If your organization has an endowment, you may want to pay close attention to the market activity near the end of your fiscal year. With a donor-restricted endowment, you are required to maintain the principal balance in perpetuity. Occasionally due to market conditions, the endowment fund may go “underwater” which means the fair value of the fund at the reporting date is less than either the original gift amount or the amount required to be maintained by the donor or by law.
The goal would be for the market conditions to improve and restore the principal balance over time. Just because your endowment is underwater does not mean you can’t take distributions from the account. It does mean that you need to evaluate whether you are being prudent with your spending and following your spending policy. It is important to have documentation showing approval by the governing body for any appropriations from the endowment. The documentation could be as simple as noting the approval in meeting minutes.
If your endowment does go underwater, you will need to disclose the aggregate amount of all underwater endowment funds. You will also need to disclose your plans for eliminating the underwater amount. This could be with future investment returns or transferring funds to the endowment to cover the losses.
Given the current state of the market, it is important to be reviewing your endowment fund periodically and know that some additional disclosures may be required for your audit this year if your endowment goes underwater.
Please contact your Hawkins Ash CPAs representative if you have questions related to underwater endowments.