Does Your Nonprofit Properly Disclose Investments?

nonprofit accountant vienna vaIt is important for nonprofit organizations to properly disclose investments.  In order to do this, nonprofits should understand the disclosures which must be made for all investments held by the organization.  The Financial Accounting Standards Board (FASB) requires fewer disclosures for Level 1 investments than for Level 2 and 3 investments, as Level 1 investments are valued at prices easily found on the market.  As Level 2 and 3 investments have a more complicated valuation, they require additional disclosures.  The services of a nonprofit certified public accountant, or CPA, in Northern Virginia can solve this issue by effectively identifying the appropriate levels of investments and properly disclosing the required information in the notes of the financial statements.

A CPA may advise nonprofits to invest in mutual funds.  Mutual funds are Level 1 investments, valued using quoted prices for an identical investment using observable inputs on the stock market through a trustee.  The current stock prices can be found online quite easily by any user of the financial statements.  However, if a nonprofit organization invests in an investment company that itself invests in mutual funds, then the nonprofit’s investment may no longer be Level 1.  If so, then the investment will require additional disclosures.  If the investment is a Level 2 investment it is valued in a different way, such as by using quoted market prices for similar aspects.  A CPA, like ours in Northern Virginia, would aid a nonprofit organization in understanding the identifying details of a Level 1, Level 2, and Level 3 investment..

It is sometimes difficult to determine the level of investments for disclosure purposes, particularly without the assistance of a nonprofit CPA.  An investment company may provide similar statements as a mutual funds trustee with a stock price value, also called a Net Asset Value (NAV), and the number of units the entity holds, together equaling the total investment value.  Like a Level 1 investment, the fair market value seems easily determined.  However, FASB requires any investment at a NAV price to be categorized as a Level 2 investment.  NAV prices are determined by calculating the investment company’s assets, subtracting liabilities, and dividing the result by the number of units held by all investors.  This process requires an audited financial statement along with an annual report of the investment company’s activities.  A nonprofit CPAcan parse this material for nonprofit organizations in Fairfax or Vienna, VA.

In conclusion, nonprofit organizations should hire an accountant to determine whether investments are Level 1, Level 2, or Level 3 for disclosure purposes.  A CPA would determine how investments are valued on financial statement of nonprofits.  If the investments are valued at a NAV, then they are Level 2 investments and require additional disclosures.  When preparing for an audit or preparing financial statements, it is important to accurately determine the level of investments.  Our nonprofit CPA in Fairfax, VA can assist in this process.