Definition
Under ASC 958-205, an endowment fund is an established fund of cash, securities, or other assets held to provide a source of income in perpetuity or for a long period. A donor-restricted endowment fund exists because a donor stipulated that the principal be maintained, so it is reported within net assets with donor restrictions. A board-designated endowment, often called a quasi-endowment, is a decision of the governing board, so it is reported within net assets without donor restrictions.
Why it matters in an audit or review
Auditors test the classification of each fund against the gift instruments, the state law that governs spending, and the appropriation of amounts for expenditure. Disclosures cover the governing board's interpretation of state law, spending and investment policies, the composition of funds by net asset class, and a reconciliation of changes in the year. Fair value of the investments is a key audit area (see ASC 820).
Example
Illustrative: a donor gives $500,000 to be held permanently. Investment return over the year is $30,000, and the board appropriates $20,000 for scholarships under its spending policy. The fund balance grows by $10,000 and stays in net assets with donor restrictions until released for the purpose.
Common mistakes
- Treating a board-designated fund as a donor restriction.
- Releasing earnings without a board appropriation.
Sources
- FASB ASC 958-205, Not-for-Profit Entities, Presentation of Financial Statements (endowment funds, classification and disclosures)
- FASB ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities: https://storage.fasb.org/ASU%202016-14.pdf
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error