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08.15.17

Reporting of Investment Return under the New ASU 2016-14 Presentation of Financial Statements for Not-for-Profit Entities
Alison Fetzer

In an effort to provide more useful information to donors, grantors, creditors and other users of the financial statements, the Financial Accounting Standards Board (FASB) released ASU 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities on August 18, 2016.  While the ASU focuses on five main areas that are changing, this blog will highlight just one – reporting of investment return.

Prior to the release of ASU 2016-14, there was no standardization of how investment returns were reported in financial statements.  Effective for financial statements dated December 31, 2018 or June 30, 2019, investment returns will be required to be presented net of investment expenses on the face of the statement of activities.  This will provide for a more comparable measure of returns across all not for profit entities.

In order to report investment returns net of expenses, it is necessary for an organization to identify the related expenses.  For many smaller not-for-profit entities, these will consist of external expenses.  Some examples include the fees paid to an outside investment manager, as well as those fees imbedded in the investment return vehicle, for example, mutual funds, hedge funds, etc.  However, if the organization has any direct internal expenses, this process will be more cumbersome.

The FASB defines direct internal investment expenses as those expenses involved in the direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return.  Examples of these expenses could include the salaries, benefits and other costs associated with the employee(s) responsible for the development and execution of the investment strategy, as well as allocable costs associated with internal investment management and supervising, selecting and monitoring of external investment management firms.  It is important to note that direct internal investment expenses do not include items that are not associated with generating investment return.

Organizations have the option to present the amounts of net investment returns from portfolios that are managed differently or derived from different sources as separate line items in the statement of activities.  For example, net investment return generated from operating cash can be shown separately from investment return generated from an endowment.  Or, net investment return appropriated for spending can be shown separately from net investment return in excess of amounts appropriated for spending.

In addition to requiring investment returns to be presented net of expenses, ASU 2016-14 also changes the required disclosures.  An organization is no longer required to disclose the netted investment expenses or the components of investment return.  This could be a significant change for the users of the financial statements, if they were previously relying on the financial statements for this information.

Organizations should be proactive and start this analysis as soon as possible.  If the organization identifies direct internal investment expenses, it will be necessary to figure out the best way to capture and calculate the amount.  Additionally, users of the financial statements will need to understand the changes to the presentation and footnote disclosures.  December 31, 2018 will be here before you know it.   We encourage you to reach out to your CPA or call us to discuss how this new standard affects your specific financial statements and any implications to the audit.

For more information, contact Alison Fetzer at [email protected], or call her at 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.
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