WALTHAM, Mass. – March 23, 2009 – Nonprofits now struggling with reduced income and donations may face even greater financial strain as they comply with state regulations on how to account for declines in endowment value, according to Accounting Management Solutions, Inc. (AMS), a leading provider of accounting, financial management, and consulting services.
“Nonprofits need to understand these issues, as endowment accounting will affect the upcoming budget year for many of them,” said Rebeka Mazzone, CPA, director of the Rhode Island practice at AMS.
Nonprofits with permanent endowments currently underwater should consult with their financial advisors in advance of their yearend audit, as they likely will be required to use unrestricted net assets to bring endowments in line with their original gift value, according to Mazzone.
An endowment is considered to be underwater if its current market value is below the original value of the contribution received, as is the case in Massachusetts and New York, or below the required historical dollar value adjusted for inflation, as is the case in Rhode Island.
Relatively new permanent endowments are more likely to be deeper underwater than older funds, Mazzone said. While most, if not all, older endowments also suffered steep value losses in recent months, those funds had more time to appreciate before the current market turmoil took hold.
Current accounting rules require the losses on an endowment to be charged first against any unspent appreciation (prior unspent gains on the endowment), and then against the unrestricted net assets. As the market value recovers, the gains are used to “pay back” unrestricted funds first, she explained.
As a result, underwater endowments are reflected on the audited financial statements as a borrowing from the unrestricted fund, Mazzone said. These borrowings are also disclosed in the Form 990 and most state tax filings, making the information available to the public.
“Ensuring that endowment accounting meets state law and GAAP requirements can be quite complicated. For that reason, and because the investment climate continues to be volatile, we strongly urge nonprofits to ensure they have a clear understanding of their endowment values and consult with their financial advisors about the status of their endowments in advance of their yearend, not only for audit purposes, but more importantly for planning the spending associated with next year’s budget,” Mazzone said.
About Accounting Management Solutions
Accounting Management Solutions, Inc. (www.amsolutions.net), based in Waltham, Mass., with offices in New York and Providence, is a leading provider of accounting, financial management, and consulting services to private, public, and nonprofit organizations. AMS is ranked as one of the fastest-growing private companies in the United States by Inc. magazine, and in Massachusetts by the Boston Business Journal.
