K.B. Parrish & Co.
Certified Public Accountants
UPMIFA vs. FASB –
Compatibility Issues
FASB FSP 117-1, UPMIFA and
Community Foundations
Ryan W. Keith, CPA, K.B. Parrish & Co. LLP, rkeith@kbparrish.com
K.B. Parrish & Co.
Certified Public Accountants

Agenda
Identification of endowment funds
 Fund agreements and accounting treatment
under the new accounting standards
 Board interpretation of the UPMIFA law
 Endowment fund accounting and related
disclosures

K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1
Financial Accounting Standards Board Staff
Position 117-1
 Issued August 6, 2008
 Effective for all fiscal years ending after
December 15, 2008

K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1

Which funds does it impact?

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Endowment funds
Identification of endowment funds (per FASB)
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An established fund of cash, securities, or other assets to
provide income for the maintenance of a not-for-profit
organization.
The use of the assets of the fund may be permanently
restricted, temporarily restricted, or unrestricted.
Generally established by donor-restricted gifts and
bequests to provide a permanent endowment to provide a
permanent source of income or a term endowment which
is to provide income for a specified period.
K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1

Identification of endowment funds continued
Portion that must be maintained permanently is
classified as permanently restricted net assets
 Portion of term endowment that must be
maintained for a specified term is classified as
temporarily restricted net assets

K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1

Identification of endowment funds - continued

Two types of endowment funds

Donor-restricted endowment funds
Endowed funds that are established by donor-restricted
gifts for that purpose
Board-designated endowment funds
Earmarked by governing board to be invested to
provide income for a long but unspecified period



K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1

Identification of endowment funds continued
Definitions of endowment funds differ between
FASB and UPMIFA
 This allows for endowments that legally fail to
meet the definition to be treated as endowments
for accounting purposes under the FASB
guidance

K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1

So what’s the problem?

There are inconsistencies between the UPMIFA
and FSP 117-1 which make it very difficult to
determine which funds are endowment funds
and how those funds are to be treated

Subject to interpretation

Variance power issues
K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1

Fund Agreements

Common wording

“Distributions – the ordinary income, capital
appreciation (realized and unrealized), and principal
(both historic dollar value and any principal
contributions, accumulations, additions, or
reinvestments) allocable to the Fund, net of the fees
and expenses set forth in this Agreement, may be
committed, granted, or expended pursuant to the
distribution (or spending) policy of the Community
Foundation, as such policy ……………..
K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1

Fund Agreements

Common wording

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“Continuity of the Fund – The Fund shall continue so long as
assets are available in the Fund and the purposes of the
Fund can be served by its continuation. If the Fund is
terminated………..”
This language dictates that there isn’t a requirement from
the donor for any component to be held in perpetuity, thus
eliminating the permanently restricted component of the
endowment fund
Basically, we are left a with temporarily restricted
endowment, until appropriations exhaust the fund balance
K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1

Fund Agreements

Theory of an endowment is a fund not fully
expendable on a current basis

Define “current basis”

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Are there limits on what we can spend right now?
Look to spending policies, fund agreements, and
organizing documents
K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1

Fund Agreements

Under UMIFA/UPMIFA, funds which are not wholly
expendable on a current basis to be endowment funds
and doesn’t include board designated assets

FSP 117-1, however, considers all funds that are
maintained to preserve income to be endowment funds

Board interpretation and consistency is very important until
further application guidance is available
K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1
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Board interpretation of enacted law
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Two interpretations available
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Must maintain the “fair value” of the original gift absent
donor stipulations to the contrary
Must preserve the “purchasing power” of the fund
absent donor stipulations to the contrary
What’s the difference?
K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1

Difference between maintaining fair value
and purchasing power

Fair value – permanent portion includes:

Original value of gifts donated to the permanent
endowment

Original value of subsequent gifts

Accumulations made in accordance with the direction
of applicable gift instrument
K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1

Difference between maintaining fair value
and purchasing power (continued)

Purchasing power – permanent portion includes:

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The same first three as the fair value treatment plus:
The portion of investment return added to the
permanent endowment to maintain its purchasing
power.
 So how is this determined?
K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1

Difference between maintaining fair value
and purchasing power (continued)

Purchasing power – investment return
component:

Each year, the permanent portion of the endowment
funds are increased by some measure of inflation
 Consumer Price Index
 Be consistent
K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1

Difference between maintaining fair value
and purchasing power (continued)
The inflation rate increase comes from
unrestricted net assets if the rate of return is less
than the inflation adjustment
 If the actual rate of return is greater than the
inflation adjustment, the excess becomes
available for appropriation and is classified as
temporarily restricted net assets until
appropriated

K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1

Difference between maintaining fair value
and purchasing power (continued)

So how will your organization interpret the law?

Factors
 Ease of implementation
 True interpretation
 Cost/benefit
K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1

Variance Power

How does this affect endowments?


Organizing documents or specific fund agreements
often grant variance power
Does this variance power automatically make the fund
unrestricted?
 Not necessarily – case-by-case basis
 Need to carefully examine wording to determine
extent of power
 Potentially an agency fund instead of net assets
K.B. Parrish & Co.
Certified Public Accountants
So what do we do?
K.B. Parrish & Co.
Certified Public Accountants
Consult your attorney
 Board interpretation
 Be consistent
 Continually evaluate documents,
agreements and implementation
 Watch for court cases!


The new guidance is so new, there isn’t
much precedence at this point, but it’s
coming.
K.B. Parrish & Co.
Certified Public Accountants

FSP 117-1

Accounting treatment
Unrestricted, Temporarily Restricted or
Permanently Restricted
 Reclassifications
 Financial statement disclosure

K.B. Parrish & Co.
Certified Public Accountants

Accounting treatment

Determining which of your funds are truly
endowments

Donor-restricted endowments

Board-designated endowments
K.B. Parrish & Co.
Certified Public Accountants

Accounting treatment

Donor-restricted endowments

Unrestricted

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Temporarily restricted
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Includes amounts not specifically dictated by donor as well
as reductions in the endowment below the original principal
Includes cumulative appreciation on the original principal of
the endowment less appropriated expenditures and
depreciation to the extent that the temporarily restricted
portion is greater than zero
Permanently restricted

Includes the original principal of the endowment that must
be retained permanently in accordance with explicit donor
stipulations or the amount the governing board determines
must be preserved in the absence or such stipulations
consistent with the relevant state law
K.B. Parrish & Co.
Certified Public Accountants

Accounting treatment

Donor-restricted endowments (continued)
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Investment losses
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The application of FASB No. 124, Accounting for
Certain Investments Held by Not-for-Profit
Organizations is not changed by FSP 117-1
Investment losses do not reduce the portion of the
endowment fund classified as permanently restricted
At the point that investment losses have reduced the
temporarily restricted endowment component to zero,
any remaining losses are shown as a reduction to the
unrestricted portion of the endowment fund
K.B. Parrish & Co.
Certified Public Accountants

Accounting treatment

Donor-restricted endowments (continued)

The portion of an endowment fund not classified
as permanently restricted is classified as
temporarily restricted net assets, until
appropriated for expenditure

Appropriation
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Deemed to occur upon approval for expenditure,
unless approved for future period
Appropriation can occur as part of formal annual
budget or specifically approved as needs arise
K.B. Parrish & Co.
Certified Public Accountants

Accounting treatment

Donor-restricted endowments (continued)
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Appropriation (continued)
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Absent a purpose restriction, appropriation eliminates
time restriction and appropriated amount is
reclassified to unrestricted net assets
For purpose restrictions not met, the appropriation is
not reclassified as unrestricted net assets until met
K.B. Parrish & Co.
Certified Public Accountants

Accounting treatment

Board-designated endowments

The portion of an organization’s unrestricted net
assets earmarked by the governing board to be
invested to provide income for a long but
unspecified period.

Not subject to UPMIFA

Internal designations are not restricted and are,
therefore, classified as unrestricted net assets
K.B. Parrish & Co.
Certified Public Accountants

Accounting treatment

Board-designated endowments (continued)

Board-designated endowments are subject to the
reporting disclosures required by FSP 117-1

No reclassification between net asset classes is necessary
as the funds are always a component of unrestricted

Shift from the endowment to non-endowment unrestricted
operating assets
K.B. Parrish & Co.
Certified Public Accountants

Accounting treatment

Reclassifications


Under FAS116 – “If an expense is incurred for a purpose
for which both unrestricted and temporarily restricted net
assets are available, a donor-imposed restriction is fulfilled
to the extent of the expense incurred unless the expense if
for a purpose that is directly attributable to another specific
external source of revenue.”
Any amounts previously determined to be available to
meet a purpose restriction, but that haven’t been
appropriated for expenditure are now considered
unavailable until appropriated and the purpose restriction
is reinstated
K.B. Parrish & Co.
Certified Public Accountants

Accounting treatment

Reclassifications
Net asset reclassifications in first year are
cumulative change adjustments
 Reported in separate line in statement of
activities
 Possible to have reclassification from
unrestricted to temporarily restricted net assets
in year of adoption

K.B. Parrish & Co.
Certified Public Accountants

Accounting treatment

Disclosures
Increased disclosure under FSP 117-1
regardless of enactment of state UPMIFA law
 Applicable for all endowment types
 Intention is to enable readers to understand the
classification of net assets
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Is it working?
Investment and spending policy information
K.B. Parrish & Co.
Certified Public Accountants

Accounting treatment

Disclosures (continued)
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Board interpretation
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Appropriation policies
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Investment policies
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Return objectives
Risk tolerance
Strategies
Relation to spending policy
K.B. Parrish & Co.
Certified Public Accountants

Accounting treatment

Disclosures (continued)

Composition of endowments by net asset class
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Potential for disconnect
Historic Dollar Value for permanently restricted net
assets, but not for endowment fund
Reconciliation, in total and by type, from
beginning of year to end of year
K.B. Parrish & Co.
Certified Public Accountants

Accounting treatment

Disclosures (continued)

Continued disclosure of temporarily restricted
and permanently restricted net assets as
required by SFAS 117

Fund deficiencies – “under water” funds
K.B. Parrish & Co.
Certified Public Accountants

Accounting treatment

Disclosures (continued)

Sample disclosure
2009
Endowment net asset composition by type of fund is as follows as of June 30, 2009:
Temporarily Permanently
Unrestricted
Restricted
Restricted
Donor-restricted endowment funds
$
(32,000) $
520,000 $ 1,500,000 $
Board-designated endowment funds
Total funds
25,000
$
(7,000) $
520,000 $
1,500,000 $
Total
1,988,000
25,000
2,013,000
K.B. Parrish & Co.
Certified Public Accountants

Accounting treatment

Disclosures (continued)
2009
Changes in endowment net assets are as follows for the year ended June 30:
Temporarily
Permanently
Unrestricted
Restricted
Restricted
Endowment net assets, beginning
$
1,000 $
950,000 $ 1,380,000 $
Investment return:
Investment income
Net depreciation
Total investment return
2,000
(10,000)
(8,000)
Contributions
-
Appropriation of endowment assets
for expenditure
-
Total funds
$
(7,000) $
50,000
(420,000)
(370,000)
-
(60,000)
520,000 $
120,000
1,500,000 $
Total
2,331,000
52,000
(430,000)
(378,000)
120,000
(60,000)
2,013,000
K.B. Parrish & Co.
Certified Public Accountants

Accounting treatment

Disclosures (continued)
2009
Permanently restricted net assets
(1) The portion of perpetual endowment funds that is required to be
retained permanently either by explicit donor stipulation or by UPMIFA
Total endowment funds classified as permanently restricted net assets
Temporarily restricted net assets
(1) Term endowment funds
(2) The portion of perpetual endowment funds subject to a
time restriction under UPMIFA:
Without purpose restrictions
With purpose restrictions
Total endowment funds classified as temporarily restricted net assets
$
$
1,500,000
1,500,000
$
5,000
$
70,000
445,000
520,000
K.B. Parrish & Co.
Certified Public Accountants

Other Issues

What else does the UPMIFA law bring to
the table?
Every organization subject to the new law must
adopt a prudent spending policy
 Investment policies become even more
important as they, in conjunction with the
spending policy, dictate the treatment of all
endowment funds

K.B. Parrish & Co.
Certified Public Accountants

Other Issues

What else does the UPMIFA law bring to the table?

Per Indiana law – “In determining to appropriate or
accumulate endowment funds, an institution shall (1) act in
good faith and with the care of a prudent person acting in
a like position would use under similar circumstances; and
(2) consider the following factors:
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Duration and preservation of the endowment fund
Purposes of the institution and the endowment fund
General economic conditions
Possible effects of inflation or deflation
Expected total return from income and the appreciation of
investments
Other resources of the institution
The investment policy of the institution”
K.B. Parrish & Co.
Certified Public Accountants

Other Issues

What else does the UPMIFA law bring to the table?

What is prudent?


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Needs to be determined by the governing board and
adhered to.
UPMIFA allows for optional 7% provision that creates a
presumption that expenditure appropriations in excess of
7% of the fair market value of an endowment fund is
imprudent.
Indiana has not adopted this provision, however it does
give a good reference point of “crossing the line”.
Less than 7% not necessarily prudent
K.B. Parrish & Co.
Certified Public Accountants

Other Issues

What else does the UPMIFA law bring to the table?

How does the thought of prudent spending apply to
accounting theory?



Imprudent appropriations and expenditures generally are a
reduction of unrestricted general operating assets.
You can spend it, but it isn’t coming from an endowment
fund!
Besides the accounting treatment, other consideration
should be given to what imprudent spending says about
the organization as a whole.
K.B. Parrish & Co.
Certified Public Accountants

Questions???

Ryan Keith, CPA
K.B. Parrish & Co. LLP
6840 Eagle Highlands Way
Indianapolis, IN 46254
(317) 347-5200