The accounting for and the responsibilities relating to endowments can be confusing to nonprofit organizations. Accounting staff, management, and the Finance Committee members should all have the knowledge to be able to ensure endowments are tracked correctly and that the organization is complying with UPMIFA. Here are the top 10 things you should know about endowments (in no particular order):
- You can have board designated endowments and donor-restricted endowments. If an endowment is set up, it means either the donor or the board has communicated that they want the original donation (aka corpus or principal) to remain in perpetuity and only the earnings can be spent.
- Don’t assume that your investment account balance should equal your endowment fund balance. It’s possible to have unrestricted or purpose restricted amounts in your investment account. The key is to understand what the donor’s intention is in order to know the type of restriction if any.
- Donor restricted endowments are included in net assets with donor restrictions. Board designated endowments are included in net assets without donor restrictions because the board can un-designate if they wish.
- You may have donor-restricted endowments from individual donors. You may also have an endowment that is made up of many donations. The latter is usually the result of a campaign where donors are asked to contribute to a permanently restricted endowment fund. It is important to track each endowment fund separately.
- Donor-restricted endowments include the original corpus amount plus any accumulated unspent investment earnings. These amounts must be tracked.
- The Organization should have a written spending policy that determines how much should be spent from each endowment fund on an annual basis. For example, if the spend percentage is 4%, then 4% of the total average balance of each fund would be withdrawn/subtracted from each fund. Again, this must be tracked for each fund.
- The spending policy should also address spending or non-spending when a fund is underwater.
- The annual amount to be spent should be determined prior to the beginning of the fiscal year based on the spending policy percentage, and then approved by the finance committee. The Board, finance committee, management, and CFO should all be very aware of the total amount that can be spent at the beginning of the year.
- It is considered imprudent under UPMIFA if, in any one year, the Organization spends 7% or more of the total endowment fund balance. UPMIFA is a law that has been adopted by most states in some form.
- Except in extremely limited circumstances with small amounts, the original corpus amount can only be released from restriction as per the donor’s direction.
Colette Kamps, Partner