Learning objective

• Identify the accounting treatment for endowments received by a not-for-profit.

Background

FASB Accounting Standards Codification^® (ASC) defines a donor-restricted endowment fund as

an endowment fund that is created by a donor stipulation (donors include other types of contributors, including makers of certain grants) requiring investment of the gift in perpetuity or for a specified term. Some donors or laws may require that a portion of income, gains, or both be added to the gift and invested subject to similar restrictions.

If a not-for-profit (NFP) is subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), the amount of the fund that must be retained in perpetuity is determined in accordance with explicit donor stipulations or the amount that is in the absence of explicit donor stipulations, the NFP’s governing board determines what must be retained (preserved) in perpetuity consistent with the relevant law.

In states that have enacted a version of the Uniform Management of Institutional Funds Act of 1972 (UMIFA) or states whose relevant law is based on trust law, at least the amount of the original gift(s) and any required accumulations is generally considered to be not expendable.

The primary difference between UPMIFA and UMIFA is the concept of historic dollar value. Under UMIFA, asset growth and income of an endowment could be appropriated for program purposes, subject to the rule that a fund could not be spent below its historic dollar value. Historic dollar value was defined as the amount of original contributions to the fund, any additional gifts to the fund, and any additions to historic dollar value made pursuant to the donor’s gift instrument. UPMIFA allows for prudent spending, removing the need for a spending floor. NFPs can appropriate what it determines to be prudent.

Therefore, FASB requires that the governing board make a determination that UPMIFA does not. UPMIFA does not define an amount that must be retained in perpetuity. Many NFPs continue to embrace historic dollar value.

For each donor-restricted endowment fund for which UPMIFA applies, an NFP should classify the portion of the fund that is restricted as net assets with donor restrictions until appropriated for expenditure by the NFP. Appropriation for expenditure is considered to be when approved for expenditure, unless the approval is for a future period, in which case appropriation is deemed to occur when that period is reached.

Some donors indicate they would like to create an endowment, but their instructions are usually incomplete. In that case, state law will apply.

Case

The following note contains excerpts from the Foundation For the Carolinas’¹ endowment note. This footnote is not meant to be comprehensive. Use the information provided to answer the questions that follow.

Return objectives and risk parameters — The Foundation has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Endowment assets include those assets of donor-restricted funds that the Foundation must hold in perpetuity (or for a donor-specified period) as well as board-designated funds. Under this policy, as approved by the board of directors, the endowment assets are invested in a manner that is intended to produce results that exceed the price and yield results of a weighted benchmark composed of 16.5% of the S&P 500 Index, 5% of the Russell 2000 Index, 12.5% of the MSCE EAFE Index, 9.5% of the MSCE Emerging Markets Index, 11.5% of the Barclays U.S. Aggregate Bond Index, 4% of the ML 1-3 Year Corporate/Government Bond Index, 1.5% of the NCREIF Property Index, 11% HFRI Equity Hedge Index, 7% of the HFRI Fund-of-Funds Index, 2.5% of the Alerian MLP Index, 3% of the CPI + 8% Index, 1.5% of the DB Liquid Commodity Index, OY Div., 3% of the DJ/CS HFI Multi-Strategy Index, 2.5% of the Thomson One All Private Equity Index, and 9% of the S&P 100 Index, while assuming a moderate level of investment risk.

The Foundation expects its endowment funds over a full market cycle (five years) to provide an average annual real rate of return, net of fees, equal to or greater than spending, administrative fees, and inflation (consumer price index + 6%). Actual returns in any given year may vary from this amount.

Spending policy and how the investment objectives relate to spending policy — For the years ended December 31, 2017 and 2016, the Foundation and its supporting organizations’ policy for the endowment funds, including board-designated endowments, is to spend up to a maximum of 5% of the average daily fair value over the prior three years through the calendar year preceding the fiscal year in which the distribution is planned. The Foundation has a policy that permits spending form underwater endowment funds depending on the degree to which the fund is underwater, unless otherwise precluded by donor intent or relevant laws and regulations. If the fair value of the endowment fund falls below 66% of the original gift amount, the spendable amount is limited to interest and dividends subject to donor appeal. If the fair value of the endowment fund falls below 50% of the original gift amount, the spendable amount is limited to interest and dividends without donor appeal.

In establishing these policies, the Foundation considered the expected return on its endowment. Accordingly, the Foundation expects the current spending policy to allow its endowment to maintain its purchasing power by growing at a rate equal to planned payouts. Additional real growth will be provided through new gifts and any excess investment return.

Questions

1. Does the Foundation follow UPMIFA or UMIFA?

    

    

2. What is the Foundation’s governing board’s interpretation of the law or laws that underlie the NFP’s net asset classification of donor-restricted endowment funds?

    

    

3. What is the Foundation’s interpretation of the ability to spend from underwater endowment funds?

    

    

4. What is the Foundation’s policy for the appropriation of endowment assets for expenditure from underwater endowment funds?

    

    

5. What is the Foundation’s return objectives and risk parameters? How do their return objectives relate to their endowment spending policy or policies?

    

    

6. What is the Foundation’s strategies to achieve return objectives?

    

    

7. In 2017, what was the value of endowment assets in net assets with donor restrictions? Without donor restrictions?

    

    

Knowledge check

1. A donor indicates that he or she would like the beneficiary to create an endowment. No further information is provided. The NFP should follow
   1. UPMIFA.
   2. UMIFA.
   3. State law.
   4. NFP policies.