Endowment fund accounting is a crucial aspect of financial management for nonprofit organizations. Understanding the various types of endowments, their restrictions, and the rules and regulations governing these funds can significantly contribute to the company’s financial sustainability, allowing it to make a greater impact on the communities or missions it serves.

What is an Endowment Fund?

An endowment fund is a pool of financial assets donated to a nonprofit organization. The key feature of an endowment is that the principal amount donated is preserved, and only the investment income generated by the fund is used to support the organization's operations or specific programs.

The restrictions on an endowment fund's usage vary depending on the donor's stipulations or the organization's self-imposed limits. An endowment fund serves as a long-term financial stability tool for a nonprofit organization, ensuring a steady income stream for its operations or distinguished purposes.

Classification of Endowments

There are three main categories of endowments:

1. Perpetual Endowments

These are funds where the principal amount is kept intact indefinitely, and only the income generated from investments is utilized for the organization's purposes.

2. Term Endowments

The principal amount in these funds is initially maintained in investment funds but can be spent after a certain number of years or after a particular event occurs.

3. Quasi Endowments (Board Designated Endowments)

These funds are set aside by the organization's board and the principal can be spent at a specific date. Unlike donor-restricted endowments, the board can change the restrictions on these funds at any time.

Accounting for Endowment Funds

The accounting process for endowment funds begins with the receipt of the donation. When a nonprofit receives a new endowment, it should set up a new investment account that identifies the endowment and records the initial funds in the relevant restricted asset account. If it is a permanent endowment, the nonprofit records the initial funds in a permanently restricted revenue account. Here is an example of a journal entry to establish the fund:

The process is similar for quasi-endowment and term endowment, but the nonprofit credits an unrestricted (for quasi-endowments) or temporarily restricted (for term endowments) revenue account instead of a permanent one.

Recording Income and Transferring Funds

Nonprofits should regularly record investment income from endowments, typically when they receive their investment summary at the end of each month. If the value of the investment increases, the nonprofit should make the following entry:

Depending on the nature and terms of the endowment account, the investment income is generally classified as unrestricted or temporarily restricted.

Certain endowment assets may be appropriated for expenditure, typically through board approval. When the nonprofit is ready and able to transfer endowment income into unrestricted assets, it should make this journal entry:

Reporting Endowment Funds

Nonprofits should disclose additional information about their endowments in their annual financial statement notes. Include details on the balance and the types of endowments held. They must also explain the spending and investment policy for the endowment and the board's understanding of the laws governing them.

Bodies Governing Endowments

Endowment funds are regulated by two main bodies:

1. Uniform Prudent Management of Institutional Funds Act (UPMIFA)

UPMIFA is a guideline for individual states to adopt as legislation. It emphasizes a duty of care, loyalty, and impartiality in managing institutional funds.

2. Generally Accepted Accounting Principles (GAAP)

GAAP provides financial reporting guidelines for U.S. companies, including nonprofits. This set of accounting standards, rules, and procedures is frequently revised by the Financial Accounting Standards Board (FASB).

Investment Options for Endowments

Endowment funds can be invested in various forms, some of which include:

• Publicly traded stocks and bonds
• Mutual funds
• Real estate
• Cash or cash equivalents

The type of investment chosen should align with the organization's short- and long-term goals and resources.

How Lutz’s Nonprofit Accounting Services Can Help

Endowment fund accounting is vital to a nonprofit organization's financial management. Understanding the different types of endowments, their restrictions, and the rules and regulations governing these funds can significantly contribute to an organization's financial stability. Lutz offers accounting and consulting services tailored to the nonprofit industry if you need assistance. Please contact us with any questions.