As a member of the task force that drove the overhaul of the recently-released AICPA Not-for-Profit Entities Audit and Accounting Guide, I am providing weekly, chapter-by-chapter summaries to help users preview the guide.
Chapter 4 combines Chapters 4 (Cash and Cash Equivalents) and 8 (Investments) of the previous guide. The Chapter does not cover:
- investments in consolidated subsidiaries (Ch. 3),
- investments in an entity that provides goods or services that accomplish the purpose or mission of the NFP entity or that serves an administrative purpose (Ch. 3),
- changes in valuation and reporting investment income on split-interest agreements (Ch. 6), or
- programmatic investments (Ch. 8).
When Cash Isn’t Cash
NFP entities may deposit funds in a related entity’s cash account under a centralized arrangement. Common examples include deposit-and-loan, revolving fund arrangements used by many religious denominations, and local chapters of national NFP organizations. FinREC believes that the depositing entity’s cash account under such arrangement generally would not be classified as cash and cash equivalents in the depositing entity’s financial statements. Instead, the entity would classify the deposit in the cash pool as a receivable from a related entity.
Cash held as part of an endowment fund or other investments held for long-term purposes is appropriately included in the investments line item in the Statement of Financial Position. Such treatment eliminates what can sometimes be an awkward or confusing division of investment balances between the various kinds of investments held within an investment portfolio.
Valuation of Investments in Entities Held for Investment
Chapter 4 includes expanded coverage of the valuation of investments in entities held for investment, and includes a table summarizing the guidance for 13 different relationships an NFP entity may have with investee entities, derivative arrangements, and investment pools, which is followed by several pages of discussion and examples.
FinREC has noted diversity in the types of costs that have been included as related investment expenses. The Guide clarifies that investment expenses include, but are not limited to the costs of the following activities if conducted by the NFP (or directly on its behalf):
- Investment advice, including advice provided by employees as well as third parties
- Investment acquisition due diligence
- Custodian services
- Legal and accounting services incurred in connection with investment activities
- Interim and year-end monitoring
- Valuation procedures and processes
Investment expenses exclude internal fees charged by mutual funds, hedge funds, and other investment funds. Instead, those charges are considered to be a part of the investment’s return.
Fair Valuing an Interest in a Community Foundation’s Investment Pool
Some NFPs transfer funds to community foundations for investment management, seeking to benefit from the foundations’ investing expertise, size, and scale. For purposes of determining the fair value of an NFP’s interest in a community foundation’s investment pool, the appropriate unit of account is the interest in the pool itself, not the underlying investments within the pool. The pool may qualify for use of the net asset value per unit or share (NAV) as a practical expedient to measure fair value.
The Rest of It
The balance of the Chapter is devoted to an expanded discussion of endowment funds, financial statement presentation, and disclosures. It also includes expanded coverage of auditing considerations, suggested audit procedures, and incorporates AICPA Technical Practice Aid questions and answers related to determining fair values of alternative investments and the use of NAV as a practical expedient to measure fair value.