Wednesday, June 4, 2008

FASB Guidance on Endowment Funds Governed by UPMIFA

During its meeting this morning, the Financial Accounting Standards Board considered the substantive issues raised in comment letters received in response to FSP FAS 117-a.  The FASB received comments from 45 respondents, some from public accounting, some from university accounting, some legal (regulators, a lawyer, and an academic), and a few others.

The board handout noted "dissatisfaction with the existing guidance and the net asset classification scheme, which the FSP largely reaffirmed."  The handout then identified two fundamental issues to be addressed at the meeting:

  • Since UPMIFA takes a fund as a whole approach, should the net asset mirror that approach, treating the fund in one net asset class?  If not, and if a piece should be singled out for characterization as permanently restricted net assets, should permanently restricted net assets be allowed to decreasein so-called "underwater" situations?
  • If a piece of the endowment is characterized as permanently restricted, is the guidance in EITF Topic D-49 still appropriate?

The Board handout prepared for the meeting is available on the FASB website, and an audiocast of the Board's meeting is posted on the website. 

The handout notes that although UPMIFA no longer requires a charity to track dollars contributed (no more historic dollar value - HDV), regulators commented that they want to know the amount of the original gift as a data point for enforcing the gift.  Thus, the staff recommended that some portion of the fund be classified as permanently restricted net assets, probably the original gift amount (the amount called HDV under UMIFA).  The Board will determine the amount, based on its interpretation of applicable law.  The guidance will downplay any suggestion that the organization needs to maintain the purchasing power. The Board voted in agreement.

If a portion of an endowment fund is classified as permanently restricted, then the next question is the appropriate accounting treatment if the fund goes underwater.  In the view of the staff, a drop in the permanently restricted amount does not represent a release of restriction.  Under UPMIFA, a charity could spend from an underwater fund, but the staff views that spending as internal borrowing.  The charity would still have an "accountability/fiduciary duty" with respect to the permanently restricted amount.  The staff then recommended that underwater funds should be reflected as a reduction of unrestricted or temporarily restricted net assets.  The Board agreed.

The handout turns next to the question of how to treat amounts other than the amount classified in permanently restricted net assets.  The staff concludes, based on the comments received, that UPMIFA extends a donor-restriction to the portion of the fund not classified in permanently restricted net assets.  The staff views the restriction as a time restriction and recommended that the amount should be classified in temporarily restricted net assets.  The Board agreed.

For many organizations with existing endowments, this change will require a one-time reclassification of assets currently classified in unrestricted to classification in temporarily restricted.

Disclosures.  The staff recommended retaining disclosures of (a) the governing board's interpretation of the law that underlies the organization's net asset classification of donor-restricted endowment funds, (b) a description of the organization's policy for the appropriation of endowment assets for expenditure, and (c) a description of the organization's endowment investment policies, including risk and return objectives, how those objectives relate to the spending policy, and the strategies employed for achieving those objectives.  The Board agreed with the recommendation.

Comment letters included two requests for additional guidance, and the staff recommended that the Board reject both requests  One request was that the disclosure requirement for investment expenses in paragraph 24 of Statement 117 be dropped. The other was a request for guidance on tangential issues concerning community foundations.  The Board agreed to reject the requests.

The staff recommended that the effective date of the guidance be deferred to fiscal years ending after December 15, 2008.  The Board agreed.

The staff recommended that the Board commit to doing a post-implemenation review in 1-2 years.  The review could consider how UPMIFA is interpreted and enforced, how the FSP is applied, and whether the creation of a new net asset class might be appropriate.  The Board did not want to commit to a post-implementation review and instead directed the staff to monitor implementation.


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