Commentary: FASB issues staff position FAS 117-1

Daily Record (Rochester, NY), Aug 15, 2008 by Jeannine M Sheehan

The Financial Accounting Standards Board (FASB) last week issued FASB Staff Position (FSP) FAS 117-1, "Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures for All Endowment Funds."

The guidance is intended to improve the quality and consistency of financial reporting of endowments held by not-for-profit organizations.

The FSP includes guidance on the net asset classification of donor-restricted endowment funds for nonprofits, subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA). UPMIFA is a modernized version of the Uniform Management of Institutional Funds Act of 1972 (UMIFA) and will serve as a guideline for states enacting legislation regarding donor-restricted endowment funds.

A number of states already have enacted a version of UPMIFA, and many more are expected to do so through the next few years. Among its changes, UPMIFA offers new guidelines for expenditures of donor- restricted endowment funds. Subsection 4(a) of UPMIFA provides that "unless stated otherwise in the gift instrument, the assets in an endowment fund are donor-restricted assets until appropriated for expenditure by the institution."

According to the FSP, "a not-for-profit organization that is subject to an enacted version of UPMIFA shall classify a portion of a donor-restricted endowment fund of perpetual duration as permanently restricted net assets. The amount classified as permanently restricted shall be the amount of the fund that must be retained permanently in accordance with explicit donor stipulations or that in the absence of such stipulations, the organization's governing board shall determine what must be retained permanently consistent with the relevant law."

In addition, "for each donor-restricted endowment fund for which the restriction described in subsection 4(a) of UPMIFA is applicable, a not-for-profit organization shall classify the portion of the fund that is not classified as permanently restricted net assets as temporarily restricted net assets [time restricted] until appropriated for expenditure by the organization."

The FSP also improves disclosures about an organization's endowment funds (both donor-restricted and board-designated endowment funds), regardless as to whether the organization is subject to UPMIFA. According to the FSP, "a not-for-profit organization ... shall disclose information to enable users of financial statements to understand the net asset classification, net asset composition, changes in net asset composition, spending policy[ies], and related investment policy[ies] of its endowment funds [both donor-restricted and board designated]."

The provisions of the FSP are effective for fiscal years ending after Dec. 15. Earlier application is permitted provided that fiscal year's annual financial statements have not been issued previously.

Jeannine M. Sheehan, CPA, is a senior manager with Mengel, Metzger, Barr & Co. LLP and may be reached at Jsheehan@mmb-co.com.