In the upcoming new FASB rules, one change will be how underwater endowments are reported. Underwater endowments are those in which the fair value of a donor-restricted fund falls below the amount an organization is required to maintain by the donor or by law. Typically, this will be the principal, or original amount of the gift, though some jurisdictions require organizations to maintain the purchasing power for donor-restricted endowment funds. In these cases, absent an index provided by the donor, the organization will use the most relevant inflation index.

In current practice, endowment deficits are reported as a reduction of unrestricted net assets. When the new FASB guidance takes effort, deficits will be reported as part of net assets with donor restrictions. This is similar to reporting under the Uniform Prudent Management of Institutional Funds Act, or UPMIFA, which has been adopted in a majority of states. Ropes and Gray gives more detail about UPMIFA here.

A downside of the current practice is the burden it puts on unrestricted net assets while the endowment fund is underwater, which can strain an organization’s liquidity. This will be eliminated under the new guidance.

Disclosures will also be increased, to give readers of financial statements more context and a better understanding of why an endowment fund is underwater and what steps are being taken to recover its value. Governing boards will be required to disclose their policy for spending from underwater endowment funds, and whether the organization followed this policy. This includes the board’s interpretation of how the law applies to their ability to spend from underwater endowment funds. Also disclosed will be the original gift amount, or the amount the donor or law requires the organization to maintain, in aggregate for all underwater endowment funds, in addition to the aggregate fair value and the aggregate deficiencies of underwater funds.

Similar to reporting for net assets, nonprofits must report the total amount of their endowment and also subtotals for endowment funds restricted by donors and those funds designated by the board (i.e. without donor restrictions).