April 01, 2009

Additional Accounting and Reporting Requirements for Endowment Funds Due for Many NPOs

As we noted in the Spring 2008 installment of Issues, changes have been in the wind for a while with regard to the way that not-for-profit organizations would have to account for and report their “endowment” funds – both the permanently restricted funds that donors require to be held in perpetuity and those unrestricted resources that a governing board sets aside to function as endowment.

To understand the rationale for the changes, it may be helpful to review the recent history of reporting for endowment funds. To begin with, in the mid-1990s the Financial Accounting Standards Board (the FASB), the entity which establishes accounting and reporting principles and practices in the United States, established revised overall rules for the treatment of donations to NPOs. As a result, for accounting purposes, when a donor stipulates that the principal of a gift to an NPO is never to be spent (regardless of whether the investment “income” from that gift – including realized and unrealized capital appreciation – is to be used for either specified or unspecified purposes), the donation is reported as an endowment and as “permanently restricted” in the NPO’s financial statements.

Read the full article [.pdf]