Overview

Endowments and UPMIFA

Agenda

•What is an institutional fund and endowment?

•What is UPMIFA and what are its changes?

•GAAP Disclosures - FASB ASC 958-205, Not-For-Profit Organizations – Net Asset Classification, and UPMIFA

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Who does UPMIFA apply to?

• The UPMIFA applies to:- Institutional funds- Endowment funds• Institutional Funds = A fund held by an institution

exclusively for charitable purposes:• Institution = Any person / entity organized and operated

exclusively for charitable purposes.

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Examples of institutional funds

• Nearly all of the funds held by a charity are “institutional funds”.

• Examples:- Operating bank account of a charity. All of the investments

of the charity. It excludes the program-related assets.- Endowment held within the charity for a specific purposes,

such as scholarships.- Funds set aside by the charity for a specific purpose, i.e.

building a library.NOT an institutional fund:- A fund held by a for-profit, even if it is for charitable

purposes.- Endowment fund set up as a charitable trust with an

individual / corporate trustee.4

What are Endowment funds

• An endowment fund – is an institutional fund that, under the terms of a gift instrument, is not wholly expendable by the institution on a current basis.

• Board-designated endowments are not, in the legal sense endowments; however for GAAP (which has a broader definition then the legal definition) they are endowment and are unrestricted (since there is no donor imposed restriction).

• Board designated endowments must meet GAAP endowment disclosure requirements.

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What are Endowment funds

- Gift instrument - Relevant in determining the management / spending

rules of the endowment. (UPMIFA will NOT apply if the gift instrument addresses a specific issue)

- Since an endowment is established by a gift instrument, and cannot be fully expandable, it is classified as follows:- The portion that must be maintained on a permanently

basis is classified as a permanently restricted asset – “aka corpus”.

- i.e.: Scholarship fund, where only the income can be used.- board-designated endowments are not donor restricted

and are classified as unrestricted net assets

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What is UPMIFA?

Uniform Prudent Management of Institutional Funds Act:- UPMIFA was signed into law in 2006 (following the

dissolution of UMIFA). The main purpose of UPMIFA is to guide the management of endowments by providing the following:- Eliminates the historic dollar value (HDV) corpus

spending limitation, and replaces it with a modern prudence standard.

- Provides for prudence for the management and spending of the endowment.

- Provides for easier modifications to certain donor restrictions.

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Prudence under UPMIFA

Uniform Prudent Management of Institutional Funds Act:- The law eliminates the standard Historic Dollar Value (HDV)

– institutions were not allowed to spend below a fund’s HDV (the value of all contributions to the fund).

- It allows spending from an underwater endowment (FMV < amount restricted by the donor) if the board determines it is prudent to do so.

- The board should follow the following 7 criteria in determining expenditures from / management of the endowment:

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Prudence under UPMIFA

Uniform Prudent Management of Institutional Funds Act:- The 7 criteria:

- Duration and preservation of the endowment fund- Purposes of the institution and the endowment fund- General economic conditions- Effect of inflation or deflation- Expected total return from income and the

appreciation of investments- Other resources of the institution- Investment policy of the institution

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UPMIFA - Modifications

Uniform Prudent Management of Institutional Funds Act:- Permits the release or modification of a restriction by a

charity if the donor consents in tangible or electronic writing and the charity continues its charitable purposes:

- Allows for a charity to modify the restriction (without donor consent), through a court of law for the following:- Restriction is impracticable, wasteful, illegal.- Restrictions impairs the investment value of the

endowment.- Modification will further the mission of the

endowment due to circumstances not anticipated by the donor.

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UPMIFA – FASB ASC 958

• In general, endowments are categorized as follows:– Charity should classify all or a portion of the

endowment as permanently restricted.– Earnings refer to both realized and unrealized income.

Under UPMIFA earnings, unless otherwise specified in the gift document, must be classified as donor-restricted until they are appropriated for spending. Therefore earnings are temporary restricted until appropriated.

– Distributions from the endowment, and losses suffered by the endowment, be taken from the endowment portion of the temporarily restricted net asset class first (until it goes to zero), then from the unrestricted net asset class.

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UPMIFA – FASB ASC 958

• Example of endowment under water:• - At December 31, 2012, a charity has an endowment of

$100,000 with a fair market of $90,000.

• The treatment is as follows:• - Permanently Restricted Fund: $100,000• - Temporarily Restricted Earnings: $5,000 – ($5,000) = $ -• - Unrestricted Income: ($5,000)

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UPMIFA – GAAP Disclosures

• 1. Governing board’s interpretation of the law(s)• 2. Endowment spending policy• 3. Investing policies• 4. Composition by net asset class• 5. Reconciliation of beginning and ending balances• 6. Nature and types of permanent or temporary

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