Endowments, UPMIFA and underwater funds

• Distinguish donor-restricted endowments from board-designated endowments
• Explain how an enacted UPMIFA affects net asset classification of investment return
• Account for and disclose underwater endowment funds
• Tie the endowment rollforward to the notes and Schedule D Part V

Two kinds of endowment

ASC 958-205-45-13 says endowment funds are established by a donor or by a governing board.

• A donor-restricted endowment fund results from a gift with a stipulation that the resources be invested for a long, specified period or in perpetuity. A term endowment ends after the period; a permanent endowment does not.
• A board-designated endowment fund (also called a quasi-endowment or funds functioning as endowment) is created when the board earmarks part of its net assets without donor restrictions to be invested for a long but unspecified period.

ASC 958-205-45-13A puts donor-restricted endowments in net assets with donor restrictions and board-designated endowments in net assets without donor restrictions. A board-designated fund can include donor-restricted amounts in rare cases.

Where UPMIFA comes in

Most states have enacted a version of the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA). ASC 958-205-45-13B explains the accounting effect: an enacted UPMIFA extends the donor's restriction to the fund's investment return until the board appropriates it for expenditure. So under ASC 958-205-45-13D the original gift, later gifts to the fund and the investment return are all initially net assets with donor restrictions.

ASC 958-205-45-13E and 45-13F cover release. When the board appropriates amounts for expenditure, the time restriction expires to the extent of the amount appropriated, and if there is no purpose restriction the amount is reclassified to net assets without donor restrictions. Absent a legal or regulatory interpretation, appropriation is deemed to occur on approval for expenditure, unless the approval is for a future period. A purpose-restricted endowment (a scholarship fund) stays restricted until the purpose is also met.

For funds governed by trust law rather than UPMIFA, ASC 958-205-45-13G describes a different pattern: the original gift and appreciation are not considered available for spending, while ordinary income such as interest and dividends is available unless a donor restricts it.

Underwater funds

An endowment is underwater when its fair value falls below the original gift amount or the level the donor or law requires to be maintained. ASU 2016-14 changed the presentation: under ASC 958-205-45-13H, the accumulated losses stay with the fund in net assets with donor restrictions. Before the update, those deficiencies were charged to unrestricted net assets.

ASC 958-205-50-2 requires disclosure, in the aggregate for all underwater funds, of:

• the fair value of the underwater funds
• the original endowment gift amount or level required to be maintained by donor stipulations or by law
• the amount of the deficiencies (the shortfall of fair value below the required level)

ASC 958-205-50-1B also requires a description of the board's interpretation of the law, including its interpretation of the ability to spend from underwater funds, and the spending policy, including the policy and any actions taken during the period on appropriation from underwater funds.

Other endowment disclosures

ASC 958-205-50-1B lists further minimum disclosures: investment policies (return objectives, risk parameters, how returns relate to spending, strategies), the composition of the endowment by net asset class and by type of fund, and a reconciliation of beginning and ending balances showing investment return (split into income and net appreciation), contributions, appropriations and other changes.

Tie to the Form 990

Schedule D, Part V reports the endowment for the current year and four prior years: beginning balance, contributions, net investment earnings, gains and losses, grants or scholarships, other expenditures for facilities and programs, administrative expenses and end of year balance (lines 1a to 1g). Line 2 gives the estimated percentages held as board-designated, permanent and term endowment, which should equal 100%. Line 3 asks whether related or unrelated organizations hold endowment funds for the organization. Your audited rollforward is the natural source.

Audit steps

• Obtain gift instruments for new and significant endowments and confirm whether each is permanent, term or board-designated.
• Recompute the board's spending appropriation from the policy and the approved budget or resolution.
• Identify underwater funds by comparing fair value to the required level fund by fund, then test the aggregate disclosure.
• Agree the rollforward to investment testing, the net asset composition note and Schedule D, Part V.

The endowment and donor restrictions guide has more on UPMIFA policy reviews.

An underwater scholarship fund at Bayview College Foundation