UNDERWATER ENDOWMENTS: Definition, Determination, Display and Disclosures

From time to time, Organizations may face the prospect of an endowment going underwater, it may become especially relevant in uncertain economic times as markets fluctuate. It is important to know how to determine if your organization has endowment(s) that are underwater and to be aware of related required disclosures. Here are the definition, determination, display and disclosure requirements: 

DEFINITION & DETERMINATION

An Endowment is considered to be underwater when the fair value of the fund at the reporting date (the date the financial statements are “as of”) is less than either:

• The amount of the original gift
• The amount required to be maintained by the donor or by law

Determination as to whether endowments are underwater must be made for each fund and not at the aggregate level if an organization has more then one endowment.

DISPLAY

Statement of Financial Position – Underwater endowments are reflected in net assets with donor restrictions.

Statement of Cash Flows – Endowment contributions and investment returns restricted for long-term investment are a financing activity.

DISCLOSURES

The following additional information is required to be disclosed when an endowment is determined to be underwater:

1. The interpretation of the Organization’s Board of the applicable laws affecting the ability to spend from underwater endowment funds and any such spending or appropriation
2. The Organization’s policies on spending and appropriations when an endowment is underwater including related donor requirements
3. Amounts – to be reported in the aggregate:

• Aggregate of the fair value of the underwater endowment funds
• Aggregate amount of the original endowment gift(s) (or the amount required to be maintained by the donor or by law) as applicable to each endowment fund
• Aggregate amount of the deficiencies of the underwater endowment funds

Source: Financial Accounting Standards Board (FASB), Accounting Standard Update (ASU) 2016-14 Not-for-profit Entities (Topic 958)

Underwater Endowment Funds

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 NFP to retain as a fund of perpetual duration. Deficiencies of this nature exist in 3 donor-restricted endowment funds, which together have an original gift value of $X,XXX, a current fair value of $X,XXX, and a deficiency of $XXX as of June 30, 20YY. These deficiencies resulted from unfavorable market fluctuations that occurred shortly after the investment of new contributions for donor-restricted endowment funds and continued appropriation for certain programs that was deemed prudent by the Board of Trustees.

Spend Policy

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, NFP considered the long-term expected return on its endowment. Accordingly, over the long term, NFP expects the current spending policy to allow its endowment to grow at an average of X percent annually. 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 expenditure $X,XXX from underwater endowment funds during the year, which represents X percent of the 12-quarter moving average, not the X percent it generally draws from its endowment.

RESOURCES:
FASB -ASU 2016-14 Not-for-profit entities (Topic 958)