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Endowments and UPMIFA, An Overview
- 1. Endowments and UPMIFA Overview
- 2. Agenda •What is an institutional fund and endowment? •What is UPMIFA and what are its changes? •GAAP Disclosures - FASB ASC 958-205, Not-For- Profit Organizations – Net Asset Classification, and UPMIFA 2
- 3. Who does UPMIFA apply to? • The UPMIFA applies to: - Institutional funds - Endowment funds • Institutional Funds = A fund held by an institution exclusively for charitable purposes: • Institution = Any person / entity organized and operated exclusively for charitable purposes. 3
- 4. Examples of institutional funds • Nearly all of the funds held by a charity are “institutional funds”. • Examples: - Operating bank account of a charity. All of the investments of the charity. It excludes the program- related assets. - Endowment held within the charity for a specific purposes, such as scholarships. - Funds set aside by the charity for a specific purpose, i.e. building a library. NOT an institutional fund: - A fund held by a for-profit, even if it is for charitable purposes. 4 - Endowment fund set up as a charitable trust with an individual / corporate trustee.
- 5. What are Endowment funds • An endowment fund – is an institutional fund that, under the terms of a gift instrument, is not wholly expendable by the institution on a current basis. • Board-designated endowments are not, in the legal sense endowments; however for GAAP (which has a broader definition then the legal definition) they are endowment and are unrestricted (since there is no donor imposed restriction). • Board designated endowments must meet GAAP endowment disclosure requirements. 5
- 6. What are Endowment funds - Gift instrument - Relevant in determining the management / spending rules of the endowment. (UPMIFA will NOT apply if the gift instrument addresses a specific issue) - Since an endowment is established by a gift instrument, and cannot be fully expandable, it is classified as follows: - The portion that must be maintained on a permanently basis is classified as a permanently restricted asset – “aka corpus”. - i.e.: Scholarship fund, where only the income can be used. - board-designated endowments are not donor restricted and are classified as unrestricted net assets 6
- 7. What is UPMIFA? Uniform Prudent Management of Institutional Funds Act: - UPMIFA was signed into law in 2006 (following the dissolution of UMIFA). The main purpose of UPMIFA is to guide the management of endowments by providing the following: - Eliminates the historic dollar value (HDV) corpus spending limitation, and replaces it with a modern prudence standard. - Provides for prudence for the management and spending of the endowment. - Provides for easier modifications to certain donor restrictions. 7
- 8. Prudence under UPMIFA Uniform Prudent Management of Institutional Funds Act: - The law eliminates the standard Historic Dollar Value (HDV) – institutions were not allowed to spend below a fund’s HDV (the value of all contributions to the fund). - It allows spending from an underwater endowment (FMV < amount restricted by the donor) if the board determines it is prudent to do so. - The board should follow the following 7 criteria in 8 determining expenditures from / management of the endowment:
- 9. Prudence under UPMIFA Uniform Prudent Management of Institutional Funds Act: - The 7 criteria: - 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 9
- 10. UPMIFA - Modifications Uniform Prudent Management of Institutional Funds Act: - Permits the release or modification of a restriction by a charity if the donor consents in tangible or electronic writing and the charity continues its charitable purposes: - Allows for a charity to modify the restriction (without donor consent), through a court of law for the following: - Restriction is impracticable, wasteful, illegal. - Restrictions impairs the investment value of the endowment. - Modification will further the mission of the 10 endowment due to circumstances not anticipated
- 11. UPMIFA – FASB ASC 958 • In general, endowments are categorized as follows: – Charity should classify all or a portion of the endowment as permanently restricted. – Earnings refer to both realized and unrealized income. Under UPMIFA earnings, unless otherwise specified in the gift document, must be classified as donor- restricted until they are appropriated for spending. Therefore earnings are temporary restricted until appropriated. – Distributions from the endowment, and losses suffered by the endowment, be taken from the endowment portion of the temporarily restricted net asset class first (until it goes to zero), then from the unrestricted net 11 asset class.
- 12. UPMIFA – FASB ASC 958 • Example of endowment under water: • - At December 31, 2012, a charity has an endowment of $100,000 with a fair market of $90,000. • The treatment is as follows: • - Permanently Restricted Fund: $100,000 • - Temporarily Restricted Earnings: $5,000 – ($5,000) = $ - • - Unrestricted Income: ($5,000) 12
- 13. UPMIFA – GAAP Disclosures • 1. Governing board’s interpretation of the law(s) • 2. Endowment spending policy • 3. Investing policies • 4. Composition by net asset class • 5. Reconciliation of beginning and ending balances • 6. Nature and types of permanent or temporary 13
Hinweis der Redaktion
- The key changes that UPMIFA brought are: Clarified the standards for spending. Clarified the standards for managing ALL of the institutional funds. Clarified the modification of the restrictions on certain funds
- The key here is that the institution is a charitable organization / governmental subdivision that it holds funds exclusively for CHARITABLE purposes. The key here is exclusively for charitable purposes. IT CANNOT be an entity or person who does other activities and holds charitable funds. It could be a trust too; however all of the non-charitable interest should have expired to be an institutional fund. The definition of the intuitional fund is very broad – It EXLUDES program related assets (i.e. the fixed assets of the charity). It refers to ALL of the funds that are being held for a specific purpose by the charity.
- ALL charities qualify as institutions and thus are governed by UPMIFA. Really the type of FUNDS that UPMIFA does not govern are the types that where a corporation / TRUST / ANY Other entity holds funds for charitable purposes.
- An endowment fund is really long term, the purpose of the gift is to continue the mission of its donor in servicing the non for profit. The idea behind the endowment is that it will be there in the future to service the specific needs that the donor restrict its usage for. Example: Donated $100,000 and the money should be kept intact and the income should be used for scholarships. Donated $100,000 and the money should be intact for 20 years and the income should be used for books. FOR GAAP any type of fund that is set aside for a specific purpose are considered endowments. i.e. the Board designates a certain funds to accumulate over 20 years and then after 20 years have passed, the funds can be used to built a library.
- The gift document is anything in writing and includes anything in electronic form. The gift document is the KEY to the endowment. IT practically specifies all of the key areas of the endowment. This needs to be as much detailed as possible. The detailed the better. UPMIFA does NOT apply once the gift instrument / agreement addresses a specific purpose, because the donor who is giving the money is making the decision. Following the gift instrument you can specify what amount is permanently restricted and what amount needs to go to the temporary income. The gift instrument basically specifies the corpus of the endowment that is permanently restricted. The gift instrument can include any type of documents; like: Grant; will; deed; conveyance Agreement; memorandum; Articles; bylaws; etc
- UPMIFA really applies to endowments where the gift agreement / document is really silent on a specific issue. The main purpose of the law is to provide prudence in the management of the endowment in the absence of a written agreement by the donor. It primarily eliminates the historic dollar value, and replaces it with 7 general criteria. These criteria emphasize prudence in the management / spending of an endowment. The other thing behind UPMIFA is that it gives the charity the option to use so much of an endowment fund as it deems prudent for the endowment uses / purposes / duration. PRUDENCE is the overall concept that the law incorporates.
- It eliminates the HDV concept in favor of this multi-faceted prudence standard. Before the Organization could spend anything from the endowment as long as the spending did not go below the corpus / original donation. NOW, you can spend anything as long as you follow the 7 criteria of prudence. With regards to underwater fund, the extend to what expenditures are prudent is NOT easy to determine. In MOST of these cases the actual donor or an attorney needs to be involved to determine what you can spend from an underwater endowment in a prudent manner / fashion.
- Policy may be based on the average market value of the endowment over the years and the needs of a charity. There is NOT a one size fits for ALL policy for the management of the endowment. It is really based on the overall prudence factor. The spending policy really needs to satisfy the overall prudence factors, without setting specific thresholds absent to an analysis that carries the mission of the donation in a prudent way. Should focus on the objective of the donation and how spending from it is prudent with its objectives.
- Especially applicable to old-funds (over 20 years and less than $25,000). For these funds you do NOT need court order / donor consent / if the restriction is impractical / impossible to achieve. Example: Donations for a vaccine that already has had a cure.
- Restriction is ALL dependent on the gift agreement. The gift agreement specifies what can restricted and what cannot. Absent to an agreement, under UPMIFA ALL earnings are temporary restricted. ALL of the distributions should be taken from the temporary restricted income (until it goes down to $-) and then unrestricted. The endowment fund remain unchanged.
- Key difference is when the endowment is underwater.