Annual Financial Statement

AMERICAN ACADEMY OF OPHTHALMOLOGY, INC.

MARCH 31, 2012

INDEPENDENT AUDITORS' REPORT

AND

CONSOLIDATED FINANCIAL STATEMENTS

F1© 2012 by the American Academy of Ophthalmology ISSN 0161-6420/12/$–see front matterPublished by Elsevier Inc. http://dx.doi.org/10.1016/j.ophtha.2012.07.081

http://dx.doi.org/10.1016/j.ophtha.2012.07.081

AMERICAN ACADEMY OF OPHTHALMOLOGY, INC. ____________

C O N T E N T S

Page

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Consolidated Financial Statements:

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Supplementary Information:

Schedule of Revenues and Expenses of the Foundation of the F30ygolomlahthpOfoymedacAnaciremA

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INDEPENDENT AUDITORS’ REPORT The Board of Trustees American Academy of Ophthalmology, Inc. We have audited the accompanying consolidated statement of financial position of the American Academy of Ophthalmology, Inc. (AAO) as of March 31, 2012, and the related consolidated statements of activities and changes in unrestricted net assets, changes in net assets and cash flows for the year then ended. These financial statements are the responsibility of AAO’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The prior year summarized comparative information has been derived from AAO’s 2011 financial statements which were audited by other auditors whose report dated July 20, 2011, expressed an unqualified opinion on those financial statements. 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 financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of AAO’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AAO as of March 31, 2012, and the changes in their unrestricted net assets and their net assets and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The consolidating information on pages 2 through 4 is presented for purposes of additional analysis rather than to present the financial position and changes in net assets of the individual entities. In addition, the supplementary information on page 27, Schedule of Revenues and Expenses of the Foundation of the American Academy of Ophthalmology is also presented for purposes of additional analysis. The consolidating information and supplemental information are not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, such information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. The prior year summarized comparative information on the Schedule of Revenues and Expenses of the Foundation of the American Academy of Ophthalmology on page 27 was derived from the supplementary information that was subjected to the auditing procedures applied in the 2011 audit of the consolidated financial statements by other auditors, whose report on such information stated that it was fairly stated in all material respects in relation to the March 31, 2011 consolidated financial statements as a whole.

San Francisco, California July 24, 2012

ACCOUNT AN TS & CONSULT ANTS

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2012 2011Academy Foundation Eliminations Total Total

ASSETS

411,6stnelaviuqe hsac dna hsaC $ 1,459$ -$ 7,573$ 7,582$ 674derebmucne - hsaC - - 476 -

Receivables:Membership dues, net of allowance

394,4576$ fo - - 4,493 3,952 -ten ,segdelP 359 - 359 625 007,1ytrap detaler morf euD - - 1,700 1,850

Other, net of allowance of $35 765 366 (369) 762 1,007 818,8ynapmocretnI - (8,818) - - 730,1yrotnevnI - - 1,037 1,146

Prepaid expenses and other assets 1,511 122 - 1,633 1,759 329,61stnemtsevnI 52,818 - 69,741 59,822 203,3ten ,tnempiuqe dna ytreporP 15,467 - 18,769 19,890

Beneficial interest in perpetual trust - 1,000 - 1,000 1,000

931,54stessa latoT $ 71,591$ (9,187)$ 107,543$ 98,633$

LIABILITIES AND NET ASSETS

Liabilities:Accounts payable and accrued liabilities 6,020$ 9,048$ (9,187)$ 5,881$ 4,498$

332noitagilbo esael latipaC - - 233 316 227,31seud derrefeD - - 13,722 13,060 654,3eunever derrefed rehtO - - 3,456 3,647

Post employment benefit obligation 419 - - 419 1,431

058,32seitilibail latoT 9,048 (9,187) 23,711 22,952

Net assets:448,91detcirtsernU 52,148 - 71,992 63,483 521detangised draoB 1,815 - 1,940 1,854

969,91detcirtsernu latoT 53,963 - 73,932 65,337

023,1detcirtser yliraropmeT 2,751 - 4,071 4,522 -detcirtser yltnenamreP 5,829 - 5,829 5,822

982,12stessa ten latoT 62,543 - 83,832 75,681

Total liabilities and net assets 45,139$ 71,591$ (9,187)$ 107,543$ 98,633$

2012 Consolidating Information


CONSOLIDATED STATEMENT OF FINANCIAL POSITION

March 31, 2012(with summarized comparative information as of March 31, 2011)

____________(Amounts in thousands)

The accompanying notes are an integralpart of these consolidated financial statements.

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Unrestricted revenue and support:140,81seef dna seud pihsrebmeM $ -$ -$ 18,041$ 17,051$ 645,8secivres dna stcudorP - - 8,546 7,147 383,51gniteem launnA - - 15,383 14,271 806,5gnisitrevda dna seitlayoR 10 - 5,618 5,879 585snoitubirtnoC 503 - 1,088 1,527 1emocni latneR 2,062 (1,175) 888 816 067,1seef tnemeganaM - - 1,760 1,736 087rehtO 138 - 918 1,091 988,3snoitcirtser morf desaeler stessa teN 2,717 (2,640) 3,966 4,321

Total unrestricted revenue and support 54,593 5,430 (3,815) 56,208 53,839

Expenses:Program expenses:

623,6secivres pihsrebmeM - (238) 6,088 5,449 437,9noitacude lacinilC 1,936 (2,082) 9,588 8,725 223,01tnemeganam sgniteeM - (162) 10,160 10,347 036,4secivres dna ecitcarp cimlahthpO - (183) 4,447 4,536 809,4sriaffa tnemnrevoG - - 4,908 4,514 460,1ecivres cilbuP 941 (905) 1,100 1,094 153,3rehtO - - 3,351 3,953

533,04sesnepxe margorp latoT 2,877 (3,570) 39,642 38,618

Management and general expenses:179,2noitartsinimda dna ecnanrevoG - (32) 2,939 2,905

Organizational support services and 063,4tnempoleved pihsrebmem 2,612 (190) 6,782 7,408 -gnisiardnuF 820 - 820 1,013

Total management and general expenses 7,331 3,432 (222) 10,541 11,326

666,74sesnepxe gnitarepo latoT 6,309 (3,792) 50,183 49,944

Increase (decrease) in unrestricted net assets from operating activities 6,927 (879) (23) 6,025 3,895

Nonoperating income (expense):)230,1(stcejorp laiceps devorppa-draoB - 23 (1,009) (1,115)

481ten ,emocni tnemtsevnI 933 - 1,117 1,008 Net realized and unrealized gains on investments 305 1,076 - 1,381 4,912 Pension-related changes other than net periodic

769tsoc noisnep 114 - 1,081 (36)

424 ten ,emocni gnitareponon latoT 2,123 23 2,570 4,769

Change in unrestricted net assets 7,351 1,244 - 8,595 8,664

Unrestricted net assets, beginning of year 12,618 52,719 - 65,337 56,673

969,91raey fo dne ,stessa ten detcirtsernU $ 53,963$ -$ 73,932$ 65,337$



CONSOLIDATED STATEMENT OF ACTIVITIES AND CHANGES IN UNRESTRICTED NET ASSETS

for the year ended March 31, 2012(with summarized comparative information for the year ended March 31, 2011)

(Amounts in thousands)____________


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Unrestricted net assets:407,05troppus dna seuneveR $ 2,713$ (1,175)$ 52,242$ 49,518$

Net assets released from restrictions 3,889 2,717 (2,640) 3,966 4,321 )666,74(sesnepxe gnitarepO (6,309) 3,792 (50,183) (49,944)

424ten ,emocni gnitareponoN 2,123 23 2,570 4,769

Change in unrestricted net assets 7,351 1,244 - 8,595 8,664

Temporarily restricted net assets:702,4snoitubirtnoC 1,558 (2,640) 3,125 3,048

Net assets released from restrictions (3,889) (2,717) 2,640 (3,966) (4,321) -emocni tnemtsevnI 209 - 209 206

Net realized and unrealized gains on -stnemtsevni 181 - 181 729

Change in temporarily restricted 813stessa ten (769) - (451) (338)

Permanently restricted net assets:-snoitubirtnoC 7 - 7 1

Change in permanently restricted-stessa ten 7 - 7 1

966,7stessa ten ni egnahC 482 - 8,151 8,327

026,31raey fo gninnigeb ,stessa teN 62,061 - 75,681 67,354

982,12raey fo dne ,stessa teN $ 62,543$ -$ 83,832$ 75,681$



CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS




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2012 2011

Cash flows from operating activities:151,8stessa ten ni egnahC $ 8,327$

Adjustments to reconcile change in net assets to net cash provided byoperating activities:

)2(ecnawolla noitaulav yrotnevnI - 5esnepxe tbed daB 2 41tnempiuqe dna ytreporp fo lasopsid no ssol teN 1 )7(sesoprup mret-gnol rof detcirtser sronod morf deviecer hsaC (1)

368,1noitazitroma dna noitaicerpeD 1,596 )265,1(stnemtsevni no sniag dezilaernu dna dezilaer teN (5,641) )2(kcots detubirtnoC (7)

05elbaviecer eton fo ssenevigroF - )869(segnahc detaler-noisneP 243

Change in assets and liabilities:)674(derebmucne - hsaC - )145(elbaviecer seud pihsrebmeM 348

Pledges 266 1,540 041selbaviecer rehtO 335

Inventory 111 116 621stessa rehto dna sesnepxe diaperP (528) 215,1seitilibail deurcca dna elbayap stnuoccA 706 174seud dna eunever derrefeD (393) )44(noitagilbo tifeneb tnemyolpme tsoP (38)

701,9seitivitca gnitarepo yb dedivorp hsac teN 6,606

Cash flows from investing activities:42seitiruces fo elas morf sdeecorP 10,253 )973,8(stnemtsevni rehto dna seitiruces fo esahcruP (12,244) )538(tnempiuqe dna ytreporp fo esahcruP (2,078)

051ytrap detaler morf eud no detcelloc tnemyaP -

)040,9(seitivitca gnitsevni ni desu hsac teN (4,069)

Cash flows from financing activities:-elbayap egagtrom fo tnemyapeR (3,915) )38(sesael latipac no stnemyaP (92)

7sesoprup mret-gnol rof detcirtser sronod morf deviecer hsaC 1

)67(seitivitca gnicnanif ni desu hsac teN (4,006)

)9(stnelaviuqe hsac dna hsac ni esaerced teN (1,469)

285,7raey fo gninnigeb ,stnelaviuqe hsac dna hsaC 9,051

375,7raey fo dne ,stnelaviuqe hsac dna hsaC $ 7,582$

____________


CONSOLIDATED STATEMENT OF CASH FLOWS


(Amounts in thousands)


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2012 2011

Supplemental disclosures of cash flow information:Cash paid during the year for:

Interest 24$ 436$

Taxes 62$ 119$

Supplemental noncash investing and financing activities:1elbayap stnuocca ni tnempiuqe dna ytreporP $ 79$

Contributed stock 2$ 7$

-sesael latipac rednu deriuqca stessA $ 129$

05elbaviecer eton fo ssenevigroF $ -$

____________


CONSOLIDATED STATEMENT OF CASH FLOWS, Continuedfor the year ended March 31, 2012

(with summarized comparative information for the year ended March 31, 2011)(Amounts in thousands)


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts rounded to thousands) ____________

1. Organization The American Academy of Ophthalmology, Inc. (the Academy) is the largest national organization for ophthalmologists (“EyeMDs”). The Academy has a subsidiary and a separate fund that are consolidated. The following is a description of the entities that make up the Academy:

• The Academy membership organization. As a professional association, the Academy develops, produces, publishes and distributes a wide range of print and electronic educational and scientific materials in the areas of clinical education, practice management and public information. The Academy provides continuing education opportunities for ophthalmologists through its annual scientific meetings. The Academy also works to educate other health care providers and the public about eye care and represents ophthalmologists and their patients before the government and other organizations that influence the provision of eye care.

• The American Academy of Ophthalmology, Inc. Political Action Committee (OPHTHPAC). OPHTHPAC is a separate fund of the Academy organized exclusively to solicit, receive, and make contributions for the purpose of influencing the federal election of persons who have indicated an interest and favorable attitude towards ophthalmology.

• Academy Services, Inc. (ASI). ASI and its subsidiary corporation, Academy Management Services, Inc., dba SF Association Management Services (SF-AMS), is a wholly owned, for-profit subsidiary of the Academy organized to carry out business activities unrelated to the tax-exempt function of the Academy by providing management services to unrelated ophthalmic medical associations.

The Foundation of the American Academy of Ophthalmology (the Foundation), a separate 501(c)(3) supporting organization created to perform charitable, educational and scientific work, is consolidated by the Academy (together referred to as AAO) through common control of its Board of Trustees (the Board). The Foundation is organized to advance lifelong ophthalmic education by supporting the Academy’s research and development activities that expedite the transfer of critical ophthalmic knowledge and the development of educational products and services for ophthalmologists world-wide. The Foundation also supports the Academy’s public service program, EyeCare America which ensures eye care services for the medically underserved and supports the Museum of Vision which preserves the history of ophthalmology and translates it into educational resources for use by the Academy members, medical historians, researchers and the public.

Nature of Activities The following programs and supporting services are included in the accompanying consolidated financial statements:

Membership Services Includes the support structure necessary to service nearly 30,000 members world-wide.

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1. Organization, continued

Nature of Activities, continued

Clinical Education Develops, produces and distributes a wide range of print and electronic ophthalmic-related educational and scientific materials. Meetings Management Develops and produces educational and scientific gatherings and annual meeting attended by more than 25,000 members and other ophthalmic professionals interested in the delivery of high quality patient eye care. Ophthalmic Practice and Services Develops, produces and distributes a wide range of print and electronic materials and coordinates meetings designed to educate and assist in the operation of a medical practice. Government Affairs Works to educate other health care providers and the public about eye care and represents ophthalmologists and their patients before the government and other organizations that influence eye care. Public Service Maintains EyeCare America, which ensures quality eye care services for nearly 200,000 medically underserved and to those at increased risk for eye disease annually; and operates the Museum of Vision, which preserves ophthalmic history and translates it into educational resources for use by Academy members, medical historians, researchers and the public. Other Includes the functions to operate the for-profit subsidiary, SF-AMS which provides management services to unrelated ophthalmic medical associations; and OPHTHPAC contributions for the purpose of influencing the federal election of persons who have indicated an interest and favorable attitude towards ophthalmology. Management and General Governance and administration provides coordination of the Academy’s program strategy through the Office of the Executive Vice-President; secures proper administrative functioning of the Board and maintains competent legal service from the program administration of the Academy.

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1. Organization, continued

Nature of Activities, continued

Management and General, continued Organization support services and membership development includes the functions necessary to maintain an adequate working environment; provide coordination in the production of Academy print and electronic materials; and manage the financial and budgetary responsibilities of the Academy. Fundraising Provides the structure necessary to encourage and secure private financial support from individuals, foundations, and corporations.

2. Basis of Presentation and Significant Accounting Policies a. Basis of Consolidation and Presentation

The consolidated financial statements of AAO are prepared on the accrual basis of accounting and in conformity with accounting principles generally accepted in the United States of America specific to nonprofit organizations. The consolidated financial statements include the accounts of the Academy and its subsidiaries, as well as the Foundation. All material intercompany transactions and balances have been eliminated. AAO’s activities and net assets are classified as unrestricted, temporarily restricted and permanently restricted according to the terms of the various contributions, grants and bequests and donors’ wishes or interests.

Unrestricted Net Assets Unrestricted net assets consist of all resources that have not been restricted by a donor and are available to support AAO’s activities. Board Designated Unrestricted Net Assets Board designated unrestricted net assets represent unrestricted net assets subject to self-imposed limits by action of the Board. Temporarily Restricted Net Assets Temporarily restricted net assets represent contributions that are limited in use in accordance with donor-imposed stipulations. These stipulations may expire with time or may be satisfied by the actions of AAO according to the intention of the donor. Upon satisfaction of such stipulations, the associated net assets are released from temporarily restricted net assets and reported as unrestricted net assets.

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2. Basis of Presentation and Significant Accounting Policies, continued a. Basis of Consolidation and Presentation, continued

Permanently Restricted Net Assets Permanently restricted net assets represent contributions to be held in perpetuity as directed by the donor as well as the perpetual right to the future income from assets held by a third party. The income from these investments is available to support activities of AAO as designated by such donors.

b. Cash and Cash Equivalents Cash and cash equivalents consist primarily of cash and money market funds. AAO considers investments with maturity of three months or less at the time of purchase to be cash equivalents, except for certificate of deposits designated for investment. Encumbered cash represents cash held on behalf of SF-AMS managed clients. A liability equal to the amount of encumbered cash is included in accounts payable and accrued liabilities.

c. Receivables Membership Dues AAO’s Bylaws govern membership benefits and obligations which extend from January 1 to December 31. Members have an obligation to pay dues unless resignation is received prior to January 1 of the said membership year. AAO uses the allowance method to account for uncollectible receivables. The allowance for doubtful accounts is based on historical experience and an evaluation of the outstanding receivables at the end of the fiscal year. Pledges Pledges receivable consist of unconditional promises to give. Pledges expected to be received after one year are recorded at their estimated net present value in the initial year received, using a market discount rate, and are recorded net of an allowance for amounts estimated by management to be uncollectible. Other Other receivables consist primarily of product orders and meeting registrations. AAO uses the allowance method to account for uncollectible receivables. The allowance for doubtful accounts is based on historical experience and an evaluation of the outstanding receivables at the end of the fiscal year.

d. Inventory Inventory consists of products available for sale and is stated at the lower of cost or market. Cost is determined by the average cost method. AAO estimates a reserve for obsolescence based on the nature and topic of each product as well as recent and projected sales.

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2. Basis of Presentation and Significant Accounting Policies, continued e. Investments

Mutual funds are stated at fair value, using closing quoted market prices at net asset value. AAO’s interest in partnership fund is stated at fair value, calculated at net asset value of the underlying securities (Note 5). Donated securities are recorded at fair value as of the date of donation. Net realized and unrealized gains or losses are reflected as increases or decreases in unrestricted net assets, unless their use is temporarily or permanently restricted by the donor. Gains or losses that result from market fluctuations are recognized in the period in which such fluctuations occur. Realized gains or losses resulting from sales of securities are calculated on an adjusted cost basis. Dividend and interest income are accrued when earned.

f. Property and Equipment Purchased property and equipment are stated at cost and are depreciated using the straight-line method based on the estimated useful lives of the assets, which range from 3 to 30 years. Donated property and equipment are stated at fair value as of the date of donation.

g. Beneficial Interest in Perpetual Trusts As the named beneficiary of a perpetual trust, the Foundation has an irrevocable right to annually receive the net amount realized by the perpetual trust or $50,000, whichever is less as defined by the Trustees. The Beneficial Interest is carried at $1,000,000, the amount used by the Trustees to determine annual distributions of $50,000 using a stipulated 5% distribution rate.

h. Capital Leases Capital leases are recorded as an asset and an obligation at the fair value of the leased property as of the inception of the lease.

i. Deferred Revenue Deferred revenue consists of dues, subscriptions, course fees, royalties, and other revenue related to subsequent fiscal years.

j. Endowment Funds AAO follows Accounting Standards Codification (ASC) Topic 958-205-50-1A and 1B, Reporting Endowment Funds. The states of California and Minnesota have adopted a version of the Uniform Prudent Management of Institutional Funds Act as its State Prudent Management of Institutional Funds Act (SPMIFA). AAO’s endowment consists of both donor-restricted endowment funds and funds designated by the Board as endowments. Income from these funds serves a variety of purposes, including education, ophthalmic heritage and various scholarships and honors.

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2. Basis of Presentation and Significant Accounting Policies, continued j. Endowment Funds, continued

Interpretation of Relevant Law The Board has interpreted the SPMIFA as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of this interpretation, AAO classifies as permanently restricted net assets (a) the original net value of gifts donated to the permanent endowment, (b) the original net value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the organization in a manner consistent with the standard of prudence prescribed by SPMIFA. In accordance with the SPMIFA, AAO considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) the duration and preservation of the fund, (2) the purposes of the organization and the donor-restricted endowment fund, (3) the expected total return from income and the appreciation of investments, (4) other resources of the organization, and (5) the investment policies of the organization. From time to time, the fair value of assets associated with individual donor restricted endowment funds may fall below the level required by the donor or the SPMIFA for AAO to retain as a fund of perpetual duration. Return Objectives and Risk Parameters AAO’s primary long-term endowment investment objective is to preserve the value of the original gift in perpetuity and to limit the volatility of the distributions from the endowment to provide a relatively stable stream of earnings consistent with spending needs. These financial objectives are intended to balance the needs of current and future generations of beneficiaries of these funds. Strategies Employed for Achieving Objectives To satisfy its long-term rate-of-return, AAO relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). AAO targets diversification both by asset class and within asset classes to provide reasonable assurance that no single security or class of securities will have a disproportionate impact on the total funds return. AAO targets place a greater emphasis on equity-based investments in order to provide long-term capital appreciation and to diversify the funds. It is recognized that the equity investments will have greater variability of returns than the fixed income instruments.

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2. Basis of Presentation and Significant Accounting Policies, continued j. Endowment Funds, continued

Spending Policy and How the Investment Objectives Relate to Spending Policy Each year up to 5% of the investment balance (calculated on a thirty-six month rolling average of the market value) will be made available for appropriation. In establishing this policy, AAO has considered the long-term expected return on its endowment. Accordingly, over the long term, AAO expects the current spending policy to allow its endowment to provide inflation-adjusted real growth through investment returns and new gifts. In some cases the donor specifies the spending policy of the fund and/or how these funds may be spent.

k. Revenue Recognition

Membership dues are recognized as revenue in the applicable membership period and are recorded net of an allowance for amounts estimated by management that are not expected to be collected. Annual meeting revenues are recognized in the applicable meeting period, and primarily include exhibitor fees, registration fees and course ticket sales. Revenue for products and services are recognized upon shipment or when the service is rendered. These amounts are recorded net of an allowance. Royalty and management fee revenue is recognized in the applicable contractual period. Advertising revenue is recognized as publications are issued. Rental income from building leases are recognized on a straight-line basis over the term of the lease.

l. Contribution Revenue Contributions are recognized as revenue when they are received or unconditionally promised. A large number of members have contributed significant amounts of time to the activities of AAO. The financial statements do not reflect the value of these contributed services because they do not meet the recognition criteria under ASC 958-605-25-16.

m. Promotions and Advertising Costs of promotions and advertising are expensed as incurred. Total promotion and advertising expenses were $1,346,000 and $1,318,000 for the years ending March 31, 2012 and 2011, respectively.

n. Functional Expense Allocations Expenses are allocated among program expenses, governance and administration, organizational support services and membership development, and fundraising classifications based on estimates made by AAO’s management of employees’ time spent by function and usage of goods and services.

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2. Basis of Presentation and Significant Accounting Policies, continued o. Non-Operating Income (Expense)

Non-operating income (expense) consists of amounts which, due to their nature, are not considered by management as part of operations. Specific items include investment results and Board-approved special projects. The latter includes expenses for the development of technology providing service to members. In fiscal 2012, 28% of the Board-approved special project expenses relate to Management and General activities such as non-capital related technology expenses and 72% to Program activities such as social media and membership surveys.

p. Income Taxes The Academy is exempt from income taxes on related business income pursuant to Internal Revenue Code Section 501 (c)(6) and corresponding California Franchise and Minnesota Taxation codes. The Academy provides for taxes on its unrelated business income. The Foundation is exempt from income taxes on related business income pursuant to Internal Revenue Code Section 501 (c)(3) and corresponding California Franchise Taxation codes. Provision is made for taxes on its unrelated business income. OPHTHPAC is a separate segregated fund of the Academy pursuant to Section 4416(b) of the Federal Election Campaign Act of 1971, as amended, and Section 527(f)(3) of the Internal Revenue Code of 1986. All investment income is subject to taxation by the Internal Revenue Service and the California Franchise Tax Board. All contributions received are exempt from federal and state taxes. ASI is a for-profit subsidiary of the Academy. Accordingly, income taxes are accounted for as an expense in the current period. ASI is subject to federal and California income taxes. AAO follows Financial Accounting Standards Board (FASB) ASC Topic 740, Income Taxes, to account for uncertain tax positions. Management has concluded that AAO has taken no uncertain tax positions that would require adjustment to the statement of financial position to comply with provisions of this guidance. AAO recognizes interest and penalties accrued related to unrecognized tax benefits in management and general expenses on the Statement of Activities and Changes in Net Assets. The years still open to audit for the U.S. federal jurisdiction are 2007 through 2010 and for various state jurisdictions are 2005 through 2010.

q. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities as of the date of the financial statements and also affect revenues and expenses during the reporting period. Actual results could differ from those estimates.

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2. Basis of Presentation and Significant Accounting Policies, continued

r. Summarized Comparative Information The financial statements include certain prior-year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with generally accepted accounting principles (GAAP). Accordingly, such information should be read in conjunction with AAO’s financial statements as of and for the year ended March 31, 2011, from which the summarized comparative information was derived.

s. Recent Accounting Pronouncements Adopted In July 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20, Receivables. This amended ASC 310 to require additional disclosures about the credit quality of financing receivables and the allowance for credit losses. Under this guidance, the amendments require an entity to provide greater level of information about the credit quality of its financing receivables and its allowance for credit losses. The amendments also require an entity to disclose credit quality indicators, past due information, and modifications of its financing receivables to allow users to assess the entity’s credit risk exposures and its allowance for credit losses. The guidance was effective for years ending on or after December 15, 2011. This update did not have a material impact on AAO’s financial statements. Pronouncements Effective in the Future In May 2011, FASB issued additional disclosure requirements for fair value measurements, ASU No. 2011-4: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. Under this guidance, the amendments change the wording used to describe many of the requirements for measuring fair value and for disclosing information about fair value measurements. The amendments explain how to measure fair value and do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices. The guidance is effective for the years beginning after December 15, 2011. AAO does not believe this update will have a material impact on its financial statements.

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3. Pledges Receivable

Pledges receivable as of March 31, 2012 are due as follows:

000,262raeyenonahtsseL $ 000,14)000,3$fotnuocsidfoten(sraeyevifotenO000,06)000,35$fotnuocsidfoten(sraeyevifnahteroM

363,000)000,4(segdelpelbitcellocnurofecnawollasseL

359,000$

Pledges receivable were discounted using the market rate of return in effect at the time of the pledge, which ranged from 1.5% to 7.875% as of March 31, 2012.

4. Investments

Investments as of March 31, 2012 are classified by nature of the underlying holdings as follows:

Academy Foundation Total

Cash and cash equivalents 1,678,000$ 5,000$ 1,683,000$ Domestic equity mutual funds 5,466,000 19,179,000 24,645,000International equity mutual funds 2,359,000 8,006,000 10,365,000Total return domestic fixed income

000,914,4sdnuf 14,911,000 19,330,000U.S. commercial real estate funds 1,576,000 5,947,000 7,523,000Partnership interest–international

000,524,1emocnidexif 4,770,000 6,195,000

16,923,000$ 52,818,000$ 69,741,000$

F18




4. Investments, continued

Investment income and gains for the year ended March 31, 2012 consists of the following:

000,914,1sdnedividdnatseretnI $ 000,172,1ten,sniagdezilaernU000,192ten,sniagdezilaeR)000,39(seeftnemtsevnI

2,888,000$

Investment income and gains are allocatedamong the following restrictions:

000,314,2stessatengnitarepodetcirtsernU $ 000,58stessatendetangiseddraobdetcirtsernU000,093stessatendetcirtseryliraropmeT

2,888,000$

5. Fair Value Measurements

Fair value is defined as 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. AAO classified its financial assets and liabilities according to the following hierarchy, and maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

Level 1–Quoted prices (unadjusted) are available in active markets for identical investment as of the measurement date.

Level 2–Values are based on significant observable market inputs, such as valuations for assets traded in less active markets.

Level 3–Values are based on significant unobservable inputs that reflect AAO’s determination of assumptions that any market participant might reasonably use, including discounted cash flow models and similar techniques.

F19




5. Fair Value Measurements, continued

The table below presents the balances of assets measured as of March 31, 2012 at fair value on a recurring basis.

Level 1 Level 2 Level 3 Total

Investments:Domestic equity mutual funds 24,645,000 -$ $ -$ 24,645,000$ International equity mutual funds 10,365,000 - - 10,365,000Total return domestic fixed income

000,033,91sdnuf - - 19,330,000U.S. commercial real estate funds 7,523,000 - - 7,523,000Cash equivalents (certificate of deposit) - 1,683,000 - 1,683,000Partnership interest–international

-emocnidexif 6,195,000 - 6,195,000

Total investments 61,863,000 7,878,000 - 69,741,000Beneficial interest in perpetual trust - - 1,000,000 1,000,000

61,863,000$ 7,878,000$ 1,000,000$ 70,741,000$

AAO uses the Net Asset Value (NAV) to determine the fair value of its investment in a partnership interest (the Partnership) that does not have a readily determinable fair value.

The Partnership’s investment objective is to seek current income consistent with the preservation of principal primarily through investments in non-US fixed income securities such as international corporate bonds and foreign government agencies and bonds. The fair values of the underlying securities have been valued on the basis of quotations from the primary market in which they are traded and translated at each valuation date from the local currency into US dollars using current exchange rates. Securities traded on national exchanges are valued at the last reported sales price or, if there are no sales, at the latest bid quotation, whichever is more recent. The Partnership’s total assets and return are valued as of the last business day of each month using the official net asset value data of the Partnership. All other information has been calculated using the Partnership manager’s accounting system data, which may differ from official net asset value data of the Partnership (i.e. due to timing of the accounting of administrative expenses and pricing for securities). Contributions, withdrawals and other participant activity normally may be made as of the first business day of each calendar month. A fifteen day redemption notice is required for withdrawals. As of March 31, 2012, there were no unfunded commitments to the Partnership.

The Level 3 asset measured at fair value on a recurring basis is comprised of AAO’s beneficial interest in perpetual trust. The balance of the asset as of April 1, 2011 and March 31, 2012 was $1,000,000 with no gains or losses, purchases, sales, issuances and settlements during the year. The Level 3 valuation techniques used to measure fair value have not changed during the year, and can be found in Note 2 for the beneficial interest in perpetual trust.

F20




6. Property and Equipment

Property and equipment consist of the following as of March 31, 2012:

000,769,21gnidliuB $ 000,385,7stnemevorpmignidliuB000,707,7tnempiuqednaerutinruF

28,257,000)000,120,41(noitaicerpeddetalumuccasseL

000,335,4dnaL

18,769,000$

The leased capital assets included in property and equipment as of March 31, 2012 totaled $477,000 less accumulated depreciation of $265,000. Depreciation expense totaled $1,863,000 for the year ended March 31, 2012.

7. Line of Credit

AAO has an unsecured $1,500,000 line of credit from a bank, which expires on September 30, 2012. AAO may draw down on this line of credit with interest payable monthly at a negotiable interest rate. The line of credit bears interest either at a fluctuating rate per annum equal to the Prime Rate or at a fixed rate per annum determined by the bank to be two percent above LIBOR. Under this line of credit, AAO is required to comply with certain financial covenants. There were no borrowings made during fiscal 2012 or outstanding as of March 31, 2012. Management believes it will be able to renew this line of credit at substantially the same terms.

8. Restricted Net Assets and Net Assets Released From Restrictions

Temporarily restricted net assets as of March 31, 2012 are available for the following purposes or time periods:

000,718,2noitacudecimlahthpO $ 000,581ecivrescilbuP000,278ycacovdacimlahthpO000,791rehtodnasdoireperutuF

4,071,000$

F21




8. Restricted Net Assets and Net Assets Released From Restrictions, continued

Net assets were released from donor restrictions by incurring expenses satisfying the purpose of the restriction, by the passage of time, or by the occurrence of other specific events as follows for the year ended March 31, 2012:

000,644,1noitacudecimlahthpO $ 000,310,1ecivrescilbuP000,680,1ycacovdacimlahthpO000,124rehtO

3,966,000$

Permanently restricted net assets as of March 31, 2012 are as follows:

Ophthalmic Education:000,169,2suproCdnuFtsurTlanoitacudE $

Retina Research Foundation Endowment (Beneficial000,000,1)tsurTnitseretnI

H. Dunbar Hoskins Jr., MD Center for Quality000,56dnuFtnemwodnEeraCeyE000,52dnuFnoitacudEnospmaSyentihW

Ophthalmic Heritage:000,020,1dnuFdewodnEDM,neslhurT.MyelnatS000,52dnuFtnemwodnElahtnesoR

Scholarships and Honors:Richard C. Troutman MD DSc (Hon) and

Suzanne Véronneau-Troutman MD000,333dnuFtnemwodnE

International Retina Research FoundationAlston Callahan, MD, FACS Visiting

000,052dnuFtnemwodnEsralohcSStraatsma Ophthalmology Residency Program Award 150,000

5,829,000$

F22




9. Board Designated Net Assets

Board designated unrestricted net assets as of March 31, 2012 are as follows:

Board designated endowment:Straatsma Ophthalmology Residency Program Award 88,000$ Charles Kelman MD Educational Fund of the FAAO 1,727,000

Board matching contribution for Ophthalmic Advocacy000,521dnuFepocSlacigruS

1,940,000$

10. Endowment Funds

Endowment net asset composition by type of fund as of March 31, 2012:

Temporarily PermanentlyUnrestricted Restricted Restricted Total

Donor restricted endowment-sdnuf $ 2,253,000$ 5,829,000$ 8,082,000$

Board designated endowment000,518,1sdnuf - - 1,815,000

1,815,000$ 2,253,000$ 5,829,000$ 9,897,000$

Changes in endowment net assets for the year ended March 31, 2012:

Temporarily PermanentlyUnrestricted Restricted Restricted Total

Endowment net assets, balanceas of April 1, 2011 1,729,000$ 2,198,000$ 5,822,000$ 9,749,000$

Investment return:000,04emocnI 209,000 - 249,000

Net appreciation (realized and000,64)dezilaernu 181,000 - 227,000

Total investment return 86,000 390,000 - 476,000

-snoitubirtnoC - 7,000 7,000Approved spending of

-stessatnemwodne (335,000) - (335,000)

Endowment net assets, balanceas of March 31, 2012 1,815,000$ 2,253,000$ 5,829,000$ 9,897,000$

F23




11. Defined Contribution Plan

AAO provides retirement benefits to its employees through the 401(k) Plan (the Plan). Under the Plan, employees are eligible on the date of hire, and may contribute beginning on the first of the month following the date of hire.

Under the Plan, AAO matches employee contributions dollar for dollar, up to 3% of eligible employee compensation. AAO also provides a non-elective contribution of 4% of eligible earnings and a safe harbor non-elective contribution of 3% of eligible earnings to all qualified Plan participants.

Plan expenses for the year ended March 31, 2012, including AAO contributions, were $1,569,000.

12. Retiree Health Programs (Post Employment Benefit Obligation)

Effective March 1, 2007 AAO’s Retiree Health Program (Program) was amended. The Program was no longer open to employees who retired before the age of 65 or to employees hired after March 1, 2007. However, employees who were hired prior to that date, and who retired on or after age 65 with at least 15 years of service, continued to be eligible for participation in the program and received a 50 percent subsidy of their premiums as required by the health care insurance contracts. Retirees who were receiving benefits under the Program before March 1, 2007 continued to receive benefits under the Program, as amended. The Program was terminated by AAO effective December 31, 2011. In accordance with curtailment accounting under ASC Topic 715, Compensation – Retirement Benefits, AAO immediately realized a gain of $543,000 and the value of the deferred items totaling $1,586,000 on the financial statements effective March 31, 2012.

In January 2009, an alternative health benefit to the Program was implemented for certain executive retirees. This program remains in effect and the liability for the executive retirees is $419,000 as of March 31, 2012.

F24




12. Retiree Health Programs (Post Employment Benefit Obligation), continued

The following tables set forth further information about the Program as of and for the year ended March 31, 2012:

Change in Benefit Obligation

000,134,11102,1lirpA,noitagilbotifeneB $ 000,74tsocecivreS000,66tsoctseretnI)000,685,1(tnemdnemanalpoteudniaG)000,44(diapstifeneB

000,505ssollairautcA

000,9142102,13hcraM,noitagilbotifeneB $

Funded status:000,914noitagilbotifeneB $ -stessamargorpfoeulavriaF

Funded status which is recognized as a liability on the000,914noitisoPlaicnaniFfotnemetatSdetadilosnoC $

Components of net periodic benefit costs:000,74tsocecivreS $ 000,66tsoctseretnI000,36tsocecivresroirpfonoitazitromA

000,671tsoctifenebcidoirepteN

)000,345(tnemliatrucoteudemocnI

)000,763(tsoctifenebcidoirepteN $

For the year ended March 31, 2012, pension-related changes other than net periodic pension cost includes the gain due to plan amendment of $1,586,000 and actuarial loss of $505,000.

The prior service credit that will be amortized on the Statement of Activities and Changes in Net Assets and included as part of net periodic benefit cost within functional expenses is estimated to be $63,000 for the fiscal year ended March 31, 2012.

Cash flows from employer contributions totaled $44,000 in 2012 and are estimated to total $24,000 in 2013.

F25




12. Retiree Health Programs (Post Employment Benefit Obligation), continued

Weighted-average assumptions used in computing the net periodic benefit cost and projected obligation at year-end:

Discount rate for determining net periodic benefit cost 5.75%Discount rate for determining benefit obligations at year-end 4.10%

%00.7raeytxenehtrofetardnerttsocerachtlaeH%05.5etardnertetamitlU5102etardnertetamitluehtsehcaeretarehttahtraeY

13. Lease Commitments

As Lessor

AAO leases office space in its building to tenants for varying lease terms and receives minimum annual rents and reimbursements for certain operating expenses as well as income from its parking garage. Rental income from tenants for common area maintenance and other operating expenses and parking income for the year ended March 31, 2012 totaled $440,000. Rental income for space totaled $448,000 for the year ended March 31, 2012. Future minimum rents to be received under non-cancelable leases for lease terms in excess of one year are as follows:

Year ending March 31:000,4763102 $ 000,0354102000,575102000,526102000,227102000,832retfaerehT

1,564,000$

As Lessee

AAO’s capital leases consist of copier lease agreements with several lessors at four and five year lease terms with interest rates ranging from 1.05% to 4.5%. The operating lease consists of the Washington, DC office rental lease and common area maintenance (CAM) expense. This lease expires on May 31, 2026 and contains rent escalation of 2.5% per year.

F26




13. Lease Commitments, continued

As Lessee, continued

Future minimum lease payments, under capital leases for office equipment and a non-cancelable operating lease for facilities, including CAM expense, are as follows:

Capital OperatingLeases Lease

Year ending March 31:000,8013102 $ 249,000$ 000,8014102 279,000000,445102 279,000-6102 310,000-7102 325,000-retfaerehT 3,231,000

Total minimum lease payments 260,000 4,673,000Less amount representing interest (27,000) -

233,000$ 4,673,000$

Rental expense for the year ended March 31, 2012 was $377,000.

14. Related Party Transactions

AAO recognized royalty and rental revenue from Ophthalmic Mutual Insurance Company (OMIC), an affiliated party, of $1,000,000 for the year ended March 31, 2012. OMIC provides professional liability insurance for the full scope of an ophthalmic practice to members of the Academy. As of March 31, 2012, receivables from OMIC to AAO for royalties and miscellaneous services were $210,000. This amount is included in other receivables on the Statement of Financial Position.

In June 2009, AAO loaned $1.8 million to the Executive Vice President/Chief Executive Officer for a second mortgage on a primary residence as agreed to by the Board-approved employment agreement. The loan term calls for monthly interest-only payments at a rate of 2.0% per annum for ten years. The loan can be paid off at any time within the ten year period. For the year ended March 31, 2012, AAO recognized interest revenue of $36,000. This amount is included in other revenue on the Statement of Activities and Changes in Net Assets. The current principal balance is $1,700,000 and this amount is reflected on the Statement of Financial Position.

F27




15. Concentrations of Credit Risk

Cash and Cash Equivalents

AAO maintains its cash and cash equivalents with two major financial institutions. At times, balances may exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. AAO has not experienced any losses in such accounts.

Investments

AAO’s credit risk is inherent principally in its investments. Credit risk is limited by diversifying AAO’s investments in accordance with its Board-approved investment policy and is regularly monitored by management. Investments are secured up to a limit set by the Securities Investor Protection Corporation (SIPC). As of March 31, 2012, AAO held investments in excess of the SIPC insurance limits.

16. Subsequent Events

AAO evaluated subsequent events through July 24, 2012, the date these financial statements were available to be issued. There were no material subsequent events that required recognition or additional disclosure in these financial statements.

F28

SUPPLEMENTARY INFORMATION

F29

Temporarily Permanently 2011Unrestricted Restricted Restricted Total Total

Revenue:Contributions, grants sponsorships and other for:

Public service -$ 514$ -$ 514$ 342$ Museum of Vision - 30 - 30 32Ophthalmic education 10 258 7 275 158Building management and corporate services 2,062 - - 2,062 1,987Administration and other 641 61 - 702 744

Revenue for new AAO sponsorships - 695 - 695 860

Total revenue 2,713 1,558 7 4,278 4,123

Released from restrictions 2,717 (2,717) - - -

Expenses:Public service 746 - - 746 804Museum of Vision 193 - - 193 196Ophthalmic education 1,938 - - 1,938 2,003Fundraising 820 - - 820 1,013Building management and corporate services 2,249 - - 2,249 2,655Administration and other 363 - - 363 306

Total expenses 6,309 - - 6,309 6,977

(Decrease) increase in net assets beforeinvestment income, pension and transfer (879) (1,159) 7 (2,031) (2,854)

Other income (expense):Investment income, including realized and

unrealized gains, net of investment management fees 2,009 390 - 2,399 5,718

Pension-related changes other than net periodic pension cost 114 - - 114 (2)

Transfer from Academy - - - - 3,000

Change in net assets 1,244 (769) 7 482 5,862

Net assets, beginning of year 52,719 3,520 5,822 62,061 56,198

Net assets, end of year 53,963$ 2,751$ 5,829$ 62,543$ 62,060$

OF THE FOUNDATION OF THE AMERICAN ACADEMY OF OPHTHALMOLOGY

(see Independent Auditors’ Report)

2012


SCHEDULE OF REVENUES AND EXPENSES



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Annual Financial Statement

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