Definition
A donor-restricted endowment fund is underwater when its fair value at the reporting date is less than the original gift amount or less than the amount the donor or applicable law requires to be maintained. Since ASU 2016-14, accumulated losses on such a fund stay in net assets with donor restrictions instead of reducing net assets without donor restrictions. Quasi-endowments set up by the board are not within this definition.
Why it matters in an audit or review
Auditors recompute the fund's fair value and compare it with the gift amount and the state law threshold, then test the disclosures. Disclosures include the aggregate amount by which funds are underwater, the aggregate original gift amounts, and the governing board's policy on spending from underwater funds. A missing deficiency disclosure is a common finding when markets fall.
Example
Illustrative: three donor-restricted funds have original gifts of $400,000, $300,000, and $200,000 and year-end fair values of $370,000, $310,000, and $180,000. Two funds are underwater. Aggregate gift amounts for those funds are $600,000, fair value is $550,000, and the deficiency is $50,000.
Common mistakes
- Netting the surplus of a fund above its gift amount against the deficiency of another fund.
- Reporting the deficiency in net assets without donor restrictions.
FAQ
Does the board have to stop spending from an underwater fund?
Not automatically. State law and the fund's terms control, and the board's spending policy for underwater funds must be disclosed.
Sources
- FASB ASC 958-205, Not-for-Profit Entities, Presentation of Financial Statements (classification and disclosure of underwater endowment funds)
- FASB ASU 2016-14: https://storage.fasb.org/ASU%202016-14.pdf
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error