underwater endowment disclosures
Published July 30, 2019

Below the Surface—Key Takeaways of Underwater Endowment Accounting and Disclosures

When the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958), it effected major changes related to the presentation of financial statements for not-for-profit (NFP) entities.  Although the ASU was filled with many pressing matters, it skimmed the surface of many important aspects of the underwater endowments disclosures.  PYA has taken a deeper dive into these changes, outlining key takeaways for NFPs with donor-restricted endowments.

What Are Underwater Endowments?

An underwater endowment, as defined by the FASB, is a donor-restricted endowment fund for which the fair value of the fund at the reporting date is less than either the original gift amount or the amount required to be maintained by the donor or by law that extends donor restrictions.

Endowments can be grouped with various investment securities to earn further profits.  An investment may perform poorly, or the market can experience a downturn, as was the case at the end of 2018.  When this occurs, the fair value, or the asset’s worth in the current market, will be less than the original gift amount, leaving an endowment “underwater.”

Who Feels the Impact?

ASU 2016-14 focuses solely on NFPs and those who use NFPs’ reported financial statements.  Endowments are popular among many NFPs, including academic institutions, cultural institutions, service organizations, charities, foundations, healthcare providers, trade associations, and religious organizations.  When an endowment is restricted, the principal is held, and the earnings are invested according to the donor’s request—e.g., a university that uses donor-restricted endowments as scholarship funds for qualifying students.

Updated FASB Disclosure Requirements

In each period for which it presents financial statements, an NFP shall disclose all of the following information:

  • The NFP’s policies concerning underwater endowments.
  • Any action taken during the period concerning appropriation from the fund.
  • The NFP’s interpretation of its ability to spend from the fund.

Furthermore, an NFP is required to disclose the following information in the aggregate:

  • The fair value of the underwater endowment funds.
  • The original gift amounts (or level required by donor or law) to be maintained.
  • The amount of the underwater endowment fund’s deficiencies (fair value less original endowment amount).

Net Asset Classification for Underwater Endowments

ASU 2016-14 also requires net assets be allocated to only two categories—Net Assets with Donor Restrictions and Net Assets without Donor Restrictions, instead of the previous three.  The entire amount of the donor-restricted endowment fund (including the underwater portion) must be classified as Net Assets with Donor Restrictions.

FASB reached this decision because stakeholders pointed out that continuing to report the underwater portion of donor-restricted endowments as an unrestricted net asset (as previously required) confused those preparing and using financial statements.  Given this change, it is important for NFPs to track each endowment’s balance separately, so management can determine the underwater status of each asset at any given point to ensure appropriate net asset classification.  Management and the governing board will also need to implement clear policies for underwater endowment spending, and to continuously monitor spending to ensure they are acting within any relevant laws and regulations, as well as the donor’s intent.

For more information about underwater endowment disclosures, or assistance with any matter involving audit and assurance, accounting, or business advisory, contact one of our PYA executives below at (800) 270-9629.

 

© 2019 PYA
No portion of this article may be used or duplicated by any person or entity for any purpose without the express written permission of PYA.

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