expected to be recognized in the net periodic benefit cost for disability benefits from the Social Security Admini- over the next fiscal year for the postretirement benefit stration. Life insurance benefits are provided based on plan are as follows (dollars in thousands): coverage at date of disability and health insurance may be continued if the disabled retiree had participated in an 2009 2008 NAS health insurance plan for 5 years at the date of Prior service cost $ 210 $ 210 disability. Insurance companies whose premiums are Recognized actuarial loss 190 469 determined on an experience-rated basis provide life and Recognized net initial obligation 26 26 health insurance benefits for retirees. Medicare supple- ment insurance is not experience rated. The retiree Total $ 426 $ 705 welfare benefit plan is contributory for health insurance purposes for employees who retired on or after January 1, 1990. Participant contributions for health insurance are based on a percentage of the monthly premium paid by NAS (from 25% to 100%). The participant contribution is also based on their date of retirement, length of service and choice of health insurance carrier. 59

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The following table presents the changes in benefit NAS postretirement benefit plan asset allocations at obligations, changes in plan assets, funded status, and the December 31, 2009 and 2008, by asset category are as components of net periodic benefit cost for the year ended follows: December 31, 2009 and 2008 (dollars in thousands): 2009 2008 2009 2008 Cash 3% 3% Change in benefit obligations: Bonds and notes 22% 11% Benefit obligation, January 1 $ 18,592 $ 16,461 Equity securities 75% 86% Service cost 613 608 100% 100% Interest cost 1,088 963 Plan participants contributions 101 131 Actuarial loss 170 1,161 The investment objective of the Plan is to produce a rate Benefits paid (650) (732) of return over the long term that will provide for fund Benefits obligation, December 31 19,914 18,592 growth, protect against the effect of inflation, and provide for some stability in different market environments. The Change in plan assets, combined: fund is diversified between fixed income and equity Fair value of plan assets, January 1 12,200 14,660 investments. With this diversification and investment in Actual return on plan assets 2,550 (4,325) broader market funds, there is reasonable assurance that Employer contributions 2,951 1,865 no single security or class of securities will have a Fair value of plan assets, December 31 17,701 12,200 disproportionate impact on the Plan assets. The Plan $ (2,213) $ (6,392) Funded status assets are invested with a long-term growth strategy, with a 70% equity guideline. Components of net periodic benefit cost: The overall long-term rate of return was developed by Service cost $ 613 $ 608 estimating the long-term real rate of return for the Plan’s Interest cost 1,088 963 asset mix, while taking into account the effects of Expected return on plan assets (915) (1,069) inflation. This estimate was developed by evaluating the Recognized prior service cost 210 210 history and similar asset allocation of the NAS Endow- Recognized actuarial (gain) loss 469 (18) ment. Recognized net initial obligation 26 26 Net periodic benefit cost $ 1,491 $ 720 The following table presents the fair value hierarchy for the postretirement benefit plan assets at December 31, 2009 (dollars in thousands): The assumptions used to determine net periodic benefit cost for years ended December 31, 2009 and 2008 are as Fair value measurements follows: at December 31 using: Fair Value Level 1 Level 2 Level 3 2009 2008 Financial Assets: Discount rate 6.00% 6.00% Retiree Welfare Benefit Plan Expected long-term return on plan assets 7.50% 7.50% Money market funds $ 519 $ 519 $ - $ - The assumptions used to calculate the accumulated U.S. Government securities 3,416 3,416 - - postretirement benefit obligation for the years ended Corporate bonds 549 - 549 - December 31, 2009 and 2008 are as follows: Common stock 7,082 7,082 - - Mutual funds 6,135 6,135 - - 2009 2008 Total investments $17,701 $17,152 $ 549 $ - Discount rate 6.00% 6.00% 60

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The methods and assumptions used to estimate the fair (16) CONDITIONAL ASSET value of each class of financial instrument are further RETIREMENT OBLIGATION discussed in footnote 4, Fair Value Measurements. The Asset Retirement Obligation subtopic of NAS expects to contribute to the Plan the actuarially FASB ASC requires a liability to be recorded if the fair determined net periodic cost for 2010, which is value of the obligation to retire an asset can be reasona- approximately $891,000. bly estimated. Asset retirement obligations include those for which an entity has a legal obligation to The following benefit payments, which reflect future perform an asset retirement activity. However, the services, are expected to be paid in future years as timing and/or method of settling the obligation are noted, as of December 31, 2009 (dollars in thousands): conditional on a future event that may or may not be within the control of the entity. Years ending December 31: NAS recorded an asset retirement obligation for which 2010 $ 892 fair value of the liability could be reasonably estimated 2011 1,078 relating to the regulatory remediation of asbestos and 2012 1,201 other hazardous materials in one of its office buildings. 2013 1,295 For the years ended December 31, 2009 and 2008, NAS 2014 1,366 has a liability of $1.84 million and $1.76 million 2015-2019 7,618 included in other long-term liabilities on the statements $ 13,450 of financial position. Accretion expense of $84,000 and $80,000 were included in management and general expense for the years ended December 31, 2009 and The measurement date of the plan assets and benefit 2008, respectively. There were no additional liabilities obligations for 2009 and 2008 is December 31, 2009 incurred or settled and no revisions to estimated cash and 2008, respectively. flows in 2009 or 2008. The trend rate for growth in healthcare costs used in calculating the accumulated postretirement benefit (17) RELATED PARTY TRANSACTIONS obligation was 9.0% for under age 65 and 7.0% for over age 65, and 8.7% for the years ended December 31, The NAS Council has authorized two agreements 2009 and 2008, respectively, declining gradually to 5% providing noninterest-bearing, collateralized advances in the year 2019. The healthcare cost trend rate assump- to two employees in connection with the purchase of tion has a significant impact on the postretirement each employee’s residence. The agreements between the benefit costs and obligations. The effect of a 1% change parties were executed in May 2005 and May 2007. They in the assumed healthcare cost trend rate at Decem- each provide that the repayment obligation will be ber 31, 2009, would have resulted in an estimated adjusted to allocate to each party its proportional share $2.0 million increase or $1.7 million decrease in the of the appreciation or depreciation in the value of the postretirement benefit obligation and an estimated residence, which is based on the relative financing $215,000 increase or $177,000 decrease in the 2009 percentage provided by each party. The agreements will benefit expense. terminate upon pay-back of the advance, sale of the property, or the end of each individual’s employment The effect of a 1% change in the assumed healthcare with NAS, which will not exceed 12 years. The cost trend rate at December 31, 2008, would have estimated present value of the receivables at Decem- resulted in an estimated $1.7 million increase or ber 31, 2009 and 2008, is $3.3 million, and is included $1.5 million decrease in the postretirement benefit in other assets on the statements of financial position. obligation and an estimated $201,000 increase or $165,000 decrease in the 2008 benefit expense. 61

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(18) COMMITMENTS AND (20) SUBSEQUENT EVENT CONTINGENCIES NAS evaluated subsequent events through May 21, 2010, which is the date the financial statements were available (a) Leases for issuance. NAS is committed to several noncancelable operating In May 2010, the District of Columbia issued $59.6 leases for office space. Future minimum rental payments million of fixed-rate tax-exempt revenue bonds on behalf due under noncancelable operating leases are as follows of NAS. The bonds mature at various dates through the (dollars in thousands): year 2040, with yields ranging from 1.44% to 4.70%. These bonds were sold to finance the cost to restore a Year ending December 31: portion of the NAS headquarters building on Constitution 2010 $ 2,431 Avenue in Washington, D.C. and pay for certain costs of 2011 2,017 issuance. 2012 1,686 In conjunction with the restoration project, NAS has 2013 1,730 entered into a contract with a guaranteed maximum price 2014 1,776 of $44.7 million. Thereafter 3,344 $ 12,984 Rental expense amounted to approximately $2.6 million and $2.1 million for years ended December 31, 2009 and 2008, respectively. (b) Contingencies NAS receives a portion of its revenues directly or indirectly from federal government grants and contracts, all of which are subject to audit by the Defense Contract Audit Agency, which has completed its examinations through December 31, 2005. A contingency exists relating to unexamined periods and final settlements of examined periods to refund any amounts received in excess of allowable costs. Management is of the opinion that no material liability will result from such audits. (c) Litigation NAS is involved in one litigation matter. While the ultimate outcome of the litigation is uncertain, NAS management believes that it has a strong legal position, intends to vigorously defend against any liability, and has concluded that the probable outcome will not have a material impact on NAS. (19) RISKS AND UNCERTAINTIES NAS invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with investment securities, it is at least reasonably possible that changes in the values of invest- ment securities will occur in the near term and that such changes could materially affect the amounts reported. 62