Accounting for Endowments: What You Need to Know - BKD

1 2/11/2019 Accounting for Endowments: What You Need to KnowFebruary 12, 2019To Receive CPE Credit Individuals Participate in entire webinar Answer polls when they are provided Groups Group leader is the person who registered & logged on to the webinar Answer polls when they are provided Complete group attendance form Group leader sign bottom of form Submit group attendance form to 24 hours of webinar If all eligibility requirements are met, each participant will be emailed their CPE certificate within 15 business days of webinar22/11/2019 PresentersNeely GeorgeSenior Managing Risk Management & Legal StructureEndowment Policy ConsiderationsUnderstanding EndowmentsToday s TopicsInvestmentsFinancial Statements from ASU 2016-14: Statement of Financial PositionNFP Reporting Standard Impact on Endowments & Investments42/11/2019 Today s TopicsEndowment Disclosure RequirementsUnderwater Endowment Fund Changes Financial Statements from ASU 2016-14.

2 Statement of Activities & Changes in Net AssetsBoard & Management Designations/ Appropriations & Enhanced Disclosure RequirementsNet asset Requirements for Presentation & Enhanced Disclosure RequirementsLiquidity Disclosure Requirements5 Understanding Endowments2/11/2019 Accountants & lawyers speak the same languageCommon Myth: 7 General Types of Endowments Perpetual type of endowment Term endowment Quasi-endowment Board-designated endowments Board-designated (reserves, rainy day funds, capital campaigns) These are NOT endowments, they are different Therefore, NOT included in the enhanced endowment disclosures But, they are required to be considered for the impact to liquidity82/11/2019 UPMIFA Legal Definition (As Adopted by Texas)

3 Endowment Fund Institutional fund a fund held by an institution exclusively for charitable purposes Institution includes A person (other than an individual) organized & operated exclusively for charitable purposes A government or governmental subdivision, agency or instrumentality, to the extent it holds funds exclusively for charitable purposes A trust that had both charitable & noncharitable interests, after all noncharitable interests have expired Endowment fund an institutional fund (or part thereof) that, under the terms of a gift instrument, is not wholly expendable by the institution on a current basis Does not include board-designated endowments since there is no gift instrument9 Investment Management Code of Conduct (CFA Institute)

4 Act with loyalty & proper purpose Act with skill, competence, prudence & reasonable care Abide by all laws, rules, regulations & founding documents Show respect for all stakeholders Review investment strategy & practices regularly102/11/2019 Endowment Risk Management & Legal StructureEndowment Risk Management Endowments impose upon the organization Contractual Legal Ethical Financial Management Reporting responsibilities122/11/2019 Regulatory/Legal Framework Restricted Gifts General Tips New endowment set up Structure & options for endowments Hurdles & leadership decision making13 Structural options Separate 501(c)(3)

5 Stand-alone public charity Private foundation Supporting organization Legal & governance implications of structure Other implications of structure Related considerations Control by operating nonprofit Endowment Structure142/11/2019 Reputational risk Donor relations Change in culture or values over time Change in circumstances Conflicts of interest Donor actions/reputation Donor default on payment Restrictions or requirements the charity cannot handle Lack of clarity around provisions State regulatory enforcement Private donor enforcement (or attempts) Charitable pledgesWhat Can Go Wrong?

6 15 Regulatory/Legal Framework Restricted Gifts Federal/IRS Completed gift Charitable deduction/Quid pro quo rules Conditional get it back restrictions Impact on 501(c)(3) status/Private benefit Private foundation rules, , self-dealingState Donor intent UPMIFA Attorney General/Charities Bureau Other issues Private litigation162/11/2019 Acceptance when & how Applicable approval thresholds Importance of record-keeping Documenting conversations regarding intent, restrictions & conditions Guidelines for communications with donors Checklists for potential issues Consider print & online solicitations also Periodic review & revisit existing restrictions Internal tracking of spending/investmentsEducation/Training Issues17 Endowment Policy Considerations2/11/2019 Endowment Fund Policy Policy of the management of endowments Philosophy & attitude Delegation of authority considerations Fiduciary responsibilities board, committees, reporting Objectives related to growth, targets, goals & benchmarks Allowable investments.

7 asset allocation Clarity of fund restrictions & interpretations Periodic reviews & updates of the policy19 Fiduciary Responsibility & Delegation of Authority Policy Considerations What documents govern activities? Charter Bylaws Laws Trust documents What governing body is tasked with managing the endowment? Board of separate 501(c)(3) Finance & investment committee Executive committee Development & public relations committee OutsourcedAny person serving on the governing committee has a fiduciary responsibility under UPMIFA202/11/2019 Gift Acceptance Policy Mission requirement Types of gifts (liquid, real estate, land, partnerships, alternative investments)

8 Restrictions to programs/campaigns Administration fees Credit risk of the donor Donor advised funds Delegation of Authority21 Gift Instruments UPMIFA Donor gift document in whatever form available Expansive definition Can include Electronic writing Will, deed, grant or conveyance Agreement or memorandum Articles/Certificate or bylaws (where gift is made for general purposes) Minutes of meetings Canceled checks Institutional solicitation (where gift is made in response)222/11/2019 Investment Policies Business plan of the ENTIRE investment portfolio Reassures potential donors of investment stewardship Required by UPMIFA Sets the risk tolerance Fiduciary responsibility of the board Necessary for GAAP-required disclosures Financial advisors/investment managers23 Spending Distribution Policies Donor always rules!

9 Parameters Mission Communicates the prudent distribution method Sets parameters for spending patterns & distribution uses Frequency, percentages & disbursements are made in accordance with the spending policy Prevents excessive distributions, promotes good stewardship Fiduciary liability required by UPMIFA242/11/2019 UPMIFA General Approach UPMIFA takes a two-tier approach its provisions apply to Institutional Funds (the duties & factors related to management & investment) & a portion (the expenditure/appropriation/spending rules) only apply to Endowment Funds So, whether (& how)

10 UPMIFA applies to you depends on whether you have an institutional fund or endowment fund UPMIFA potentially applies to all charitable entities regardless of form, , nonprofit corporations, nonprofit associations, limited liability companies, trusts25 Common misconception that this is a safe harbor, particularly because UMIFA gave us abright line rule Applies to expenditures from TUPMIFA endowment funds, but not to institutional funds If spending from endowment fund exceeds thresholds Funds > $1MM presumption at 7% FMV University systems > $450MM 9% FMV Funds < $1MM presumption at 5% FMV FMV determined quarterly & averaged over a 3-year period (or if in existence less than 3years, for the period since inception) Presumption is rebuttable if facts & circumstances dictate that expenditure fromthe endowment fund was prudent (for example, a fund for a major constructionproject may have no expenditures for 3 years & then spend 20% in year 4)