DATELINE: March 3, 2008, Chicago
[I have written a 45-page article that will be appearing in the April edition of the Exempt Organization Tax Review (early April), together with a 10-page comment letter to the FASB. The comment letter focuses on substance rather than process. It will be submitted following publication of the article. I plan to make the article available following its publication]
Our Jack Siegel is concerned regarding the recently proposed FSP FAS 117-a and its impact on accounting for endowments by nonprofit institutions, including colleges and universities. In Jack's view, the proposal, if adopted by the Financial Accounting Standards Board (FASB), will result in the overstatement of freely spendable (unrestricted) assets held nonprofits as endowment. That could put pressure on nonprofits and their boards to spend more money than is prudent or permitted. Moreover, it could cause donors who review nonprofit financial statements to reduce donations to particular institutions because those institutions appear to have too must freely spendable cash and marketable securities.
Despite acknowledging that there are diametrically opposing viewpoints on this issue, the FASB's staff has set a 60-day (ending April 18th) comment period on the proposal. In response to the woefully inadequate commet period, Jack has submitted a comment letter to the FASB asking them to extend the comment period by...
The Desktop Guide is Quickly Becoming the Must Have Guide for Nonprofit Executives
Some of our readers have followed the link to the Amazon.com Web site, but apparently have not bought the Guide. If they were turned off by the price, they should reconsider. One prominent attorney in the exempt organization field grabbed a review copy of the Guide and couldn't put it down. She has instructed a number of her clients to buy it, pointing out to them that for less than 1/2 hour of her billable time, they receive a lesson (and resource) that tells it like she would like it told. If you are starting a new charity, the Guide could save you thousands of dollars in legal fees by teaching you how to better utilize your legal counsel and framing the issues so you don't spin your wheels at $400 an hour. |
six months. Jack offers five reasons why this is advisable and provides the FASB with a stopgap solution for those nonprofits that already are operating under the Uniform Prudent Management of Institutional Funds Act (UPMIFA), the event that necessitated the staff's proposal. Jack's letter is reproduced below. Both he and we encourage you to contact the FASB and request an extension of the comment period. Jack has granted permission to anyone to copy all or portions of his letter if that would aid them in requesting an extension. All comments to the FASB concerning FSP FAS 117-a should be directed as follows:
e-mail: director@fasb.org, File Reference: Proposed FSP FAS 117-a.
Ground: Russell G. Golden, Director of Technical Application and Implementation Activities, FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, File Reference: Proposed FSP FAS 117-a.
Jack's letter now follows:
VIA E-Mail
March 3, 2008
Russell G. Golden
Director of Technical Application and Implementation Activities
Financial Accounting Standards Board
401 Merritt 7, PO Box 5116
Norwalk, CT 06856-5116Re: File Reference: Proposed FSP FAS 117-a.
Dear Mr. Golden:
The staff of the Financial Accounting Standards Board recently issued Proposed FSP No. 117-a, placing a 60-day public comment period on the proposal, which expires April 18, 2008. I am writing to request a six-month extension of that comment period given the importance of the issues raised by the proposal.
Until recently, the issues addressed in Proposed FSP No. 117-a were largely questions of arcane accounting principles. In recent months, however, members of the both the U.S. Senate and House of Representatives have been highly critical of university endowment spending rates, arguing that colleges and universities should be spending more of their endowments to reduce the ever-increasing cost of tuition, books, room, and board. Some legislators have threatened legislation that would impose minimum spending rates on colleges and universities. During the same period, Steven T. Miller, the IRS Commissioner, Tax Exempt and Governmental Entities, has given several speeches in which he has suggested a possible link between tax-exemption and the level of asset utilization by exempt organizations—which is another way of saying that some tax-exempt entities should be spending a greater share of their endowments.
These developments, which are being hotly debated and may even find their way into the upcoming Presidential election, make it more important than ever that nonprofit financial statements accurately reflect the unrestricted and restricted portions of nonprofit endowments. Appendix A to Proposed FSP No. 117-a sets out four views of how donor-restricted endowment funds should be accounted for, with at least two of these views reflecting diametrically opposing viewpoints. The importance to good public policy of the issues addressed by Proposed FSP No. 117-a makes it imperative that the FASB and its staff make the right decisions.
For at least five reasons, a 60-day comment period does not provide adequate time for a full and fair airing of the issues posed by the FASB staff's proposal. First, the issues being debated center on a relatively new statute, the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which was promulgated by the Uniform Law Commission in July of 2006. In order arrive at accounting principles that correctly reflect what UPMIFA requires, it is necessary to understand UPMIFA. This makes input from the legal profession particularly important. Yet, because Proposed FSP NO. 117-a has its origins with the FASB, there will be some delay before members of the legal profession become aware of this development from the accounting profession. The length of the comment period should take that delay into account, as well as the importance of lawyer input.
Second, many of the lawyers and accountants who work with nonprofit institutions assist these institutions and their donors with tax return preparation. The comment period spans the busiest portion of the filing season, ending just three days after April 15th. The people who are most likely to be in a position to offer constructive comments simply don't have the time at this time of year to be submitting thoughtful comments. These people include tax lawyers and accountants who represent and serve on the boards of many nonprofits and who also represent donors, trusts, and estates that fund nonprofit endowments. As a consequence of their representation, these professionals are currently buried in trust accounts and tax returns, often supervising staff accountants and paralegals in the preparation of hundreds, if not thousands, of fiduciary tax returns.
Third, the issues posed by Proposed FSP No. 117-a are the sorts that a number of professional associations likely would want to comment on. While I am not authorized to speak for the American Bar Association Tax Section and don't purport to do so, I do note that their Exempt Organization's committee has scheduled a program which focuses on endowments, including accounting for endowments, at its May 2008 meeting in Washington, D.C. This is the group's first formal meeting since the issuance of the staff's proposal ten days ago. Any ruling-making body should set deadlines that recognize that professional groups do not meet on a weekly basis.
Even if ABA Tax Section or Exempt Organizations Committee choose not submit formal comments, members of the group who represent institutions with endowments may want to comment once they understand the issues. I also note that the AICPA holds an annual not-for-profit conference each June. The issues posed by Proposed FSP No. 117-a should be of great interest to many conference attendees, but undoubtedly there will be many participants who are unaware of the full import of the issues raised by the proposal until they have the opportunity to attend a formal presentation. They too might want to comment, but the 60-day comment period closes well before that conference.
Fourth, last year, I devoted a significant amount of time to commenting on the IRS's proposed redesign of the Form 990, the tax return filed by tax-exempt entities. I also participated in the ABA Tax Section's formal comment process. As an individual, I was able to submit my comments shortly after the proposed redesign was released in June 2007. Through no fault of anyone, the Tax Section was unable to respond nearly as quickly. That is the nature of a professional group. They have an elaborate approval process that takes time to adhere to. That process is designed, in part, to assure that the group is making fair and objective comments rather than reflecting the views of someone who has somehow hijacked the process for the benefit of a client who desires a particular outcome. By setting a 60-day comment period, you will be freezing out a number of professional groups that might want to comment, but can't because their internal processes do not permit such rapid responses.
Fifth, there needs to be public discussion. People and professional groups need time to become aware of other people's thinking and engage in debate. As already noted, 60 days will be an insufficient amount of time for people and groups to analyze and publish positions, let alone read and reflect on the positions and comments that others make. In the end, the FASB and its staff are the beneficiaries of such discussion and debate, leading to better standards and principles.
Given these five reasons for extending the comment period, it is hard to understand why the staff opted for such a short comment period. I can only speculate, but I suspect it might be because there are nonprofits with fiscal years ending in 2008 that must already (or soon will) account for endowments that are subject to UPMIFA. This is certainly a legitimate concern, but I believe the FASB can address it by permitting nonprofits located in UPMIFA states to apply Proposed FSP No. 117-a in its proposed form until a final pronouncement is issued. But expediency should not trump a full airing, analysis, and resolution of the issues posed by Proposed FSP No. 117-a.
At the end of the day, a 60-day comment period denies all the diverse constituencies that should have input into the process the opportunity to comment. It is unrealistically short. As someone who disagrees with much of Proposed FSP No. 117-a, the 60-day period looks to me like a rush to judgment—a closed process with a foregone conclusion. Given the public policy implications of this proposal and the likelihood that everyone will be living with it for the next three or four decades, I believe an extension of the comment period is more than warranted.
Thank you for your time and consideration.
Sincerely yours,
/s/ Jack B. Siegel
Jack B. Siegel, Principal
Charity Governance Consulting LLC
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL. If you liked this post, please visit http://www.charitygovernance.com for a description of our training and consulting services. You will also want to acquire a copy of Jack Siegel's book, A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good."
Copyright 2008, Charity Governance Consulting LLC. All Rights Reserved. You may not copy any portion of this post to a computer "clipboard" for re-posting anywhere or e-mailing, or otherwise reproduce this post. If you want others to review this post, you may provide them with a link to this web blog. Any use of the material or ideas in this post by reporters or other publishers shall make reference to Jack Siegel, author of "A Guide for Non-Profit Directors, Officers and Advisors: Avoiding Trouble While Doing Good" and this web blog. For additional information call 773-325-2124
