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Not-for-Profit Enews Update: Not-for-Profits May Be Required To Disclose Additional Investment Activity

by Victor Neff, CPA - Senior Accountant

May 30, 2014


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Many not-for-profit entities rely on donations and grants to fund their day-to-day activities. These contributions can take on the form of being restricted or unrestricted. Regardless, when these revenues are not used to meet the immediate needs of operating activities, they are commonly invested to generate returns. As funds are invested and managed, the investment activities typically result in some sort of investment fee. The Financial Accounting Standards Board (FASB) is working on a proposal that would require not-for-profit organizations to disclose the amount of “direct internal investment expenses incurred during a reporting period.” This proposal is being developed to further enhance the transparency of investment costs. Investment fees can take on different forms and can significantly affect a portfolio’s return. There is currently no guidance on investment expenses in U.S. GAAP. It is the FASB's belief that by providing additional guidance in describing what is included within investment expense and further disclosing that information in notes, more clarity and consistency in a not-for-profit organization’s financial statements would result.


Nothing formal has been presented yet, but the FASB plans to release a proposal for public comment by the end of 2014. This will allow time to define and develop examples of which investment fees should be included or excluded.


As FASB develops this proposal, it is important for organizations to be aware of the types of investment fees they incur. Here is a list of six common investment fees:


1. Expense Ratio or Internal Expenses – Common in mutual funds, this fee consists of an expense ratio where a certain percentage is charged based on the balance invested. A fund with an expense ratio of 1.10% means that for every $1,000 invested, $11 per year will go towards operating expenses. These fees are not directly deducted from the investment account. Rather, they are netted with investment return.eir employees.


2. Investment Management Fees or Investment Advisory Fees – These fees are charged as a percentage of the total assets managed. Unlike the expense ratio, this fee is commonly debited from the investment account.


3. Transaction Fee – This tends to be a flat fee charged every time an order to buy or sell an investment is placed.


4. Front End Load – A commission or sales charge applied at the time of the initial purchase for an investment. This fee is in addition to the ongoing operating expenses. If there are front end load fees of 4% and you buy shares at $10 per share, this fee is netted with the investment value making the share value $9.60.


5. Back End Load or Surrender Charge – A fee that investors pay when selling mutual fund shares within a specified number of years, usually 5 to 10 year. The fee percentage usually drops as time passes. (5% if sold in year 1, 4% if sold in year 2, etc.)


6. Annual Account Fee or Custodian Fee – The fees are typically charged by brokerage or mutual fund accounts on an annual basis. They typically can range from $25 - $90 a year.


Fees can vary greatly but might be worth it depending on the service and investment return. If you are uncertain about your organizations investment fees, contact your custodian or investment manager.




If you have any questions regarding the article above or any other issue affecting your not-for-profit organization please contact your Blue & Co. advisor or e-mail us at blue@blueandco.com or call us at 800-717-BLUE.