This is the fourth in a series of posts we have prepared regarding ASU 2016-14 and its impact on endowment related reporting. Stay tuned for the rest of the series! To view the other parts, click here: ASU 2016-14 Series
Endowment management is full of challenges and difficult issues. In this installment of our ASU 2016-14 series, we are going to look at how the standard addresses one of those difficult issues: underwater endowment funds.
Per FASB Accounting Standards, an underwater fund is defined 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 that extends donor restrictions.”
Prior to ASU 2016-14, it was required that organizations report an underwater endowment fund’s accumulated losses as unrestricted and the principal, or original gift amount, as permanently restricted.
ASU 2016-14 has changed how underwater reporting is handled for endowed funds. The accumulated losses of donor-restricted funds are no longer re-classified as unrestricted. Rather, the accumulated losses are to be reported along with the principal portion of the fund under net assets with donor restrictions.
In a prior blog in our ASU 2016-14 series (FASB Accounting Standards Update No. 2016-14: Part I), we discussed the change in presentation from three to two net asset classes. The change in the number of net assets contributed to the shift in how underwater funds are to be reported for endowments. Also, this change was made to help reduce confusion generated by the old method of reporting underwater funds.
ASU 2016-14 also requires the following disclosures related to underwater funds:
- How an organization’s board interprets state UPMIFA and its ability to spend from underwater funds
- Aggregate fair value, aggregate original gift amounts and the aggregate amount by which funds are underwater
- An organization’s policy concerning the spending of underwater funds and what occurred during the reporting period in question
The Financial Accounting Standards Board (FASB) includes examples of these disclosures in ASU 2016-14. You can access ASU 2016-14 by going to the FASB website: https://www.fasb.org/home.
In our next and final blog post in this series, we will discuss what Fundriver is doing in response to ASU 2016-14.