THE FASB SHOULD TAKE A PAGE OUT OF THE IRS’S BOOK: NEW PROPOSED STAFF POSITION ON ENDOWMENT ACCOUNTING IS NOT ONLY WRONG AND ILL-CONCEIVED, BUT IT IS OBTUSE
DATELINE: February 25, 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. These two offerings take a much more deliberative and organized approach than this post, which was essentially a one-afternoon effort to get some thoughts on paper]
The last year has seen significant efforts to improve nonprofit transparency. The IRS is in the process of finalizing the redesigned Form 990. Its efforts have almost uniformly been applauded as an excellent step toward improving transparency. Our friends in the accounting profession have now weighed in, hoping to improve the public’s understanding of nonprofit endowments. Regrettably, the new proposal does anything but make endowment accounting more transparent.
I. INTRODUCTION. In an effort to clarify the accounting treatment applied to nonprofit endowment funds, the Staff of the Financial Accounting Standards Board (FASB) issued Draft Staff Position 117-a on February 22, 2008,. This was necessary because 14 states and the District of Columbia have adopted the Uniform Law Commission’s recently promulgated Uniform Prudent Management of Institutional Funds Act (UPMIFA), with virtually all states expected to adopt it within the next few years. During the first two months of 2008, 14 states legislatures began consideration of UPMIFA-based legislation.
If Draft FAS 117-a doesn’t at first sound like a snoozer, we don’t know what does. As it turns out it could prove to be an explosive proposal, once it is finalized. To see why, you only need recall recent pronouncements from Senator Grassley and other legislators regarding college endowments, calling into question what they have characterized as paltry spending rates on college endowments, particularly in light of ever-increasing college tuition, room, and boarding costs. Like many other critics of endowment spending, the legislators have argued that a larger portion of endowment funds and income should go to assist needy students today. They have threatened a legislative fix to the perceived problem if institutions do not increase spending—although Senator Grassley has already indicated that he is pleased with how some universities have responded to his concerns.
The accounting rules that the FASB is now considering bear directly...
