Financial Statements

In October 2006, the Bill & Melinda Gates Foundation created a two-entity structure. One entity, the Bill & Melinda Gates Foundation (“foundation”), distributes money to grantees. The other, the Bill & Melinda Gates Foundation Trust (“trust”), manages the endowment assets. The trust makes contributions to the foundation to fund the foundation’s grantmaking activities and its operating costs. It should be noted, however, that the trust carried out most of the charitable activities in 2006 because the foundation, in its current structure, was not formed until late in the year. The foundation and the trust are separate legal entities with independently audited financial statements. However, because of certain transactions between the two entities, their financial positions are presented on a combined basis, with appropriate elimination entries, to help readers more clearly understand the activity of these entities on a combined basis.

Investments managed by the trust are comprised primarily of bonds, notes, equities, and short-term investments.

The trust participates in securities lending transactions with a third-party investment company whereby the trust lends certain investments in exchange for a premium. Under the terms of the securities lending agreement, the trust requires collateral of a value at least equal to 102 percent of the value of the loaned investments. Consistent with generally accepted accounting principles (GAAP), these transactions are recorded in the audited financial statements as an asset to reflect the investments on loan, and as a liability to return the collateral for the loaned assets. This "double counting" tends to display a higher dollar value of the trust's investment assets than would exist if only the net value was presented. For this reason, an eliminating entry is shown in the Elimination Adjustments column to remove the effects of the security lending program. In this way, the reader is provided with a clearer picture of the net endowment assets available for charitable purposes at December 31, 2006.

The trust's investments are accounted for on a trade date, rather than a settlement date, basis. This means that at any given time there are significant investment receivables and payables outstanding related to trades that are in process. These transactions are recorded in the audited financial statements as required by GAAP. Eliminating these receivables and payables as shown in the Elimination Adjustments column gives the reader a clearer picture of the actual endowment balance available for charitable purposes as of December 31, 2006.

The legal documents that govern the trust obligate it to fund the foundation in whatever dollar amounts are necessary to accomplish the foundation's charitable purposes. Because the foundation has the legal right to call upon the assets of the trust, the foundation's financial statements reflect an interest in the net assets of the trust in accordance with GAAP. However, when presenting the two entities on a combined basis, this amount must be eliminated to avoid double counting of the same net assets.

Property and equipment for the foundation is comprised of land and construction in progress related to the foundation's new campus headquarters that is being constructed on a 12-acre site in downtown Seattle. IRIS Holdings, LLC (IRIS) is the legal entity which owns the land and will construct the headquarters for the foundation's use. Because the foundation is the sole owner in IRIS, the financial statements of the two entities are presented here on a consolidated basis.

Grants payable reflects the total amount of grants approved for payment in future periods ($3.8 billion), discounted to the present value as of December 31, 2006, as required by GAAP.

Total assets, total liabilities, and total liabilities and net assets per the audited financial statements will not match the amounts shown in the trust's 2006 990-PF tax return because the audited financial statements include adjustments required under GAAP to reflect securities lending transactions and investment receivables and payables as described in notes 3 and 4 above. These transactions are eliminated for purposes of presentation in the tax return, as they are in this presentation by the Elimination Adjustments, in order to describe more clearly for the reader the endowment assets available for charitable purposes. After removing the effect of these adjustments, the following amounts will appear in the trust's 2006 990-PF: total assets of $33,030,016; total liabilities of $3,465,840; and total liabilities and net assets of $33,030,016.

Total assets and total liabilities and net assets per the audited financial statements will not agree to the amounts shown in the foundation's 2006 990-PF tax return because the audited financial statements include an adjustment to reflect an interest in the net assets of the trust as required by GAAP and as described in note 5. This adjustment will be eliminated for purposes of presentation in the tax return, as it is in this presentation by the Elimination Adjustments, in order to avoid what might otherwise appear as a "double counting" of those same net assets. After removing the effect of this adjustment, the following amounts will appear in the foundation's 2006 990-PF: total assets of $90,365 and total liabilities and net assets of $90,365.

General Note: More information about the financial positions of the trust and the foundation are available in their respective audited financial statements.

In October 2006, the Bill & Melinda Gates Foundation created a two-entity structure. One entity, the Bill & Melinda Gates Foundation (“foundation”), distributes money to grantees. The other, the Bill & Melinda Gates Foundation Trust (“trust”), manages the endowment assets. The trust makes contributions to the foundation to fund the foundation’s grantmaking activities and its operating costs. It should be noted, however, that the trust carried out most of the charitable activities in 2006 because the foundation, in its current structure, was not formed until late in the year. The foundation and the trust are separate legal entities with independently audited financial statements. However, because of certain transactions between the two entities, their financial positions are presented on a combined basis, with appropriate elimination entries, to help readers more clearly understand the activity of these entities on a combined basis.

Contributions received by the trust in 2006 were provided by Warren Buffett and Bill Gates. Approximately $1.6 billion was received from Warren Buffett in the form of 500,000 shares of Berkshire Hathaway "B" stock. Bill Gates contributed $333 million in cash and securities, and approximately $151 million in contributed investment management services. Also, several donors from the general public made contributions to the foundation.

The foundation received $94.7 million in contributions from the trust in 2006, which were used to fund acquisition of the land for the new campus, program related investments made for charitable purposes, and grants to third parties. When presenting the financial statements of the two entities on a combined basis, the grant from the trust to the foundation must be eliminated, as shown in the Elimination Adjustments, in order to avoid double counting of the funds.

Includes realized and unrealized gains and losses on the endowment portfolio, less investment management expenses. The trust maintains a conservative approach to endowment management, aiming for a 5 percent return each year, since Bill and Melinda intend to donate more of their financial resources over time.

Grant expense includes cash payments made during 2006, as well as an adjustment to record expenses related to grants approved for payment in future years. The future grants payable portion is then discounted to the present value as of December 31, 2006, as required by generally accepted accounting principles (GAAP). Presented in the accompanying grants paid summary is grant expense on a cash basis, consistent with the reporting basis required in the annual 990-PF tax return. In 2006, the trust granted $94,739 to the foundation, which must be eliminated in the Elimination Adjustments to avoid double counting of grants when the financials are presented on a combined basis.

Direct charitable expense includes payments made to third parties for charitable purposes. Examples of direct charitable expenses include payment for consulting services provided for grantees' benefit and travel costs to bring grantees and other participants together. Direct charitable expenses, working in tandem with grants, are an effective means of achieving charitable goals and are disclosed separately in the audited financial statements to distinguish these from operational costs of running the trust.

The trust is subject to federal excise taxes imposed on private foundations at 2 percent, or at 1 percent if certain conditions are met. The excise tax is imposed on net investment income, as defined under federal law, which does not include all components of net investment income as presented in these financial statements on a GAAP basis. The trust qualified for a 1 percent tax rate in 2006. The foundation was not able to qualify for the 1 percent tax rate in 2006 because tax laws preclude the option to achieve a 1 percent tax rate in the year of formation.

The legal documents that govern the trust obligate it to fund the foundation in whatever dollar amounts are necessary to accomplish the foundation's charitable purposes. Because the foundation has the legal right to call upon the assets of the trust, the foundation's financial statements reflect an interest in the net assets of the trust in accordance with GAAP. However, when presenting the two entities on a combined basis, this amount must be eliminated in the Elimination Adjustments to avoid double counting of the same net assets.

General Note: More information about the financial positions of the trust and the foundation are available in their respective audited financial statements.