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Donor-restricted endowments: new FASB 117-1 guidelines take effect this month.

Nonprofit organizations with donor-restricted endowment funds and board-designated endowment funds are facing changes in financial statement reporting and disclosure requirements in the immediate future. Now is the time to ensure that your organization will be ready for these changes.

The Financial Accounting Standards Board (FASB) this past August issued FASB Staff Position (FSP) No. FAS 117-1, "Endowments of Not-for-Profit Organizations: Net Asset Classifications of Funds Subject an Enacted Version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), and Enhanced Disclosures for All Endowment Funds." The FSP's objective is two-fold:

* 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 (both donor-restricted endowment funds and board-designated endowment funds) whether or not the organization is subject to UPMIFA.

The provisions of FAS 117-1 are effective for fiscal years ending after December 15, 2008, but earlier application is permitted.


In general, UPMIFA changes the way boards and their investment committees invest and manage donor-restricted endowment Rather than focusing on the prudent spending of only the net appreciation of donor-restricted endowment funds, UPMIFA requires that boards consider both the original gift amounts and the net appreciation on those invested gifts when making investment decisions or setting spending policies.

It eliminates the historical-dollar-threshold and establishes prudent spending guidelines that consider both the duration and preservation of the fund. UPMIFA also changes the net asset classification of certain of not-for-profit organizations' donor-restricted endowment funds.

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. The amount classified as permanently restricted is the amount that must be retained 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. Accordingly, permanently restricted net assets may, in certain circumstances, include accumulated earnings on those assets.

Subsection 4(a) of UPMIFA states that "unless stated otherwise in the gift instrument, the assets in the endowment fund are donor-restricted assets until appropriated for expenditure by the institution." This differs from previous guidance under FASB 124 that considered earnings on donor-restricted endowments unrestricted (whether or not appropriated for expenditure by the organization) unless otherwise restricted by donors or by specific relevant law.

As a result of this change, the portion of donor-restricted endowment funds that is 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. FAS 117-1 states that an appropriation for expenditure occurs upon approval for expenditure.

Nonprofits affected by this change must restate their financial statements by reclassifying certain amounts previously reported as unrestricted to temporarily restricted net assets to the extent they have not already been appropriated for expenditure.


All nonprofits with board-designated or donor-restricted endowment funds, whether or not subject to an enacted version of UPMIFA, must make additional disclosures in their financial statements under FAS 117-1. These additional disclosures include:

* The governing board's interpretation of the law(s) underlying the net asset classification of the donor-restricted endowment funds;

* The organization's policy for appropriation of endowment assets for expenditure;

* The organization's endowment investment policies, including a description of the organization's return objectives and risk parameters, how those objectives relate to the organization's endowment spending policy, 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; and,

* A reconciliation of the beginning and ending balance of the organization's endowment, in total and by net asset class, including, at minimum, the following line items (as applicable): investment return separated into investment income (for example, interest, dividends and rents) and net appreciation or depreciation of investments, contributions, amounts appropriated for expenditure, reclassifications, and other changes.

Illustrative examples of these required disclosures can be found in Appendix C of FAS 117-1 on FASB's Web site,


If an organization initially applies this FSP to donor-restricted endowment funds in existence when UPMIFA is first effective, any resulting net asset reclassifications should be reported on a separate line on the statement of activities for that period, outside a performance indicator or other immediate measure of operations.

If an organization initially applies this FSP subsequent to the period in which UPMIFA is first effective, the reclassification should 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 should be reported retrospectively in the earliest period presented.

Mark J. Piszko is a partner in the Not-for-Profit Services Division of O'Connor Davies Munns & Dobbins, LLP in New York City His email is
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Title Annotation:ACCOUNTING
Author:Piszko, Mark J.
Publication:The Non-profit Times
Date:Dec 1, 2008
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