July 12, 2004 -- If your nonprofit organization has investment funds, you should pay close attention to FAS 124.  It provides guidance on accounting for certain investments including debt securities such as bonds and equity securities such as stocks and mutual funds.  However, it does not cover securities accounted for under the equity method or other types of investments such as real estate, consolidated subsidiaries, venture capital funds etc.

Investments are initially recorded at the acquisition cost or the fair value if they are received as a contribution.  When a valuation (fair value) of the investment is made subsequent to acquisition, the valuation is made at market to market (not cost to market).  The resulting gains or losses are reported as increases or decreases to unrestricted net assets unless their use is temporarily or permanently restricted by donor or law.  On the Statement of Activities, gains or losses can be shown separately or combined.

Investment gains and losses that have donor imposed restrictions are recorded using the same method used for contributions.  If the restriction is met in the same reporting period as the gains or losses, then record them to unrestricted net assets if this is your organization’s policy for recording similar contributions.  If it is a temporarily restricted net asset, then show it being transferred to unrestricted in the same period that the restriction is met.

FAS 124 states that Investment income is always recorded in the period earned and it is recorded in unrestricted net assets unless otherwise restricted.

Investments that are included in permanently restricted net assets typically result from donor-imposed stipulations that neither expire by passage of time nor can they be fulfilled or removed by actions of the organization.  These funds must be donor restricted and do not include Board restricted funds. Permanently restricted contributions are recorded at fair value when received (historic cost), and this amount usually never changes.  The related income is recorded as unrestricted unless restricted by the donor.  Gains are usually unrestricted unless the donor states otherwise.

This brief article only highlights some of the key points and it is not meant to be a full summary of FAS 124.  In addition, if your nonprofit organization is located in Pennsylvania,  ACT 141 imposes legal restrictions as to the use of income and gains on permanently restricted net assets.  It also restricts the amount your organization can spend in any given year.  If FAS No. 124 or Act 141 applies to your organization, review the statements in their entirety or seek the advice of your accountant.  

For more information, call Russell Heid at 215-564-1900 .

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