Include annual contribution into return requirement / liquidity requirement?

Suppose a donor will contribute 2 million to a foundation every year.

Do we need to consider this 2 million in the return requirement and liquidity requirement?

In CFAI Mock 2013 am Q5 Pearce’s case, they include it in the liquidity requirement but not in the return requirement (which consists only of spending rate, inflation rate, and management fees).

I am confused, with the 2 million contribution, we can afford to make 2 million less from the investment and yet still satisfy the spending/inflation/management fees requirement. So our return requirement from investment should be lower. (which seems to be the reason for lower liquidity requirement in the same question)

And for liquidity, I remember there was another mock question that does not subtract off the contribution from the liquidity requirement (i guess because it is a source to satisfy the liquidity requirement, but not the requirement itself?). This looks contradictory to the answer in 2013 Mock.

If you mean the am exam and not the mock, they say in the text that the real value of contributions should be preserved. So the reason is in there :wink:

Thanks TFIF12. Yes I mean the AM exam (I thought they were mocks…)

Ok it makes sense to remove contribution from the return requirement.

As for liquidity, do we always subtract off contribution from the requirement? (I kind of remember there was another year’s exam that does not consider the contribution when computing liquidity requirement … maybe I remembered wrong?)

They also say that in the text. They state they want to use donations for spending requirements or so.

For ips, every sentence of the story is important!

Actually they didn’t say that they will use the contribution from the doner (Pearce).

They say they will use the contribution from the Foundation to the university for operating expenses…

“The annual contributions from the Foundation to the university will be used to cover a portion of the university’s operating expenses.”

I feel so uncomfortable about IPS because it is unclear what do they expect. If it is my own IPS, I would not include the contribution. The reason is it is a source of liquidity, but it is not part of what is required. Source of liquidity can come from the return of investment, or contribution, but it is not part of the requirement.

Ok, got it wrong, thanks. I tend to include rather a bit too much in liquidity, guess that’s better than leaving sth out.

Yeah, I was scratching my head as to why it was removed from the liquidity requirement. If you need to spend X, then you need to spend X amount. If the foundation is receiving yrly contributions then the contributed funds have to be part of the foundation before you use them. By the way, don’t remember seeing anything on the text that they want to use annual contributions for spending req.

But I know better than to fight this on exam day. If I see this again I will answer just like I saw here.

This also affected my answer later in that same question when they ask about how the liq req is affected after the contributions go away. Very tricky.

By the way, I just noticed I missread Return Objective on that same part that asked for the effect after contributions go away, Thought they said Return Requirement. BIg difference.

Wow, you really have to read these questions carefully. This was a very tricky question. In fact 2013 was pretty challenging I thought. More so than 2012 in my opinion.

Thanks again TGIF2, your advice is very valuable. I guess I will do the same as you