Unrealized Gains & Losses
Behind the Scenes at GIA
Champ Knecht
For our recent Grantmakers in the Arts board meeting, the first of our fiscal year, I prepared unaudited fiscal year 2021 financial statements. As I was doing so, a couple of factors in our budgeting process emerged as opportunities I saw for us to do things differently. Clearer and better financial reporting will help us with evaluation and decision making throughout the fiscal year. As part of our desire at GIA to model better practices in the field of arts funding, I want to share what I have learned.
GIA ended 2021 with a healthy budget surplus, which resulted in an increase in our net assets. One of the big drivers of that surplus was an increase in the value of our investments. (GIA has capital reserves invested through Boston Common Asset Management, a BIPOC-led investment management firm.) Our practice had been to report changes in the value of our investments, as well as interest and dividends, as an Earned Revenue line on our Profit & Loss Statement (P&L). Gains and losses in our investment value were unrealized but reflected increases and decreases in our Earned Revenue.
I don’t think I need to tell anyone that 2020 and 2021 were very volatile years for stock market activity. The value of GIA’s investments fluctuated widely, especially in 2020. Our investment value dropped precipitately in the early days of the pandemic, but subsequently recovered and then rose just as dramatically. Performance since then has been erratic. I realized as I was putting together our 2021 year-end financials that our practice of reporting unrealized investment gains and losses as Earned Revenue on our monthly P&L would be impacting our forecasting and reporting in a negative way.
When I began working at GIA, I instituted a practice of mid-year budget forecasting. It has been helpful to me, and also to our President & CEO, to forecast our budget at the midpoint of the fiscal year. Our budget policy is to present a draft organizational budget for the coming fiscal year to the GIA board of directors for approval at the last meeting of a given fiscal year, typically in October. This means that our annual budget is developed in August & September of the preceding year; by June of the budget year, the information we used to develop the budget is already nine months out of date. For an organization of our size, small changes in revenue and expense expectations can have a significant impact on our decision making. If we have clearer information about what is happening organizationally in June than we did in the preceding August, we should reflect that in our financial projections. Also, because our annual conference takes place in the autumn, GIA’s financial activity ramps up in the second half of the year. A forecast in June allows us to reflect where we expect to be with regards to our most financially active period.
GIA does minimal trading of our investments, and we don’t typically take distributions, so gains and losses to our investment value are unrealized. We won’t have access to the funds represented by any gains unless we were to sell off some of our holdings, which we don’t generally do. Posting unrealized investment gains as revenue on our monthly P&L is therefore misleading; those investment gains are not really revenue to use to offset budgeted expenses or incur new ones. By the same token, unrealized losses to our investments, while of course concerning, don’t represent a loss of revenue in the same way that underperforming in membership dues, for example, does. I realized that GIA should set aside unrealized gains and losses as part of our forecasting process so we are not making financial decisions based on a revenue stream that is not strictly speaking usable.
For 2022, we have begun to report investment activity in two places on our P&L. We report only interest & dividends as Earned Revenue, and we are now reporting unrealized gains and losses “below the line” of our operating surplus or deficit. It is still important to include the unrealized gains and losses in our monthly financials because those results will impact the change in net assets we post at year end, and it is important for our team and board to see a projection of what that change will be. Removing those unrealized gains and losses from our revenue reporting allows us a clearer picture of what our usable revenue is and enables us to make sounder financial decisions. Reporting them below the line allows us to keep the overall change in net assets in our sight without confusing unrealized revenue with usable revenue streams.
ABOUT THE AUTHOR
Champ Knecht is Director of Operations & Finance at Grantmakers in the Arts
