Most investments held by nonprofit organizations are publicly traded and therefore easily valued at fair value or trading value. But sometimes nonprofit organizations also hold investments where it is not so easy to determine the fair value.
One example is alternative investments which by definition do not have a readily determinable fair value (RDFV), meaning they are not listed on an exchange. These include hedge funds, private equity funds, real estate funds, etc. An entity is permitted to report alternative investments at net asset value (NAV) if the investment is held by an investment company. NAV is calculated by taking total net assets of the fund entity divided by the total number of issued shares.
But what if you have a more unusual type of investment that is not held by an insurance company and therefore does not meet the requirement for being able to measure at NAV? For example, what value would you report on your financial statements for an investment in a closely-held partnership or LLC (which is not required to be consolidated)? You may have reported this type of investment at cost or tried to somehow determine the fair value. For years ended 12/31/19 and after, Accounting Standards Update (ASU) 2016-01 is effective and assists in answering this question about how to value certain investments without RDFV’s. ASU 2016-01 eliminates the cost method but provides a “measurement alternative” so that you don’t have to try to calculate fair value.
The measurement alternative allows an organization to initially record these investments at cost, and then adjust that amount for observable price changes and any subsequent impairment. This measurement alternative can only be used if the investment does not qualify for the NAV measurement as described above.
So what is an observable price change? And how do you know when there is an impairment? The Organization will need to review recent transactions of the issuer of the investment for sales or purchases or new issuances of the exact same investment or a similar investment, which indicate that the investment should be either written up or down, depending on the sales/purchase price in the recent transaction. Determining if there is impairment also requires some research and analysis to look for any significant deterioration in earnings performance, any adverse changes in the market condition, and other possible indicators. Some degree of judgement will be involved in these situations to determine the amount of the impairment.
So, in summary, if the investment does not have a RDFV and it does not qualify for measuring at NAV and it’s not required to be consolidated into the entity (due to control/ownership), then this new alternative measurement may be a more simplified approach than determining fair value.
Please contact your Henry+Horne nonprofit adviser with any questions.
Colette Kamps, CPA