GAIN CLARITY

INVESTMENTS vs. ENDOWMENTS

Ryan Gough
Resources
Tammy Michaud, CPA

Investments vs. Endowments: Understanding the Difference

At a recent board meeting of a not-for-profit, a new board member asked how much money the organization had in its endowment. The board president quickly responded, “$25 million.” The CFO indicated, however, that the endowment was $15 million. How can that be? Why was each reporting a different figure? The difference is attributable to a frequent misunderstanding that all investments are permanently endowed. Let us explain.

Not all investments are permanently endowed

It is common for not-for-profit organizations to “pool” their investments into one or a few investment portfolios for greater investing flexibility. Often, the pooled investments are comprised of permanently endowed funds as well as unrestricted funds (board designated/quasi-endowment) funds, and sometimes temporarily restricted funds. In our example, the board president was providing the value of the total pooled investment portfolio to the new board member, which consisted of permanently endowed funds as well as unrestricted (board designated/quasi-endowment) funds. The CFO was reporting the value of the permanently endowed funds to the new board member.

Knowing the distinction helps decision making

The distinction in terminology between invested funds and endowed funds is particularly important for board members and management to understand. Doing so will assist the board to:

  • Make informed decisions regarding appropriations and withdrawals from the investment portfolio
  • Clarify intent when soliciting contributions
  • Provide ease of interpretation for purposes of financial reporting

BerryDunn is available to assist in further understanding, training, and application of these points. If you have any questions about your organization’s investments and endowments, contact an advisor in our Not-for-Profit Group.