Donor support can have complex accounting requirements for private schools. This can lead to schools improperly recording certain types of donor support, which can result in misstatements or reclassifications.
The following are just some of the most commonly overlooked or misstated areas of donor support in private school financial reporting.
1. Pledges Receivable
Proper accounting for pledges receivable depends on whether there are donor-imposed conditions, donor-imposed restrictions or both.
Private schools need to review the terms of the pledge to determine whether the pledge is conditional or unconditional, and with or without donor restrictions, as the accounting for each is different. Recognize unconditional pledges receivable as revenue in the year you receive the pledge. If the unconditional pledge contains a donor-imposed restriction, it should be classified as with donor restrictions. Recognize conditional pledges receivable as revenue when the conditions are substantially met.
2. Classification of Net Assets
Net assets should be included in one of two classes depending on the presence and type of donor-imposed restrictions:
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Net assets without donor restrictions
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Net assets with donor restrictions
The school and its board of directors are unable to restrict net assets. Only donors can restrict net assets. If the board determines that it wants to limit the use of certain net assets without donor restrictions, the net assets become board designated net assets. Net assets with donor restrictions are subject to donor-imposed restrictions that are temporary in nature, such as those with time limits or other events specified by the donor, or are perpetual in nature, where the donor stipulates the maintenance of resources in perpetuity.
3. Split Interest Agreements
One of the many ways donors provide financial support to charitable organizations is through arrangements under which nonprofits receive shared benefits with other beneficiaries. This arrangement is a split interest agreement.
The most commonly used split interest agreements are:
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Charitable lead annuity and unit trusts
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Charitable remainder annuity and unit trusts
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Charitable gift annuities
Depending on the type of arrangement and who holds the assets, the school will either recognize the split interest agreement as contribution revenue along with the related assets and liabilities, or recognize its beneficial interest in the assets as an asset and contribution revenue when the school is notified of the split interest agreement’s existence.
Unfortunately, nonprofits may not always be recording split interest agreements, may not be recording them correctly, or may not realize that they are a party to a split interest agreement at all. As a result, nonprofits might be understating assets, liabilities, revenue and net assets.
4. Endowments & UPMIFA
The Uniform Prudent Management of Institutional Funds (UPMIFA), in the absence of specific donor instructions, provides guidance regarding endowments and specifically sets standards for endowment spending and the preservation of the original gift in accordance with donor intent. UPMIFA mandates that earnings, unless otherwise instructed, be classified as donor restricted for legal purposes until they are appropriated for expenditure.
Under UPMIFA, donor intent extends not just to the original gift but also to earnings on the related investments as well. Therefore, earnings are donor restricted until the governing board provides approval to use the funds.
The endowment accounting guidance requires that certain disclosures be included for all donor restricted and board designated endowments, regardless of whether UPMIFA affects them or not. Nonprofits are also required to disclose a description of their governing board’s interpretation of applicable law governing net asset classification for donor restricted endowments, endowment spending policies, and investment policies.
The ultimate purpose of the enhanced disclosure requirements is to improve transparency, making underwater endowments more evident. (An underwater endowment is one whose fair market value is less than its historic dollar value.) Investment losses associated with underwater endowments are to go against the net assets with donor restrictions.
Note: Most states have adopted their own version of UPMIFA that have minor variations in regulations.
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This post was originally published in December 2013 and has been updated for accuracy and comprehensiveness.
