FASB proposes statement on not-for-profits' investments.

The Financial Accounting Standards board has issued an exposure draft of a proposed Statement of Financial Accounting Standards, Accounting for Certain Investments Held by Not-for-Profit Organizations.

The proposal is the fourth in the board's five-part project to resolve inconsistencies in accounting and reporting by not-for-profits. According to Susan Weiss, FASB project manager, "Although a significant number of not-for-profits report all investments at fair value, inconsistencies exist because the current guidance permits alternatives." The board believes that fair value is a better measure of the resources a not-for-profit has available to provide its mission-related services. "That information will help donors and others make informed decisions about allocating resources," Weiss added.

If the statement is adopted, its requirements would become effective for annual financial statements issued for years beginning after December 15, 1995. The statement would be applied either by restating the financial statements of all prior years presented or by recognizing the cumulative effect of the change in the year it's adopted, the board said. The expiration of restrictions on previously unrecognized net gains could be recognized prospectively.

The proposed statement would require that investments in equity securities with readily determinable fair values and all investments in debt securities be reported at fair value with gains and losses included in a statement of activities. It would require certain disclosures about investments held by not-for-profit organizations and the return on those investments.

In addition, the statement would establish standards for reporting losses on investments of an endowment fund created by a donor's stipulation that requires investment of the gift in perpetuity or for a specified term.

"This is a very positive step that will make not-for-profits' accounting for certain investments comparable," according to Sally L. Hoffman, a partner of Richard A. Eisner & Co., New York. "There is a lot of diversity in practice, with different entities accounting for their investments in different ways.

"The proposed statement would require that equity securities with readily determinable fair values and an investments in debt securities be reported at fair value. Many not-for-profits, especially those with large investment portfolios, already report these securities at fair value. But there are many that do not, and these will have to change their accounting," Hoffman continued. "The change will create additional volatility in their financial statements because they will have to `mark to market' their securities, with gains and losses included in their statements of activity.

"Also, the requirement that all debt securities must be carried at fair value will be a change for many not-for-profits," she added. "Many of them--even those that use fair value for their equity securities--have not been using that amortized cost for their debt securities."

Although the comment period has passed, copies of this ED are still available for $11 each by writing to the FASB order department, 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116, or calling [phone], ext. 555.