Endowments of Not-for-Profit Organizations (FSP FAS 117-1)


By Bradley Tobe

In 2006, the Uniform Law Commission (ULC) approved and recommended for enactment in all states the Uniform Prudent Management of Institutional Funds Act of 2006 (known as UPMIFA), which updated expenditure policies for not-for-profit organizations. This new legislation has been adopted by approximately 35 of the 50 states in the U.S. as of May 2009, and more states are expected to follow during 2009. The legislatures of each state must introduce and approve UPMIFA in order for it to be applicable in that state.   


Ohio and Maryland have gone through this process at the state level and have enacted UPMIFA during 2009. Pennsylvania, on the other hand, has not enacted UPMFIA into law as of May 2009. Pennsylvania still follows the Commonwealth of Pennsylvania Act 141, which has been in effect since December 1998. UPMIFA provides guidance concerning management and investment of funds held by the organizations and imposes additional duties on those who manage the charitable funds. Among the many changes under UPMIFA is new guidance for improving the protection of donor intent for endowments. When a donor expresses clear intent in a written donation, the legislation requires the organization to follow the donor’s instructions. When a donor’s intent is not explicitly expressed, UPMIFA directs the charity to spend an amount that is prudent and consistent with the donation’s purpose, and considers the donor’s intent that the fund continue in perpetuity. In August 2008, as a result of UPMIFA, the Financial Accounting Standards Board (FASB) released guidance in FASB Staff Position No. 117-1, “Endowments of Not-for-Profit Organizations” (FSP FAS 117-1).  


This FSP is effective for years ending after December 15, 2008. The FSP provides guidance on the net asset classification of donor-restricted endowment funds for a not-for-profit organization that adopted UPMIFA.  Under this guidance, the organization must classify a portion of a donor-restricted endowment fund of perpetual duration as permanently restricted net assets, and the remaining portion is to be classified as temporarily restricted net assets (time-restricted) until it has been appropriated for expenditure by the organization. Note that earnings on the endowment that used to be considered unrestricted under past guidance will now be classified as temporarily restricted until the expenditure is appropriated and approved.  The most significant changes for organizations will be the new disclosure requirements under FSP 117-1. Organizations will be required to disclose information to enable users of the financial statements to understand the net asset classifications, changes in net assets, spending policies, and related investment policies of its endowment funds. These financial disclosures are very specific and are detailed in FSP 117-1.

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