Edward R. Friel July 16, 2009 Endo ndowment nt Di Disclosur sclosures FSP FAS 117-1: Endow owme ments ts of of Not-f Not-for or Profit Organiza zati tion ons – Ne Net Asset Classificati tion on of of Funds Su Subject to an Enacte ted Ve Version on of of th the Uni Uniform Pr Prudent Manageme ment of Insti titu tuti tion onal Funds Act, and Enhanced Disclos osures for All Endow owme ment Funds Com ommon onwealth th of of Pe Pennsylvania Act 141
Pre resen sentation tion Overv rview iew • Uniform Prudent Management of Institutional Funds Act (UPMIFA) & Related Disclosures Under FSP FAS 117-1 – Summary – Disclosure requirements • Commonwealth of Pennsylvania Act 141 2
FSP FAS 117-1 • Key Points – Applies to all types of not-for-profit (NFP) organizations – Applies to ALL donor-restricted endowment funds – Provide guidance on net asset classification of donor-restricted endowment funds for NFP organizations subject to UPMIFA – Improve disclosures about an organization’s endowment funds (both donor-restricted and board designated), whether or not the organization is subject to UPMIFA – Pennsylvania is not an UPMIFA state 3
Key De Defi finition nition Endowment Fund – “an established fund of cash, securities, or other assets to provide income for the maintenance of a not-for-profit organization” (per paragraph 168 of SFAS 117). – This FSP uses the term endowment funds in a collective manner, including both donor-restricted and board- designated funds. 4
FSP FAS 117-1: Effect ective for Fis Fiscal Yea ears Ending afte ter Decem ember 15, 2008 • Net asset classification guidance effective for NFPs with donor endowments in states in which that law has been enacted and is effective – Pennsylvania is not an UPMIFA state • Disclosure requirements effective for ALL NFPs with endowments – Including board-designated endowment 5
UP UPMIFA: MIFA: What is it? it? • The Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA) • A model act that serves as the basis for state-by-state legislation • An overhaul/modernization of the Uniform Management of Institutional Funds Act of 1972 (UMIFA), which has/had been the basis for primary endowment laws in 46 states and the District of Columbia. – Pennsylvania has not adopted 6
UP UPMIFA MIFA Hi Highlig hlight hts • Investment freedom • Costs must be managed • Expenditures of funds • UPMIFA abolishes the historic dollar value limitation on expenditures. • Seven percent rule. 7
UPM PMIF IFA: A: Fa Factors to to Con onsid sider in Prud Pruden ent Approp Ap opriati tion on for Spen ending 1. The duration and preservation of the endowment fund; 2. The purpose of the institution and the endowment fund; 3. General economic conditions; 4. The possible effect of inflation or deflation; 5. The expected total return from income and the appreciation of investments; 6. Other resources of the institution; and 7. The investment policy of the institution. 8
Commonw Co nwealth lth of of Penn nnsylv lvani nia Act Act 141 41 • Effective December 1998, this Act addresses the management of trust funds held by Pennsylvania not-for-profit organizations. • Act 141 applies only to contributions permanently restricted by donors to be held in a trust by the organization where the related income may be distributed . 9
Com ommon onwea ealth th of of Pe Pennsy sylvania Ac Act 141 (con ont’d t’d) • With th the the en enact ctment of Act ct 141 41 the the foll following was implemented ted: Unless the trust document specifically precludes such an election, a not-for-profit organization’s board of directors can elect to adopt and follow a “total return” investment policy A total return policy is a policy that seeks the best total return on the principal whether from capital appreciation, earnings or both 10
Com ommon onwea ealth th of of Pe Pennsy sylvania Ac Act 141 (con ont’d t’d) • With th the the en enact ctment of Act ct 141 41 the the foll following was implemented ted: With the adoption of a total return investment policy, income from the trust will be defined as a percentage of the trust principal, with the board of director’s being permitted to annually set that percentage Percentage rate that can be applied is limited to a range of 2% - 7% Commonly referred to as the “spending rate” 11
Com ommon onwea ealth th of of Pe Pennsy sylvania Ac Act 141 (con ont’d t’d) • The percentage rate set by the board is then applied to the average market value of investments held in the trust at the end of the prior year – Average market value is determined as the average fair market value of the assets over a three-year period ( or the average value of any short period if held less than three years) • If a total return investment policy is not elected by the organization , income that can be distributed from a trust and spent by the organization is limited to only accounting income (interest, dividends, rent, and royalties) 12
Com ommon onwea ealth th of of Pe Pennsy sylvania Ac Act 141 (con ont’d t’d) • The percentage range set under Act 141 is intended to apply only to contributions held in trust by an organization and with respect to which only the income can be currently expended. However, it should also serve as a benchmark for annual spending to be utilized by a not-for-profit organization whose endowment funds are not formally held in trust. • Restricted use of income: – Donors often restrict the use of income earned on permanently restricted contributions. Be sure to the organization is complying with any such requirements and these investments should be excluded from their annual distribution calculation. 13
FSP FAS 117-1: Disc sclosu osure Req equirem emen ents ts • A not-for-profit organization shall disclose information to enable users to understand the following: (1) the net asset classification, (2) net asset composition, (3) changes in net asset composition, (4) spending policy(ies), (5) related investment policy(ies) concerning its endowment funds (both donor-restricted and board-designated) • Applies to all organizations with endowme ments, not just those subject to UPMIFA • Rationale: Transparency of endowments – Many institutions are already presenting much of this information 14
FSP FSP FA FAS 11 117- 7-1: 1: Di Disclos sclosure ures • Description of governing board’s interpretation of relevant law underlying net asset classification • Description of endowment spending (distribution) policy(ies) • Description of endowment investment policy(ies) – Return objectives and risk parameters – How the objectives relate to spending policy(ies) – Strategies for achieving objectives • Composition of endowment by net asset class • Endowment roll-forward by net asset class 15
Othe ther Disclosu osures es (as a rem eminder) • Nature and types of permanent and temporary restrictions. • Amount of deficiencies for all donor-restricted endowment funds; i.e. Fair Value of assets is less than level required by donor or law. 16
FSP FAS 117-1: Com ommon on Im Implem emen enta tation on Qu Ques estions • Does the FSP apply to me if I am in a state in which UPMIFA is not yet effective? • Does the FSP apply to private foundations? • Do I have to present two years’ worth of disclosures in the year I first implement the FSP? • Should I include pledges receivable associated with donor endowments in the tabular disclosures? 17
Endo ndowment nt Di Disclosur sclosures Questions ?? 18
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