Endowments are a cornerstone for nonprofit financial sustainability, providing a permanent funding source that enables organizations to support their mission for generations. Yet, nonprofit endowment fund accounting is daunting, with complex compliance requirements and evolving standards such as UPMIFA (Uniform Prudent Management of Institutional Funds Act) and ASC 958. For nonprofits and their boards, proper endowment management entails more than maintaining spreadsheets — it involves building stakeholder trust and ensuring the organization’s long-term future. In this guide, Temple Management CPA shares everything you need to know about accounting, compliance, and reporting for nonprofit endowment funds.
Understanding Nonprofit Endowments
What is an Endowment Fund?
A nonprofit endowment fund is a pool of assets — such as cash, securities, or property — meant to be invested permanently. Earnings from these investments support a nonprofit’s programs, operations, or future initiatives, providing stability in unpredictable times. Endowments are built to last, typically preserving the principal forever. Only part of the investment returns are used each year, which helps safeguard the organization’s future and honor donor intent.
Types of Endowment Funds
- Permanent (True) Endowments: The donor requires the principal to remain intact, allowing only the generated earnings to be used. These are the most common and align with the perpetual nature of endowments.
- Term Endowments: The principal is held for a set period or until a specified event. Afterward, the organization may access the funds.
- Quasi-Endowments: Board-designated funds. Here, the board may decide to treat unrestricted assets as an endowment, but can also change their designation in the future. Each type has different accounting and reporting implications.
Essential Accounting Standards for NFP Endowments
FASB ASC 958-205: Financial Statement Presentation
ASC 958 requires nonprofits to report net assets in two categories: with donor restrictions and without donor restrictions. Endowment funds typically fall under restricted net assets, with detailed disclosures about fund purpose, changes, spending policies, and investment strategy. Financial statements must show:
- Statement of Financial Position with endowment balances.
- Statement of Activities, highlighting changes due to income, spending, gifts, and market fluctuations.
- Detailed footnotes on endowment policy, spending policy, and investment approach.
Understanding Underwater Endowments
An underwater endowment occurs when the fair value of the fund drops below the original gift amount. ASC 958 mandates clear financial statement display and specific disclosures about board actions, changes in spending policies, and corrective measures. Transparency here bolsters donor confidence, demonstrating prudent management.
Investment Income Allocation
Nonprofits often pool endowment investments, requiring a fair allocation of earnings. Allocations usually reflect each fund’s average value over the period, with careful tracking to prevent errors or inequitable distributions. Accounting mistakes in allocation can jeopardize tax status and trust, so robust processes and controls are essential.
UPMIFA Compliance: Legal Framework and Best Practices
Overview of the Uniform Prudent Management of Institutional Funds Act
UPMIFA governs the investment and spending of nonprofit endowments in most states. It outlines fiduciary duties, promoting prudent stewards of endowment funds. Each board member or committee must consider seven critical factors when setting spending rates and evaluating investment choices:
- Duration and preservation of the fund
- Organization and fund purposes
- Economic conditions
- Inflation or deflation effects
- Expected total return
- Organization’s other resources
- Investment policy
UPMIFA offers flexibility but also places the onus on organizations to proactively manage endowments, document decisions, and ensure alignment with donor intent.
Developing a Spending Policy
A typical endowment disbursement rate falls between 4-5% of average fund value, calculated over three or five years to smooth market fluctuations. Proper documentation, routine board reviews, and transparent communication are vital. A solid spending policy preserves both the principal and stakeholder goodwill.
Endowment Financial Reporting and IRS Form 990
Schedule D Requirements
Nonprofits report endowment activity on IRS Form 990, Schedule D, detailing fund balances, contributions, investment earnings, grants, program distributions, and administrative costs. This rigorous reporting tracks board designations, donor restrictions, and fund types, ensuring transparency for regulators and donors alike.
Transparency and Stakeholder Reporting
Beyond compliance, nonprofits should maintain clear donor stewardship reports and periodic updates to the board. This strengthens relationships and demonstrates responsible fund stewardship.
Best Practices for Endowment Fund Management
Establishing Strong Governance
Building robust governance around the endowment, such as appointing an investment committee, creates accountability. The committee sets policies, reviews performance, and ensures the organization fulfills fiduciary responsibilities.
Developing Comprehensive Policies
Key documents include:
- Investment Policy Statement (IPS): Outlines financial goals, risk, and allocation.
- Gift Acceptance Policy: Clarifies criteria for accepting restrictions.
- Spending Policy: Details withdrawal procedures.
- Administrative Fee Policy: Explains fund management costs.
Maintaining Accurate Records
Track donor agreements, restrictions, and transactions using technology for audit readiness and seamless management.
Internal Controls and Risk Management
Segregate duties, authorize distributions, and automate reconciliations. Internal controls protect both assets and reputation.
Common Endowment Accounting Challenges and Solutions
Tracking Multiple Funds
Using fund accounting software and clear transaction coding, nonprofits can track and manage diverse donor restrictions and funds within pooled investments.
Allocating Investment Returns
Applying unitization or average balances ensures fair distribution.
When to Seek Professional Endowment Accounting Support
If your organization struggles with fund tracking, compliance, or reporting, professional CPA support can make a critical difference. Outsourcing endowment accounting provides access to expert systems and guidance without expanding in-house staff. Virtual nonprofit accounting services are especially valuable for small and mid-sized organizations, offering scalable solutions.
Conclusion
Proper nonprofit endowment fund accounting is the foundation for sustainability and donor trust. ASC 958 and UPMIFA compliance are nonnegotiable requirements; best practices in governance, reporting, and record keeping set high-performing organizations apart. Implementing these strategies today ensures your mission thrives for generations to come.
Navigating endowment fund accounting and UPMIFA compliance requires specialized expertise. Temple Management Consulting provides comprehensive virtual accounting services tailored to nonprofit organizations. Contact us today for a complimentary financial assessment at (770) 892-2087 or [email protected] to ensure your endowment is properly managed and fully compliant.
