Accounting and Bookkeeping
What Is FSP FAS 117-1 "Endowments of Not-For-Profit Organizations"?
FSP FAS 117-1 (now included in the FASB Accounting Standards Codification in sub-topic 958-205) is officially named "Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures for All Endowment Funds." This FSP provides guidance on the net asset classification of donor-restricted endowment funds that are subject to the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA). The FSP also modifies the disclosures about an organization's endowment funds (both donor-restricted endowment funds and board-designated endowment funds), whether or not the organization is subject to UPMIFA.
Who Is Impacted By This FSP?
The classification rules in the FSP apply to any not-for-profit organization that maintains a donor-restricted endowment fund. This includes permanently restricted funds that are not specifically identified as endowments. In addition, the FSP disclosures are applicable to organizations that maintain quasi-endowment funds, including funds that are board-designated or otherwise internally identified as endowments.
What Is UPMIFA?
The Uniform Prudent Management of Institutional Funds Act (UPMIFA) is a new act governing the management of endowment funds held by charitable institutions, which has been adopted by most states. UPMIFA prescribes new guidelines for expenditures of a donor-restricted endowment fund (in the absence of overriding, explicit donor stipulations) in a more robust set of guidelines about what constitutes prudent spending, explicitly requiring consideration of the duration and preservation of the fund. The act generally requires the institution's governing board to establish a spending policy and establishes a rebuttable presumption of imprudence for spending greater than 7% in any given year. To determine the applicability of UPMIFA in your state, check http://www.upmifa.org/DesktopDefault.aspx?tabindex=5&tabid=68.
Among its changes, UPMIFA prescribes new guidelines for expenditure of a donor-restricted endowment fund (in the absence of overriding, explicit donor stipulations). Its predecessor, UMIFA, focused on the prudent spending of the net appreciation of the fund. UPMIFA instead focuses on the entirety of a donor-restricted endowment fund, that is, the original gift amount(s), earned income (interest and dividends), and net appreciation. UPMIFA eliminates UMIFA's historic-dollar-value threshold, 4 an amount below which an organization could not spend from the fund, in favor of a more robust set of guidelines about what constitutes prudent spending, explicitly requiring consideration of the duration and preservation of the fund. Questions have arisen about whether UPMIFA's shift in focus affects the net asset classification of a donor-restricted endowment fund.
In light of questions raised by this new uniform act, the FASB has issued a FASB Staff Position (No. FAS 117-1) to provide guidance. This pronouncement (the FSP) is effective for years ending after December 15, 2008.
Accounting Treatment Under FSP FAS 117-1
Permanently Restricted Net Assets
Generally there is no difference in the accounting for the permanently restricted portion of the endowment fund. [The amount of permanently restricted net assets is the amount which must be retained permanently in accordance with explicit donor stipulations or, in the absence of such stipulations, that which the organization's governing board determines must be retained (preserved) permanently consistent with the relevant law. ASV: I find this sentence to be very awkward and somewhat confusing. I would reword it.]
Temporarily Restricted Net Assets
The FSP does change the accounting for temporarily restricted net assets. Under previous guidance, if an expense was incurred for a purpose for which both unrestricted and temporarily restricted net assets were available, the donor-imposed restriction was considered fulfilled to the extent of the expense incurred. Under the new FSP, any portion of the endowment fund that is not classified as permanently restricted net assets is classified as temporarily restricted net assets (time restricted) until "appropriated for expenditure" by the organization. In the absence of interpretation by legal or regulatory authorities, "appropriation for expenditure" is deemed to occur upon approval for expenditure, unless approval is for a future period, in which case appropriation is deemed to occur when that period is reached. Thus, for example, if an educational institution established a spending policy of 2% of the endowment principal per semester, at the beginning of each semester the time restrictions on the accumulated temporarily restricted earnings attributable to the endowment would have been met for an amount equal to 2% of the principal. However, the funds would still not be released from restrictions until the purpose restriction (if any) is also met. On the other hand, if more than 2% is used for the purpose restriction, only 2% of the principal would be released because that is all that had been appropriated for expenditure. Both the purpose restriction and the time restriction have to be met before the funds are released. Also, the organization cannot accumulate a deficit in these temporarily restricted balances. If no unspent income has been earned in the current year or accumulated from prior years, any amounts appropriated for expenditure come from unrestricted net assets. Questions have arisen about just what qualifies as an "appropriation" for this purpose. For example, does the approval of an annual budget--including a line item for income from endowment--constitute an appropriation of that amount? FASB does not say specifically, but this author believes it does.
Net Asset Reclassification
If in prior years amounts have been reported as released from restrictions under paragraph that were not actually intended to be an expenditure of endowment earnings, such as expenditures in excess of the approved spending policy, a prior period adjustment will be required. This reclassification should be reported in a separate line item within the organization's statement of activities, outside a performance indicator or other intermediate measure of operations. If the organization initially applies the provisions of the FSP subsequent to the period in which UPMIFA is first effective, the reclassification shall be reported in those financial statements in the earliest comparative period presented for which UPMIFA was effective.
SFAS 124, which governs accounting for investments held by non-profit organizations, has not been modified and thus permanently restricted net assets are not reduced by losses on the investments in the fund, except to the extent required by the donor. If the donor requests the institution to hold specific investments, any losses on those investments would reduce the permanently restricted net assets. Absent donor stipulations, losses on investments of a donor-restricted endowment fund shall reduce temporarily restricted net assets that may exist (such as unexpended net appreciation) and then any remaining loss shall reduce unrestricted net assets.
Enhanced Disclosures For All Endowment Funds
A not-for-profit organization, whether or not it is subject to an enacted version of UPMIFA, shall disclose information to enable users of financial statements to understand the net asset classification, net asset composition, changes in net asset composition, spending policy(ies), and related investment policy(ies) of its endowment funds (both donor-restricted and board-designated).
At a minimum, an organization shall disclose the following information for each period for which the organization presents financial statements:
- A description of the governing board's interpretation of the law(s) underlies the organization's net asset classification of donor-restricted endowment funds.
- A description of the organization's policy(ies) for the appropriation of endowment assets for expenditure (its endowment spending policy(ies)).
- A description of the organization's endowment investment policies. The description shall include the organization's return objectives and risk parameters, how those objectives relate to the organization's endowment spending policy(ies), and the strategies employed for achieving those objectives.
- The composition of the organization's endowment by net asset class at the end of the period, in total and by type of endowment fund, showing donor-restricted endowment funds separately from board-designated endowment funds.
- A reconciliation of the beginning and ending balance of the organization's endowment, in total and by net asset class, including, at a minimum, the following line items (as applicable):
- investment return, separated into investment income (for example, interest, dividends, rents) and net appreciation or depreciation of investments
- amounts appropriated for expenditure
- other changes.
In accordance with the requirements of Statements 117 and 124, an organization also shall provide information about the net assets of its endowment funds, including:
- The nature and types of permanent restrictions or temporary restrictions (paragraphs 14 and 15 of Statement 117)
- The aggregate amount of the deficiencies for all donor-restricted endowment funds for which the fair value of the assets at the reporting date is less than the level required by donor stipulations or law (paragraph 15(d) of Statement 124).
You should refer to paragraph 11 of the FSP for the requirements and to Appendix C of the FSP for an illustrative example. You can obtain a copy of the FSP, including appendices, at: http://www.fasb.org/jsp/FASB/Page/PreCodSectionPage&cid=1218220137031#fsp.
Definition of 'Endowment'
Questions have also arisen as to just what is considered an "endowment" for this purpose. For example, should a third-party trust held for the benefit of, but not managed by, the organization be included in the endowment? Or a remainder trust where the organization is the trustee? How about a pledge receivable, which upon collection will be added to the endowment per donor stipulation? Again, FASB does not say specifically, but the FSP gives the impression that what FASB is after is information related to the organization's stewardship of its endowment assets. Thus this author believes that assets under the organization's control such as the remainder trust should be included, but the third-party trust and the pledge probably not. However if the organization wishes to include all "endowment-type" assets in its disclosures, there would be no objection; in this case assets not under management control should be disclosed separately from assets under control.