Charities in England and Wales are permitted (subject to conditions) to adopt total return accounting in respect of their permanent endowment funds, but how is this accounted for?
Normal treatment
Without total return accounting, investment income earned from endowment funds is credited to unrestricted or restricted funds in the Statement of Financial Activities (SoFA). It is credited to restricted income when the income earned from the permanent endowment fund can only be used for a particular purpose.
Gains/losses on revaluation/disposal of investments and investment management costs are included in endowment funds, for example:
What is different under total return accounting?
As well as gains / losses on revaluation / disposal of investments and investment management costs, the investment income is all included in the endowment fund. There is then a transfer from endowment to unrestricted / restricted funds (it is credited to restricted income when the permanent endowment fund income can only be used for a particular purpose.)
Under the Charities Statement of Recommended Practice (SORP) this transfer can be reflected as a line within income (the more common approach) but it can also be shown within transfers.
Below is an example showing the total return allocation within income:
Other disclosures under total return accounting
The endowment fund balance is deemed to consist of 2 parts. The following need to be tracked for each individual permanent endowment fund.
Trust for Investment
This represents the donations into the fund over the years. If a long-established fund, on first time adoption of total return accounting may need to estimate this balance if full historic donation records are no longer available. This can often be the earliest available fund balance (looking at historic accounts and schedules).
The only movement on this part of the fund in the year would be permanent endowment donations received.
Unapplied total return
This is the balance of the permanent endowment fund and consists of the cumulative balance of
- Gains/losses on revaluation/disposal of investments
- Investment income
- Less: investment management costs
- Less: Total return transfer to unrestricted/restricted funds
For each individual permanent endowment fund, a transfer to unrestricted / restricted can only be made to the extent that there is positive unapplied total return. If proposed transfer is such that it would make unapplied total return negative, then the amount of the transfer would need to be reduced accordingly.
Full disclosure is needed of these movements in the year, for example:
More information
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