This chapter discusses the guidance used by NFPs in accounting for investments in for-profit entities, including equity securities, as well as investments in debt securities and nonfinancial assets. This guidance differs significantly in certain respects from the model applied by business entities, particularly with respect to investments in equity instruments. The primary differences arise from legacy guidance carried forward from AICPA audit and accounting guides for various subtypes of NFPs.
GAAP contains three models for NFP investment accounting:
- investments by NFP HCOs (which closely resembles the accounting used by business entities)
- investments in entities that are a component of a non-HCO NFP’s operations (“operating investments”)
- investments entered into by a non-HCO NFP to generate investment return (“portfolio investments”)
A unique feature of the model for portfolio investments is an option to measure all investments in the portfolio at fair value, which, among other things, provides exceptions to consolidation of certain investments that are not available to business entities.
Some NFPs enter into specialized investments with their constituents as part of their charitable mission (for example, certain social investments). For information on accounting for these investments (sometimes referred to as “programmatic investments”), see chapter 8 of the AAG-NFP.
This chapter explains the NFP investment accounting models and highlights differences from the general investment accounting guidance applied by business entities. It also discusses the Uniform Prudent Management of Institutional Funds Act (UPMIFA)—a model rule that underpins key accounting considerations related to donor-restricted endowments.
Recent standard setting
Many of the historic differences in accounting for noncontrolling equity investments (between NFPs and business entities, as well as among different types of NFPs) were eliminated by issuance of ASU 2016-01
, Recognition and Measurement of Financial Assets and Financial Liabilities
. LI 1.3
provides a high-level overview of the ASU’s amendments affecting investment accounting. Detailed guidance regarding the standard is contained throughout the PwC Loans and investments
The ASU eliminates use of the cost method of accounting for investments and replaces it with an expanded use of fair value measurement. For NFPs that avail themselves of the portfolio-wide fair value measurement option in connection with total return investing of endowment funds, a new measurement alternative is available which, if elected, can be used to simplify fair value measurement of certain hard-to-measure investments.
For NFPs (including conduit bond obligors), ASU 2016-01
was effective for annual reporting periods beginning after December 15, 2018 and interim periods beginning after December 15, 2019. See LI 13.3
for information on transition provisions.
This chapter incorporates the guidance in ASU 2016-01
. In areas where ASU 2016-01
resulted in significant changes, a description of the legacy accounting guidance is also provided. Those areas are indicated by section headings that include an “A.” For example, NP 9.2.3A
discusses the accounting requirements for alternative investments prior to an entity’s adoption of ASU 2016-01
, while NP 9.2.3
discusses the accounting requirements for those investments in accordance with ASU 2016-01