Endowments, Part 1: An Overview

Gurman & Co's nonprofit auditors in Northern VA on endowmentsWhen you think of an endowment fund, you may think of different colleges and universities, either from the news or fundraising solicitation.  However, many different not-for-profit organizations have an endowment.

What is an endowment?  How do you know if you have an endowment?  If you have an endowment, how do you account for it?  Why is it important for the organization and its financial statements?  These are questions that we will address in a series of articles.

What is an Endowment?

We will start with understanding of an endowment.  U.S. generally accepted accounting principles (GAAP) define an endowment fund as the following:

An established fund of cash, securities, or other assets to provide income for the maintenance of a not-for-profit entity (NFP).  The use of the assets of the fund may be permanently restricted, temporarily restricted, or unrestricted.  Endowment funds generally are established by donor-restricted gifts and bequests to provide either of the following:

  1. A permanent endowment, which is to provide a permanent source of income.
  2. A term endowment, which is to provide income for a specified period.

Alternatively an NFP’s governing board may earmark a portion of its unrestricted net assets as a board-designated endowment fund.

To simplify, an endowment fund is a fund established to provide a source of income.  Generally, the intent is for the principal to generate the income and the income is available for spending according to the donor’s wishes.

For purposes of this article and series, we will differentiate endowment from an endowment fund as defining endowment as the collection of all of the endowment funds of a NFP.

The endowment is separate from the NFP’s operations.  For purposes of discussing endowments, operations means anything that is not the endowment.  At a minimum, the net asset balances and activities of each fund should be accounted for and tracked separately from operations.  In addition, each endowment fund should be accounted for and tracked separately.  It is important to note that endowment funds with the same terms that are established for the same purpose can be combined into one endowment fund.  The assets of the endowment (i.e., the cash, investments, etc.) can be combined, but they should be tracked separately from the assets used for operations.

We will go into further detail in understanding and accounting for endowments in future articles, which will include understanding the types of endowments, understanding the differences between the Uniform Prudent Management of Institutional Funds Act (UPMIFA) and GAAP, accounting for donor-restricted endowment, and accounting for board-designated endowments.

For additional information regarding endowments, please contact us.