UPMIFA was developed to improve the protection of donor intent with respect to expenditures from endowments and applies to charities organized as charitable trusts or as nonprofit corporations and trusts managed by charities. The Act does not apply to funds managed by trustees that are not charities or trusts managed by corporate or individual trustees. UPMIFA provides guidance and authority to charitable organizations concerning the management and investment of funds held by those organizations and imposes additional duties on those who manage and invest charitable funds to provide additional protection for charities and also protect the interests of donors who want to see their contributions used wisely. The Act updates the rules governing expenditures from endowment funds, whether donor restricted or board designated, to provide stricter guidelines on spending endowment funds and to give institutions the ability to cope more easily with fluctuations in the value of the endowment.

In addition to identifying factors that a charity must consider in making management and investment decisions, UPMIFA requires a charity and those who manage and invest its funds to 1) give primary consideration to donor intent as expressed in a gift instrument, 2) act in good faith, with the care an ordinarily prudent person would exercise, 3) incur only reasonable costs in investing and managing charitable funds, 4) make a reasonable effort to verify relevant facts, 5) make decisions about each asset in the context of the portfolio of investments, as part of an overall investment strategy, 6) diversify investments unless due to special circumstances, the purposes of the fund are better served without diversification, 7) dispose of unsuitable assets, and 8) in general, develop an investment strategy appropriate for the fund and the charity.

Has your organization adopted an investment policy that complies with your state’s version of UPMIFA? Review your state’s requirements and make sure your policies conform to the prudent management of funds.

For additional information see http://www.upmifa.org.

For the State of Texas version of UPMIFA see http://www.statutes.legis.state.tx.us/SOTWDocs/PR/htm/PR.163.htm

So what can churches do to weather this environment? Here’s a few suggestions:

1. Don’t abandon your mission, and certainly don’t abandon your message. Despite this economy, I believe (and have seen) that people still want to give generously to causes they are passionate about. The problem caused by the economy is that more nonprofit organizations are providing more services to more people in need with less available funding. That’s why it’s so important to trumpet a compelling vision to your contributors. There are simply more options for donors to consider, and with limited resources, they give to causes they are the most passionate about.
2. Communicate, communicate, communicate. Churches (and lots of other organizations) make the mistake of not wanting to communicate negative financial trends and results. But if you don’t communicate, how will your contributors know there’s a need? Many churches also make the mistake of talking about money only when the numbers are down. Generosity is ultimately a spiritual issue not a financial one, and that message is lost if you only talk about money in a bad economy.
3. Rethink budgets. Churches are generally very slow to make difficult decisions about (i.e. cutting) budgets, minstries, and staff. The line between faith and stewardship is often very faint, but in a giving environment like we’re experiencing now, churches must consider the efficiency of their ministries. When giving is up year after year after year, churches often add a little more “flair” to ministries than is really needed and let certain ministries linger on a little longer than they should. Spend some time thinking strategically about your ministries in light of your mission and your investment in those ministries, and you might be surprised what you find.

The economy we’ve been dealt presents its share of challenges for churches and ministries, but there are opportunities to impact the quality and direction of your ministries. And who knows – you might even find youself in the 9% next year.

If we can be of any help or answer any questions as you wrestle through these issues, please don’t hesitate to call me.

Conditional promises to give are recognized only when the conditions are satisfied. Therefore, no revenue or receivable should be recognized at the time the promise is received. If any assets are received prior to the conditions being met, the assets should be accounted for as a refundable advance (liability). Once the condition is met, the liability is removed and revenue is recognized.

Additional disclosures must be made regarding promises to give. When disclosing conditional promises to give, you should disclose the following:

1. the total of the amounts promised; and
2. a description and amount for each group of promises having similar characteristics, such as promises conditioned on establishing new programs, completing a new building, or raising matching gifts by a specified date.

Summary of Unconditional vs. Conditional Promises to Give

 The following are examples of promises to give:

 Unconditional or Conditional?

Conditional Disclosure 1:

A trustee has agreed to match contributions to the Entity’s endowment funds on a one-for-two basis until the total reaches $5,000,000. In addition, a contributor has pledged to contribute $250,000, conditional upon proper matching with a grant.

Conditional Disclosure 2:

During 20X7, the Entity received restricted grants totaling $50,000 that contained donor conditions (primarily matching funds requirements). Since these grants represent conditional promises to give, they are not recorded as contribution revenue until donor conditions are met. Funds received from the donor in advance of the conditions being met totaled $20,000; are recorded as refundable advances; and will subsequently be recognized as contribution revenue when donor conditions are met.

For more information see “Unconditional Promises to Give” for general information regarding promises to give.

Promises to give can be unconditional or conditional. Unconditional promises to give are exactly that: unconditional (no strings attached). Once received, they can be used toward the ongoing operations or mission of the not-for-profit organization. 

The timing of recognition of contribution revenue or receivable depends upon the promise to give being unconditional or conditional. Unconditional promises to give are recognized when received, even if the donor restricts the promised contribution for use in a future period and even if the promise will not be paid until a future period. If the promise to give is restricted for use in a future period or won’t be paid until a future period, it should be reported as restricted support, either temporary or permanent. 

Contributions received should be measured at their fair values.  If the promise is expected to be collected in less than a year, it is measured at net realizable value, which in most cases would be the face value net of any estimated uncollectible amount. If the promise is expected to be collected after one year, the fair value should be based on future cash receipts, discounted at a rate “commensurate with the risks involved.”  Basically, the discount rate should be based on the same criteria that would be used for trade receivables.  The entity should consider the following factors:

1. when the receivable is expected to be collected;
2. the creditworthiness of the other parties;
3. the entity’s past collection experience;
4. the entity’s policies concerning the enforcement of promises to give;
5. expectations about possible variations in the amount or timing of the cash flows; and
6. other factors concerning the receivable’s collectibility.

Additional disclosures must be made regarding promises to give. When disclosing unconditional promises to give, you should disclose the following:

1. the amount of promises receivable in less than one year, in one to five years, and in more than five years; and
2. the amount of the allowance for uncollectible promises receivable.

 Examples

 Unconditional Disclosure 1:

Unconditional promises to give are recorded as receivables and revenue when received. The Entity distinguishes between contributions received for each net asset category in accordance with donor-imposed restrictions. Pledges are recorded after being discounted to the anticipated net present value of the future cash flows.

              Pledges are expected to be realized in the following periods:

                                                                                                  20X1                20X0     

                    In one year or less                                                 $  1,438,547     $   1,313,217
                    Between one year and five years                                 1,970,255          1,780,764
                                                                                                 3,408,802          3,093,981
                    Less:
                        Allowance for uncollectible pledges                            (969,036)          (717,538)
                        Discount, at 6%                                                     (387,800)          (324,867)
                                                                                             $  2,051,966     $   2,051,576

Unconditional Disclosure 2:

The pledges receivable consist of operating and capital project fund-raising campaigns. At June 30, 20X1, all pledges receivable are expected to be collected during the next year. Management has determined that the pledges receivable are fully collectible; therefore, no allowance for uncollectible accounts are considered necessary at June 30, 20X1.

For more information about conditional promises to give, watch for my next post.

If the donor stipulates that the funds are to be spent on a particular item/activity or within a particular period of time, then the contribution is temporarily restricted. If the contribution is never to be spent, as in the case of certain endowments, the contribution is permanently restricted, thus increasing permanently restricted net assets. These permanently restricted net assets generate investment income that can be spent, but the investment income may have donor restrictions to consider as well.

Recording a contribution increases cash and increases revenue. Therefore the asset account is debited and the revenue account is credited. The revenues are classified based on the donor’s intent. When the donor’s restriction has been met then the funds are released and classified as unrestricted support.

There are two different methods utilized in recording temporarily restricted revenues. The first method allows temporarily restricted contributions to be recorded as unrestricted support if the purpose or timing is met in the same year as the receipt.  The second method requires the full amount of temporarily restricted contributions to be recorded as restricted support when received and then released as the restriction has been met.

For more information on recording and classifying contributions, see FAS 116, Accounting for Contributions Received and Contributions Made.

1. Unconditional promises to give are statements by a donor of their intent to make a contribution of some kind at a future period. (For example, the ABC Foundation informs you that they have voted at their last Board meeting to give your organization $10,000 in January.)
2. Conditional promises to give are pledges by a donor that are “conditioned” upon some other event (other than the passage of time) occurring. (Some examples are: 1). A donor states that he will give you $5,000 for your capital campaign if a contract with a builder has been signed. 2). A foundation will contribute $100,000 if a new program is implemented. 3). A corporation will donate $1,000 if other corporations in your community do the same.)

Remember: Conditional pledges require some other action to occur.

So what is the different accounting treatment?

1. Unconditional pledges are recorded as revenue (which is temporarily restricted – see blog on this topic) when the not-for-profit organization receives the pledge (written or verbal).
2. Conditional pledges are recorded as revenue when the condition has been met. Until that time, the conditional pledge would be disclosed in the notes to the financial statements (if significant), but not reflected in the accounting records. [For example, you learn on December 1, 2008 that a donor is going to contribute $1 million for your organization to begin an endowment if you are able to establish a location in another town by December 1, 2009. In the financial statements ending December 31, 2008, this information would be disclosed in the footnotes. On March 31, 2009 the location is opened, and at that time you would recognize the pledge and the associated revenue of $1 million even if payment has not actually occurred.]

Pledge information can be conveyed to you verbally or in writing. However, we suggest that all significant pledges be obtained from the donor in writing stipulating any restrictions, date payment is to be expected, any conditional information, etc. This practice helps to reduce any confusion or errors.

If the donor does not send this written information, then we suggest that you write the donor an acknowledgement of their pledge and outline the verbal specifications. Ask the donor to sign a copy of the letter and return it to you.

Sometimes it can be unclear when the condition of the pledge has been met and should be recorded in your accounting records. If you have questions regarding this recognition, give us a call.

If material, the components of temporarily restricted net assets and the amounts released are disclosed in the footnotes of the financial statements.

Authored by Tishia Jordan