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Possible Changes in Financial Reporting of Endowment Funds
By: James G. Kennedy, CPA
The Financial Accounting Standards Board (FASB) issued an update on January 17, 2008 related to a not-for-profit Endowment Project that it has undertaken. When completed, the FASB expects to issue a FASB Staff Position (FSP) with guidance concerning the potential effect of the adoption of the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA) on the classification of net assets related to donor –restricted endowment funds.
The FASB has already decided in the proposed FSP to require five new additional disclosures as follows:
1) NET ASSET COMPOSITION BY TYPE OF ENDOWMENT FUND:
The Statement of Financial Position for each period presented must include the composition of its endowment by net asset class, in total and by type of endowment fund. Donor-restricted endowment funds must be shown separately from funds designated by the not-for-profit organization to function as endowment funds. The organization should also disclose the cumulative amount of investment return contained in the permanently restricted net asset class because of the organization's interpretation of relevant law, beyond the amount required by any explicit donor stipulations.
2) ENDOWMENT ROLLFORWARD:
A not-for-profit organization should present a reconciliation of the beginning and ending balance of its endowment, in total and by net asset class, for all periods presented in the financial statements. The presentation should include disclosures of interest, dividend and rental income, net appreciation or depreciation of investments, contributions, distribution of endowment return to other funds and reclassifications and other changes.
The organization should also indicate how much of the additions of investment return to permanently restricted net assets are the result of the organization's interpretation of relevant law, as opposed to explicit donor stipulations.
3) ENDOWMENT SPENDING POLICY:
The organization should disclose its policy on the appropriation of endowment assets for spending.
4) PLANNED ENDOWMENT DISTRIBUTIONS:
The organization should disclose its planned distribution of endowment return to other funds for the next year, if known.
5) ENDOWMENT INVESTMENT POLICIES AND STRATEGIES:
The organization should disclose its endowment investment policy , including at a minimum a) return objectives and risk parameters, b) how those objectives relate to the organization's spending policy, and, c) the strategies employed for achieving those objectives.
The effective date of the proposed FSP would be for fiscal years ending after June 15, 2008 with earlier adoption permitted if the organization's financial statements had not already been issued.
The cumulative effect of any reclassification between net asset classes would be made as of the beginning of the period in which UPMIFA became effective for the organization.
If you have any questions, please feel free to contact Jim Kennedy, CPA at 617-426-9440 or e-mail him at jkennedy@pmn.com.
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