Does your nonprofit have a donor-restricted endowment fund or a board-designated endowment fund? Are you hoping to get or create one? Effective for fiscal years ending after December 15, 2008, nonprofit organizations with donor-restricted and board-designated endowment funds are facing changes in financial statement reporting and disclosure requirements.
In August 2008 the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 117-1, “Endowments of Not-for-Profit Organizations: Net Asset Classifications of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), and Enhanced Disclosures for All Endowment Funds.”
With this extremely long and cumbersome name the objectives are:
- To provide guidance on the net asset classification of donor-restricted endowment funds for not-for-profit organizations subject to an enacted version of UPMIFA.
- To provide increased disclosures about an organization’s endowment funds whether or not the organization is subject to UPMIFA.
First, let us talk about what UPMIFA is. In general, UPMIFA changes the way boards invest and manage donor-restricted endowment funds. Rather than focusing on the spending of only the earnings from donor-restricted endowment funds, UPMIFA requires that boards now consider both the original amount and the earnings on those invested funds when making investment decisions or setting spending policies. For more on it try this here (link opens a PDF document).
Excerpted from the Nonprofit Times piece:
Nonprofits that are subject to UPMIFA must classify the portion of the donor-restricted endowment fund that is perpetual in duration as permanently restricted net assets. That amount must be kept permanently in accordance with explicit donor restrictions, or if such restrictions are absent, the amount the organization’s governing board determines must be retained permanently consistent with relevant law.
This differs from previous guidance that considered earnings on donor-restricted endowments unrestricted unless otherwise restricted by donors or by specific relevant law. The portion of donor-restricted endowment funds that are not classified as permanently restricted net assets must now be classified as temporarily restricted net assets (time restricted) until appropriated for expenditure by the organization.
Shoot me an email or post a comment if you have questions, I’m going to come up with a nonprofit accounting glossary page* in the weeks to come as I realize this post has some terms that may not be familiar to everybody.
*I didn’t need to put one together because a good one already exists.
I am the president of a board for a 501c-3… my question is, if the value of the permanently restricted endowment falls, does a charity have to wait for the value to rebound before they can apply their stated spending policy withdrawal to the endowment? For example, if we had $50K and it fell to $40K, does the permanently resticted endowment have to grow back to above $50K (the value of the corpus must be above the original value) before we can withdraw out annual spending amount?
Thanks,
Craig,
I’m going to say that, based on what I have read about this, if the board has established that the permanently restricted amount of this fund is $50,000 that you cannot draw from it until it reaches that point. If the fund is restricted by the donor then check with the agreement you have with them or ask then if you can re-work the agreement based on the current environment.
I’d like to read what others think.
Alan,
Our non-profit transfered $50,000 to a non-profit community foundation. We may make recommendations and give advice to the foundation regarding administration and distribution of the funds but the foundation maintains ultimate authority and control over the assets and distributions. How would this transaction be reflected on our financials in the year it took place. Would we need to show the balance and ongoing activity of the fund held by the foundation as an assets showing as beneficial interest in an asset held by other?
Thank you,
Randy,
As long as you still own the asset I would think it should still be listed on your books. Have you checked with the foundation to see how other nonprofits have recorded similar transfers?
Hi: Could you help me to define a board designated endowment ? I have read the definition, but am not clear about how to define “income” and “long” period. I presume that income = earnings, but I am told that income could also mean the future release of principal. Not sure how to define long, seems quite subjective. Thank you ! Tanya
Tanya,
The income would the earnings of the principle of the original amount put into a board designated endowment. For the time period, I read it as permanent. The endowment is something to be held in perpetuity. Here are two more links on the subject that may help, and do check the glossary linked to above as well.
http://www.entrepreneur.com/tradejournals/article/190793212.html
http://www.abanet.org/rppt/meetings_cle/2008/jointfall/Joint08/ExemptOrgCharitablePlanOrganGroup/FSP_No_FAS%20117-1_EndowmentNot-for-ProfitOrg.pdf
Alan