Monday, February 1, 2016

Accounting for Impact Investments

Impact investing is a still nascent practice, but one sure to continue growth in the coming years. At its core, impact investing is about directing investment funds in a way that helps promote a mission objective in addition to returns (as opposed to a singular focus on maximizing returns).  The dual nature of impact investments presents an accounting conundrum: should these investments be treated as investments, program efforts, or both?

As of now, the answer is that for financial accounting purposes they are largely treated as investments.  As such, these investments likely will just look like investments with poor returns, and the full programming impact of an organization’s efforts will be understated.


If we want financial statements to reflect the totality of a nonprofit's activities, and to provide a reasonable split between the success of activities aimed at generating returns and the success of activities aimed at devoting resources toward the mission, the current approach is clearly suboptimal.


That said, the answer is a difficult one.  Theoretically, accounting standards could require organizations to report the return that could have been earned had the investment been free of programmatic goals, offset by an expense representing the sacrificed return from opting for a mission-oriented investment.  This would allow the “sacrificed” investment return to be properly reflected in program expenses.


Since accounting standards are reluctant to reflect opportunity costs, though, this may be a long time coming.  However, accounting standard setters in the for profit realm have not shied away from equally (if not more) difficult topics such as stock option expensing, accounting for pension liabilities, and tracking risks of derivative investments so there is still hope for bold action.

3 comments:

  1. Great idea that we ought to think about.

    Enjoyed your point comparing the difficulty of measuring impact investments to the far more difficult and subjective issues of pensions and derivatives. Shall we discuss discount rate, expected rate of return, or embedded derivatives for a comparison?

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  3. I think the returns on impact investments are intangible in nature and in the long run enhances the goodwill of the company. In event where a company's goodwill is being computed as part of its financial statements, then of course there could be a case for it. Thus I believe measuring impact investment return as a component of goodwill could be a step forward

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