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9.11 Investment return
Publication date: 27 May 2020
us NFP guide
When investments are reported at fair value, the fair value changes are reported within the appropriate class of net assets—with donor restrictions or without donor restrictions—as required by ASC 958-321-15-3 and ASC 958-220-45-8. For NFP HCOs, those changes are included in or excluded from the performance indicator as prescribed by ASC 954-220-45-9 through ASC 954-220-45-11. General presentation and disclosure requirements for equity interests measured at fair value can be found in LI 12, FSP 20, and FSP 9.
Apart from these minimum requirements, NFPs have significant latitude in how investment return is displayed and disclosed. Prior to the recent changes in financial statement presentation guidance in ASU 2016-14, NFP entities were required to either present or disclose the details of the components of investment return (i.e., interest income, dividends, realized and unrealized appreciation) either on the face of the statement of activities or in the notes. That requirement no longer exists and while still permissible, NFPs may now collapse investment return into a single line item without further disaggregation.
NFPs with endowments will typically use a "total return" or "spending rate" concept for internal reporting, for investment management, and for budgetary purposes. The total return approach is a method of managing endowment fund assets so that a portion of capital gains is made available for current use (see NP 9.10). Often when an organization uses a total return approach and includes a measure of operations in their statement of activities, the amount of investment return in operations is based on the budgeted or board-approved spending rate. ASC 958-220-45-14 (and a related example in ASC 958-220-55-20) provide guidance on the flexibility in the display of income, gains, and losses from investments, including the presentation of operating and nonoperating components.
Excerpt from ASC 958-220-45-14
An NFP may present the amounts of net investment return from portfolios that are managed differently or derived from different sources as separate, appropriately labeled line items on the statement of activities. For example, if an NFP has net investment return generated from operating cash, it may present that return separately from net investment return generated from its endowment. In addition, if appropriately labeled, an NFP may present the amounts of net investment return appropriated for spending separate from net investment return in excess of amounts appropriated for spending.
For example, any of the following displays is acceptable for an organization that chooses to divide its changes in net assets into operating and nonoperating components, as long as the NFP provides a description of the policy used to determine the amount that is included in the measure of operations and a discussion of circumstances leading to a change, if any, in that policy:
- All dividend and interest income and gains in operating revenue, on one or more lines
- Dividend and interest income in operating revenue; all gains and losses in nonoperating revenue
- Income and realized gains in operating revenue; unrealized appreciation in nonoperating revenue
- Investment return up to the institution's set "spending rate" in operating revenue; the difference between that amount and actual total return (which difference may be either positive or negative) in nonoperating revenue
ASC 958-220-45-27 through ASC 958-220-45-30 provides additional guidance for NFPs that present an operating measure.
9.11.1 Net asset classification of investment return
ASC 958-220-45-8 addresses the reporting of investment return by net asset class. Gains and losses on investments and dividends, interest, and other investment income are reported in the statement of activities as increases or decreases in net assets without donor restrictions, unless their use is limited by donor-imposed restrictions (including limitations imposed by UPMIFA laws, as discussed in 9.10.1).
An exception is provided for NFPs that have adopted a policy to report gains and investment income that are limited to specific uses by donor-imposed restrictions as increases in net assets without donor restrictions if the restrictions are met in the same reporting period as the gains and income are recognized (often referred to as a “simultaneous release” policy). NFPs must also have a similar policy for reporting contributions received. This allows the NFP to “bypass” the initial classification as donor-restricted and the subsequent reclassification to net assets without donor restrictions (sometimes presented as release from restriction.) For more information on simultaneous release policies, see NP 6.7.2.3.
9.11.2 Presentation and disclosure of investment expenses
ASC 958-220-45-14 requires NFPs to report investment return (related to total return investing and not programmatic investing) net of external and direct internal investment expenses. “Direct internal investment expenses” are defined in ASC 958-220-45-15.
Direct internal investment expenses involve the direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return. These include, but are not limited to, both of the following:
a. Salaries, benefits, travel, and other costs associated with the officer and staff responsible for the development and execution of investment strategy
b. Allocable costs associated with internal investment management and supervising, selecting, and monitoring of external investment management firms.
ASC 958-220-45-16 clarifies that direct internal investment expenses do not include items that are not associated with generating investment return. For example, the costs associated with unitization and other such aspects of endowment management would not be allocated.
As discussed in NP 3.5, investment expenses do not follow the general rule under the NFP financial reporting framework that all expenses should be reported as decreases in net assets without donor restrictions. Because investment expenses must be netted against investment return, they will be reported in the same categories (with or without donor restrictions) in which the investment return is reported. Similarly, in accordance with ASC 958-205-45-6 and ASC 958-720-45-15, investment expenses that have been netted against investment return are not included in the analysis of expenses by nature and function (see NP 3.5.2).
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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