New endowment accounting measures

Cindy Bertrand
Cindy Bertrand

Cindy Bertrand

A few recent accounting measures will have significant implications for nonprofits in many states.


Nonprofit endowment and investment policies will soon or may have already been impacted by UPMIFA, the Uniform Prudent Management of Institutional Funds Act, which was released in July 2006.

This is the first time since 1972 that the general policy on managing institutional funds has been revised.

This was a “model act” that individual states must consider for adoption.  As of today, UPMIFA has been enacted in 24 states and the District of Columbia, and is being considered for enactment in most of the remaining states. North Carolina and a handful of others have not considered it at all.

Its predecessor, known as UMIFA, was eventually adopted in 46 states and the District of Columbia.

This act applies to a variety of nonprofit organizations, from charity trusts to donor-designated funds and soup kitchens with an endowment.

Many organizations will have to go back and review their endowment policies because most groups’ investment policies were probably modeled after state law.

The state law was not updated since 1972 – in most places it was the old version of the revised act. Most nonprofits are unaware of what their endowment policies were modeled after because the old provisions have been in place for so long.

The key changes in the new model act include:

  • An elimination of the reference to “historical dollar value” – the way a fund is preserved over time. The new act assumes that the nonprofit will act in a prudent way to preserve principal for the funds it manages, but unlike the old act, does not require a specific amount to be set aside as principal and does not specifically reference purchasing power. Essentially, these changes modernize the law, giving the organization more flexibility to invest funds and keep up with inflation.
  • An optional 7 percent rebuttable presumption of imprudence. This refers to an organization’s spending power, or the spending rate for a given fund. Most organizations currently spend anywhere from 3 to 5 percent of their endowment annually. The provision discusses a spending policy of less than 7 percent in a given year that is computed using at least quarterly values on a rolling three-year period. Spending above 7 percent in one year is not always imprudent, depending on circumstances. For example, an organization may defer spending for a number of years and plan to spend a significant amount for a building project in one year. Only about seven states have adopted this provision so far, as it is pretty aggressive. But nevertheless, it’s something nonprofits should be keeping an eye on.

Nonprofits potentially affected by these provisions should ask themselves the following key questions:

  • How did my state implement and adopt the new UPMIFA? Most states do not adopt such model acts as is, but instead consider and change key aspects before adopting them.
  • Did my state require maintenance of purchasing power, or did they modify or change the donor-restricted language in the model act?
  • Did the attorney general put forth any guidance relating to the fiduciary amount that must be maintained permanently or at least a minimum amount that must be maintained long-term? Did the attorney indicate an amount equal to the original gift that has to be maintained in perpetuity?

FSP 117

On August 6, 2008, the Financial Accounting Standards Board issued Staff Position (FSP) FAS 117-1, “Endowments of Not-for-Profit Organizations: 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.” 

Nonprofits located in States where UPMIFA has been passed into law are required to early adopt this position. The following is guidance from the paragraph 16: “If the organization initially applies the provisions of this 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. If the period in which UPMIFA first became effective is not presented, the effects of the reclassification shall be reported retrospectively in the earliest period presented.”

The position has an effective date for fiscal years ending after Dec. 15, 2008.  Earlier application is permitted provided that annual financial statements for that fiscal year have not been previously issued.

There are a couple of potential compliance issues nonprofits should begin reviewing now, as coming into compliance with new regulations can often be a lengthy process.

The primary changes in the new position that could affect nonprofits are financial statement disclosures and designation of net assets. The disclosures are applicable whether or not it is subject to an enacted version of UPMIFA.

A few of the disclosures that organizations will need to disclose are: a summary of the board’s interpretation of the laws that govern the organization’s net asset classification for donor-restricted endowment funds; the entity’s policies for appropriation of endowment funds for expenditure (their permanent endowment spending policy); the asset composition of their endowment funds by net asset class at the end of their reporting period; and a reconciliation of the activity of the permanently restricted endowment funds.

Though the new position does not change the definition of permanently-restricted net assets, what it does change is how the earnings from the permanently-restricted net assets are reflected in financial statements.

Say you have an endowment fund of $100,000, and the donors didn’t explicitly place any restrictions or requirements on the earnings of that fund. They simply designated it for centers for senior citizens to be held in perpetuity and given to senior centers in your city, but it’s up to the board to decide which senior centers receive those earnings and when.

Currently, earnings will be reflected in the organization’s financial statement as unrestricted net assets. But with the new FSP guidance, appropriation takes place when the expenditures are approved by the appropriate governing body.

If the expenditure is for a future time, the appropriated earnings will be reported as temporarily-restricted net assets until the expiration of time.

As a result, the board may need to consider changing the way they appropriate earnings on gifts held in perpetuity.

The new FSP 117 is immediately effective in states that have adopted UPMIFA.

For a list of states where UPMIFA has been enacted or is under consideration, visit UPMIFA’s website.

Cindy Bertrand, CPA is a director of the nonprofit practice at CBIZ Accounting, Tax and Advisory Services, based in San Diego, Calif.

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