AAF NewsFlash

Keeping you informed of changes that may impact your financial reporting is important to AAF. The following information pertains to the allocation of investment losses for organizations with endowment funds. As the economic environment changes, it's important to understand how to take appropriate action.

If you are in a situation where your investment losses exceed (essentially “use up”) the appreciation that was previously accumulated in temporarily restricted net assets and losses begin to dip into the principal corpus of the endowment balance, you should be aware of Financial Accounting Standards Board (FASB) Statement No. 124 - Accounting for Certain Investments Held By Not-for-Profit Organizations. FASB Statement No. 124 requires the accounting for endowment investment losses in excess of accumulated earnings in temporarily restricted net assets to be charged against unrestricted net assets. These losses can be shown as a separate component of unrestricted net assets.

Subsequent investment earnings are first allocated to cover the deficit in unrestricted net assets that pertains to the endowment losses to bring the deficit balance to zero. Any remaining investment earnings are then allocated in accordance with your investment income allocation policy.

Please note: In August, 2008, FASB issued FASB Staff Position No. FAS 117-1 (the FSP) — Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), and Enhanced Disclosures for All Endowment Funds. Although the Commonwealth of Massachusetts (the Commonwealth) has not yet adopted UPMIFA, we want to make certain you are aware of the existence of the new disclosure requirements for both donor-restricted and board designated endowment funds under the FSP. These requirements become effective for organizations with fiscal years ending after December 15, 2008 .

The most significant impact the FSP will have on nonprofit organizations in the Commonwealth will be the enhanced disclosure requirements for investment policies. With the new requirements, it will be required that policies be documented in writing.

An investment policy should include:

• Methodology used to calculate the annual available “draw” from investments that is computed in accordance with your spending policy – (typically based on the rolling average market value of investments over a specific time period such as three years or 12 consecutive quarters)
• Whether the spending policy includes a provision for growth of the investment portfolio
• Intended rate of return on investments (by type)
• Whether the rate of return is based on a total return concept including interest, dividends and market appreciation
• The Organization's risk tolerance
• Whether investment criteria take donor restrictions into consideration
• Clearly defined spending policy in accordance with the Commonwealth's regulations
• Investment restrictions based upon specific environmental/ethical criteria

We hope this information assists you. If you need further assistance or have any questions, please contact one of our partners at your convenience.

Sincerely,

Your Friends at Alexander, Aronson, Finning & Co., P.C.