Get Back To The Endowment Basics

Endowments, especially those of large universities, have come under the microscope of regulators, donors, and constituents in recent years. Despite the buzz, some in the sector still might not have a firm handle on the basics.

    John R. Kroll, associate vice president for finance and administration at the University of Chicago, and Jennifer Richards, senior manager at Crowe Horwath LLP, provided a bit of a refresher course during their session, “Accounting for Endowments and Annuity and Life Income Gifts,” at the 2018 American Institute of Certified Public Accountants (AICPA) Not-For-Profit Industry Conference in National Harbor, Md. Some of the basic lessons provided included:

  • What is an endowment? This isn’t something that you cannot accurately find in Merriam-Webster, which defines it as the part of an institution’s income coming from donations The AICPA defines endowment as funds that have been stipulated to be maintained in perpetuity and invested to generate present and future income. At the University of Chicago, the minimum donation for an endowment is $25,000. The maximum not requiring board approval is $1 million;
  • What is a perpetual trust? This is an instrument in which the trust is administered by a third-party other than the nonprofit. The nonprofit has an irrevocable right to the income generated by the trust assets, but leaders never hold the trust assets themselves;
  • Gift stipulations come in a variety of types. Precatory declarations are to be honored, but are not legally binding. Sometimes stipulations are placed in “change of conditions” language that allow funds to be used for an alternative purpose should the original purpose become unfulfillable. Such language can be useful. The presenters referenced a University of California scholarship fund worth nearly $400,000 that has never been used because it is required to benefit undergraduate, Jewish orphans seeking a path toward graduate studies in aeronautical engineering; and,
  • Why are investments pooled? To spread risk, minimize cash not invested, and ease management and accounting. Best pooling practices include identifying each fund maintained at book value, base additions and withdrawals on the current market, determine the market value of the pool periodically, identify pool participants by units, and base the income distributed on the units within the pool.