Muse Accounting Reporting Endowment Funds
Muse Accounting Reporting Endowment Funds
Prepared by:
Junia Perez, Director, McGladrey LLP and Ian Benjamin, Partner, McGladrey LLP
The Uniform Prudent Management of Institutional Funds Act (“UPMIFA”) and the 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, have been in existence for some time now, yet confusion
and inconsistency in accounting and reporting for endowment funds have continued.
UPMIFA was approved in July 2006 by the National Conference of Commissioners on Uniform
State Laws to replace the Uniform Management of Institutional Funds (UMIFA) Act of 1972, and to
provide guidance and authority to charitable organizations concerning the management and
investment of funds held by those organizations. UPMIFA imposes additional duties on those
who manage and invest charitable funds to provide additional protection for charities and protect
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the interests of donors who want to see their contributions used wisely. To date, 49 states, the
District of Columbia and the U.S. Virgin Islands have adopted or enacted a version of UPMIFA.
Pennsylvania and Puerto Rico are the only jurisdictions that have not enacted a version
of UPMIFA.
UPMIFA also prescribes the standard of conduct in managing and investing endowment funds. It
requires investments in good faith and with the care of an ordinarily prudent person in a like
position would exercise under similar circumstances. UPMIFA emphasizes that investment
decisions must be made in relation to the overall resources of the institution and its charitable
purposes, and not be made in isolation but rather in the context of the institutional fund‟s portfolio of
investments as a whole and as a part of an overall investment strategy having risks and return
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objectives reasonably suited to the fund and to the institution.
One of the key changes brought about by UPMIFA was the elimination of the historic-dollar-value
threshold set by UMIFA. UPMIFA allows not-for-profit organizations, absent explicit donor
restrictions, to spend endowment funds below their original dollar amount, subject to the standard
of prudence and consideration of the following factors:
1. The duration and preservation of the endowment fund
5. The expected total return from income and the appreciation of investments
FSP FAS 117- 1 was issued in August 2008 to address the accounting and reporting issues
brought about by UPMIFA. FSP FAS 117-1 1 (now in the FASB codification at ASC 958-205-
45/50) provides guidance on the net asset classification of donor-restricted endowment funds
for a not-for-profit organization that is subject to an enacted version of UPMIFA.
The table below summarizes the key provisions in Section 4(a) of UPMIFA that result in an
accounting issue for endowment funds and the guidelines provided by FASB ASCS 958-205 to
address the issue.
Unless stated otherwise in the gift instrument, For each donor-restricted endowment fund for
the assets in an endowment fund are donor- which the restriction described in subsection
restricted assets until appropriated for 4(a) of UPMIFA is applicable, a not-for-profit
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expenditure by the institution. organization shall classify the portion of the
fund that is not classified as permanently
restricted net assets as temporarily restricted
net assets (time restricted) until appropriated
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for expenditure by the organization.
FSP FAS 117-1 (codified as FASB ASC 958-205-50-1B) also requires improved disclosures
about a not-for-profit organization‟s donor-restricted and board-designated endowment funds
regardless of whether or not the not-for-profit organization is subject to UPMIFA. The following
information about all endowment funds is required to be disclosed for each period for which the
organization presents financial statements:
A description of the governing board‟s interpretation of the law(s) that underlies the
organization‟s net asset classification of donor-restricted funds.
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.
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
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required by donor stipulations or law.
Permanently Temporarily
Restricted Restricted Unrestricted
In early Year 200Y, ABC Organization became subject to UPMIFA and adopted FSP FAS 117-
1/FASB ASC 958-205-45/50.
Below are the activities related to the endowment funds of ABC Organization during Year 200Y
and Year 200Z:
Investment return:
Investment income 600 200 650 250
Net appreciation (depreciation) (350) 125 1,000 500
Investment fees and expenses (15) (5) (25) (6)
Of the total investment return for donor-restricted endowment funds, $120 must be retained annually and
and added to the perpetual funds in accordance with the explicit donor stipulations to maintain the
purchasing power of those funds.
Due to the depreciation of investments during Year 200Y, the fair value of certain donor-restricted endowment
funds were less than the amount of the original gift by $750. The board deemed it prudent to continue
to appropriate $100 from those funds so as not to suspend certain programs.
$500 of the net appreciation for Year 200Z were attributed to investments of donor-restricted endowment
funds that have gone underwater in Year 200Y.
Considering the above assumptions and the requirements of UPMIFA and FASB ASC 950-
205-45/50, ABC Organization would account for its endowment funds during years 200Y and
200Z, as follows, with note explanations following the table:
Year 200Y
Board-
Designated
Donor-Restricted Endowments Endowments
Permanently Temporarily Total
Restricted Restricted Unrestricted Total Unrestricted Endowments
Year 200Z
Board-
Designated
Donor-Restricted Endowments Endowments
Permanently Temporarily Total
Restricted Restricted Unrestricted Total Unrestricted Endowments
In its notes to financial statements for Years 200Y and 200Z, ABC Organization would
show a roll-forward reconciliation of all endowment funds similar to the one shown in this
example and the other information required by FASB ASC 958-205-50, such as the
governing board‟s interpretation of the laws underlying the net asset classifications of
donor-restricted endowment funds, the investing and spending policies, the nature and
type of permanent or temporary donor restrictions, and the amount of deficiencies for all
donor-restricted endowment funds for which the fair value of the assets at the reporting
date have gone below the level required by donor stipulations or law.
Pursuant to FASB ASC 958-205-45-14, each source – original gift, gains and losses,
interest and dividends – must be evaluated separately when classifying an
endowment fund.
- If a donor stipulates that interest and dividends and net gains be added to
the principal of the gift until that endowed gift increases to a specified dollar
level, then the accumulated earnings and gains are usually classified as
permanently restricted. If a donor states that a specific investment security
must be held in perpetuity, the gains and losses on that security are subject
to the same permanent restrictions, unless the donor specifies otherwise.
- When the funds are appropriated after the period or term specified by the
donor has been met by the organization.
- Endowment fund balances and net assets are reduced upon appropriation
for expenditure even if cash and assets are not yet transferred. In effect, the
appropriated (but not transferred) amount is due to the non-endowment
funds (i.e., general operating fund, plant fund, etc.) of the organization. This
requirement may be met through the approval of an annual budget that
includes such spending.
For further information, contact Junia Perez, Director, McGladrey LLP, or Ian Benjamin,
Partner, McGladrey LLP.
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1
UPMIFA, Prefatory Note
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UPMIFA, Section 3
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UPMIFA, Section 4(a)
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FASB ASC 958-205-45-28
5
UPMIFA, Section 4(a)
6
FASB ASC 958-205-45-30
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FASB ASC 958-205-50-2
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FASB ASC 958-205-45-29
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FASB ASC 958-205-45-22, FASB ASC 958-205-5-24, and AAG-NPO, par. 8.29 and 8.30
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FASB ASC 958-205-45-31
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FASB ASC 958-205-45-29
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