MEMO To: From: Date: Re: File Controller Classification of Investments as Cash Equivalents or Short Term Investments

This memo is intended to outline the accounting related issues arising from Companys investments that are treated as cash equivalents versus short term investments for financial statement classification purposes. Company Investments Company has a formal investment policy in place for the use of funds received from investors. That policy requires that all investments be made in quality investment vehicles (defined in the policy) with maturities not in excess of six months and preferably three months or less. The funds received from investors are held in an interest-bearing cash account with [Bank 1] as well as short term investments with [Bank 2]. The Bank 2 assets include money market funds, municipal commercial paper, commercial paper, and U.S. Treasury bills, some of which have original maturities at the time of purchase of three months or less and some with maturities in excess of three months at time of purchase. Related Accounting Literature Cash Equivalents and Debt Securities General An investment in a debt or marketable equity security that is not a derivative instrument must be classified at acquisition, according to management's intent, into one of the following categories and accounted for accordingly: trading, held to, or available-for-sale. A debt or marketable equity security (including those received for noncash consideration) should be recognized initially at its fair value, which establishes its cost basis. After initial recognition, a debt or marketable equity security should be measured at its fair value, except if held to maturity (as defined), in which circumstance it should be measured at amortized cost subject to nontemporary impairment. Trading Securities A debt or marketable equity security classified as trading is one that was acquired principally for the purpose of generating a profit from short-term fluctuations in price. A debt or marketable equity security should be classified as trading if, regardless of why it was acquired, it is part of a portfolio for which there is evidence of a recent actual pattern of short-term profit-taking. If a debt or marketable equity security is classified as trading, changes in its fair value should be reported currently in earnings. Transfers of debt or marketable equity securities into or from the trading category should be rare. Available for Sale Available-for-sale securities are those that are not trading securities or held-to-maturity debt securities. If an available-for-sale security is not a hedged item, changes in its fair value should be reported in other comprehensive income, net of tax, until the security is collected, disposed of, or determined to be nontemporarily impaired. If an available-for-sale security is measured at fair value pursuant to the fair value option, unrealized gains and losses are reported in earnings. Gains and Losses Realized gains and losses on transfers of securities that meet the criteria for sale should be included in earnings. Unrealized gains and losses on trading securities should be included in earnings. Cash For financial reporting purposes, cash includes currency on hand and demand deposits with banks or other financial institutions, as well as deposits in transit. Cash equivalents represent short-term, highly liquid investments that are both: (a) readily convertible to known

amounts of cash and (b) so near their maturity that they present an insignificant risk of changes in value because of changes in interest rates. Generally, only investments with original maturities of three months or less qualify for presentation as cash equivalents. Enterprises are required to establish, and disclose, a policy concerning which investments are treated as cash equivalents.

Company Application Company includes all items with original maturities of three months or less at date of purchase to be cash equivalents. All items with original maturities in excess of three months at date of purchase are recorded as short term, available for sale investments. All unrealized gains and losses related to the short term investments are recognized as income or loss in accumulated other comprehensive income rather than as current income in the statement of operations. Additionally, Company follows the guidance of SFAS No. 157, Fair Value Measurements, for its investments. The short term investments have been identified as Level 1 financial instruments as their value can readily be determined based on the open market trading of identical securities. The market value is adjusted monthly with each financial statement close. Refer to Companys memo on the adoption of SFAS NO. 157 for additional details on the overall adoption of this pronouncement. Conclusion Company is properly dividing investment classifications between investments with maturities of three months or less at purchase (cash equivalent) and greater than three months at purchase (short term investments). All related income, gains and losses are recognized currently in earnings for cash equivalents and through accumulated other comprehensive income for short term investments. Company has properly adopted the provisions of SFAS No. 157 for its investments and prepares required disclosures for the financial statements relating to the investments. .

Prepared by:

Approved by:

Controller

VP Finance