According to the Financial Accounting Standards Board (FASB), an underwater endowment fund is defined as: “A donor-restricted fund for which the fair value of the fund at the reporting date is less than either the original gift amount or the amount required to be maintained by the donor or by law that extends donor restrictions.”
Per FASB Update No. 2016-14, endowment returns on donor-restricted endowments will be reported within net assets with donor restrictions. This includes returns that cause an endowment's fair value to fall below it's historical gift value (corpus).
This is a reporting change from previous guidelines under FAS 117-1 where underwater funds were classified as unrestricted.