Charity Governance

FASB SIGNALS MAJOR CHANGE IN ACCOUNTING FOR ENDOWMENTS

DATELINE: June 4, 2008, Chicago

CAVEATS: All comments are based on a discussion at today's meeting of the FASB. The comments and decisions at the meeting should be viewed as preliminary because the staff must first incorporate them into a final proposal and the FASB must then approve that proposal. Even more importantly, we might have misheard or misinterpreted comments as we listened on the Internet.

That said, this is what we heard:

The Financial Accounting Standards Board (FASB) approved major changes in the accounting for endowments today as it considered proposed staff FSP 117-a. The substantive changes will only apply to endowments that are governed by the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which is now in effect in 20 states and under consideration by a number of others.

Boards will continue to be charged with interpreting state law to arrive at the classification of endowment funds. However, the interaction between the rules in the finalized FSP and how the plain-vanilla version of UPMIFA will be interpreted is expected to achieve the following radically...

FASB NEEDS TO GO BACK TO BASICS ON ACCOUNTING FOR ENDOWMENTS: ACCOUNTANTS NEED TO STOP PRACTICING LAW

DATELINE: April 21, 2008, Chicago.

Last Friday, the comment period for FSP 117-a, 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, came to a close. In reviewing the 37 comment letters posted on the FASB's Web site, one thing is clear: The state of endowment accounting is a...

AROUND AND AROUND AND AROUND THE DIAL: ST. OLAF COLLEGE SELLS RADIO STATION AND IS CHALLENGED BY A LISTENERS GROUP

I've been around the dial so many times,
But you're not there.
Somebody tells me that you've been taken off the air.
Well, you were my favorite D.J.,
Since I can't remember when.
You always played the best records,
You never followed any trend.
F.M., A.M. where are you?
You gotta be out there somewhere on the dial.
On the dial.

Kinks, Around the Dial

DATELINE: March 20, 2008, Chicago

A dispute has been brewing in Minnesota for the past three and half years over a November 2004 decision by St. Olaf College to sell radio station WCAL to Minnesota Public Radio for a reported $10.5 million. SaveWCAL, a Minnesota nonprofit corporation organized to save WCAL, tried to stop the transaction, but was unsuccessful.

Following the sale, St. Olaf petitioned the Rice County District Court to release certain restrictions on endowed funds designated for WCAL's support, claiming that it was now impossible to honor the restrictions because the college no longer owned the station. Talk about trying to lift yourself by your own bootstraps. Once again, SaveWCAL tried to intervene. This time...

STOP THAT TRAIN: PETITION THE FASB TO EXTEND THE COMMENT PERIOD FOR ITS ENDOWMENT ACCOUNTING PRONOUNCEMENT

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 18^th) 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 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...

FIN 48: BIG DEAL OR MUCH ADO ABOUT NOTHING?

Dateline: April 28, 2007, Chicago

Our friends at the Financial Accounting Standards Board have been at it again.  It has been 13 years since the FASB turned the nonprofit world upside down with its pronouncements on pledges (FASB No. 116, Accounting for Contributions Received and Contributions Made).  It has now served up FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes: An Interpretation of FASB Statement No. 109. 

Our very own Jack Siegel has written a comprehensive 28-page article focused on how Fin 48 will affect tax-exempt entities.  Titled Applying Fin 48 to Tax-Exempt Organizations; Too Much of Nothing or It's All Too Much?, Jack's article is scheduled for publication by Tax Analysts later this week in the Exempt Organization Tax Review, Tax Notes Today, and Financial Reporting Watch. It is a must read for...