Investment Expense

Posted on: 10/8/18 by Thomas W. Hosey, CPA

The next few years will include the implementation of multiple challenging new accounting standards.  ASU 2016-14, Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities, makes changes to the way organizations report investment expense. 

Changes

After the adoption of ASU 2016-14, organizations are no longer allowed to present investment expenses with other expenses in the statement of activities.  The ASU requires organizations to report investment return net of external and direct internal investment expenses regardless of who manages the investment activities (internal staff, outside investment managers, volunteers or a combination).    Accordingly, the analysis of expenses by functional and natural expense classifications doesn’t include the external and direct internal investment expenses that are netted against investment return.  Additionally, the disclosure requirements change.

Understanding the Terminology

Direct Internal Investment Expenses:  ASU 2016-14 defines direct internal investment expenses as expenses that are the costs of the direct conduct or direct supervision of the activities involved in generating investment returns.  The ASU provides the following examples of direct internal investment expenses:

  • Salaries, benefits travel, and other costs associated with the officer and staff responsible for the development and execution of investment strategy. 
  • Allocable costs associated with internal investment management and supervising, selecting, and monitoring external investment management firms. 

Direct internal investment expenses are only costs incurred to generate investment return.  Costs associated with endowment bookkeeping aren’t direct internal investment expenses. 

External Investment Expenses:  External investment expenses include the fees paid to outside investment managers, as well as fees embedded in the investment vehicle (such as mutual funds). 

Practical Consideration

ASU 2016-14 distinguishes between programmatic investing (investments directed at carrying out the organization’s mission) and total return investing (investments to produce income and capital gains).  Expenses netted against the related investment return on the statement of activities include only the investment expenses of total return investing. 

What to Do

For some organizations, no change will be needed because they have always netted investment expenses against investment returns, and the organization’s determination of which expenses are netted is consistent with ASU 2016-14.  However, some organizations may have to adjust the types of expenses that they are netting against investment return because ASU 2016-14 limits the types of expenses that can be netted to external investment expenses and direct internal investment expenses.  For other organizations that haven’t been netting investment expenses against investment returns, the organization will need to identify the applicable investment expenses and net those expenses against investment return. 

Know What is Required in the Financial Statements 

Organizations will need to analyze the types of costs that should be netted against investment returns.  Identifying external costs should be straightforward.  When identifying direct internal investment costs, organizations should refer to the definition and examples in ASU 2016-14 to determine costs that should be included.  Organizations should only include the costs incurred in generating investment returns as direct internal investment expenses.

ASU 2016-14 eliminates the following disclosure requirements:

  • The amount of investment expenses netted against investment income. 
  • The reconciliation of investment return to the amounts on the face of the statement of activities if the investment return is divided into operating and nonoperating components, and the components of investment income. 

Review Your Organization’s Policies 

Organizations should review their accounting policies to determine whether their policies are consistent with the new standard.  ASU2016-14 may require new policies related to reporting of investment returns.  For assistance, please contact your Marvin and Company, P.C. representative. 

Marvin University

The Marvin University professors are here to help your organization. see our list of upcoming educational events and download past sessions.

Community Involvement

We not only provide professional services to the not-for-profit industry, we provide our own time and resources.
Learn more here.

Careers

Start shaping your future at Marvin and Company today.