Project Pages

Endowment Funds—Accounting and Reporting for Land and Other Real Estate Held as Investments—Project Plan

Project Description: The objective of this project is to determine the most appropriate measurement attribute to report land and other real estate that are held as investments by endowment funds.

Background: Many public colleges and universities and other entities acquire and carry land and other real estate as part of their endowment investments. Land and other real estate are not included within the scope of Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools. Therefore, these investments are currently required to be reported at historical costs. Fair value reporting for these investments is only provided for defined benefit pension plans, other postemployment retirement benefit plans, external investment pools, and Internal Revenue Code 457 deferred compensation plans.

The AICPA Audit and Accounting Guide, Not-for-Profit Organizations, paragraph 8.03, provides, "Investments not covered by FASB Statement No. 124 or FASB Statement No. 133, as amended, are referred to in this Guide as other investments. Other investments include, among others, investments in real estate, mortgage notes, venture capital funds, partnership interests, oil and gas interests, and equity securities that do not have a readily determinable fair value. The various AICPA Industry Audit Guides, Audit and Accounting Guides, and Statements of Position (SOP) that are superseded by this Guide included guidance concerning other investments. This Guide retains the measurement guidance for accounting for other investments included in the AICPA publications that are superseded by this Guide, until such time as the FASB or the Accounting Standards Executive Committee (AcSEC) issues more definitive guidance. Since this Guide was originally issued in 1996, two FASB Emerging Issues Task Force (EITF) consensus opinions have provided guidance on certain other investments—equity securities whose fair value is not readily determinable and limited liability companies."

Paragraph 8.11 of the AIPCA Guide addresses valuation subsequent to acquisition as follows, "FASB Statement No. 124 provides that investments in equity securities with readily determinable fair value and all debt securities should be reported at their fair value. FASB Statement No. 133 provides that investments in derivative instruments should be reported as either assets or liabilities and measured at fair value. (Paragraphs 8.28 through 8.31 further discuss derivative instruments.) As noted in paragraph 8.03, AICPA guidance concerning the carrying amounts of other investments subsequent to acquisition is diverse. Organizations should follow the guidance in appendix A [paragraph 8.34] of this chapter for their other investments. That guidance is based on the AICPA Industry Audit Guides, Audit and Accounting Guides, and SOPs that are superseded by this Guide, and is intended to maintain the status quo for other investments held by each kind of not-for-profit organization covered by that literature until it is changed by the FASB or by AcSEC."

Finally, the AICPA Guide in paragraph 8.34, A-9, provides, "Other investments of institutions of higher education, including colleges, universities, and community or junior colleges, that were acquired by purchase may be reported at cost, and contributed other investments may be reported at their fair market value or appraised value at the date of the gift, unless there has been an impairment of value that is not considered to be temporary. Other investments may also be reported at current market value or fair value, provided that the same attribute is used for all other investments. (Investments in wasting assets are usually reported net of an allowance for depreciation or depletion.) The financial statements or notes should set forth the total performance (that is, investment income and realized and unrealized gains and losses) of the other investment portfolio."

Although the Guide does not apply to state and local government units some entities have used this guidance. The result is a divergence in practice with some entities reporting these investments to historical costs and other reporting similar investments at fair value.

Accounting and Reporting Issue:

Should land and other real estate held as investments by endowment funds continue to be reported at historical cost or should those investments be reported at fair value?

Project History: In January the Board held a liaison meeting with NACUBO and discussed the scope and direction of the project. At the February meeting the Board reviewed discussed the accounting issues and a preballot draft of an Exposure Draft of a proposed Statement that would require fair value reporting for land and other real estate held by endowments, including permanent funds, for investment purposes. The Board approved a ballot draft of Exposure Draft at the March teleconference. The Exposure Draft was issued in March, with a three month comment period.

Endowment Funds—Accounting and Reporting for Land and Other Real Estate Held as Investments—Recent Developments

Minutes of Meeting, October 30-31, 2007

The Board completed redeliberations on the provisions in the Exposure Draft of the proposed Statement, Land and Other Real Estate Held as Investments by Endowments. Specifically, the Board concluded that the transition and effective date provisions should be carried forward from the Exposure Draft to the final Statement. Additionally, the Board reviewed a preballot draft and, after minor editorial changes, authorized production of a ballot draft. [Note: subsequent to the Board meeting, the final Statement was balloted and approved unanimously by the Board. Statement 52 is scheduled for release in November.]

Minutes of Meeting, September 18-19, 2007

The Board continued deliberations on the provisions in the Exposure Draft of the proposed Statement, Land and Other Real Estate Held as Investments by Endowments. The Board discussed real estate that cannot be sold, lands granted by the Federal government in connection with a state being admitted to the United States, investments in real estate investment trusts (REITs), and investments in real estate limited partnerships. The Board tentatively concluded that real estate that cannot be sold should remain within the scope of the document. With regard to the Federal land grants, the Board acknowledged that this project was not designed to address this issue. Accordingly, the Board tentatively concluded to exclude these lands from the scope of the proposed Statement. Similarly, investments in REITs and investments in real estate limited partnerships appear to be beyond the scope of the proposed Statement, and the Board tentatively concluded not to provide guidance in this proposed Statement for those investments.

The Board believes that further guidance for Federal land grants and investments in real estate limited partnerships may be more appropriately addressed in another investment project currently on the GASB research agenda. The Board also requested that the staff draft guidance for the Comprehensive Implementation Guide for REITs that have readily determinable fair values.

Minutes of Meeting, August 7-9, 2007

The Board commenced redeliberations on the provisions in the Exposure Draft of the proposed Statement, Accounting for Land and Other Real Estate Held as Investments by Endowments. Subject to further discussion of state trust lands and real estate that cannot be sold, the Board tentatively reaffirmed the proposed disclosure and fair value reporting requirements for investments in land and other real estate. The Board also reaffirmed its prior decision to exclude quasi endowments from the scope of the proposed Statement. Lastly, the Board tentatively decided not to expand the scope of the project by providing specific guidance on fair value measurement techniques in the final standard, although the Basis for Conclusions will discuss that methods and significant assumptions can consider cost-benefit constraints.

Minutes of Meeting, March 12, 2007 Teleconference

The Board reviewed a ballot draft of an Exposure Draft (ED) of the proposed Statement, Land and Other Real Estate Held as Investments by Endowments. The Board requested clarifications to the discussion of endowments in the Basis for Conclusions and approved the ED for publication.

Minutes of Meeting, February 20–22, 2007

The Board reviewed a preballot draft of the proposed Statement that would require fair value accounting for land and other real estate held as investments by endowments. The Board requested minor editorial changes and authorized production of a ballot draft.