Big Changes Coming for Financial Reporting of Not-for-Profit Organizations – Part 7: Reporting on Investment Return

Posted on Jan 19, 2017

By Andrew Prather, CPA

Recap

On August 18, 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-14 “Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities.” ASU 2016-14 requires a number of changes to the financial statements of NFPs. These changes will be effective for fiscal years beginning on or after December 15, 2017.

This article is the seventh in a series discussing the changes required by ASU 2016-14. In this article, we discuss changes to the presentation and disclosure of investment return.

Background

U.S. GAAP currently provides not-for-profit organizations (NFPs) with options for reporting and disclosing investment return and the related investment expenses. NFPs are currently allowed to report investment expenses on their statement of activities, either netted against investment return, or as a component of expenses. Additionally, NFPs are required to disclose the composition of investment return, including, at a minimum:

  • Investment income
  • Net realized gains and losses on investments reported at other than fair value
  • Net gains and losses on investments reported at fair value

NFPs that report investment expenses netted against investment return, must also disclose the amount of investment expense included in net investment return.

In issuing ASU 2016-14, the FASB is making changes to these options and disclosures.

What is Changing?

ASU 2016-14 will change current U.S. GAAP, requiring NFPs to report all external and direct internal investment expenses, netted against investment return, on the statement of activities. NFPs will no longer have the option of reporting these investment expenses as a component of expenses on the statement of activities.

External investment expenses are those amounts paid to third parties to generate investment return. Direct internal investment expenses are those that involve the direct conduct, or direct supervision, of the strategic and tactical activities involved with generating investment return. They do not include items that are not associated with generating the return – for example, the unitization and other such aspects of endowment management.

Direct internal expenses may include, but are not limited to:

  • Salaries and other costs associated with the staff responsible for the development and execution of investment strategy
  • Costs associated with supervising, selecting, and monitoring external investment management firms

However, the FASB did provide an exception to the requirement to present investment expenses netted against investment. This requirement does not apply to the returns and expenses associated with programmatic investing activities.

The U.S. GAAP defines programmatic investing as, “the activity of making loans or other investments that are directed at carrying out a not-for-profit entity’s purpose for existence rather than investing in the general production of income or appreciation of an asset (for example, total return investing). An example of programmatic investing is a loan made to lower-income individuals to promote home ownership.”

In addition to changing how NFPs report investment expenses, the FASB has made the following changes to disclosure requirements:

  • It has eliminated the requirement to disclose the composition of investment return.
  • It has eliminated the requirement to disclose the amount of investment expenses.
  • For NFPs with endowment funds, the roll-forward schedule in the endowment disclosure now only needs to present net investment return. It does not need to present the components of investment return.

Why Change the Current Guidance?

According to the FASB, these changes provide a more comparable measurement of investment returns across all NFPs, regardless as to whether their investment activities are managed by internal staff, outside investment managers, volunteers, or a combination thereof. It also provides a more comparable measurement of investment vehicles that embed management fees in the asset’s investment return – such as mutual funds and hedge funds.

Want to Learn More?

This article focuses on one of the key changes required by ASU 2016-14. In future articles, we will discuss other key changes in more detail along with practical guidance on implementation issues. In the meantime, please contact your Clark Nuber service team or Andrew Prather if you would like to discuss how these changes will impact your NFP’s financial statements.

© Clark Nuber PS and Developing News, 2017. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

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