Nonprofits, Changes Coming your Way Regarding Underwater Endowments - A Mission Matters Blog Article from KLR

Mission Matters Blog

Nonprofits, Changes Coming your Way Regarding Underwater Endowments

posted Apr 14, 2017 by Patrick Martin, CPA in the Mission Matters Blog

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Underwater endowments...they affect nearly all nonprofit organizations, especially colleges and universities. Changes are in store in this area of nonprofit financial reporting—is your organization prepared? The Board has just released ASU 2016-14, which provides an update to the changes first introduced in 2015—including changes to the reporting requirements for these “underwater” endowments.

What is an underwater endowment?

A permanent 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 restriction. An endowment can also go underwater if an organization appropriates funds over and above the amount of investment returns.

Let’s say a university receives a $1.5 million restricted gift (designated by the donor to specifically pay for a scholarship program). As time goes on, the fund’s value decreases (due to market forces) by $100,000 making it worth $1.4 million. The endowment is now considered “underwater”.

How does spending work from an underwater endowment?

Organizations are limited on how much they can spend from an underwater endowment. At times donors require that the income from their endowments be spent specifically to fund a certain program, and that a portion of the original income will remain in the fund.

The original practice of reporting underwater endowments

For any underwater endowment, the organization must disclose:

  • The current value of the fund,
  • The original gift amount, and
  • The net loss.

Under the current practice, the original amount of the fund is reported as “permanently restricted” while the “underwater” amount is reported as “Without Donor Restrictions.”

The new proposed change

Under the FASB’s proposed changes, the entire balance of the endowment must be reported within the “With Donor Restrictions” class of net assets.
Moreover, disclosures must now include:

  1. The NFP’s policy relating to spending from these funds, and whether that policy was followed
  2. The fair value of the underwater endowment funds
  3. The original amount of the endowment fund
  4. The amount of the deficiencies of the underwater funds.

Stay tuned for additional changes to NFP reporting in our new series—“New Reporting Standards for Nonprofits.”

Questions? Contact any member of our Not-for-Profit Services Team.