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NACUBO Issues FSP FAS 117-1 Implementation Guidance

September 2, 2009

Independent institutions and not-for-profit foundations affiliated with public institutions will be implementing the requirements of FASB Staff Position (FSP) FAS 117-1 in their 2009 financial statements. Disclosure requirements apply to all not-for-profit organizations, whether or not they are in a state that has adopted Uniform Prudent Management of Institutional Funds Act (UPMIFA). Conveying the proper net asset reclassification, however, will depend upon whether, and when, a state has adopted UPMIFA. In addition, whether comparable financial statements are presented and the format used for the statement of activities may present implementation issues. NACUBO's Accounting Principles Council (APC) offers guidance for these circumstances.

Background

UPMIFA was first enacted in 2007, with 13 states adopting a version of the law in that year. By August 2009, all but approximately eight states have enacted a version of UPMIFA, and five of the eight states are in the legislative process. UPMIFA is applied retroactively, and the net asset classification applies to all donor-restricted endowment funds in existence as of the effective date of the relevant enacted version of the law regardless of when the endowment fund was established.

Institutions with Comparative Financial Statements

FSP FAS 117-1, paragraph 16, provides transition guidance for institutions that prepare comparative financial statements as follows:

In initially applying the guidance in paragraphs 5-9 to donor-restricted endowment funds in existence when UPMIFA is first effective, an organization shall report any resulting net asset reclassification(s) in a separate line item within the organization's statement of activities for that period, outside a performance indicator or other intermediate measure of operations, if one is presented. If the organization initially applies the provisions of FSP FAS 117-1 subsequent to the period in which UPMIFA is first effective, the reclassification shall be reported in those financial statements in the earliest comparative period presented for which UPMIFA was effective. If the period in which UPMIFA first became effective is not presented, the effects of the reclassification shall be reported retrospectively in the earliest period presented.

There are three potential scenarios that independent institutions must deal with in implementing FSP FAS 117-1.

1.      UPMIFA enacted prior to fiscal year 2008

2.      UPMIFA became effective during fiscal year 2008

3.      UPMIFA enacted during fiscal year 2009

Various questions have arisen concerning the presentation of the retroactive application of UPMIFA in an earlier reporting period. Some question whether paragraph 16 requires a retrospective application of the accounting principle change if UPMIFA is first effective in the earliest reporting period (above number 2. during fiscal year 2008). Paragraph 16 explicitly calls for retrospective application if UPMIFA is in effect during a reporting period not presented - (above number 1. prior to fiscal year 2008. In specifying a separate summarized net asset change presentation outside of an intermediate operating measure if UPMIFA is effective in the earliest reporting period - (above number 2. during fiscal year 2008) - paragraph 16 appears to fall short of recommending a comparable retrospective reporting presentation. In addition, paragraph 16 provides no guidance as to whether the retrospective application should be "as of the beginning" of the fiscal year, "as of the end" of the fiscal year, or for organizations in states that enacted UPMIFA in fiscal year 2008 or 2009, at the effective date of the enactment.

NACUBO Guidance:

1. States that enact UPMIFA prior to fiscal year 2008.

Paragraph 16 explicitly calls for retrospective application if UPMIFA is in effect during a reporting period not presented. In states that enacted UPMIFA prior to fiscal year 2008, beginning net asset balances are restated to reflect the correct net asset classification required by paragraph 16 of FSP FAS 117-1. Endowment investment returns (net of distributions) for fiscal year 2008 should be shown retrospectively as if the accounting principle (FSP FAS 117-1 guidance) had always been used during fiscal year 2008. The fiscal year 2008 statements should be clearly labeled as restated. In this scenario, endowment investment returns will be comparable for both years presented as the net asset reclassification will be reflected for the entire year.

2. & 3. States where UPMIFA became effective during fiscal year 2008 and states that enacted UPMIFA during fiscal year 2009.

As a practical expedient, NACUBO recommends that the effect of the change be reported either "as of the beginning" of the fiscal year or "as of the end" of the fiscal year in which it is presented. Because the change in accounting principle results from accounting guidance that is linked to a change in law, organizations should consider when the effective date of UPMIFA falls in their fiscal year. For example, if UPMIFA is effective during the last month of the fiscal year, it may make sense to report the corresponding accounting change at the end of the fiscal year. Alternatively, if UPMIFA is effective during earlier months in a fiscal year, it may be reasonable to report the effect of the change at the beginning of the fiscal year. When deciding whether to adjust beginning or ending net asset balances in the earliest comparative period presented, organizations should also consider how the following are affected by a retrospective restatement:

  • Future (especially near future) bond offerings
  • Previously calculated Department of Education Financial Responsibility Ratios
  • Related disclosures and other explanations necessitated by restatement

Professional judgment must be used to assess all matters. Ultimately the pros and cons should be evaluated and decisions discussed with auditors. In all cases, the notes to the financial statements should clearly state and explain the approach taken and how the effect of the change is reflected in the institution's financial statements. The following discussion highlights the differences between the two options for each scenario.

2a. In states where UPMIFA became effective during fiscal year 2008 and the institution chooses to present the effect of the change "as of the beginning" of fiscal year 2008, a net asset reclassification equal to the cumulative effect of the accounting principle change is reported in a separate line below an intermediate measure of operations, or just above the increase (decrease) in net assets (if no intermediate measure is reported), "as of the beginning" of fiscal year 2008. Additionally, the statement of activities should reflect the fiscal year 2008 effect of applying the new accounting principle - retrospectively - as if the guidance in FSP FAS 117-1 was applied during fiscal year 2008. The fiscal year 2008 statements should be clearly labeled as "restated." This presentation enhances the comparability between endowment investment returns in fiscal years 2009 and 2008.

2b. In states where UPMIFA became effective during fiscal year 2008 and the institution chooses to present the effect of the change "as of the end" of fiscal year 2008, beginning net asset balances and fiscal year 2008 endowment investment returns (net of distributions) are not restated. The effect of the change would be shown as an adjustment to ending net assets. In this scenario, there is no restatement of prior year amounts. This may be particularly important for institutions that present historical information and do not want to have to restate previously reported amounts. The endowment investment returns under this scenario would not be comparable as the fiscal year 2008 would not reflect the effect of the change, but the fiscal year 2009 would.

3a. In states that enacted UPMIFA during fiscal year 2009 and the institution chooses to present the effect of the change "as of the beginning" of the fiscal year, a reclassification adjustment equal to the cumulative effect of the accounting principle change is reported in a separate line below an intermediate measure of operations, or just above the increase (decrease) in net assets (if no intermediate measure is reported), "as of the beginning" of fiscal year 2009. There is no change to fiscal year 2008. In this scenario, the allocation of investment returns by restriction classification is not comparable between fiscal years 2008 and 2009 because the effects of FSP 117-1 are reflected only in the fiscal year 2009 Statement of Activities.

3b. In states that enacted UPMIFA during fiscal year 2009 and the institution chooses to present the effect of the change "as of the end" of the fiscal year, the reclassification adjustment would be presented the same as in (3a) above, but the amount of the reclassification would differ due to the timing of recognizing the effect on net assets. There is no change to fiscal year 2008. In this scenario, fiscal year 2008 and 2009 endowment investment returns are comparable as neither year reflects the effect of the change. Similar to (3a.), the allocation of investment returns by restriction classification will not be comparable between fiscal years 2009 and 2010 because the effects of FSP 117-1 are reflected only in the fiscal year 2010 Statement of Activities.

Illustrations of NACUBO's Recommendations

The following examples are included as an appendix to this bulletin as an Excel spreadsheet with worksheets that correspond with the guidance scenarios previously presented:

  • Example 1 - Eight column statement of activity format, UPMIFA enacted in a year prior to those shown in the comparative financial statements, effect of the change reflected at the beginning of the fiscal year.
  • Example 1 - Summary statement of activity format, UPMIFA enacted in a year prior to those shown in the comparative financial statements, effect of the change reflected at the beginning of the fiscal year.
  • Example 2a - Eight column statement of activity format, UPMIFA enacted in the earliest year shown in the comparative financial statements, effect of the change reflected at the beginning of the fiscal year.
  • Example 2a - Summary statement of activity format, UPMIFA enacted in the earliest year shown in the comparative financial statements, effect of the change reflected at the beginning of the fiscal year.
  • Example 2b - Eight column statement of activity format, UPMIFA enacted in the earliest year shown in the comparative financial statements, effect of the change reflected at the end of the fiscal year.
  • Example 3a - Eight column statement of activity format, UPMIFA enacted in the current year shown in the comparative financial statements, effect of the change reflected at the beginning of the fiscal year.
  • Example 3a - Summary statement of activity format, UPMIFA enacted in the current year shown in the comparative financial statements, effect of the change reflected at the beginning of the fiscal year.
  • Example 3b - Eight column statement of activity format, UPMIFA enacted in the current year shown in the comparative financial statements, effect of the change reflected at the end of the fiscal year.

Contact

Sue Menditto
Director, Accounting Policy
202.861.2542
E-mail