NOT-FOR-PROFIT ADVISORY COMMITTEE (NAC)
PROJECT – EXPOSURE DRAFT ISSUED
AND
FINANCIAL STATEMENT
Introduction
On April 22, 2015, the FASB issued a long-awaited Exposure Draft on Not-for-Profit
(NFP) Financial Statements, Presentation of Financial Statement of Not-for-Profit
Entities (ED). The purpose of the ED is to improve financial statements so that they
provide better information to donors, creditors and other users. As drafted, the
standard would require changes to the net asset classification scheme and provide
better information about a not-for-profit entity’s liquidity, financial performance and cash
flows.
The proposed effective date, as discussed in the NAC meeting on March 3, 2015, is
2017 for public entities (those that have conduit debt that is widely distributed) and
2018 for nonpublic entities. Nonpublic entities can implement in 2017. Some
stakeholders have already requested a delay in the effective date. The ED itself was
issued without an effective date. The questions asked by the FASB in the ED included
questions about the difficulty respondents believe that NFPs would have in
implementing the standard.
The ED would amend significant sections of ASC 958 although the main changes are to
958-205 (Presentation of Financial Statements), 210 (Balance Sheet), 225 (Income
Statement) and 230 (Statement of Cash Flows). Due to the changes in net asset
classification, most significant sections are affected in some way. Since this is an ED
and not a final statement, this addendum will focus primarily on these changes.
Statement of Financial Position and Net Asset Classifications
Not-for-profit entities would replace the categories “unrestricted,” “temporarily restricted”
and “permanently restricted” with the categories “with donor imposed restrictions” and
“without donor imposed restrictions.”
Purpose: There was concern about the three classes of net assets currently required.
The FASB believes that the main deficiency is the lack of information related to liquidity
and financial flexibility. The FASB also believes that the current presentation causes
confusion about how restriction or other limitations imposed by donors, laws, contracts
and the board affect liquidity.
In addition, the currently required distinction between temporarily and permanently
restricted net assets has blurred by changes in state laws that make it possible to
spend down endowment funds.
Supplement-1
EXAMPLE
Example NFP Charitable Entity
June 30, 20X1
(in thousands)
Assets
Cash and cash equivalents
Accounts and interest receivable
Inventories and prepaid expenses
Contributions receivable
Short-term investments
Assets restricted to investment in land,
buildings and equipment
Land, buildings and equipment
Long-term investments
Total Assets
Liabilities and Net Assets
Accounts payable
Grants payable
Annuity obligations
Long-term debt
$
5,210
61,700
218,070
$ 296,720
$
Total Liabilities
Net assets
Without donor restrictions (Note G)
With donor restrictions (Note C)
2,570
875
1,685
5,500
10,630
92,677
193,413
Total Net Assets
Total Liabilities and Net Assets
4,575
2,130
610
3,025
1,400
286,090
$ 296,720
******
There will be new disclosures required related to the amount, purpose and type of
board designations for the “without donor restrictions” category. The entity will also
disclose the nature and amount of donor restrictions. The Statement of Financial
Position, which could also be called a balance sheet, if desired, will sequence assets
and liabilities based on relative liquidity. A classified statement could be presented but
is not required.
Supplement-2
EXAMPLE OF NOTE DISCLOSURE ON COMPOSITION OF NET ASSETS
Note C
Net assets with donor restrictions are restricted for the following purposes or periods:
Subject to expenditure for specified purpose
Program A activities
Purchase of equipment
Research
Educational seminars and publications
Program B activities
Disaster relief
Educational seminars and publications
Program C activities, general
Buildings and equipment
Annuity trust agreements for research
$
1,530
2,128
760
1,120
1,079
1,484
1,075
1,425
10,601
Subject to the passage of time
For periods after June 30, 20X1
3,140
Subject to NFP spending policy and appropriation
Investment in perpetuity (including amounts above
original gift amount of $22,337), the income from
which is expendable to support:
Program A activities
Program B activities
Program C activities
Any activities of the organization
27,524
13,662
27,403
105,793
174,382
Subject to appropriation and expenditure when a specified event occurs
Endowment requiring income to be added to original gift
until fund's value is $2,500
Paid-up life insurance policy that will provide proceeds upon
death of insured for an endowment to support general activities
Not subject to appropriation or expenditure
Land required to be used as a recreation area
Total net assets with donor restrictions
Supplement-3
2,210
80
2,290
$
3,000
193,413
Note D
Net assets were released from donor restrictions by incurring expenses satisfying the restricted
purposes or by occurrence of the passage of time or other events specified by donors.
Purpose restrictions accomplished:
Program A expenses
Program B expenses
Program C expenses
$
Program A equipment acquired and placed in service
15,800
4,600
1,590
21,990
1,500
Time restrictions expired:
Passage of specified time
Death of annuity beneficiary
850
400
1,250
Release of appropriated endowment returns without
purpose restrictions
Total restrictions released
7,500
$
32,240
******
Statement of Activities, Operating Measure and Other Changes
The ED does not require a specific format for the Statement of Activities although there
are specific requirements related to the operating measure, transfers and other
elements that are less frequently found in financial statements such as discontinued
operations. The ED provides examples of the statement for a charitable entity, a private
foundation, healthcare entity and an institution of higher education. Entities may
choose to call the statement a Statement of Operations. It will be referred to as a
statement of activities throughout this discussion.
The statement of activities will have a defined intermediate operating measure. This will
be required for all NFPs. This will require two additional subtotals of the operating
activities that are associated with changes in net assets without donor restrictions.
Operating activities are distinguished by two dimensions:
1. Mission – based on whether resources are from or directed at carrying out a notfor-profit entity’s purpose as opposed to investing and financing.
Supplement-4
2. Availability – based on whether resources are available for current period activities.
Reflects limits imposed by external donors and internal actions of the governing
board. The not-for-profit can present one or two statements.
Purpose: The FASB believes this change will foster greater comparability across notfor-profits across the spectrum and also allow flexibility for the entities. The operating
measure should help to communicate the financial performance of the entity and show
creditors, donors and others how the NFP is managed by reflecting the self-imposed
constraints placed on the resources by the governing board.
The statement of activities will have:

A subtotal before internal transfers. This reflects all legally-available amounts
generated by or used in operations of the current period including taking into
account the effects of donor restrictions and their expiration. Included will be
operating revenues, support, expenses, gains and losses that are without donorimposed restrictions.

All internal transfers (designations) are included in a discrete section after the
subtotal but before the operating measure. Appropriate labeling and disclosure is
required whether it is a one-time transfer or an ongoing policy. Included would be
internal transfers resulting from board designations, appropriations and other
actions that place or remove self-imposed limits on resources making them available
or unavailable for current operating activities.

At a minimum, the not-for-profit must present aggregate of transfers out of operating
activities separate from aggregate transfers into operating activities.

Not-for-profits must disclose further details of transfers in a note if all transfers were
not reported as discrete line items.

All not-for-profits are required to qualitatively describe the purpose, amounts and
types of transfers used.
The NFP will use the “placed-in-service” approach for reporting expirations of
restrictions of gifts of cash or other assets to be used to acquire or construct a longlived asset. Therefore, NFPs will be able to release the donor-imposed restriction over
the estimated useful life of the acquired asset the way they can now.

Not-for-profits report gifts of long-lived assets without donor restrictions as operating
revenue.

Gifts of cash restricted for long-lived asset acquisition are reported as revenue in net
assets with donor restrictions and reclassified within operations when the restriction
is met.
Supplement-5

There will be a transfer out of operations reported when the item is placed in
service.
Investment Return
The guidance related to investment expenses was amended. NFPs are no longer
required to disclose the investment expenses that are netted against the investment
return. They are, however, required to disclose the internal salaries and benefits that
have been netted against the investment return.
Purpose: The FASB believes that reporting investment income net of expense makes
the measure more comparable across all NFPs no matter if their investments are:

Managed by internal staff, outside managers, volunteers or a combination.

Employ the use of mutual funds, hedge funds or other vehicles where the
management fee is embedded in the investment return.
Activities Required to be Included in Operations Because of Other Standards

Impairment loss recognized for a long-lived asset or asset group to be held and
used (ASC 360-10-45-4)

Costs associated with an exit or disposal activity that does not involve a
discontinued operation (ASC 420-10-45-3)

A gain or loss recognized on the sale of a long-lived asset (disposal group) that is
not a component of an entity that qualifies for discontinued operations treatment
(ASC 360-10-45-5)
Example Statements of Activities/Operations
Following is an example statement (Example 1) which shows a combined Statement of
Activities and Changes in Net Assets. This illustration presents the information in two
columns in one statement. This format is more likely to appeal to charitable entities.
Note that this is not the only format that could be used. The ED provides examples of:

Private Foundation (Example 2)

Healthcare Entity (Example 3)

Institution of Higher Education (Example 4)
Supplement-6
EXAMPLE 1
Example NFP Charitable Entity
Statement of Activities
Year Ended June 30, 20X1
(in thousands)
Without
With
Donor
Donor
Restrictions Restrictions
Revenues and gains
Contributions
Fees
Other
Gains
Total revenues and gains without donor restrictions
$
Net assets released from restrictions (Note D)
Satisfaction of program restrictions
Satisfaction of equipment acquisition restrictions
Expiration of time restrictions
Appropriation from donor endowment
8,640 $
5,200
150
200
14,190
21,990
1,500
1,250
7,500
Total net assets released from restrictions
Total revenues, gains, and other support
without donor restrictions
8,390 $
17,030
5,200
150
200
22,580
(21,990)
(1,500)
(1,250)
(7,500)
-
32,240
46,430
Expenses and losses
Program A
Program B
Program C
Management and general
Fundraising
Total Expenses
Fire loss
Total expenses and losses
13,100
8,540
5,760
2,038
2,150
13,100
8,540
5,760
2,038
2,150
31,588
31,588
80
80
31,668
31,668
Operating excess, before transfers
Board designations, appropriations, and similar
transfers to (from) operations
Investment returns appropriated from
quasi-endowment
Transfer of gifted equipment
Transfer of equipment acquired with donorrestricted funds and placed in service
14,762
Operating excess, after transfers
15,122
Nonoperating charges
Investment return, net (Note E)
Interest expense
Actuarial loss on annuity obligations
Board designations, appropriations, and similar
transfers to (from) nonoperations
Investment returns appropriated for current
operations from quasi-endowment
Transfer of gifted equipment
Transfer of equipment acquired with donorrestricted funds and placed in service
2,000
(140)
2,000
(140)
(1,500)
(1,500)
4,678
(382)
20,272
24,950
(382)
(30)
(30)
Increase (decrease) in net assets
Net assets at beginning of year
Net assets at end of year
Total
$
(2,000)
140
(2,000)
140
1,500
1,500
19,058
(3,608)
15,450
73,619
197,021
270,640
92,677 $ 193,413 $ 286,090
******
Supplement-7
EXAMPLE 2
Example Private Foundation
Statement of Activities
Year Ended June 30, 20X3
Nonoperating activity
Net realized appreciation on long-term investments
Net unrealized appreciation on long-term investments
Income on long-term investments
Other external and direct internal investment expenses
Investment return, net
Excise tax
Current
Deferred
Increase from nonoperating activities
Operating activity
Revenues
Programmatic-related investment return
Expenses
Program expenses
Grants
Salaries and benefits
Supplies and travel
Office and occupancy
Services and professional fees
$
6,210
11,825
8,700
(850)
25,885
(124)
(237)
25,524
2,500
13,750
3,025
2,055
2,010
1,250
22,090
Administrative and support expenses
Salaries and benefits
Supplies and travel
Office and occupancy
Services and professional fees
Total expenses
Operating expenses in excess of revenues
Increase in net assets
Net assets at beginning of year
Net assets at end of year
1,130
790
710
590
3,220
25,310
(22,810)
2,714
262,160
$ 264,874
******
Supplement-8
EXAMPLE 3
Example Not-for-Profit Health Care Entity
Statement of Operations
Year Ended June 30, 20X3
(in thousands)
Without
Donor
Restrictions
Operating revenues and support
Patient revenue, net of contractual allowances and discounts
Premium revenue
Other operating revenue
Contributions
Donated property, plant and equipment
Expiration of restrictions
Total operating revenue and support
Operating expenses
Salaries and benefits
Purchased services
Supplies
Depreciation and amortization
Bad-debt expense
Other
Total operating expenses
Operating excess, before transfers
Transfers to (from) operating activities
Gifted property, plant and equipment placed in service
Operating excess, after transfers
$
660,230
33,342
21,780
1,216
1,940
6,145
724,653
305,900
257,550
84,820
32,040
19,777
2,500
702,587
22,066
(3,290)
18,776
$
Example Not-for-Profit Health Care Entity
Statement of Changes in Net Assets
Year Ended June 30, 20X3
(in thousands)
Without Donor Restrictions
Operating excess, after transfers
$
Nonoperating activity
Investment return, net
Interest expense
Pension-related changes other than net periodic pension costs
18,776
9,302
(7,350)
2,300
Transfers (to) from operating activities
Gifted property, plant and equipment in service
3,290
Increase from nonoperating activities
7,542
Increase in net assets without donor restrictions
26,318
With Donor Restrictions
Contributions
Expiration of restrictions
Investment return, net
Increase in net assets with donor restrictions
Increase in net assets
Net assets at beginning of year
Net assets at end of year
2,390
(6,145)
5,152
1,397
27,715
270,250
$ 297,965
******
Supplement-9
EXAMPLE 4
Example Entity - University
Statement of Activities
Year Ended June 30, 20X1
(in thousands)
Without
With
Donor
Donor
Restrictions Restrictions
Tuition and fees, net of tuition discount of $143,250
Government grants
Contributions, grants and bequests
Auxiliary services and sales
Interest on student and employee loans
$ 370,215
15,380
28,860 $
11,800
8,560
Total
$ 370,215
15,380
19,400
48,260
11,800
8,560
434,815
Net assets released from restrictions
Satisfaction of program restrictions
Satisfaction of equipment acquisition restrictions
Expiration of time restrictions
Appropriation of endowment returns with purpose restrictions satisfied
Appropriation of endowment returns without purpose restrictions satisfied
27,000
12,100
9,200
10,000
8,000
(27,000)
(12,100)
(9,200)
(10,000)
(8,000)
66,300
Total revenue and support
501,115
Expenses
Instruction and academic support
Student services
Research
Management and general
Fundraising
213,100
75,680
70,940
50,100
22,150
Total Operating Expenses
213,100
75,680
70,940
50,100
22,150
431,970
Excess operating revenues and support over expenses, before transfers
Transfers to (from) operating activities
Transfer to operating activities
Aggregate of transfers from operating activities
69,145
21,945
(27,850)
Excess operating revenues and support over expenses, after transfers
63,240
Investment return, net
Interest expense
39,050
(7,220)
21,945
(27,850)
50,270
89,320
(7,220)
Transfers (to) from operating activities
Transfer to operating activities
Aggregate of transfers from operating activities
(21,945)
27,850
Change in net assets
100,975
3,370
104,345
Net assets at beginning of year
468,400
260,500
728,900
Net assets at end of year
$ 569,375 $
******
Supplement-10
(21,945)
27,850
263,870 $ 833,245
Statement of Cash Flows
Not-for-profit entities will be required to use the direct method of reporting cash flows of
operating activities. The indirect method which is presented as well in commercial
entities would not be required.
Purpose: The FASB believes that presenting the operating activities under the direct
method increases understandability of information and makes it more useful to
creditors, donors and others.
There are certain items, illustrated below that will be moved to a different classification
of cash flows in order to conform to the changes in the statement of activities. In this
way, users will be able to see whether the resource inflows and outflows are from or
directed at carrying out a NFP’s purpose for existence.
A supplemental schedule of noncash investing and financing activities is still required
for the donations of long-lived assets and collection items even if they are classified as
operating cash flows.
The ED poses a question to constituents asking if some types of not-for-profit entities
should be required to present both.
Certain items would also be presented in cash flow categories that are different from
the ones in which these items are currently presented in order to better align “operating”
with the new statement of activities including the operating measure.
Item
Cash gifts with restrictions to purchase, construct or
acquire long-lived assets for operating purposes
Cash payments to purchase, construct or acquire
long-lived assets for operating purposes
Cash interest and dividends unless coming from a
program
Cash payments of interest expense
Supplement-11
Current
Financing
Proposed
Operating
Investing
Operating
Operating
Investing
Operating
Financing
EXAMPLE
Example NFP Charitable Entity
Statement of Cash Flows
Year Ended June 30, 20X1
(in thousands)
Cash flows from operating activities
Cash received from service recipients
Cash received from contributors, restricted for
investment in land, buildings, equipment
Cash received from contributors, other
Proceeds on sale of equipment
Insurance proceeds from fire loss on building
Miscellaneous receipts
Cash paid to employees and retirees
Cash paid to suppliers
Grants paid
Purchase of equipment
$
5,220
1,210
10,645
200
250
150
(13,400)
(5,858)
(5,175)
(1,500)
Net cash used by operating activities
(8,258)
Cash flows from investing activities
Interest and dividends received
Proceeds from sale of investments
Purchase of investments
8,870
76,100
(74,900)
Net cash provided by investing activities
10,070
Cash flows from financing activities
Proceeds from contributions restricted for:
Investment in endowment
Investment in term endowment
Investment subject to annuity agreements
Payments of annuity obligations
Payments of interest
Payments on notes payable
Payments on long-term debt
Net cash used by financing activities
200
70
200
(145)
(382)
(1,140)
(1,000)
(2,197)
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
Supplemental data for noncash operating, investing, and financing activities
Gifts of equipment
$
140
Gift of paid-up life insurance, cash surrender value
80
******
Supplement-12
(385)
4,960
4,575
Functional Expenses
Not-for-profit entities would report expenses by both natural and functional
classification. This would include all expenses. Although the ED says that the
information could be provided in the statement of activities, this could be, for many
entities, cumbersome.
The example shown below is a footnote. However, a
supplement schedule could be used or even a separate statement. In addition, the
method used to allocate costs among program and support functions must be
disclosed. Voluntary health and welfare entities no longer have to present a statement
of functional expenses.
EXAMPLE
Note E
Operating expenses are presented below by both their nature and function for the fiscal year
20X1. Internal salaries and benefits that have been netted against investment returns amount to
$375 and are excluded from the salaries and benefits information presented below.
Program Activities
Salaries and benefits
Grants to other organizations
Supplies and travel
Services and professional fees
Office and occupancy
Depreciation
Interest
Total expenses
$
$
Program
Supporting Activities
Management
Fundand General
Raising
Supporting
A
B
C
7,400 $
2,075
865
160
1,160
1,440
3,900 $
750
1,000
1,490
600
800
1,725 $
1,925
490
600
450
570
13,025 $
4,750
2,355
2,250
2,210
2,810
1,130 $
13,100 $
8,540 $
5,760 $
27,400 $
2,038 $
240
200
218
250
960 $
560
390
100
140
2,150 $
Operating
Expenses
Nonoperating
Expenses
2,090 $
800
590
318
390
15,115
4,750
3,155
2,840
2,528
3,200
4,188 $
31,588 $
Total
Expenses
$
382
382 $
15,115
4,750
3,155
2,840
2,528
3,200
382
31,970
The financial statements report certain categories of expenses that are attributable to more than
one program or supporting function. Therefore, these expenses require allocation on a
reasonable basis that is consistently applied. The expenses that are allocated include
depreciation and office and occupancy, which are both allocated on a square footage basis, as
well as salaries and benefits, which are allocated on the basis of time and effort studies.
******
Supplement-13
Other Disclosures
Additional disclosures which are illustrated in the examples below are designed to
supplement the amended guidance related to the financial statements.
Policy Disclosures
The ED requires enhanced disclosures related to the governing board’s designations,
appropriations and self-imposed limits on the use of resources without donor
restrictions. The policies should include:

Purpose

Amount

Types of transfers (ad hoc or routine)

Qualitative information – any end of period balances of board designations
Supplement-14
EXAMPLE
Note F
The governing board of Example NFP has several standing board policies that affect the
presentation of board designations, appropriations and other similar transfers on the statement
of activities. Bequests without donor restrictions are designated for long-term investment (quasiendowment). No bequests were received during 20X1. Occasionally, the governing board
designates a portion of its net assets without donor restrictions for its liquidity reserve. No
amounts were added to the liquidity reserve during 20X1. Annually, the governing board
appropriates portions of the quasi-endowment and donor-restricted endowments for currentperiod operations. During 20X1, a total of $9,500 was appropriated and used, consisting of
$2,000 from the quasi-endowment and $7,500 from donor-restricted endowments. Example NFP
placed $1,640 of equipment into service during the year which was funded with $1,500 of donorrestricted funds that is shown as a release from restrictions, as well as $140 of donated
equipment. Both of the amounts are included in board designations, appropriations, and similar
transfers in the statement of activities.
Note G
Example NFP’s governing board has designated net assets without donor restrictions for the
following purposes as of June 30, 20X1.
Quasi-endowment
$
Liquidity reserve
Total
34,628
1,300
$
35,928
******
The FASB amended ASC 958-320, Investments – Debt and Equity Securities, to add
guidance which requires returns from programmatic investing to be reported as an
operating activity in the statement of activities. Returns other than from programmatic
investments should be reported as nonoperating.
The guidance also requires investment returns appropriated for spending to be
presented in the same manner as board designations, appropriations and similar
transfers.
An illustrative footnote was added which integrates the disclosure of the aggregate
carrying amount of investments by major types with the fair value level hierarchy
disclosure requirements as noted below.
Supplement-15
EXAMPLE
Note H
Investments are carried at fair value, and realized and unrealized gains and losses are reflected
in the statement of activities. Example NFP invests cash in excess of daily requirements in shortterm investments. At June 30, 20X1, $1,400 was invested in short-term investments, and during
the year short-term investments earned $850. Most long-term investments are held in two
investment pools. Pool 1 is for donor-restricted endowments and the unappropriated net
appreciation of those endowments. Pool B is for amounts designated by the board of trustees for
long-term investments.
Annuity trusts, term endowments and certain donor-restricted
endowments are separately invested. Long-term investment activity is shown below.
Investments at beginning of year
Gifts available for investment
Gifts creating permanent endowment
Gifts creating term endowments
Gifts creating annuity trusts
Amount withdrawn at death of annuitant
Investment return, net
Amounts appropriated for current operations
Annuity trust income for current and future payments
Investments at end of year
Pool A
Pool B
Other
Total
$ 164,000 $ 32,800 $
6,700 $ 203,500
200
80
280
70
70
200
200
(400)
(400)
19,972
3,828
300
24,100
(7,500)
(2,000)
(9,500)
(180)
(180)
$ 176,672 $ 34,628 $
6,770 $ 218,070
The participation in the pools and the ownership of the other investments at June 30, 20X1 is
shown below.
Net assets with donor restrictions
Net assets without donor restrictions
Pool A
$ 176,672
$
$ 176,672 $
Pool B
Other
Total
$
6,770 $ 183,442
34,628
34,628
34,628 $
6,770 $ 218,070
Laws and regulations allow the board to appropriate so much of the net appreciation as is
prudent considering Example NFP’s long- and short-term needs, present and anticipated
financial requirements, the expected total return on its investments, price level trends and
general economic conditions. Under the Entity’s spending policy, 5 percent of the average of the
fair value at the end of the previous 3 years is appropriated, which was $7,500 for the year
ended June 30, 20X1.
******
Supplement-16
Liquidity Disclosures
The ED provides enhanced disclosures related to the management of liquidity and
quantitative information as of the reporting date about financial assets available to meet
near-term demands for cash, including demands resulting from near-term financial
liabilities as illustrated below.
EXAMPLE
Note I
Example NFP uses a 60-day time horizon to assess its immediate liquidity needs. This period of
time was established based on management’s review of the typical cash management cycle. The
entity invests its cash in excess of daily requirements in short-term investments.
From time to time, the Board will designate a portion of any operating surplus to its liquidity
reserve. As of June 30, 20X1, the liquidity reserve was $1,300. This is a governing boarddesignated fund with the objective of setting aside funds to be drawn upon in the event of
financial distress or an immediate liquidity need resulting from events outside the typical day-today activities of converting financial assets to cash and settling liabilities. In the event of an
unanticipated liquidity need, Example NFP could also draw on $10,000 of available lines of
credit or the quasi-endowment fund. The following reflects Example NFP’s financial assets,
amounts not available within its 60-day time horizon for managing liquidity, amounts set aside
for long-term investing that could be drawn upon, and financial liabilities due within 60 days.
Financial assets
$
Less:
Contractual or donor-imposed restrictions making assets
unavailable within 60 days
(192,413)
Quasi-endowment fund
Financial assets available within 60 days
Financial liabilities
Financial liabilities due within 60 days
Net financial assets in excess of financial liabilities, within 60 days
******
Supplement-17
229,200
(34,628)
2,159
$
1,845
314
Endowment Fund Disclosures
The ED makes changes related to endowment funds. It requires the classification of
donor-restricted underwater endowment funds as donor restricted rather than as
unrestricted, as is presently required. The entity must disclose the aggregate amount
by which the funds are underwater as well as the amount of the aggregate original gift
or level required by the donor or by law. It must also disclose policies or decisions to
spend or not spend from such funds.
Note that the guidance removes the references to the Uniform Prudent Management of
Institutional Funds Act (UPMIFA) and provides references to the State Prudent
Management of Institutional Funds Act since at this time all states that are not under
trust law have adopted a version of UPMIFA according to state law.
EXAMPLE
Note J
Example NFP’s endowment consists of approximately 50 individual funds established primarily
to support the entity’s programs. Its endowment includes donor-restricted funds as well as those
designated as quasi-endowment by the governing board. The endowment funds are classified
and reported based on the existence or absence of donor-imposed restrictions.
Interpretation of Relevant Law
Example NFP is subject to the State Prudent Management of Institutional Funds Act (SPMIFA)
and classifies amounts in its donor-restricted endowment funds as net assets with donor
restrictions until the governing board appropriates such amounts for expenditure. The Board of
Directors of Example NFP has interpreted SPMIFA as not requiring the maintenance of
purchasing power of the original gift amount contributed to an endowment fund, unless a donor
stipulates the contrary. As a result of this interpretation, when reviewing its donor-restricted
endowment funds, Example NFP considers a fund to be underwater when the fair value of the
fund is less than the sum of the amount that Example NFP classifies as permanently restricted
net assets. This consists of (a) the original value of initial and subsequent gift amounts donated
to the fund, and (b) any accumulations to the fund that are required to be maintained in
perpetuity in accordance with the direction of the applicable donor gift instrument. Additionally,
in accordance with SPMIFA, Example NFP considers the following factors in making a
determination to appropriate or accumulate donor-restricted endowment funds:
(1) The duration and preservation of the fund
(2) The purposes of the organization and the donor-restricted endowment fund
(3) General economic conditions
(4) The possible effect of inflation and deflation
(5) The expected total return from income and the appreciation of investments
(6) Other resources of the organization
(7) The investment policies of Example NFP
Supplement-18
200Y
Endowment Net Asset Composition by Type of Fund as of June 30, 200Y
Board-designated endowment funds
Donor-restricted endowment funds
Perpetual
Term
Total funds
Without
With
Donor
Donor
Restrictions Restrictions
Total
$
7,084 $
$
7,084
97,759
97,759
39,589
39,589
$
7,084 $ 137,348 $ 144,432
Changes in Endowment Net Assets
for the Fiscal Year Ended June 30, 200Y
Endowment net assets, beginning of year
Investment return, net
Contributions
Appropriation of endowment assets for expenditure
Other changes:
Transfers to create board-designated endowment funds
Endowment net assets, end of year
Without
With
Donor
Donor
Restrictions Restrictions
Total
$
6,947 $ 142,053 $ 149,000
10
372
382
2,000
2,000
(373)
(7,077)
(7,450)
500
500
$
7,084 $ 137,348 $ 144,432
Description of Amounts Classified as Net Assets with Donor Restrictions (Endowment Only)
200Y
Net Assets with Donor Restrictions
(1) Original donor-restricted endowment gift amount and
amounts required to be retained by donor
(2) Term endowment funds
(3) The portion of perpetual endowment funds subject to
a time restriction under SPMIFA
Without purpose restrictions
With purpose restrictions
Total endowment funds classified as net assets with donor restrictions
Supplement-19
$
97,959
4,388
19,902
15,099
$
137,348
From time to time, the fair value of assets associated with individual donor-restricted
endowment funds may fall below the level that the donor or SPMIFA requires Example NFP to
retain as a fund of perpetual duration. Deficiencies of this nature exist in three donor-restricted
endowment funds which together have an original value of $3,500, a current fair value of $3,300
and a deficiency of $200 as of June 30, 200Y. These deficiencies resulted from unfavorable
market fluctuations that occurred shortly after the investment of new contributions for donorrestricted endowment funds and continued appropriation for certain programs that was deemed
prudent by the governing board.
Return Objectives and Risk Parameters
Example NFP has adopted investment and spending policies for endowment assets that attempt
to provide a predictable stream of funding to programs supported by its endowment while
seeking to maintain the purchasing power of the endowment assets. Endowment assets include
those assets of donor-restricted funds that the organization must hold in perpetuity or for a
donor-specified period(s) as well as board-designated funds. Under this policy, as approved by
the governing board, the endowment assets are invested in a manner that is intended to produce
results that exceed the price and yield results of the S&P 500 index while assuming a moderate
level of investment risk. Example NFP expects its endowment funds, over time, to provide an
average rate of return of approximately 89 percent annually. Actual returns in any given year
may vary from this amount.
Strategies Employed for Achieving Objectives
To satisfy its long-term rate-of-return objectives, Example NFP relies on a total return strategy
in which investment returns are achieved through both capital appreciation (realized and
unrealized) and current yield (interest and dividends). Example NFP targets a diversified asset
allocation that places a greater emphasis on equity-based investments to achieve its long-term
return objectives within prudent risk constraints.
Spending Policy and How the Investment Objectives Relate to Spending Policy
Example NFP has a policy of appropriating for distribution each year 5 percent of its
endowment fund’s average fair value over the prior 12 quarters through the calendar year-end
preceding the fiscal year in which the distribution is planned. In establishing this policy,
Example NFP considered the long-term expected return on its endowment. Accordingly, over the
long term, Example NFP expects the current spending policy to allow its endowment to grow at
an average of 3 percent annually.
Example NFP has a policy that permits spending from underwater endowment funds depending
on the degree to which the fund is underwater, unless otherwise precluded by donor intent or
relevant laws and regulations. The governing board appropriated for $75 from underwater
endowment funds during the year for expenditure, which represents 3 percent of the 12-quarter
moving average, not the 5 percent it generally draws from its endowment.
******
Supplement-20
Following are other items addressed by the standard. For more information see the
ED.
Operating Measure and Classification on the Activity and Cash Flow Statements

Presentation of amortization of pension and post-retirement costs other than net
periodic costs (ASC 958-715)

Presentation of discontinued operations on the activity statement (ASC 958-22555-7)

Classification for a not-for-profit’s acquisition of another not-for-profit (inherent
contribution) (ASC 958-805-25-31)

Presentation of cash flows resulting from an acquisition of an entity (ASC 958-80555-68)

Disclosure of noncash activities (ASC 230-10-50-3)

Presentation of distributions from third party perpetual trusts on the activity and cash
flow statements (ASC 958-605-35-3)

Classification on the statements of activities and cash flows for charitable gift
annuities subject to reserve requirements in accordance with state law (ASC 85830-45-2)
Other Presentation Matters

Reporting gross investment return for programmatic investing returns (ASC 958320-55-7)

Presentation of equity transfers on statements of activities of subsidiaries (958-20)

Presentation of consolidated cash flow statement for a not-for-profit with a for-profit
subsidiary (958-230-45-10)

Split interest agreement illustrations (958-30)

Collection items not capitalized in Statement of Activities (958-360-45-3)
Supplement-21
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Supplement-22