Fall 2008 issue of Horizons

INDUSTRY ◆

NOT-FOR-PROFIT

Alternative Investments (cont.)

• Audited financial statements for the alternative investment fund: Audited financial statements are available for most alternative investment funds. These financial statements often contain an appendix indicating the value of each investor’s interest in the fund or identify a per share value from which the value of the investor’s interest in the fund can be calculated. However, if the not-for-profit organization and the alternative investment fund have different fiscal year- ends, the audited financial statements of the fund will not be of use in calculating the value of the not-for- profit’s interest as of the financial statement date. • Transactions at or near the financial statement date: If the not-for-profit organization purchased or sold shares in an alternative investment fund at or near the financial statement date, the price per share at which the investments were purchased or sold may be utilized to calculate the value of the shares held by the not-for-profit organization as of the financial statement date. • Independent appraisal: For certain alternative investments, an independent appraisal of the investment’s value may be obtained. For example, for certain real estate funds, an appraisal of the value of the underlying property held by the fund may be useful in calculating the value of the not-for-profit’s interest in the fund. Impact of SFAS 157 on Alternative Investments Statement of Financial Accounting Standards No. 157, Fair Value Measurements, is effective for fiscal years ending after Nov. 15, 2007, for financial assets and liabilities. SFAS 157 establishes a three-level hierarchy of inputs into the calculation of fair value. These levels are as follows: • Level 1: Quoted market prices in active markets for identical assets or liabilities. • Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. • Level 3: Unobservable inputs, which are an entity’s own assumptions about what market participants would assume when determining a price to pay.

Since, by definition, alternative investments do not have readily available quoted market prices in active markets, level 1 inputs will rarely, if ever, be available for alternative investment fair value calculations. However, not-for-profit organizations are reminded that the SFAS 157 hierarchy does apply to alternative investment valuations. Therefore, when multiple possible sources of fair value information for a given alternative investment are available, preference should be given to level 2 inputs over level 3 inputs. For example, when valuing real estate assets held by a real estate fund, market prices for similar real estate assets (a level 2 input) should be given preference over the not-for-profit’s own discounted cash flow analysis (a level 3 input). Summary Alternative investments are inherently difficult to value due to the unavailability of quoted market prices or other easily accessible fair value measurements for these instruments. The preponderance of these investments within the not-for-profit industry has complicated the financial reporting process for some organizations. Management should establish sound control procedures over the selection, monitoring and reporting of alternative investments and should identify appropriate sources of financial information to utilize in developing a fair value for its alternative investments. Not-for-profit organizations are encouraged to be proactive in carrying out their responsibility for the valuation of alternative investments in order to avoid adjusting entries, control deficiencies or opinion modifications during the annual independent audit process.

Questions? Contact:

Judy Murphy, CPA Partner-in-Charge Not-for-Profit Services Group 314.290.3496 judy.muphy@rubinbrown.com

41 ◆ fall 2008 issue