In July 2006, the National Conference of Commissioners on Uniform State Laws approved the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA). This Act is a modernized version of the Uniform Management of Institutional Funds Act of 1972 (UMIFA), the model act on which most states have based their laws governing the investment and management of donor-restricted endowment funds by not-for-profit organizations. Because the UPMIFA prescribes new guidelines for expenditure of donor-restricted endowment funds, questions have arisen as to the appropriate net asset classification of such funds. To provide 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 the UPMIFA, the Financial Accounting Standards Board (FASB) has proposed FASB Staff Position (FSP) No. FAS 117-a, 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. The proposed FSP addresses the following accounting issues resulting from new guidelines in the UPMIFA:
- The UPMIFA shifts its focus from the prudent spending of the net appreciation of the fund to the entirety of a donor-restricted endowment fund. The UPMIFA eliminates UMIFA’s historic-dollar-value threshold, an amount below which an organization could not spend from the fund, in favor of a more robust set of guidelines about what constitutes prudent spending, explicitly requiring consideration of the duration and preservation of the fund. The proposed FSP therefore would require a not-for-profit organization that is subject to an enacted version of the UPMIFA to classify all or a portion of a donor-restricted endowment fund of perpetual duration as permanently restricted net assets. The amount classified as permanently restricted is the amount of the fund (a) that must be retained permanently in accordance with explicit donor stipulations, or (b) that in the absence of such stipulations, the organization’s governing board determines must be retained permanently, if any, under the relevant law.
- Subsection 4(a) of the UPMIFA provides that “unless stated otherwise in the gift instrument, the assets in an endowment fund are donor-restricted assets until appropriated for expenditure by the institution.” Subsection 4(d) includes an optional provision for adding a rebuttable presumption of imprudence for spending over seven percent of the fair market value of the fund (calculated over the period on which the organization bases its endowment spending formula but not less than three years). The proposed FSP concludes that in determining whether provisions in enacted legislation that are based on subsection 4(a) or 4(d) of the UPMIFA impose a temporary (time) restriction on the portion of a donor-restricted endowment fund that otherwise would be classified as unrestricted net assets, an organization should apply the guidance in EITF Topic No. D-49, “Classifying Net Appreciation on Investments of a Donor-Restricted Endowment Fund”. Topic D-49 concludes that, in the absence of other relevant law, if the Act has been adopted without modifications that preclude the governing board from exercising its discretion to appropriate some or all of an organization's net appreciation on investments, realized or unrealized, the net appreciation is not donor-restricted, unless the donor has explicitly restricted the use of either income or net appreciation. A legal limitation requiring that a governing board exercise ordinary business care and prudence when appropriating net appreciation is not the equivalent of a law that extends a donor-imposed restriction and, therefore, does not result in classification of net appreciation as donor-restricted, either permanently or temporarily.
The proposed FSP also would require improved disclosures about an organization’s endowment (both donor-restricted and board-designated funds), whether or not the organization is subject to the UPMIFA. The proposed FSP requires a not-for-profit organization to disclose information to enable financial statement users to understand the net asset classification, net asset composition, changes in net asset composition, spending policies, and related investment policies about its endowment funds (both donor-restricted and board-designated).
If finalized, the provisions of the proposed FSP would be effective for fiscal years ending after June 15, 2008. The proposed FSP is available for comment until April 18, 2008 at http://www.fasb.org/fasb_staff_positions/prop_fsp_fas117-a.pdf.
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