A nonprofit’s guide to endowment accounting

Endowment accounting for nonprofits: Definitions, rules, and more

Commonly referred to as a board-designated fund, a quasi endowment functions similarly to a true endowment, but decisions about how donations are spent are made by the receiving organization instead of the donor.

Donor-advised fund (DAF)

This increasingly popular giving option is defined by a donor or delegate’s advisory rights around grantmaking and investments. Multiple charities can be supported by a single DAF. Donors can also contribute directly to a sponsoring charity that maintains their DAF account and receive an immediate tax deduction.

Rules, regulations, and bodies governing endowments 

The vast majority of rules and regulations that pertain to endowments and sub-accounting come from the following two places:

UPMIFA (Uniform Prudent Management of Institutional Funds Act) serves as a guideline for individual states to adapt and adopt as legislation, meaning provisions can vary slightly by state.

The standard was established to promote responsible management of funds with consideration for long-term sustainability. UPMIFA emphasizes a duty of care, loyalty, and impartiality in managing institutional funds by getting granular; taking into account an organization’s short- and long-term charitable goals in relation to resources. 

GAAP (Generally Accepted Accounting Principles) provides financial reporting guidelines for U.S. companies. GAAP reports are intended to inform stakeholders of a company’s performance, financial position, and cash flows to ensure transparency. The Financial Accounting Standards Board (FASB) is responsible for setting and maintaining GAAP standards. 

Initial endowment investment

Upon creating an endowment, donors will need to provide an investment at the get-go. Depending on the managing organization, that can take various forms. Some common investments include:

  • Publicly traded stocks and bonds: Representing ownership interests in a corporation and offering dividends and capital appreciation.
  • Mutual funds: Allowing investors to diversify their income.
  • Real estate: Providing appreciation value and potential rental income through commercial, residential, and investment properties.
  • Cash: Or cash equivalents such as cryptocurrency.

Understanding the investment pool

An investment pool combines revenue streams from multiple donors. Gifts are most commonly contributed in the form of cash or securities, and provide a way for modest investors to make a greater charitable impact. Contributing to a pooled income fund alleviates tax requirements by providing tax deductions when a contribution is made.

This concept is often used interchangeably with the term “mutual funds,” but there are some notable differences; access being the most prominent. Mutual funds are available to the general public while pooled funds are even broader, encompassing various types of investment vehicles.

Another related giving vehicle is the unitized endowment pool (UEP), which generally allows for transfers of units between individual endowments within the pool. For example, if one endowment wants to increase its allocation in the pool, it can purchase units from another endowment. Specifics are managed by individual agreements.

Explore our quick guide to pooled income funds for a more detailed breakdown of how to get started.

What is a historical gift? 

Historical gifts are the culmination of investments made years prior, helping to provide a sense of security for an organization as invested funds continue to generate income. When a gift is made, the donation is added to the corpus of the endowment (the principal or capital portion), rather than being immediately available to spend.

Expendable accounts

When we discuss expendable accounts, one of the most important factors is the timeline requirement. Unlike a regular endowment, expendable accounts allow organizations to use donated money and investment earnings to support a specific program or project. In the nonprofit sector, this concept is known as a “spend-down.”

Partnering with Ren

At Ren, we provide the technology to bridge gaps between donors, investors, and charities to serve giving needs at scale. We understand that having a trusted partner to lead the process is vital for your nonprofit to carry on with efficient operations. That’s why we handle the backend work so your team can focus on its greater mission.

Our secure online portal allows for access anywhere, and includes a branded participant and sponsor view. We also improve your operational efficiency through automation, allowing you to gain better insight into multi-level reporting of spendable balances, cash flow, and investment values.

With Ren, giving options are always diverse, with more than 150 charitable vehicles to choose from, including endowments, DAFs, agency endowments, all types of charitable trusts and many more.

Contact our experienced team about philanthropic giving and learn how you can proceed on your unique journey with ease.

Is a donor-advised fund the right choice for your client?​

Get the answers to the most frequently asked questions about donor-advised funds in our free eBook — 12 Questions to Ask Before Setting Up a Donor-Advised Fund.