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Underwater Endowment Considerations for Nonprofits Implementing the New Financial Statement Presentation Framework

AAFCPAs advises nonprofits in assessing the impact of the new Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, and we provide guidance throughout the transition process. The new financial statement framework affects nonprofit organizations in all industries (i.e. healthcare, affordable housing, social services, foundations, and education) and is effective for fiscal years beginning after December 15, 2017 (CY 2018 or FY 2019).

Underwater Endowment

ASU 2016-14 defines an underwater endowment fund as a 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 (i.e. UPMIFA). Nonprofits now will be required to report the underwater amount within net assets with donor restrictions.

Substantially all states have adopted a version of the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA). Under UPMIFA, a nonprofit is permitted to spend from endowment funds even if the fair value has fallen below the original gift or level required by donor or law. Nevertheless, a nonprofit is required to disclose the following information related to the underwater endowment funds:

  1. Its interpretation of the ability to spend from underwater endowment funds, and
  2. The actions taken during the period concerning appropriation from underwater endowment funds.

During implementation, AAFCPAs advises nonprofit clients to update endowment investment and spending policies surrounding underwater endowment funds, and ensure that the nonprofit has proper policies and procedures in place in order to obtain information for the following required disclosures in the financial statements:

  • Nonprofit’s governing board’s interpretation of the law, including its interpretation of the ability to spend from underwater endowment funds.
  • Spending policy, including any actions taken during the period concerning appropriation from underwater endowment funds.
  • Related investment policies.
  • Aggregate amount of all underwater endowment funds.
  • Aggregate amount of the original endowment gifts or level required by donor or law to be maintained.
  • Aggregate amount by which the original gift’s amount exceeds the fair value (deficiencies), which are to be classified as part of net assets with donor restrictions.

Related Insights

AAFCPAs advises nonprofits in assessing the impact of the new standards, and provides guidance throughout the transition process. In addition, we advise clients on reviewing and updating accounting policies and procedures to reflect any changes, including solutions for processing information and producing financial reporting in line with the new reporting standard. Learn more. >>

If you have any additional questions about how the new ASU will impact you, please contact Matt Hutt, CPA, CGMA, at 774.512.4043, mhutt@nullaafcpa.com; Hui-Ting Grady, CPA, at 774.512.4106, hgrady@nullaafcpa.com; or your AAFCPAs Partner.

About the Authors

Hui-Ting Grady
Hui-Ting has extensive experience providing assurance solutions to diverse nonprofit organizations, including: affordable housing development projects with HUD requirements, multi-service human & social services providers, and behavioral health agencies. She delivers audits in accordance with Uniform Guidance/Single Audit and Government Auditing Standards, as well as Uniform Financial Report (UFR) and other funding source regulations. Hui-Ting is a member of AAF’s Accounting and Assurance (A&A) Committee, and Revenue Recognition Task Force. She is dedicated to keeping the firm and clients apprised of regulatory changes and new pronouncements in a proactive and timely manner, as well as providing best practice recommendations for efficient and effective implementations of new accounting standards.
Matthew Hutt CPA
Matt leads AAFCPAs’ Healthcare Division, providing assurance, tax and advisory solutions for Federally Qualified Health Centers (FQHCs), behavioral health providers, home care agencies and hospices, nursing homes, and senior care living centers. Matt advises healthcare providers on consolidation and coordination of care, including the integration of behavioral health into the primary care delivery system. He also provides consulting solutions for providers transitioning to new value-based reimbursement models, and data driven patient care, including: developing business process and controls for collecting and advantaging data to provide analysis on: provider activity, delivery of care, and analysis of efficiency & cost effectiveness. Matt is also highly-sought after for his knowledge on issues related to affordable housing developers with requirements related to the US Department of Housing and Urban Development, MassHousing, Low Income Housing Tax Credits, Historical Tax Credits and New Markets Tax Credits.