ASU 2016-14, Presentation of Financial Statements of Not-For-Profit (NFP) Entities, was effective for fiscal years beginning after December 15, 2017 and required many changes to NFP financial statements, including endowment disclosures. And while the changes were aimed at helping provide more relevant information to stakeholders, they can be confusing at times. We’ve outlined some key takeaways pertaining to endowment disclosures in this article.
Disclosure requirements
NFP organizations that hold donor-restricted endowment funds are required to comply with disclosure requirements that are specific to their endowments. Endowment funds can include quazi-endowment (board designated), term endowment (time or purpose restricted), and perpetual endowment. The ASU simplified the accounting for underwater endowments and provided greater transparency regarding board spending policies and the availability of funds for spending.
ASU 2016-14 required enhanced disclosures for board-designated endowment funds. The disclosures included a description of the purpose, amounts, and types of transfers from board-designated to undesignated. The disclosures are required to be qualitative and quantitative in nature.
Term and perpetual endowment fund disclosure requirements did not change and include disclosure on net asset classification, net asset composition, changes in net asset composition, policy or policies for the appropriation of endowment assets for expenditure, investment policies (including return objectives and risk parameters), how return objectives relate to the NFP’s endowment spending policy, and the strategies employed for achieving the return objectives. Each organization should also include a description of the governing boards interpretation of the law or laws that underlie the NFP’s net asset classification of donor-restricted endowment funds and disclosure of aggregate deficiencies of all donor-restricted endowment funds.
Laws and regulations allow the governing board to appropriate as much of an endowment fund as is prudent considering factors such as the duration and preservation of the endowment fund, general economic conditions, the possible effect of inflation or deflation, the expected return from income and appreciation of investments and the organization’s other resources and investment policy. Investment management of endowment funds require organizations to follow a code of conduct that requires management and governance to act with loyalty and proper purpose, and to act with skill, competence, prudence and reasonable care. Management must abide by all laws, rules, regulations and founding documents. Mismanagement of endowment funds could cause reputational risk, state regulatory enforcement or private donor enforcement for the organization.
Underwater endowments
Management, in conjunction with their attorneys, should develop policies and procedures to address risks of accepting and managing endowments held by the organization. Internal policies related to the management of endowments should include endowment philosophy, delegation of authority, fiduciary responsibilities, investment objectives, and investment policies that address both allowable investments and asset allocation. Endowment policies should also address spending distribution policies that included underwater endowments and the board policy to spend (or not to spend) underwater endowment funds. Remember, when it comes to distribution policies, the donor always rules!
Underwater endowments are defined as a donor-restricted funds 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 donor or law, which extends donor restrictions.
Previous accounting practices required that accumulated losses first be offset with temporarily restricted net assets up to the amount of unappropriated earnings from permanently restricted endowment funds. Losses in excess of unappropriated earnings were included in unrestricted net assets.
Effective for fiscal years beginning after December 15, 2017, if the donor-restricted endowment fund is underwater, the accumulated losses shall be included in net assets with donor restrictions. Underwater endowment funds’ enhanced disclosures include the organization’s policy and any actions taken during the period, concerning appropriation from underwater funds, aggregate fair value of such funds, aggregate of the original gift amounts (or level required by donor or law) to be maintained, and aggregate amount by which funds are underwater (deficiencies) which are to be classified as part of net assets with donor restrictions. The organization will is also be required to restate net asset categories in the financial statements if underwater endowments existed at the end of the prior year.
Availability of financial assets
ASU 2016-14 also required enhanced disclosures about the organization’s liquidity. The disclosures require both quantitative and qualitative disclosures about the availability of the organization’s financial assets at the statement of financial position date available to meet cash needs for general expenditures (within one year of the statement of financial position date).
The availability of financial assets may be affected by factors such as external limits imposed by donors, grantors, laws, contracts, etc. The availability may also be affected by internal limits imposed by the governing board. In these cases, the organization should consider additional disclosure related to donor restricted contributions and/or quazi-endowed funds and how those restrictions can be fulfilled in the future period. For example, a fund established by the governing board that may be drawn upon in the event of financial distress or liquidity need.
Endowment disclosures can be complex, but your audit team is a great resource when questions arise. Don’t hesitate to reach out for clarification.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.