Investment Return 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).

Investment Return

As discussed in AAFCPAs’ Blog: Expense Reporting Considerations for Nonprofits Implementing the New Financial Statement Presentation Framework, nonprofits are now permitted to allocate internal resources that directly relate to investing activities to investment expenses. The direct internal investment expense is defined, under ASU 2016-14 as costs involved in the direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return. These costs may include compensation or other costs associated with the officers and staff responsible for the development and execution of investment strategy, including supervising, selecting, and monitoring external investment managers. Direct internal investment expenses do not include any costs not associated with generating investment return, such as administrative management or investment accounting.
Under ASU 2016-14, nonprofits are required to present investment return, other than that which is programmatic in nature, on a net basis in the statement of activities. In other words, investment return, net of external and direct internal investment expenses, will be generally presented as one line item in the statement of activities, either included in changes in net assets with donor restrictions, changes in net assets without donor restriction, or in both sections. Additionally, the nonprofit may present the amount of net investment return from investment portfolios that are managed differently or derived from different sources as separate line items in the statement of activities. However, the caption should be clear when presenting net investment return in separate line items, such as “net investment return – endowment funds” or “net investment return – operating funds.”
Nonprofits will no longer be required to report the investment income components (i.e. interest, dividends, and realized and unrealized gain and loss) as well as the detail of the investment expenses, both external and direct internal. Furthermore, the external and direct internal investment expense that have been netted against investment return should not be included in the functional expense disclosure.

Related Insights

• eBook: AAFCPAs’ Guidance on New Nonprofit Financial Statement Framework
• Net Asset Classification Considerations for Nonprofits Implementing the Financial Statement Presentation Standards
• Liquidity Considerations for Nonprofits Implementing the New Financial Statement Presentation Framework
• Expense Reporting Considerations for Nonprofits Implementing the New Financial Statement Presentation Framework
• Underwater Endowment Considerations for Nonprofits Implementing the New Financial Statement Presentation Framework

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.