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Nonprofits, It’s Time to Re-examine Your Endowment Funds

Changes are now firmly in place for endowment funds. What once was governed by rules of UMIFA (Uniform Management of Institutional Funds Act), are now governed by the newer rules of UPMIFA (Uniform Prudent Management of Institutional Funds Act) and, now, additional supplemental rules from the Financial Accounting Standards Board with FASB Staff Position (FSP) 117-1. With all these rules now in play, it’s time to relook at just how you’re handling your endowment funds to ensure you’re in compliance with both.

Updating UMIFA
UMIFA was enacted in 1972 and worked well for its 35 year run. UMIFA provided rules for the investment of funds by nonprofits and the expenditure of funds donated as endowments to those nonprofit organizations. Those rules supported two general principles: assets would be invested prudently in diversified investments that sought growth as well as income, and that income and appreciation of assets could prudently be spent for the purposes of any endowment fund held by a charitable institution.

Since expenditures and asset management has matured in the last 35 years, refinement and updates to UMIFA were needed to keep up with the changing and expanding complexities of endowment fund management. UPMIFA is that refinement; it was adopted to modernize the laws to take into account current best practices for managing investment portfolios. UPMIFA provides better guidance on “prudent” management of funds rather than certain specific rules under UMIFA. Under the new Act, there are seven criteria that outline an organization’s annual expenditure decisions:

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

While UMIFA focused on the prudent spending of the income and net appreciation of the fund, UPMIFA instead focuses on the entire endowment fund. In addition, UPMIFA eliminates UMIFA’s historic-dollar-value threshold, which allows for more flexible fund spending.

Most of the changes to UMIFA are in favor of the governing of endowment funds to allow organizations more flexibility to adopt prudent management and spending policies for the funds.

FASB Introduces FSP 117-1 in Response to UPMIFA
In August of 2008, the Financial Accounting Standards Board issued FASB Staff Position (FSP) FAS 117-1 to provide accounting rules flexible enough to handle the new rules of UPMIFA. The new pronouncement is effective for fiscal years ending after December 15, 2008; Fiscal year 2009 will be the first year that most nonprofit organizations will need to comply with the new pronouncement. FSP 117-1 is intended to improve the quality and consistency of financial reporting of endowments by nonprofit organizations and will provide guidance on classifying net assets as outlined by UPMIFA.

The main theme of FSP 117-1 is the classification of a portion of the donor-restricted endowment fund as permanently restricted net assets or as temporarily restricted net assets until appropriated for expenditure. Additional disclosures must be made so users of financial statements may understand the classification, composition, changes in composition, spending policies and related investment policies of the funds.

How To Prepare for the Changes
Since UPMIFA allows for more flexibility in spending of endowment funds, FSP 117-1 requires a significant increase in the required disclosures to compensate for the lack of hard and fast rules. Unfortunately, this may require significant efforts by nonprofit organizations and their accountants to comply with the new FASB pronouncement, with possibly some increase in bookkeeping requirements. It is important that organizations review endowment funds and donor communications to gather information required to implement the changes. The nonprofit organization may want to adopt or modify endowment management and spending policies to be consistent with the changes.

Catching Up
After 35 years, UPMIFA was a welcomed update to an aging set of rules, allowing needed flexibility for management and spending of endowment funds. And although FSP 117-1 attempts to provide accounting rules to deal with the new flexibility, it may cause disruption until nonprofit organizations adjust to the new disclosures and rules set forth by the pronouncement. However, the benefit afforded to nonprofit organizations regarding flexibility will far outweigh the initial measures necessary to comply with the new standards.

This article contributed by Paul Peterson, Partner with Armanino McKenna. Paul can answer any questions regarding this article. Contact Paul at (925) 790-2600 or e-mail This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

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