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FASB Issues Final FSP on Endowments

On August 6, 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) FAS 117-1, "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 on All Endowment Funds."

FAS 117-1 provides 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 Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA).

In addition, the objective of FAS 117-1 is to provide more detailed disclosures about an organization's endowment funds (both donor-restricted and board-designated), whether or not the organization is subject to UPMIFA.

The enhanced disclosures regarding both donor-restricted and board-designated endowment funds should enable users of financial statements to understand the following:

• Net asset classification
• Net asset composition
• Changes in net asset composition
• Spending policies
• Related investment policies of both donor-restricted and board-designated endowment funds

FAS 117-1 includes further detail about the required disclosures.

UPMIFA is a model act approved by the Uniform Law Commission, which serves as a guide for states to use when enacting legislation. It is a modernized version of the Uniform Management of Institutional Funds Act of 1972 (UMIFA), the model act on which 46 states and the District of Columbia have based their primary laws governing the investment and management of donor-restricted endowment funds by not-for-profit organizations.

UPMIFA directs managers of charities to:

• Consider general economic conditions
• Make decisions on a portfolio basis
• Allocate risk and return across the portfolio
• Consider the needs of the charity when making distributions and preserving capital

To date, approximately 25 states have enacted a version of UPMIFA and many more, including Illinois, are expected to do so over the next few years. The current status of enactments and introduced legislation can be found by clicking here.

Additional Impact on Not-for-Profits Subject to UPMIFA

Once Illinois enacts a version of UPMIFA, the NPO:

• Will be required to classify a portion of a donor-restricted endowment fund of perpetual duration (as distinguished from term endowments) as permanently restricted net assets. The amount classified as permanently restricted should be 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 (preserved) permanently, consistent with the relevant law.
• The portion of the fund that is not classified as permanently restricted net assets as defined in (1) shall be classified as temporarily restricted net assets (time-restricted) until appropriated for expenditure by the organization.

Effective Date

The provisions of FAS 117-1 are effective for fiscal years ending after December 15, 2008. Earlier application is permitted provided that annual financial statements for that fiscal year have not been previously issued.

To see a complete copy of FAS 117-1 or UPMIFA, follow the links to the Blackman Kallick Web site below.

FASB Staff Position (FSP) FAS 117-1, 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 for All Endowment Funds

Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA)

For more information, please contact Cliff Shapiro at 312-980-2908.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.