Back to top

Blog

Click here to go back


Oct 26 2012
Non-profits - Accounting for Endowments

Posted in not-for-profits

How is your non-profit organization accounting for its endowments?

First, accounting for endowments starts with donor imposed restrictions.  But what happens when donors do not provide adequate guidelines for investment and spending from the fund?

Accounting for endowments became a significant issue for many non-profits and was highlighted during 2007/2008 when investment values plummeted and annual funding revenue decreased due to various economic factors.  At that time, organizations that relied on investment income to supplement their program funding faced a major challenge in states (like Massachusetts) that required non-profits to follow the Uniform Management of Institutional Funds Act (UMIFA) to account for endowments.  Under UMIFA, a charity could spend appreciation from an endowment fund that exceeded the fund's historic dollar value the aggregate value of all contributions to an endowment fund at the time they were made to the extent the charity deemed prudent. A rebuttable presumption of imprudence, however, was created if the charity spent more than 7% of the average fair market value of the institution's endowment funds in any year.  If the fund was underwater, meaning the current fair market value was less than the original value of the gift, no spending could occur from the fund.

On June 30, 2009, Massachusetts enacted the Uniform Prudent Management of Institutional Funds Act (UPMIFA) to account for endowments.  Under UPMIFA, Massachusetts non-profits are no longer restricted by the historic dollar value of a fund.  Without that limitation, organizations can now spend from a fund that is underwater so long as the organization deems the spending to be prudent when considering the following factors:

  • the duration and preservation of the endowment fund;
  • the purposes of the institution and the endowment fund;general economic conditions;
  • the possible effect of inflation or deflation;
  • the expected total return from income and the appreciation of investments;
  • other resources of the institution; and
  • the investment policy of the institution.

UPMIFA also removes the presumption of imprudence for spending more than 7% of the average FMV of the endowment funds.

Generally, an organization's board of directors will be responsible for setting the policy for applying UPMIFA and determining that organization's approach to prudent spending. 

As noted above and reiterated here due to the importance, donor restrictions WILL override UPMIFA.

To discuss this or other matters involving your non-profit organization please call 781-468-6655.

Please visit www.twbatescpa.com to learn more about Thomas W. Bates & Associates CPAs.  We provide quality accounting and tax services to business, individuals and non-profit organizations.

Last Updated by Mike on 2012-10-26 06:49:18 AM

Thank you for visiting our blog.  While we work hard to keep our content informative and accurate, should you come across an apparent error or misstatement we would appreciate your feedback so we are able to correct the post.  Please be aware that certain information contained in a post may be time sensitive, and as often is the case, can become outdated.

The content of our blog often represents our professional opinion, but it may not apply to your specific set of circumstances, please contact your tax professional for more information.  What you find on this blog should not be taken as counsel and nor should it be considered as fact or absolute.

Comments on this website are the sole responsibility of their writers and the writer will take full responsibility, liability, and blame from any libel or litigation that results from something written in or as a direct result of something written in a comment.

Thank you for visiting our blog.  While we work hard to keep our content informative and accurate, should you come across an apparent error or misstatement we would appreciate your feedback so we are able to correct the post.  Please be aware that certain information contained in a post may be time sensitive, and as often is the case, can become outdated.

The content of our blog often represents our professional opinion, but it may not apply to your specific set of circumstances, please contact your tax professional for more information.  What you find on this blog should not be taken as counsel and nor should it be considered as fact or absolute.

Comments on this website are the sole responsibility of their writers and the writer will take full responsibility, liability, and blame from any libel or litigation that results from something written in or as a direct result of something written in a comment.

Thank you for visiting our blog.  While we work hard to keep our content informative and accurate, should you come across an apparent error or misstatement we would appreciate your feedback so we are able to correct the post.  Please be aware that certain information contained in a post may be time sensitive, and as often is the case, can become outdated.

The content of our blog often represents our professional opinion, but it may not apply to your specific set of circumstances, please contact your tax professional for more information.  What you find on this blog should not be taken as counsel and nor should it be considered as fact or absolute.

Comments on this website are the sole responsibility of their writers and the writer will take full responsibility, liability, and blame from any libel or litigation that results from something written in or as a direct result of something written in a comment.