OUR THOUGHTS ON:

Is Your Nonprofit Organization Actually an Investment Company?

Not-for-Profit

By Jenna Zelenski

In October 2011, the Financial Accounting Standards Board (FASB) issued two exposure drafts: Real Estate – Investment Property Entities and Financial Services – Investment Companies. As nonprofit organizations seek new investments to generate revenue and support, organizations should be mindful of these proposed updates, because they may affect their financial reporting.

According to the Proposed Accounting Standards Update relating to Investment Property Entities (found here), in order for an organization to be an investment property entity, the following five criteria must be met: 

  1. Substantially all of the entity’s business activities are investing in a real estate property or properties. 
  2. The express business purpose of the entity is to invest in a real estate property or properties for total return, including an objective to realize capital appreciation.
  3. Ownership in the entity is represented by units of investments, in the form of equity or partnership interests, to which a portion of the net assets are attributed.
  4. The funds of the entity’s investors are pooled to avail the investors of professional investment management.
  5. The entity provides financial results about its investing activities to its investors.

For nonprofit organizations that measure investments at fair value and have subsidiaries, the subsidiaries are not subject to the unit-ownership and pooling-of-funds criteria.

The Investment Companies proposal (found here) states that an entity that not only invests in real estate properties but also meets the criteria to be an investment property as outlined above would not be an investment company. Additionally, some of the key provisions include the requirement for consolidation and the use of fair value measurements. Consolidation is required of another investment company or an investment property entity if it holds a controlling financial interest in the entity in a fund-of-funds structure. Fair value, instead of the equity method of accounting, must be used to measure investments in investment companies or investment properties entities in which an investment company exercises significant influence. As is typical with amendments, additional disclosures would also be required.

The comment deadline for these proposals was February 15, 2012. Roundtable meetings or other public forums are planned to take place on March 16, 2012. For nonprofit organizations that have different types of investments, evaluation of these new criteria and the main provisions will be of the utmost importance.

Resources:
Proposed Accounting Standards Update—Real Estate—Investment Property Entities (Topic 973)
Proposed Accounting Standards Update—Financial Services—Investment Companies (Topic 946)

 

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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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.

© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

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