1.	BASIS OF CONSOLIDATION AND PRESENTATION

National Research Corporation, doing business as NRC Health (“NRC Health,” the “Company,” “we,” “our,” “us” or similar terms), is a leading provider of analytics and insights that facilitate measurement and improvement of the patient and employee experience while also increasing patient engagement and customer loyalty for healthcare providers, payers and other healthcare organizations in the United States and Canada. The Company

’s solutions enable its clients to understand the voice of the customer with greater clarity, immediacy and depth.

The Company

’s

six

operating segments are aggregated into

one

reporting segment because they have similar economic characteristics and meet the other aggregation criteria from the Financial Accounting Standards Board (“FASB”) guidance on segment disclosure. The

six

operating segments are Experience, The Governance Institute, Market Insights, Transparency, NRC Health Canada and Transitions (formerly Connect), which offer a portfolio of solutions that address specific needs around market insight, experience, transparency and governance for healthcare providers, payers and other healthcare organizations.

The condensed consolidated balance sheet of the Company at

December 31, 2016,

was derived from the Company

’s audited consolidated balance sheet as of that date. All other financial statements contained herein are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) the Company considers necessary for a fair presentation of financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States.

Information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto that are included in the Company

’s Form

-K for the year ended

December 31, 2016,

filed with the Securities and Exchange Commission (the “SEC”) on

March 3, 2017.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, National Research Corporation Canada, doing business as NRC Health Canada. The condensed consolidated statement of income for the

nine

months ended

September 30, 2016

also included Customer-Connect LLC. Customer-Connect LLC became a wholly-owned subsidiary in

March 2016

and was previously a variable interest entity for which NRC Health was deemed the primary beneficiary. On

June 30, 2016,

Customer-Connect LLC was dissolved. All significant intercompany transactions and balances have been eliminated.

The functional currency of the Company

’s foreign subsidiary, National Research Corporation Canada, doing business as NRC Health Canada, is the subsidiary’s local currency. The Company translates the assets and liabilities of its foreign subsidiary at the period-end rate of exchange and its foreign subsidiary’s income statement balances at the average rate prevailing during the period. The Company records the resulting translation adjustment in accumulated other comprehensive loss, a component of shareholders’ equity. Since the undistributed earnings of the Company’s foreign subsidiary are considered to be indefinitely reinvested,

taxes were provided for on currency translation adjustments arising from converting the investment denominated in a foreign currency to U.S. dollars. Gains and losses related to transactions denominated in a currency other than the subsidiary’s local currency and short-term intercompany accounts are included in other income (expense) in the condensed consolidated statements of income.

Equity Investments

The Company acquires equity investments to promote business and strategic objectives.

For investments that do

not

have a readily determinable fair value, the Company applies either cost or equity method of accounting depending on the nature of its investment and its ability to exercise significant influence. Investments are periodically analyzed to determine whether or

not

there are any indicators of impairment and written down to fair value if the investment has incurred an other than temporary impairment. During the

three

-month period ended

September 30, 2017,

the Company acquired a

$1.3

million investment in convertible preferred stock of PracticingExcellence.com, Inc., a privately-held Delaware Corporation (“PX”), which is carried

at cost and included in other non-current assets.

The Company has a seat on PX's board of directors and the Company's investment, which is

not

considered to be in-substance common stock, represents approximately

15.7%

of the issued and outstanding equity interests in PX at

September 30, 2017.

Reclassifications

Reclassifications have been made from noncurrent deferred income taxes to other noncurrent liabilities in the

2016

condensed consolidated balance sheet to present the unrecognized tax benefits related to state taxes gross of federal tax benefits, consistent with the

2017

financial statement presentation. There was

impact on the previously reported net income and earnings per share.

Fair Value Measurements

The Company

’s valuation techniques are based on maximizing observable inputs and minimizing the use of unobservable inputs when measuring fair value. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s market assumptions. The inputs are then classified into the following hierarchy: (

) Level

Inputs—quoted prices in active markets for identical assets and liabilities; (

) Level

Inputs—observable market-based inputs other than Level

inputs, such as quoted prices for similar assets or liabilities in active markets, quoted prices for similar or identical assets or liabilities in markets that are

not

active, or other inputs that are observable or can be corroborated by observable market data; and (

) Level

Inputs—unobservable inputs.

Commercial paper and Eurodollar deposits are included in cash equivalents and are valued at amortized cost, which approximates fair value due to their short-term nature. Eurodollar deposits are United States dollars deposited in a foreign bank branch of a United States bank and have daily liquidity. Both of these are included as a Level

measurement in the table below.

The following details the Company

’s financial assets and liabilities within the fair value hierarchy at

September 30, 2017

and

December 31, 2016:

Fair Values Measured on a Recurring Basis

	Level 1		Level 2		Level 3		Total
	(In thousands)
As of September 30, 2017
Money Market Funds	$	12,586	$	--	$	--	$	12,586
Commercial Paper		--		12,948		--		12,948
Eurodollar Deposits		--		10,008		--		10,008
Total	$	12,586	$	22,956	$	--	$	35,542

As of December 31, 2016
Money Market Funds	$	11,200	$	--	$	--	$	11,200
Commercial Paper		--		21,450		--		21,450
Total	$	11,200	$	21,450	$	--	$	32,650

The Company

’s long-term debt is recorded at historical cost. The following are the carrying amounts and estimated fair values, using a Level

discounted cash flow analysis based primarily on estimated current rates available for debt of the same remaining duration and adjusted for nonperformance and credit risk:

	September 30, 2017		December 31, 2016
	(In thousands)
Total carrying amounts of long-term debt	$	1,693	$	3,540
Estimated fair value of long-term debt	$	1,690	$	3,533

The Company believes that the carrying amounts of trade accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of those instruments.

Long-lived assets that are

not

recognized or disclosed at fair value in the financial statements on a recurring basis, which includes property and equipment, goodwill, intangibles, and cost method investments are measured at fair value in certain circumstances (for example, when there is evidence of impairment). As of

September 30, 2017,

and

December 31, 2016,

there was

indication of impairment related to these assets.