The Accounting Practices Committee meets once a month via conference call to discuss current accounting and tax issues facing community foundations. If you have any questions, please feel free to contact any member of the committee.
Agency Endowments – Frequently Asked Questions
Since the passing of Statement of Financial Accounting Standard No. 136, Transfers of Assets to a Not-for-Profit Organization or Charitable Trust that Raises or Holds Contributions for Others (FAS 136), there have been numerous questions on the listserve about “agency endowment” funds. APC is taking a look at some of these questions and attempting to provide guidance on some of the issues. Please see the attached FAQ and stay tuned for further assistance.
Proposed Increased Disclosures for Endowments
On February 22, 2008, the FASB issued FASB Staff Position (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. FSP 117-a is considered an interpretation of FASB 117 and is meant to convey the nature of endowment management under UPMIFA through enhanced financial statement disclosures. If issued as presented, FSP 117-a will require the following disclosures about an organization’s endowment:
- A description of the governing board’s interpretation of the law that underlies the organization’s net asset classification of donor-restricted endowment funds.
- A description of the organization’s policy(ies) for the appropriation of endowment assets for expenditure (its endowment spending policy(ies)).
- A description of the organization’s endowment investment policies. The description shall include the organization’s return objectives and risk parameters; how those objectives relate to the organization’s endowment spending policy(ies); and the strategies employed for achieving those objectives.
- The composition of the organization’s endowment by net asset class at the end of the period, in total and by type of endowment fund, showing donor-restricted endowment funds separately from board-designated endowment funds. In addition, the organization shall indicate the cumulative amount of investment return, if any, contained in the permanently restricted net asset class because of the organization’s interpretation of relevant law, beyond that required by explicit donor stipulations.
- A reconciliation of the beginning and ending balance of the organization’s endowment, in total and by net asset class, including, at a minimum, the following line items (as applicable): investment return, separated into investment income (for example, interest, dividends, rents) and net appreciation or depreciation of investments; contribution; amounts appropriated for expenditure; reclassifications; and other changes. In addition, the organization shall indicate how much, if any, of the additions of investment return to permanently restricted net assets are the result of the organization’s interpretation of relevant law, beyond that required by explicit donor stipulations.
The proposed effective date for FSP 117-a is June 15, 2008. FASB invited respondents to send written comments by April 18, 2008. A subcommittee of the Accounting Practices Group drafted a response letter to FASB (see attached) and also convened a conference call with FASB and Janne Gallagher of the Council on Foundations to discuss the group’s concerns with FSP 117-a. While the APC subcommittee agreed with the intent of FSP 117-a, the following concerns were expressed in the letter:
- For reasons stated in the attached letter, the effective date of June 15, 2008 is too soon and should be postponed to December 15, 2008.
- Paragraph #7 of the FSP states that “a governing board’s interpretation of the relevant law should be…consistent from year to year.” However, boards change over time and today’s board interpretation of the relevant law may differ from a future board’s interpretation.
- The definition of endowment is broader under FASB 117, and by reference in FSP 117-a, includes board designated endowment funds. UPMIFA does not include board designated funds in its definition of endowment funds.
All responses to the FSP, including one from Janne Gallagher, can be found on FASB’s website at http://www.fasb.org/ocl/fasb-getletters.php?project=FSPFAS117A. APC will continue to monitor the interpretation and provide guidance for the field once it is released in its final form.
FIN 48 – Accounting for Uncertainty in Income Taxes
You might assume from the title of this accounting rule that it should not apply to tax exempt organizations, including community foundations. Unfortunately, you would be wrong.
This interpretation by FASB of its Statement No. 109 applies to not-for-profit organizations and for most organizations it will apply first for years ending December 31, 2008 and later.
FIN 48 requires an organization to determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the organization should presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information.
For most community foundations this is unlikely to be an arduous process. Its scope will principally address two areas:
- Validity of Exemption. The most significant tax position taken by any not-for-profit organization is that it still retains its tax exempt status. Each organization will need to address whether or not it maintains proper evidence of its tax exempt status, and that its activities are consistent with the original filings with the IRS.
- Unrelated Business Income Taxes. If a foundation owns investments or engages in activities that subject it to state and federal tax on unrelated business income it will need to look at tax positions taken
This review will need to encompass the community foundation and all consolidated entities.
Community foundations should discuss the potential implications of FIN 48 with their independent accountants.
Ian J. Benjamin, Partner, McGladrey & Pullen, LLP Ian.Benjamin@rsmi.com