The need for a diversified investment portfolio is a good-to-have that is so fundamental to how many of us view wealth, that the phrase is constantly repeated in advertisements for wealth-management services.
What’s good for your retirement savings is also good for your organization, according to Melisa F. Galasso, director of Audit Professional Practices at Cherry Bekaert LLP, and Janice Ratica, managing director, tax for KPMG LLP. Traditional asset types, according to Galasso and Ratica, include stocks, bonds, and cash. Alternative investments might include commingled funds, limited partnerships, feeder funds, and trusts. Long a popular practice among wealthier organizations, such as large universities, smaller organizations are looking into alternative investments with greater frequency.
- During their session, “Breaking Down Alternative Investments,” at an American Institute of Certified Public Accountants (AICPA) Not-For-Profit Industry Conference, the presenters laid out some of the basics to understanding and engaging with alternative investments. Topics of discussion included:
- Tax considerations related to partnerships. There are three means from which partnerships can result in unrelated business income, according to the presenters: ordinary income from operation of the trade or business, debt-financed income, and flow-through from other investments. Tax reform has changed how unrelated business income is treated, as losses from one unrelated income stream cannot now be used to offset a gain in another;
- Understanding fair value. Valuation methods include a market approach, in which market information regarding identical or comparable assets is used; a cost approach, in which the current cost needed to replace the service capacity of the asset is used; and an income approach, which is based on the current market expectation of the asset’s future cash flows; and,
- Net-asset value (NAV). NAV refers to the per-share value of net assets attributable to each share of capital stock other than senior equity securities. In order to use NAV, the investment must not have a readily determinable fair value and it must either be in an investment company or real estate fund consistent with Topic 946 of the Financial Accounting Standards Board (FASB).