Endowment Funds and FSP 117-1
By Dick Larkin
A question has come up as to just what constitutes an endowment fund for purposes of application of Financial Accounting Standards Board (FASB) Staff Position (FSP) 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 (UPMIFA) and Enhanced Disclosures for All Endowment Funds, (now part of ASC 958-205). For example,must a perpetual, irrevocable third-party trust be included with endowments?
As is often the case, the answer is, ‘it depends.’ Variables to consider are whether or not the organization is subject to an enacted version of UPMIFA, whether the fund in question is donor-restricted vs. board designated, who manages the assets, and which paragraph of FSP 117-1 is being applied.
For purposes of Paragraphs 5 and 8 of FSP 117-1 (net asset classification), only donor-restricted endowment funds are covered, and only if the organization is subject to UPMIFA. However, since UPMIFA does not apply to assets not under the control of the organization, these paragraphs would not apply to a third-party trust for the benefit of the organization when the trust is managed by an unrelated trustee, such as a bank. Of course if the organization were the trustee, or a co-trustee, then UPMIFA would apply.
For purposes of Paragraphs 11 and 12 of FSP 117-1 (disclosures), the answer is more complex. First, note that UPMIFA is not a factor here; all organizations maintaining endowment funds must make these disclosures. Also, all endowment funds – both donor-restricted and board-designated – are included in the disclosures, which must show the two types separately.
As for third-party trusts, the FSP is not specific as to their status. In general such trusts would not be included in the 'endowment fund' for purposes of these disclosures because the purpose of the disclosures, per the background material to FSP 117-1, is to enable readers to assess the organization's discharge of its stewardship and management responsibilities over such funds. Since the organization has no responsibility for managing such funds, the need for this type of disclosure about them is not present. (See the end of paragraph A-18 in the original FSP.) However, if an organization wishes to include such funds in its disclosures, this would be acceptable, but they should be listed separately from funds which the organization does manage. Such inclusion might be appropriate, for example, if the organization regularly publicizes such funds as part of its 'endowment' in an annual report or fundraising report, or uses the term in its fundraising appeals for such gifts or the legal documents relating thereto.
The definition of an endowment could also be considered. FASB's definition of an endowment fund can be found in footnote 2 to paragraph 1 of the FSP (now in ASC 958- 205-20-Glossary), but that definition does not speak to this scenario, one way or the other. The overall tone of the definition could be interpreted to, in effect, say that an endowment fund is whatever management says it is (similar to the concept of board-designated endowment funds).
For more information, please contact our Nonprofit Services Group at 440-449 6800 or Dick Larkin, National Nonprofit Technical Director of the Institute for Nonprofit Excellence in BDO Seidman’s Greater Washington, D.C. office at dlarkin@bdo.com.
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