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Title: Section 442.16 - Pooled investments

442.16 Pooled investments. (1360) (a) Investments of various funds may be pooled unless prohibited by law or the terms of a donation or grant. Gains/losses and investment income on pooled investments must be distributed to participating funds on a basis utilizing market value.
(b) To illustrate the market value method of distributing gains/losses and income on pooled investments, assume the following facts:
(1) A hospital decides to create a pool of investments from funds provided from the following sources:
Market value at inception of pool*
Amount % of total pool
Unrestricted Fund $1,000,000 20%
Endowment Fund (single endowment) $3,000,000 60%
Plant Replacement and
Expansion (PR&E) Fund $1,000,000 20%
___________ _______
$5,000,000 100%
___________________________________________________________________________
*FOOTNOTE: This serves as the initial distribution basis.
___________________________________________________________________________
(2) Gains/losses on the Endowment Fund must be added to or deducted from the principal; however, the investment income is available for unrestricted purposes under the terms of the gift.
(3) Gains/losses and investment income for the Plant Replacement and Expansion Fund must be added to or deducted from fund balance pursuant to the wishes of the donor.
(4) There were no gains/losses on the sale of investments for the first year the pool was in existence. The income generated by the pool for that year was $400,000.
(5) Any gains on investment sales and investment income are not reinvested in the investment pool. The cash is remitted to funds that are entitled to the gains and/or income.
(c) The distribution of the income for the first year would be based on each participating fund's percentage of the pool based on its contribution at market value at the initiation of the pool.
(1) Therefore, the distribution would be as follows:
Income
Distributed to distributed
Unrestricted Fund (total income of $400,000 x 20%) $ 80,000
Endowment Fund (total income of $400,000 x 60%) 240,000
PR&E Fund (total income of $400,000 x 20%) 80,000
__________________
$400,000
(2) The accounting entries necessary to account for the distribution of income from the pooled investments would be as follows:
(i) Unrestricted Fund
Account Dr. Cr.
Cash 1010 $320,000
Unrestricted income from Endowment
Fund (nonoperating revenue) 9050 $240,000
Income, gains and losses from
unrestricted investments 9040 $ 80,000
To record the income from pooled
investments for the year.
(ii) PR&E Fund
Cash 1510 $ 80,000
Fund balance 2690 $ 80,000
To record the income from pooled investments for the year.
(d) In the second year the following facts are assumed:
(1) On the first day of the year the hospital decided to add $1,000,000 of Unrestricted Funds to the pooled investments. On that date, but prior to making the aforementioned addition, the pooled investments had the same cost, $5,000,000, as at inception, but a market value of $6,000,000. There were no other additions to the pool during this year.
(2) There were net gains on the sale of investments of $100,000 for the year and the investment income was $500,000 for the same period.
(e) Based on the above facts, the distribution percentage (%) for the income and gains on pooled investments for each of the participating funds would be based on the market value of the investment pool as of the date of the last addition and would be calculated as follows:
Revised
distribution basis
Units % of total units
(1) Unrestricted Fund.
Market Value $6,000,000 x 20%
(distribution % prior to addition) $1,200,000
Addition to pool at fair value
as of that date 1,000,000
____________
$2,200,000 31.4%
(2) Endowment Fund.
Market Value $6,000,000 x 60%
(distribution % prior to addition
-- no new additions) $3,600,000 51.4%
(3) PR&E Fund.
Market Value $6,000,000 x 20%
(distribution % prior to addition
-- no new additions) 1,200,000 17.2%
____________
$7,000,000 100.0%
(f) The income and gains from pooled investments for the second year would be based on the newly computed distribution and would be as follows:
Current Gains to be Income to be
distribution % distributed distributed
Unrestricted Fund 31.4% $ 31,400 $157,000
Endowment Fund 51.4% 51,400 257,000
PR&E Fund 17.2% 17,200 86,000
_______ __________ __________ 100.0% $100,000 $500,000
(g) The accounting entries necessary to reflect the above distribution would be as follows:
(1) Unrestricted Fund.
Account Dr. Cr.
Cash 1010 $445,400
Unrestricted income from Endowment Fund (nonoperating revenue) 9050 $257,000
Income, gains and losses from unrestricted investments 9040 188,400
To record the income and gains on pooled investments attributable to these funds for the year.
(2) Endowment Fund.
Cash 1810 $ 51,400
Fund balance (gains on sales of investments) 2890 $ 51,400
To record the gains on pooled investments attributable to this fund for the year.
(3) PR&E Fund.
Cash 1510 $103,200
Fund balance 2690 $103,200
To record the gains and income on pooled investments attributable to this fund for the year.
(h) As the above example illustrates, each time an addition is made to the investment pool a new distribution basis must be calculated. This is also true for any reductions to the pool. All gains/losses and investment income from the beginning of the accounting period up to the date of the addition must be determined and distributed on the basis of account balances prior to the addition. Any gains/losses and investment income subsequent to an addition would be distributed on the new basis until another addition or reduction is made.
 

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VOLUME C (Title 10)

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