By Melissa Harman Transparency, transparency, transparency! If you have an endowment fund, you need to read and understand the following: Effective January 1, 2009, Senate Bill 1329 was enacted by Gov. Arnold Schwarzenegger. This means California now has an enacted version of the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA). In response to UPMIFA, many in the endowment community fired questions to the Financial Accounting Standards Board (FASB) demanding guidance on how UPMIFA should be accounted for and reported on in the not-for-profit world. There needed to be a tie between law and accounting guidance. After many questions and discussion, the FASB Board responded with FASB Staff Position 117-1 in August 2008. What does this mean to you as a fiduciary of endowment funds? Simply put, more prudence and disclosure. Institutions with certain institutional funds and specifically endowment funds not wholly expendable on a current basis (in the next year) are required to expand presentation and disclosure in the financial statements and footnotes for fiscal years ending after December 15, 2008. FASB Staff Position 117-1 of FSP 117-1 is broken into two parts. The first part speaks specifically to the net asset classification of institutional funds subject to UPMIFA or relevant law. It retains the “donor is king” interpretation as first and foremost funds must be retained permanently in accordance with explicit donor instructions. In the absence of such explicit donor instructions, the institutions board determines what must be preserved of such funds and that the determination is in accordance with the relevant law. The first part also retains the position that permanently restricted funds are not to be reduced by losses or appropriations on the investments of the funds except to the extent required by the donor (e.g. specific investment vehicles required by the donor to be held in perpetuity). The major change in the first part of the position relates to the classification of the portion of a fund that is not stipulated by the donor as restricted into perpetuity. The primary example of this is earnings on the permanently restricted funds. In the absence of explicit donor instructions on use of funds, the funds should be classified as temporarily restricted until appropriated for expenditure by the institution or organization. Appropriated is interpreted to mean when approval for the expenditure has occurred unless for a future period. If approval for future expenditure has occurred, it is deemed appropriated when the future period is reached. Once appropriated and in the absence of purpose restrictions, the funds are then to be classified as an unrestricted net asset. The second part of the position speaks to enhanced disclosure requirements. The intent of the disclosures is to give more transparency to the care and prudence a fiduciary is providing for endowment funds. At a minimum an organization or institution shall disclose the following: 1. Board’s interpretation of the law(s) related to the net asset classification of donor-restricted endowments (e.g. fair value vs. preservation of purchasing power) 2. Endowment spending policy 3. Endowment investment policy (with specific policy disclosure requirements as outlined in FSP 117-1) 4. Endowments by net asset classification in total and by type of endowment fund 5. Reconciliation of beginning and ending balances of net asset classes to include the following: a. Investment returns (separately disclose income and appreciation/depreciation of investments) b. Contributions c. Appropriations for expenditure d. Reclassifications e. Other changes The position retains the disclosure requirements related to net assets as follows: 1. Nature and type of permanent and temporary restrictions 2. The aggregate amount of deficiencies for donor-restricted endowments for which fair value at the reporting date is less than the level required by the donor instructions or law. For some, the adoption and implementation of UPMIFA and FSP 117-1 will be painless and for others painful. We recognize that. The FASB board has provided good examples of disclosures in Appendix C to FSP 117-1. For more information please contact Melissa Harman, Senior Manager or Jay Azar, Partner, Moss Adams LLP’s Not-For-Profit Group, 310-477-0450.
