Implementing FAS for Endowment Fund Management. MACPA s 2010 Government & Not for Profit Conference. April 30, 2010.

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1 Implementing FAS for Endowment Fund Management MACPA s 2010 Government & Not for Profit Conference April 30, 2010 Introduction Marie Caputo, CPA, CGFM Partner with Clifton Gunderson 18 years of experience Clifton Gunderson s Local Not for Profit Team Leader MACPA s Not for Profit Committee cochair President of the DC Metropolitan Chapter of the American Women s Society of CPAs Recognized as a SmartCPA by the Washington SmartCEO Magazine 2 1

2 FSP FAS Presentation Overview Highlights FSP FAS UPMIFA Net asset classification UMIFA UPMIFA what changed Example Disclosure guidelines 3 FSP FAS Highlights Effective for fiscal years ending after December 15, 2008 Net asset classification guidance effective for not for profits (NFPs) with donor restricted endowments of perpetual duration (permanently restricted net assets) in states that have enacted UPMIFA Disclosure guidelines effective for all NFPs with endowments (donor restricted and boarddesignated endowments) whether or not UPMIFA applies Uses the term endowment to mean: Donor restricted endowment funds Board designated endowment funds (quasi endowments) 4 2

3 UPMIFA Highlights What is it? Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA) A model act that serves as the basis for state by state legislation An overhaul /modernization of the Uniform Management of Institutional Funds Act of 1972 (UMIFA), which has/had been the basis for primary endowment laws in 46 states and the District of Columbia 5 UPMIFA: Enactment Status 6 3

4 UPMIFA Highlights Go to to find: Full text of the model act History of UPMIFA and UMIFA State law comparisons to the model act (prior to enactment of UPMIFA) Enactment status 7 UPMIFA Highlights Investment freedom Portfolio managers are not limited in the kinds of assets that may be sought for the portfolio (broader than UMIFA) Costs Costs must be managed prudently in relationship to the assets, the purposes of the institution, and the skills available to the institution (not addressed in UMIFA) Expenditure of funds Total return expenditure is expressly authorized under comprehensive prudent standards relating to the whole economic situation of the charitable institution (UMIFA does not address this standard) 8 4

5 UPMIFA Highlights UPMIFA abolishes the historic dollar value limitation on expenditure in UMIFA. Seven percent rule. States may adopt a provision that creates a rebuttable presumption of imprudence if an institution expends an amount greater than 7% of the fair market value of a fund, calculated in an averaging formula over three years (not addressed in UMIFA). Release of restrictions for small institutional funds. There is a new procedure for releasing restrictions on small institutional funds (less than $25,000) held for a long period of time (20 years), requiring only notice to the Attorney General 60 days in advance of the release (not addressed in UMIFA). 9 UPMIFA Highlights Application UPMIFA applies to funds held in any form, including NFP corporate form, except charitable trusts, with a commercial or individual trustee (UMIFA applies only to endowments held by a charitable institution for its own account) 10 5

6 UPMIFA Highlights 7 Factors to Consider in Prudent Appropriation for Spending 1. Fund duration 2. Fund/Institution purposes 3. General economic conditions 4. Effects inflation/deflation 5. Expected total return 6. Other resources 7. Investment policy of the institution 11 UPMIFA Highlights Other Key Points Most of the provisions of UPMIFA, including the key appropriation provisions, only apply to donor endowments, not board designated endowments (or other funds) UPMIFA applies retroactively, that is, to all such funds in existence, not just to new funds received after the law is effective The specific provisions of UPMIFA only apply in the absence of explicit donor stipulations 12 6

7 UPMIFA Highlights Why it matters UPMIFA may require a change in current accounting UMIFA no change in current accounting Disclosures are the same no matter which is effective 13 Net Asset Classification UMIFA FAS 117 and 124; EITF Topic D 49 Net asset classification is done fund by fund and then aggregated Historic dollar value (HDV) portion of fund is classified as permanently restricted net assets Portion of each fund in excess of HDV: Additional amounts a governing board determines that the law requires to be retained permanently are also classified as permanently restricted net assets Donors may specify portions of investment earnings on the fund that must be maintained in perpetuity. These amounts are classified as permanently restricted net assets Remainder of fund is classified as temporarily restricted or unrestricted net assets based on existence of donor stipulations on the use of investment earnings 14 7

8 Net Asset Classification UMIFA Losses that bring the value of the fund below HDV are charged to temporarily restricted or unrestricted net assets Unless maintenance of purchasing power is required by either the donor or the state s UMIFA, the amount classified as permanently restricted net assets for a particular fund does not change from year to year 15 Net Asset Classification UPMIFA What Changed? FSP FAS Historic dollar value (HDV) concept is eliminated by UPMIFA in favor of more robust guidance on what constitutes prudent endowment spending 16 8

9 Net Asset Classification UPMIFA What Changed? Permanently restricted net assets. Not much has changed. In the absence of explicit donor stipulations, an institution must determine what portion of a donor restricted fund the state s UPMIFA (and other relevant law) requires the organization to retain permanently. This will be classified as permanently restricted net assets. Reflects the organization s fiduciary duty for a fund of permanent duration Depending on whether or not the state s UPMIFA is interpreted to explicitly require maintenance of purchasing power Permanently restricted net assets will likely be either the equivalent of HDV or purchasing power maintained by HDV 17 Net Asset Classification UPMIFA What Changed? Unless stated otherwise in the gift instrument, the assets in an endowment fund are donor restricted assets until appropriated for expenditure by the institution Net asset classification changes possible reclassifications from prior year relating to donor restricted endowments: Considerations made on a fund by fund basis Portion of endowment that is not permanently restricted is time restricted (temporary restriction) until the organization appropriates it for expenditure Reinstate the purpose restriction on any portion of a donorrestricted endowment fund if the purpose restriction was previously considered fulfilled but the resources were not appropriate Net asset reclassifications from initial application of the FSP are a cumulative change adjustment in the year in which the law is effective Reported in a separate line item in the statement of activities, outside of any operating measures The time restriction lapses upon appropriation 18 9

10 Net Asset Classification UPMIFA What Changed? The only balances in donor endowments that will be classified as unrestricted are negative balances in underwater situations Permanently restricted net assets are not diminished by investment losses or organizational appropriations for spending Allows for short term funding/cash management flexibility for legal purposes versus net asset classification for financial reporting purposes Temporarily restricted or unrestricted net assets within the endowment, not within operating funds, would be charged 19 Net Asset Classification UPMIFA What Changed? Appropriation Can be through normal budget process Can be emergency appropriation Appropriation for expenditure is deemed to occur upon approval for expenditure, unless approval is for a future period then no expenditure until the period is reached For funds without purpose restrictions, reclassification to unrestricted occurs at time of appropriation For funds with purpose restrictions, reclassification can only happen when funds are spent or deemed spent for that purpose Purpose restrictions cannot be released until amounts are appropriated: The deemed spent rule will no longer apply to unappropriated amounts 20 10

11 Net Asset Classification Example Step 1 New gift comes in for endowment, with explicit donor language affecting initial net asset classification; Gift instrument states purpose restrictions relating to the use of future investment earnings Managed as one fund, likely unitized as part of an investment pool All classified as permanently restricted net assets for financial reporting purposes 21 Net Asset Classification Example Step 2 Investment activity Allocated to fund based on unitization Permanently restricted net assets normally do not increase or decrease Exception: Explicit requirements by donor or law such as to maintain purchasing power Increase or decrease is to temporarily restricted net assets Exception: In underwater situations, temporarily restricted net assets cannot be negative so unrestricted net assets would be decreased Very Important that unrestricted deficit is within the endowment 22 11

12 Net Asset Classification Example Step 3 Funds are spent elsewhere for the same purpose restrictions No effect on either the fund balance or on net asset classification A time restriction is still in place until appropriation and thus the funds are available for spending for that purpose In other words, unlike with net asset classifications for UMIFA endowments, the deemed spent rule does not apply here and there is no reclassification to unrestricted net assets for financial reporting purposes 23 Net Asset Classification Example Step 4 Board approves funding from the endowment for next year s budget No effect on either the fund balance or net asset classification until next year is reached Step 5 Next year is reached and the amounts approved are now available for spending Fund balance is reduced by that amount, even if the cash is not yet transferred: In effect the cash is due to the corresponding nonendowment fund where it will be spent (operating fund, plant fund, etc.) Alternative treatment: In a corresponding boarddesignated endowment fund until the cash is moved 24 12

13 Disclosure Guidelines Interpretation of Laws Disclose the governing board s interpretation of the law(s) underlying the organization s net asset classification of donor restricted endowment funds Endowment Spending Policy Description of the organization s endowment spending policy Endowment Investment Policies Return objectives and risk parameters Relation of the objectives to the spending policy Strategies for achieving those objectives 25 Disclosure Guidelines Composition of Endowment by Net Asset Class At the end of the period In total, and By type of endowment fund showing donor restricted endowments separately from board designated endowment funds Reconciliation of Beginning and Ending Endowments In total, and By net asset classification separated into: Investment income Net appreciation/depreciation of investments, Contributions Amounts appropriated for expenditure, and Reclassifications and other changes 26 13

14 Disclosure Guidelines Sample Endowment Composition Disclosure (No Underwater Funds) Endowment Net Asset Composition by Type of Fund as of June 30, 20XX Unrestricted Temporarily Restricted Permanently Restricted Total Donor restricted endowment funds $ $ 200,000 $ 1,500,000 $ 1,700,000 Board designated endowment funds 1,000,000 1,000,000 Total Funds $ 1,000,000 $ 200,000 $ 1,500,000 $ 2,700, Disclosure Guidelines Sample Endowment Composition Disclosure (Underwater Funds) Endowment Net Asset Composition by Type of Fund as of June 30, 20XX Unrestricted Temporarily Restricted Permanently Restricted Total Donor restricted endowment funds $ (100,000) $ 200,000 $ 1,500,000 $ 1,600,000 Board designated endowment funds 1,000,000 1,000,000 Total Funds $ 900,000 $ 200,000 $ 1,500,000 $ 2,600,

15 Contact Information Marie C. Caputo, CPA, CGFM Any tax advice included in this communication is not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer