Not-for-Profit Reporting Model - Part 2: Board-Designated or Quasi-Endowment Funds

Audit|Higher Education|Not-for-Profit

By Michael Stetson

In Part 1 of our NFP Reporting Model series, we discussed FASB's proposed ASU on the presentation ot financial statements of not-for-profit entities and how this proposal could change the current three classifications of net assets from three to two.

In April 2015, the Financial Accounting Standards Board (FASB) issued its proposed Accounting Standards Update on the presentation of financial statements of not-for-profit entities.  Within the proposal, the FASB discusses the treatment of endowments without donor restrictions, commonly referred to as board-designated endowment or quasi-endowment fund.  A board-designated endowment fund is created when a governing board designates or earmarks a portion of its net assets without donor restrictions to be invested, generally for a long but possibly unspecified period of time. 

The Proposed Guidance Changes to FASB's ASU on the Presentation of Financial Statements of Not-for-Profit Entities Regarding the Treatment of Endowments

Under the proposed changes, a not-for-profit would report the original fund and all investment returns from a board-designated endowment within net assets on the statement of financial position within net assets WITHOUT donor restrictions, whereas current practice is to report those funds within unrestricted net assets.  Conversely, endowment funds created with donor restrictions would be reported within net assets WITH donor restrictions as opposed to temporarily or permanently restricted net assets. 

A not-for-profit would also be required to disclose the following information to enable users of financial statements to understand both types of endowments: a) net asset classification; b) net asset composition; c) changes in net asset composition; d) spending policies; and e) related investment policies.  This proposed change would enhance disclosures on self-imposed limits including the amount, purpose, and types of transfers.  For example, an organization would be required to disclose whether a transfer is a recurring or a one-time transfer.

These disclosures are intended to complement the FASB’s intention to reduce the complexities in financial reporting.  The disclosures are intended to provide more detailed distinctions about the nature and types of disclosures on board-designated and donor-designated endowments, including the availability of those resources.  Ultimately, the goal of the proposed changes is to allow the financial statement reader to gain a better picture of existing restrictions and liquidity of an organization’s investment funds by providing additional quantitative and qualitative information within the financial statements and notes.

Contact us for more information regarding the FASB's proposed guidance to board-designated or quasi-endowment funds and visit our not-for-profit services page to learn about our industry group.

Read Part 1 of our NFP Reporting Model series about net asset classification.
Read Part 3 of our NFP Reporting Model series about performance measurement.
Read Part 4 of our NFP Reporting Model series about measuring and disclosing liquidity.

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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