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Foundations are using program-related investments (PRIs) as a tool to further their overall mission. PRIs have made a comeback and are becoming an attractive option for many organizations as an investment strategy and to supplement existing grant programs.

Program-Related Investments Make a Comeback With Foundations

  • 8/16/2013

Program-Related Investments Make a Comeback With Foundations

by Heidi Tatro and Sarah Reichling

As foundations review their investment portfolios, overall investment objectives, and grant programs, it becomes clear that more are using program-related investments (PRIs) as a tool to further their overall mission. PRIs have made a comeback and are becoming an attractive option for many organizations as an investment strategy and to supplement existing grant programs.

Traditional PRIs are usually loans to foundations or investments in organizations that fall into categories the foundation would typically support (i.e., an entity that the foundation would grant funds to or one that enhances the foundation’s overall mission). Organizations receiving PRIs are all nonprofits with a charitable purpose.

PRIs are made with the option of the foundation receiving the investment back over a specified period of time in which it can then recycle the funds and provide a PRI to another organization(s) or grant the funds through its granting procedures. Another option is for the PRI to become a deferred grant, in which the foundation reviews the organization’s use of the funds and ultimately forgives the loan and treats the original PRI as a grant.

Additional guidance for PRIs

The American Institute of Certified Public Accountants (AICPA) has responded to the increased use of PRIs by devoting a chapter to programmatic investments in the updated AICPA Audit and Accounting Guide for Not-for-Profit Entities. Released in March 2013, the guide provides clarification to existing accounting guidance for these instruments and guidance on how to record PRIs at issuance, either as a loan receivable, a grant, or a combination of both.

If the PRI is considered a loan receivable, the guide provides direction on:

  • How to discount loans in situations where the interest charged is not the market rate
  • How to record a potential impairment of the loan receivable or ultimate forgiveness of the loan receivable
  • Recommended financial statement disclosures

Overall, the audit guide is an excellent resource to those foundations that are considering issuing PRIs or those that just need to refresh their PRI accounting skills.

Items to consider

So what does this mean going forward? As with any significant area, decisions related to these types of investments should follow the foundation’s policies and be considered in all planning. PRIs should be a formal component of investment and grant policies, and grant budgeting.

While the PRI is not initially a traditional grant expense to the foundation, it is important to know the foundation’s giving plans to ensure there are not too many of the investments converted to grants in any single year. Doing so would hinder the foundation’s grant budget in that particular year.

In addition, a foundation should consider the need to perform due diligence prior to issuance and throughout the life of the investment. A foundation should also implement policies and procedures to monitor these program-related investments.

Prior to issuance of the PRI:

  • Perform due diligence to ensure that the issuance of the loan will further the mission of the foundation
  • Evaluate the collectability of the loan if forgiveness of the debt is not contemplated

Upon issuance of the PRI:

  • Ensure that policies and procedures are in place to monitor the investments for collectability, and that the funds were used for the intended purpose
  • Typical policies would include:
    • Communicating the level of approval needed to issue
    • Monitoring procedures the foundation will utilize
    • A communication process to relate the status of PRIs to the appropriate board or committees

Overall, PRIs are useful instruments to diversify investment portfolios, further the mission of the foundation, and provide tax benefits to a foundation. When a PRI is issued, a foundation can determine whether it wants the investment to count toward its distribution requirements, similar to a grant in the year it is issued, or if and when it is forgiven. The PRI balance is not included in the asset base used to calculate the distribution requirement (even though it is considered an investment).

Keep in mind that if a foundation counts the PRI in its distribution requirements the year it was issued, the repayment of principal is considered a negative distribution in the year it is repaid.

As a result, the foundation may need to issue additional PRIs or to grant those funds in the year the principal is repaid. Whether your foundation already issues PRIs or is looking to further understand them as they relate to investment, granting, and overall goals of your organization, there are numerous items to consider. Discuss your options with governance leaders and your auditors to ensure you have proper treatment and documentation throughout the foundation.

Heidi Tatro, Manager, Nonprofits
heidi.tatro@CLAconnect.com or 612-397-3123

Sarah Reichling, Manager, Nonprofits
sarah.reichling@CLAconnect.com or 612-397-3066