IRS Form 990 Preparation

by: Nathan Perrine, CPA MBA
Accounting Manager

Does your charitable organization have restricted funds that are so old that no one really knows the restricted purpose anymore? Or do you have restricted funds that are so small that the burden of recordkeeping outweighs any benefit the funds could produce? If you do, you're not alone. Many charitable organizations have funds on the books that go back decades. Sometimes, the donor-restricted purpose is no longer known; sometimes organizations lose track of records and/or lose institutional knowledge due to staff turnover. Even if the restricted purpose for a fund is known, sometimes the fund is so small that it provides little or no benefit to the organization. Consider the following example:

The Foundation for the Widening of Television Screens* (FWTS) received a contribution of $10,000 in 1970 from an individual donor. The donor apparently directed FWTS to permanently restrict the contribution and use only the earnings on the amount to further the mission of the organization in a specific way. However, since 1970, FWTS has moved its office six times, has gone through eight executive directors, ten chief financial officers, and multiple turns of the entire accounting staff. In the audited financial statements for the fiscal year 2009, FWTS reports the $10,000 as permanently restricted net assets - but no one at FWTS can recall the exact purpose of the restriction. The letter from the donor was lost in one of the moves, and no one is left on staff that can remember any of the details.

The executive director of FWTS asks the CFO what the line in the audited financial statements means, but the CFO has no answer. The executive director then asks a more pointed question: "Since nobody knows what this means, how can we use this money?"

Enter the Uniform Prudent Management of Institutional Funds Act (UPMIFA). UPMIFA was adopted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in July 2006 and recommended to the state legislatures for enactment . As of December 2009, UPMIFA has been enacted in 43 states and in the District of Columbia. Four more states and the US Virgin Islands have UPMIFA legislation as part of their 2010 agendas.
UPMIFA provides some guidance to help charitable organizations deal with restricted funds that are "unlawful, impracticable, impossible to achieve or wasteful." Under the Act drafted by the NCCUSL, organizations may modify restrictions on existing funds that are:

1. at least 20 years old (from the inception of the fund; not from the last contribution to the fund), and
2. no more than $25,000.

The organization must serve notice to the attorney general of the state in question, and allow the attorney general a period of 60 days to respond. If the organization does not hear from the attorney general, the restriction may be modified - though the organization has a duty to use the property "in a manner consistent with the charitable purposes expressed in the gift instrument." Different states may have enacted legislation that differs in one way or another from the version of UPMIFA adopted by NCCUSL; check with your legal counsel to identify the specific legislation in your state.

Back to our example of FWTS. The permanently restricted funds listed on the statement of financial position meet both the criteria specified in UPMIFA: the gift is less than $25,000 and more than 20 years old. FWTS may, with the assistance of legal counsel, inform the attorney general of its intent to modify the restriction on the gift.
In an economic climate like this one, every dollar matters. UPMIFA gives organizations an opportunity to access restricted funds that have previously been off-limits.

* A fictional company

Nathan Perrine, CPA is a manager in Tate & Tryon's Outsourced Accounting Services department and can be reached at nperrine@tatetryon.com.