Endowments — Don’t Deviate

ALISON FETZER, CPA

Does your not-for-profit receive and make use of endowments? The term “endowment” is a frequently misused term in the not-for-profit world. A true endowment consists of funds received from external donors with restrictions that the principal or gift amount is to be retained in perpetuity and cannot be spent.

The most common misuse of the term endowment occurs when members of an organization’s board of directors set aside unrestricted funds to be used for a specific purpose and call it an endowment. This is incorrect. In a true endowment, restrictions must come from the initial donor. Because the board is not the initial donor, the restriction is not enforceable. Instead, these funds should be referred to as “Board Designated Net Assets” and are listed in the unrestricted net assets section on the statement of financial position.

Once you have determined that you have a true endowment, it is important to familiarize yourself with the specific restrictions placed on the funds. The gift should come with instructions on how the money is to be used, what can be done with the income earned, and potentially how both the initial funds and income earned should be invested. Restrictions placed at the time of donation are absolute and cannot be changed without permission from the original donor. Permission can be difficult to obtain, particularly since many endowment donations are made as part of a will. Changes in this example would need to be approved by the individual’s estate.

There are three elements of an endowment fund — original gift, gains and losses, and interest and dividends — that must be evaluated separately.

Each element is considered to be unrestricted unless its use is temporarily or permanently restricted by explicit donor stipulations or by law. A donor can restrict one or all of the elements of an endowment fund. It is very important to have a thorough understanding of the donor’s wishes to ensure that all restrictions can be met. In some instances, restrictions imposed can be financially cumbersome and/or time consuming, making it in the organization’s best interest to pass on acceptance of the donation.

After the restrictions are understood, an organization must come up with a method for tracking each restriction, paying particular attention to when the restrictions have been satisfied. Next a spending policy must be developed. Most spending policies provide for a range of spending determined after taking into consideration an assumed average long-term rate of return on invested assets and inflation.

Finally, it is very important that an organization DOCUMENT, DOCUMENT, DOCUMENT the endowment. Endowment accounting is complex and subject to many rules and requirements. Make sure to retain and regularly review all donor letters, legal opinions, correspondence, board resolutions, etc. to ensure that you are properly accounting for your endowments.

If you have additional questions about endowments, contact Alison Fetzer at [email protected].

Newsbits

LARRY SOPHIAN, CPA

Who Gives Big Gifts?

A new study sponsored by international consultants CCS, through its William B. Hanrahan Fellowship at the Lilly Family School of Philanthropy at Indiana University, has found that the majority of charitable contributions of $1 million or more come from local donors. About 60% come from donors from the same state or geographic region as the recipient’s and about half of all publicly-announced gifts of this size come from donors living in the same state.

Health nonprofits, arts, culture and humanities organizations, higher education institutions, foundations and government agencies received more than half of their million-dollar-plus gifts from donors in the same state.

Not-for-profit organizations may want to focus their efforts on cultivating relationships with donors invested in their local communities who have the financial capacity to make significant gifts.

EITF Issues Rule on Affiliate Personnel Services

The Financial Accounting Standards Board’s Emerging Issues Task Force (EITF) has issued a new rule that addresses the proper accounting for services received from personnel of an affiliate for which the affiliate does not seek compensation (EITF Issue 12-B).

Currently, the recipient organization only recognizes contributed services from an affiliate if the services either create or enhance nonfinancial assets, or require specialized skills and would typically need to be purchased if they had not been donated.  Such contributed services are recognized at fair value.

Under the new standard, a not-for-profit generally should recognize personnel services that are performed by an affiliate’s employees at the affiliate’s cost of such services, rather than at fair value. The cost components would depend on the nature and type of service provided, but, at a minimum, costs should include all direct personnel costs (for example, compensation and payroll-related fringe benefits) incurred by the affiliate. The guidance will be effective for fiscal years beginning after June 15, 2014. This means that a recipient organization will now be recognizing the cost of services, such as clerical services, that under the old standard would not have been recognized.

Coalition Launches Charitable Deduction Website

The Charitable Giving Coalition has launched a new website designed to provide user-friendly, accessible information about the vital role of charitable giving in U.S. communities. Formed in 2009, the Coalition is dedicated to preserving the tax deduction for those who give to charities. Discussions about eliminating the charitable deduction have come up during the tax reform debates of the past few years. The website (http://protectgiving.org) includes information about the policy debate surrounding the charitable deduction, the effect on the charitable sector, and the coalition and its membership, which includes organizations ranging from the American Red Cross to United Way Worldwide.

If you have any questions about charitable donations or charity tax deductions, please call Larry Sophian at 312.670.7444.