Accounting for Investments: Unrealized Misstatements


Nonprofit organizations face potentially complex accounting issues. As an example, nonprofit accounting for investment income is unique. While all entities reporting under U.S. GAAP must report investments at fair value, for nonprofits unrealized gains and losses flow through the statement of activities rather than through other comprehensive income. Typically, nonprofits will “mark to market” entire portfolio balances without regard to individual investment market values.

 

There could be problems with that approach.

 

Many nonprofit accountants use the portfolio’s realized gain or loss as reported on the investment statement to record a realized gain or loss. Investment companies typically use the original cost of the individual investment sold to calculate the realized gain or loss rather than using the beginning-of-year market value. As a result, according to nonprofit accounting rules, the realized gain or loss is misstated, causing any “true up” entries to the unrealized gain or loss to be misstated as well. In a large portfolio, these errors repeated multiple times (due to numerous purchases and sales) may net against each other to yield realized and unrealized gains or losses that appear reasonable but are actually materially misstated when reported separately.

 

Ordinarily, there would not be a favorable cost-to-benefit ratio for updating individual investments in a very large portfolio. Additionally, the nonprofit would not be wise to reduce its diversification (and thereby increase its risk) to make the accounting duties lighter. A fairly simple solution would be to present the unrealized and realized gains or losses as one net amount on the statement of activities.

 

These and other nonprofit accounting issues can be challenging. If you have questions or want to learn more, please contact author Michael (Mickey) H. Simon, CPA, at MSimon@laporte.com or Lance Moran, CPA, LaPorte’s Nonprofit Industry Group Leader at LMoran@laporte.com.

 

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