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%

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*FOOTNOTE: This serves as the initial distribution basis.

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(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.