How ASC 958-205 and UPMIFA Enhance Endowment Transparency

Endowments are incredible tools for financial sustainability. But some of the reasons endowments are so valuable also create reporting and transparency headaches.

Whether you currently have an endowment and want to make sure you’re complying with authoritative standards, or your organization is looking to build one, FASB ASC 958-205 and UPMIFA are two of the standards you need to know.

Federal Accounting Standards Board (FASB) Accounting Standards Update (ASC) 958-205

The Federal Accounting Standards Board (FASB) issued Accounting Standards Update (ASC) 958-205 to enhance the presentation of financial statements for nonprofit organizations. This standard simplifies how nonprofits communicate their financial health to stakeholders.

ASC 958-205 is designed to improve transparency, making it easier for donors, board members, and other users of financial statements to understand an organization’s financial standing. One of its key provisions is the reclassification of net assets into two categories: with donor restrictions and without donor restrictions. This shift reduces complexity compared to the previous three-category model, ensuring stakeholders can more clearly differentiate between funds intended for specific purposes and funds available for general use.

For organizations with endowments, ASC 958-205 requires a more thorough presentation of financial statements. Finance officers must include the Statement of Financial Position, Statement of Activities, Statement of Cash Flows, and, for many nonprofits, the Statement of Functional Expenses. The latter outlines expenses by both nature (such as salaries or office supplies) and function (such as program services or administrative costs), offering greater insight into how resources are allocated.

ASC 958-205 reinforces transparency by requiring nonprofits to disclose details about their liquidity and availability of resources. This provides confidence to donors and financial stakeholders, ensuring they can trust how funds are managed and used.

Uniform Prudent Management of Institutional Funds Act (UPMIFA)

The Uniform Prudent Management of Institutional Funds Act was created to guide nonprofit organizations in managing and investing their endowment funds responsibly. Its primary purpose is to ensure long-term sustainability, protect charitable assets, and promote financial stability through prudent decision-making.

Replacing the older Uniform Management of Institutional Funds Act (UMIFA), UPMIFA introduced updated guidelines that reflect modern investment practices. Nonprofit organizations are now required to manage their funds with care, skill, and diligence, prioritizing both investment returns and risk management. UPMIFA places a strong emphasis on diversifying investments and maintaining a balance between growth and preservation to support an organization’s charitable mission for years to come.

A key feature of UPMIFA is its allowance for prudent spending from the principal of endowment funds, provided the spending aligns with the intent of the donor and does not jeopardize the fund’s ability to support future beneficiaries. Nonprofit organizations must carefully evaluate the long-term impact of withdrawing from principal amounts and ensure their decisions comply with UPMIFA’s requirements.

To stay in compliance, organizations are encouraged to periodically review and analyze their endowed funds. This includes assessing their investment strategies, spending policies, and alignment with UPMIFA standards. By doing so, organizations can strengthen their financial health and continue serving their communities effectively. With UPMIFA’s framework, you have tools to uphold the integrity and sustainability of your endowment funds while meeting your organization’s mission-driven goals.

Understand Your Endowment Management Responsibilities

Managing endowments effectively starts with understanding your legal obligations. Because UPMIFA’s application can vary by state, it’s essential to check your local state laws. If you’re unsure how these laws impact your organization, consult legal counsel for clarification to ensure compliance.

It is management’s responsibility to comply with these laws and adhere to GAAP (Generally Accepted Accounting Principles). Ensuring your organization operates within these frameworks protects the integrity of your financial reporting and demonstrates accountability to donors and stakeholders.

Given the nonprofit accounting complexity involved, make sure your staff is properly trained in these regulations and understands nonprofit-specific accounting practices as well as compliance requirements. Investing in staff education minimizes the risk of errors and enhances the organization’s ability to fulfill its fiduciary responsibilities.

To support compliance and financial accuracy, nonprofits need reliable systems capable of tracking transactions and restricted funding. These systems should be able to monitor fund usage and document financial activity in alignment with applicable laws and accounting standards. Efficient systems reduce manual errors and give you–and your donors–greater confidence in the organization’s reporting.

By understanding your endowment management responsibilities and prioritizing compliance, you can safeguard your nonprofit’s financial health and uphold its mission.

Endowment Compliance with Blackbaud Financial Edge NXT®

Without the right systems in place, managing an endowment can cause significant challenges for your accounting staff in complying with regulations and for your development team in securing funding. The development team, in particular, may struggle to provide compelling information about the use of a donor’s previous donations when approaching them for additional gifts. It’s imperative that your organization has accounting software with sub-fund capabilities in place that can ensure you are in compliance with these reporting standards and can provide timely information to various stakeholders.

Blackbaud’s fund accounting software, Financial Edge NXT, was designed specifically to manage the unique accounting requirements of nonprofit organizations. Utilizing fund accounting functionality to report on the proper net asset classifications, liquidity, functional expense allocations, and more, Financial Edge NXT can help your organization comply with authoritative standards and maintain the highest level of transparency with your donors. 

Within Financial Edge NXT, you can use Transaction Codes, which add a layer of flexibility for categorizing and analyzing data. These codes help finance officers track liquidity, simplify reporting processes, and gain deeper insights into their organization’s financial health. By leveraging these features, organizations can better position themselves to address the demands of modern endowment management.

With Financial Edge NXT, your organization gains a trusted partner in maintaining compliance and achieving excellence in endowment management. These tools don’t just simplify processes—they help organizations uphold their commitment to transparency and effective stewardship.

Check out our infographic or request a demo to learn more about how fund accounting software simplifies endowment management.