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SFAS 124: accounting for investments by not-for-profit entities.

A primary goal of the FASB's continuing project on not-for-profit Not-for-profit

An organization established for charitable, humanitarian, or educational purposes that is exempt from some taxes and in which no one in profits or losses.
 (NFP NFP Not for Profit
NFP Natural Family Planning (contraception)
NFP National Focal Point
NFP National Financial Partners Corp.
NFP Nurse Family Partnership (Denver, CO) 
) accounting is to reduce the inconsistencies in accounting methods used in the various NFP sectors. To that end, Statement of Financial Accounting Standards (SFAS SFAS Statement of Financial Accounting Standards
SFAS Special Forces Assessment and Selection
SFAS Student Financial Aid Services
SFAS Sport Fishing Association of Singapore
SFAS Safety Features Actuation System
SFAS Statewide Fixed Assets System
) 116, Accounting for Contributions Received and Contributions Made, standardized standardized

pertaining to data that have been submitted to standardization procedures.

standardized morbidity rate
see morbidity rate.

standardized mortality rate
see mortality rate.
 NFP accounting procedures for contributions and SFAS 117, Financial Statements of Not-for-Profit Organizations, established a minimum level of financial reporting and disclosures for all NFPs. The latest chapter of the FASB's NFP project is SFAS 124, Accounting for Certain Investments Held by Not-for-Profit Organizations. This standard provides accounting and reporting requirements for all NFPs with certain types of investments. Prior to SFAS 124, accounting guidance for investments of NFPs was contained in four separate AICPA AICPA

See American Institute of Certified Public Accountants (AICPA).
 audit guides which resulted in diverse practices among the different NFP sectors.

In general, SFAS 124 applies to investments in equity securities (i.e., stock) with readily determinable Liable to come to an end upon the happening of a certain contingency. Susceptible of being determined, found out, definitely decided upon, or settled.

determinable adj.
 market values and all investments in debt securities. The standard became effective for fiscal years beginning after December December: see month.  15, 1995, with earlier application encouraged. This article addresses the main points of SFAS 124, including the special problems surrounding sur·round  
tr.v. sur·round·ed, sur·round·ing, sur·rounds
1. To extend on all sides of simultaneously; encircle.

2. To enclose or confine on all sides so as to bar escape or outside communication.

 accounting for endowment funds Endowment funds

Investment funds established for the support of institutions such as colleges, private schools, museums, hospitals, and foundations. The investment income may be used for the operation of the institution and for capital expenditures.

Accounting for Investment Gains, Losses and Income

SFAS 124 bears a striking resemblance Resemblance may refer to:
  • Resemblance: as in "you have a resemblance to your brother" (In the case of twins) see analogy and similarity.
  • Resemblance nominalism
  • Ludwig Wittgenstein's family resemblances.
 to SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, which establishes reporting requirements for business enterprises' investments. That similarity Similarity is some degree of symmetry in either analogy and resemblance between two or more concepts or objects. The notion of similarity rests either on exact or approximate repetitions of patterns in the compared items.  is the use of fair value accounting. A primary difference between the two investment standards is that there is no requirement under SFAS 124 for investments to be categorized cat·e·go·rize  
tr.v. cat·e·go·rized, cat·e·go·riz·ing, cat·e·go·riz·es
To put into a category or categories; classify.

 as either held-to-maturity, available-for-sale or trading. Under SFAS 115, investments must be classified in these groups, with different reporting requirements for each group. SFAS 124 simplifies investment accounting for NFPs by requiring all investment securities under its scope to be accounted for at fair value.

As previously mentioned, SFAS 124 applies to an NFP's investments in equity securities that have readily determinable fair values and to all investments in debt securities. Equity securities are considered to have readily determinable fair values if any one of the following conditions exist:

* For a security traded in the domestic market, a sales price or bid-and-asked quotation QUOTATION, practice. The allegation of some authority or case, or passage of some law, in support of a position which it is desired to establish.
     2. Quotations when properly made, assist the reader, but when misplaced, they are inconvenient.
 is available on a securities exchange registered with the SEC or in the over-the-counter market over-the-counter market

Trading in stocks and bonds that does not take place on stock exchanges. Such trading occurs most often in the U.S., where requirements for listing stocks on the exchanges are strict.

* For a security traded only in a foreign market, that foreign market is of a breadth and scope comparable to one of the U.S. markets referred to above.

* For an investment in a mutual fund, the fair value per share is determined and published and is the basis for current transactions.

The quoted market price for equity securities meeting one of the above criteria will be the measure of fair value used for accounting and reporting purposes.

SFAS 124 also notes that quoted market prices represent the best measure of fair value for debt securities. However, some debt securities do not trade regularly and therefore, quoted market prices are not available. In these instances, other means of measuring fair value must be used. These measures will be more subjective and should consider the market price of similar securities and the results of valuation techniques, such as the present value of expected cash flows discounted at a rate commensurate com·men·su·rate  
1. Of the same size, extent, or duration as another.

2. Corresponding in size or degree; proportionate: a salary commensurate with my performance.

 with the risk involved. Regardless of the particular method employed to determine fair value, the investments are reported on the NFP's statement of financial position at this amount.

SFAS 124 requires all gains and losses, both realized and unrealized, related to an NFP's investments be reported in the current period's statement of activities. These gains and losses are measured as the changes in the fair values of the investments. For example, on January January: see month.  1, 1995, Acme (company, jargon) ACME - /ak'mee/ 1. A Company that Makes Everything. The canonical imaginary business. Possibly also derived from the word "acme" meaning "highest point".

2. A program for MS-DOS.
 College has an investment portfolio with a fair value of $1,200,000. On December 31, 1995, the makeup makeup

In the performing arts, material used by actors for cosmetic purposes and to help create the characters they play. Not needed in Greek and Roman theatre because of the use of masks, makeup was used in the religious plays of medieval Europe, in which the angels' faces
 of the investment portfolio is unchanged, but it has a fair value of $1,300,000. For 1995, Acme College has a gain, albeit unrealized, of $100,000 from their investments; the gain would be recognized in full in the statement of activities.

In the absence of any donor-imposed or legal restrictions on how an investment may be used, this gain would be reported as an increase in unrestricted net assets Net assets

The difference between total assets on the one hand and current liabilities and noncapitalized long-term liabilities on the other hand.

net assets

See owners' equity.
. A loss, realized or unrealized, would decrease unrestricted net assets. If restrictions do exist on the use of an investment, the gain or loss is shown as an increase or decrease in either temporarily or permanently restricted net assets, depending on the type of restriction restriction - A bug or design error that limits a program's capabilities, and which is sufficiently egregious that nobody can quite work up enough nerve to describe it as a feature.  existing. Investment income (i.e., interest and dividends) earned during the year is reported as an increase in unrestricted net assets, unless the income's use is restricted; in that case, temporarily or permanently restricted net assets are increased depending upon the restriction. The steps used in reporting investments and their gains and losses are summarized in Table 1.

One issue concerning donor-imposed restrictions on the use of investment income and gains is how to report these items when the restriction is satisfied in the same period the income or gain is earned. In this situation, the investment income and gains may be reported as increases in unrestricted net assets as long as the organization has a similar policy for reporting contributions received, reports consistently from period to period and discloses its accounting policy.

For example, assume an individual donates $1,000,000 to a private college to establish an endowment A transfer, generally as a gift, of money or property to an institution for a particular purpose. The bestowal of money as a permanent fund, the income of which is to be used for the benefit of a charity, college, or other institution.  to be used to bring nationally known speakers to the college's speakers forum. The $1,000,000 principal is permanently restricted by the donor The party conferring a power. One who makes a gift. One who creates a trust.

donor n. a person or entity making a gift or donation.

DONOR. He who makes a gift. (q.v.)
 and the investment income can only be used to pay speaker fees and related travel costs. During the first year of the program, the endowment earned $95,000 of investment income and the university spent $80,000 on speakers for the forum. Therefore, during the year, the restrictions on $80,000 of the $95,000 of investment income were met and $80,000 would be shown as an increase in unrestricted net assets in the statement of activities. The remaining $15,000 would be reported as an increase in temporarily restricted net assets. Of course, the $80,000 paid to the speakers would also be recognized as a program expense (i.e., reduction of unrestricted net assets).

This is a fairly straightforward example of a donor-restricted endowment. However, these types of funds often create the greatest complexities associated with applying SFAS 124. The next section addresses the problems associated with endowment funds.

Accounting for Endowment Funds

A donor-restricted endowment fund Noun 1. endowment fund - the capital that provides income for an institution

patrimony - a church endowment

chantry - an endowment for the singing of Masses
 results from a contribution carrying a stipulation An agreement between attorneys that concerns business before a court and is designed to simplify or shorten litigation and save costs.

During the course of a civil lawsuit, criminal proceeding, or any other type of litigation, the opposing attorneys may come to an agreement
 that the gift be invested in perpetuity Of endless duration; not subject to termination.

The phrase in perpetuity is often used in the grant of an Easement to a utility company.

in perpetuity adj. forever, as in one's right to keep the profits from the land in perpetuity.
 or for a specified time period. This donor stipulation sometimes relates not only to the principal amount but also to a net appreciation value.

Reporting investment income and gains on endowment funds depends on the existence of any donor restrictions concerning the use of the income or investment appreciation. If no restrictions exist, investment income and gains are shown as increases in unrestricted net assets. If part of the net appreciation value is permanently restricted, any investment income or gains would be reported as increases in permanently restricted net assets until the required net appreciation value is reached. Once this value is reached, any further investment income and gains are increases in unrestricted net assets unless donor restrictions on their use exist, in which case either temporarily or permanently restricted net assets are increased, depending on the nature of the restrictions.

Classifying losses on endowment funds is slightly more complicated than classifying gains, since most donor agreements are silent regarding loss disposition. SFAS 124 requires, unless donor stipulations exist to the contrary, that losses not affect permanently restricted net assets, even if fair value falls below the principal amount. Instead, these losses reduce temporarily restricted net assets to the extent that donor-imposed restrictions on net appreciation have not been reached before the loss occurs. Any remaining losses reduce unrestricted net assets. Gains occurring in subsequent years that restore the endowment fund to the permanently restricted amount are reported as increases in unrestricted net assets. Table 2 summarizes the reporting requirements for gains and losses on endowment funds.

As an example of accounting for a donor-restricted endowment fund, assume on January 1, 1992, an individual donates $1,000,000 to a private college. The donor stipulates that the principal plus the first $100,000 of net appreciation are to be permanently maintained. All remaining income and gains earned by the fund are unrestricted. Further assume that the fair values of the endowment fund are as follows:
December 31, 1992       $1,070,000
December 31, 1993        1,150,000
December 31, 1994          980,000
December 31, 1995        1,040,000

For the year ending December 31, 1992, the endowment fund has a total gain of $70,000 ($1,070,000 fair value at the end of the year minus $1,000,000 fair value at the beginning of the year). Since the fund has not attained at·tain  
v. at·tained, at·tain·ing, at·tains
1. To gain as an objective; achieve: attain a diploma by hard work.

 the required net appreciation value ($1,100,000) at this point, the $70,000 gain is shown as an increase in permanently restricted net assets.

The fund has an $80,000 gain in 1993 and met and surpassed the required net appreciation value during the year. As a result, the first $30,000 of the gain (the amount needed to reach the required net appreciation value of $1,100,000) is shown as an increase in permanently restricted net assets. The remaining $50,000 gain results in an increase in unrestricted net assets.

The endowment suffers a loss of $170,000 in 1994. Since there are no donor stipulations on loss disposition and the required level of net appreciation value had been reached prior to the loss, the full $170,000 loss is shown as a reduction in unrestricted net assets.

Finally, the fund recovers somewhat in 1995 and shows a gain of $60,000. The full amount of this gain is reported as an increase in unrestricted net assets.

Required Disclosures

SFAS 124's disclosure requirements are extensive and are designed to allow the financial statement reader to understand the investments owned, the changes in these investments and the risks associated with the investments of the NFP. The standard requires the following disclosures for each period for which a statement of activities is presented:

* the composition of investment return, including investment income, realized gains Realized Gain

A gain resulting from selling an asset at a price higher than the original purchase price.

There may be tax consequences for a realized profit.
 and losses on investments reported at other than fair value, and net gains and losses on investments reported at fair value; and

* a reconciliation of investment return to amounts reported in the statement of activities if the investment return is separated into operating and nonoperating amounts, together with a description of the policy used to determine the amount that is included in the measure of operations and a discussion of circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact.
     2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or
 leading to a change, if any, in that policy.

Additionally, the following must be disclosed for each period a statement of financial position is presented:

* the aggregate carrying amount of investments by major types (e.g., equity securities, mutual funds, corporate debt securities, etc.);

* the basis for determining the carrying amount for investments not covered not covered Health care adjective Referring to a procedure, test or other health service to which a policy holder or insurance beneficiary is not entitled under the terms of the policy or payment system–eg, Medicare. Cf Covered.  by this standard;

* the method(s) and significant assumptions used to estimate the fair values of investments other than financial instruments, if those other investments are reported at fair value; and

* the aggregate amount of deficiencies for all donor-restricted endowment funds for which the fair value of the investment at the reporting date is less than the level required by donor stipulation or law.

Finally, for the most recent period for which a statement of financial position is presented, the NFP shall disclose the nature of each individual investment or group of investments that represents a significant concentration of market risk.


SFAS 124 is the latest standard resulting from the FASB's ongoing NFP project. This standard eliminates inconsistencies in how various NFP sectors account for investments and also enhances the comparability of NFP financial statements with those of business enterprises. For all investments under its scope, SFAS 124 requires fair value measurement in the statement of financial position with the effects of changes in fair value reported in the statement of activities.

This standard is effective for fiscal years beginning after December 15, 1996, with earlier application encouraged. The adoption of SFAS 124 can be made either on a prospective basis with the related cumulative effect reported in the current year's financial statements or on a retroactive Having reference to things that happened in the past, prior to the occurrence of the act in question.

A retroactive or retrospective law is one that takes away or impairs vested rights acquired under existing laws, creates new obligations, imposes new duties, or attaches a
 basis with prior years' financial statements restated.

Table 1: Accounting for Investments

1. Determine which investments fall under SFAS 124's scope.

A. investments in equity securities, not accounted for under the equity method or in consolidation, with readily determinable fair values.

B. all investments in debt securities

2. These investments are measured and reported at fair value in the statement of financial position.

A. quoted market prices, if available, are best measures of fair value

B. for debt security for which there is no quoted market price, use selling price of similar securities or valuation techniques such as discounted cash flows to determine fair value.

3. Report gains and losses, both realized and unrealized, related to the change in the investment's fair value on the statement of activities.

A. if no donor restriction exists, the gain (loss) is an increase (decrease) in unrestricted net assets

B. if donor restriction exists, the gain (loss) is an increase (decrease) in either temporarily or permanently restricted net assets, depending on the nature of the restriction.

Table 2: Accounting for Gains and Losses on Endowment Funds

1. Endowment funds are contributions required to be maintained in perpetuity or for a specified period of time.

2. Reporting gains on endowment fund investments:

A. In general, until any net appreciation requirement is met, gains are shown as increases in permanently restricted net assets.

B. Once the net appreciation requirement is met, gains are shown as increases in unrestricted net assets unless donor restrictions exist; in that case, either temporarily or permanently restricted net assets are increased, depending upon the restrictions.

3. Reporting losses on endowment fund investments:

A. Assuming the net appreciation requirement has been met, losses are shown as decreases in unrestricted net assets.

B. If the net appreciation requirement has not been met, losses are shown as decreases in temporarily restricted net assets. Any remaining losses are shown as decreases in unrestricted net assets.

C. All subsequent recoveries of previous losses result in increases of unrestricted net assets.

Stanley Stanley, town (1991 pop. 1,557), capital of the Falkland Islands, S Atlantic Ocean, on East Falkland island. It is the main port and trading center of the islands. The name is sometimes written as Port Stanley.  J. Clark, PhD, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , is an assistant professor of accounting at the University of Southern Mississippi Mississippi, state, United States
Mississippi (mĭs'əsĭp`ē), one of the Deep South states of the United States. It is bordered by Alabama (E), the Gulf of Mexico (S), Arkansas and Louisiana, with most of the border formed by
. Charles Charles, archduke of Austria
Charles, 1771–1847, archduke of Austria; brother of Holy Roman Emperor Francis II. Despite his epilepsy, he was the ablest Austrian commander in the French Revolutionary and Napoleonic wars; however, he was handicapped by
 E. Jordan Jordan, country, Asia
Jordan, officially Hashemite Kingdom of Jordan, kingdom (2005 est. pop. 5,760,000), 35,637 sq mi (92,300 sq km), SW Asia. It borders on Israel and the West Bank in the west, on Syria in the north, on Iraq in the northeast, and on Saudi
, DBA, CPA, is an associate professor of accounting at the University of Southern Mississippi.
COPYRIGHT 1997 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Author:Clark, Stanley J.; Jordan, Charles E.
Publication:The National Public Accountant
Date:Jan 1, 1997
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