ACCOUNTING FOR THE BRADLEY FOUNDATION'S

SECURITIES LENDING PROGRAM

Since November, 1993 the Bradley Foundation has participated in a securities lending program administered by Firstar Trust Company and Chase Manhattan Bank. With the change of investment custodian as of July 1, 1999, the securities lending program is now administered by the Northern Trust Company. In 1999 securities lending revenue was $132,689 with approximately $58,140,000 of securities on loan at December 31, 1999.

For financial reporting purposes the Foundation recognizes securities lending revenue when received and discloses the scope of the securities lending program in the footnotes to the financial statements.

In 1999 KPMG raised the question if the Foundation's method of accounting was in conformity with Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 125).

This matter was reviewed in detail both by the Foundation's financial staff and KPMG. A summary of the research and conclusion is presented below:

FAS 125 SUMMARY

FAS 125 focuses on accounting for the transfer of assets. A transfer of assets can take several forms and occurs in some transactions where the transferee is required to collateralize a borrowing. Transfers in a collateralized borrowing that meet the criteria under FAS 125 require the transferee to reflect the collateral as an asset and liability on their financial statements.

Application to the Bradley Foundation

The Foundation engages in securities lending transactions with Northern Trust Company as its agent. The fundamental transaction in securities lending is the Foundation transfers securities to a borrower, and the borrower transfers collateral to the Foundation. The collateral is defined in the agreement as cash and/or specified securities. Northern Trust, as the Foundation's agent, transfers the securities and holds the collateral in a pool with collateral for all clients. The question regarding the Foundation's securities lending program is whether the transactions are either a sale that requires the collateral to be carried on the financial statements or secured borrowing where the collateral might be carried on the Foundation's financial statements. If FAS 125 applies, the Foundation would record an asset in 1999 of $58,140,267 and a corresponding liability of $58,140,267.

Sale

Transfers treated as a sale require the transferee to carry the collateral as an asset. The criteria for a sale is the transferor surrenders control over the collateral assets. Control is surrendered when the assets are isolated from the transferor's creditors, and the transferee has to right to pledge or exchange the assets, and the transferee does not retain the ability to repurchase or redeem the transferred assets before maturity. If all three conditions are not met, the transferor has not surrendered control. The transfer is not treated as a sale and is accounted for as a secured borrowing with a pledge. Secured borrowing is discussed below.

Secured Borrowing

Accounting for a secured borrowing requires the secured party to carry the collateral as an asset if the secured party has taken control of the collateral. The definition of control here is slightly different than for a sale. The secured party has control if it may repledge or sell the collateral, and the debtor does not have the right and ability to redeem the collateral on short notice. The secured party will also have control if the debtor defaults under the terms of the secured contract and is no longer entitled to the collateral. If these conditions are not met, the secured party will not recognize the assets.

Conclusion

FAS 125 is not applicable to the Foundation's securities lending transactions. The criteria that classifies a transaction as a sale has not been met. The terms of the Northern Trust securities lending agreement preclude the Foundation from pledging the collateral assets and therefore failing the sale criteria that must be met for requiring the Foundation to carry the asset on the financial statements.

The Foundation engages in securities lending transactions that are treated as secured borrowing. Secured borrowings would require the Foundation to carry the collateral on its financial statements if the Foundation has taken control of the collateral. Noting again the Northern Trust agreement does not give the Foundation rights to the collateral in absence of a default means that the Foundation has not taken control and shall not recognize the pledged assets. In the event of a default, the Foundation would have an obligation to record an asset to the extent of the collateral retained.

The conclusion is applicable to the agreement currently in place with Northern Trust. KPMG's Department of Professional Practice reviewed the Northern Trust agreement with members of the FASB staff. The FASB concurred with our interpretation that FAS 125 does not apply because the Foundation does not have rights to the collateral in absence of a default.