APRIL 2010

Is determining the fair value and the related “level” disclosures of your Nonprofit’s alternative investments a source of confusion? New guidance is here to help! In September 2009, FASB released Update 2009-12 under Topic 820, Fair Value Measurements and Disclosures, entitled, “Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). This new guidance is effective for annual periods ending December 15, 2009, and beyond.

An investor, such as a Nonprofit, may invest in entities that permit the Nonprofit to redeem its investments directly with the investee at certain specified times under the investment agreement. Many of these investments, deemed “alternative investments” do not have readily determinable fair values because these investments are not traded on a national exchange or over the counter market. Examples of such alternative investments include hedge funds, private equity funds, real estate funds, venture capital funds, offshore fund vehicles, and funds of funds. Many of the investments (investees) provide their investors with a net asset value per share (or its equivalent, for example, member units or an ownership interest in partners’ capital to which a proportionate share of net assets is attributed). Since the net asset value is commonly used by investors to estimate the value of the investments by using net asset value, FASB decided to issue guidance on its use as a practical way of estimating the fair value of an alternative investment.

The guidance applies to all investments, as follows: • • The investment does not have a readily determinable fair value The investment is in an entity that has all of the following attributes specified in Topic 946 of the Codification (U.S. GAAP for Investment Companies) • Investment activity – the entity’s primary business activity involves investing its assets, usually securities, for current income, appreciation, or both. • Unit ownership – ownership in the entity is represented by units of investments, such as shares of stock or partnership interests, to which proportionate shares of net assets can be attributed • Pooling of funds – the funds of the entity’s owners are pooled to avail owners of professional investment management • Reporting entity – the entity is the primary reporting entity

So what does this mean? If all of the criteria above are met, an entity is allowed, as a practical expedient, to measure fair value of an investment on the basis of net asset value per share (or its equivalent) as reported as of its measurement date (usually its balance sheet date). The guidance also adds disclosure requirements, as follows: • Disclosure by major category of investment about liquidity restrictions, unfunded capital commitments, and investment strategies

Furthermore, the guidance also clarifies fair value hierarchy classifications for alternative investments, as follows: • • • If the Nonprofit has the ability to redeem (sell) its investment with the investee at net asset value per share (or its equivalent) at the measurement date, the investment may be classified as a Level 2 investment under Topic 820 (e.g investment in a hedge fund that is redeemable). If the Nonprofit will never have the ability to redeem its investment at net asset value, it should be categorized as a Level 3 (e.g. non-redeemable investment in a private equity fund). If the reporting entity does not know when an alternative investment will be redeemable in the future, it should be categorized as a Level 3 investment.

While the guidance is aimed primarily at alternative investments, it also may apply to other assets represented by an ownership interest based on a proportionate share of net assets. For example, in a beneficial interest in a perpetual trust, a Nonprofits ownership interest in the trust is determined by it percentage ownership in the fair value of the underlying trust assets, which may have an underlying net asset value. For more information, or if we can be of assistance to you, please do not hesitate contact one of SingerLewak’s Nonprofit Partners:

Stephen P. Carter - Silicon Valley SCarter@singerlewak.com Jeff Holt - Los Angeles JHolt@singerlewak.com

Lewis Sharpstone - Los Angeles LSharpstone@singerlewak.com Rob Schlener - Orange County RSchlener@singerlewak.com

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