Accounting for Endowments - Get UPMIFA'd

On Tuesday, January 26, 2010, Ted Williamson of RubinBrown discussed the impace of the Uniform Prudent Management of Institutional Funds Act (UPMIFA) with the nfpFMA members. UPMIFA was signed into Missouri law on July 10, 2009 and Illinois law on June 30, 2009. UPMIFA replaces the Uniform Management of Institutional Funds Act which had been in effect in Missouri since 1976 and Illlinois since 1973.


Though, as always, donor intent reigns supreme, in the absence of specific donor instructions, UPMIFA requires preservation of principal through the practice of a “total return focus” which allows the nfp to spend gains as well as earnings. This applies even for underwater investments provided that what is expended is “prudent for the uses, benefits, purposes, and duration for which the endowment fund is established.”

Also, under UPMIFA, endowment earnings are considered donor restricted until formally approved for expenditure by the organization (usually by board decree). Thus earnings on endowments are considered temporarily restricted until appropriated for expenditure by the organization.

UPMIFA applies retroactively to all previous endowment gifts.

FASB 117-1 adjusts accounting rules for the effects of UPMIFA and applies retroactively to all existing endowments. This means unappropriated earnings in prior years should be reclassified from unrestricted to temporarily restricted net assets. However, prior year financial statements should not be restated because UPMIFA is a change in the law rather than a change in accounting, and the financial statements should reflect the laws in effect during that accounting period.

FASB 117-1 also requires certain disclosures on the financial statements that provide information about the composition of the endowment, a roll forward of the endowment by net asset classification, and certain policy statements, in addition to disclosures required by other FASB statements: the nature and types of temporary and permanent restrictions (FASB 117), and the aggregate amount of underwater endowments (FASB 124).


Recommended Action Steps:
• review existing endowment agreements to see which have spending provisions that will take precedence over UPMIFA
• consider rewriting standard donor endowment agreements to comply with UPMIFA
• work with legal counsel to develop an interpretation of state law relative to the balance of endowments that must be retained permanently
• develop a formal investment policy, or revise the existing policy, to conform to the provisions of UPMIFA
• develop a formal endowment spending policy to conform to the provisions of UPMIFA
• develop a policy regarding the expenditure of underwater endowments
• develop a formal process for appropriating endowment earnings for expenditure
• develop a system for tracking endowment balances by individual endowment fund and allocating earnings and distributions to these funds.