Endowment Funds Demystified — How to Properly Account, Track & Report Endowments

Blog Series: The Endowment Blueprint for Nonprofit Leaders
Part 2 of 3: Endowment Funds Demystified — How to Properly Account, Track & Report Endowments

This article is part two of our three-part series designed to make endowment accounting both understandable and actionable for nonprofit executives, finance leaders, and board members.

• Part 1: Understanding Endowment Funds: What Nonprofits Need to Know
  Provided a foundational look at what qualifies as an endowment, donor vs. board restrictions, and why clear designation matters.
• Part 2 (you are here): Endowment Funds Demystified — How to Properly Account, Track & Report Endowments
  Focuses on day-to-day accounting requirements, classification, valuation, and reporting disclosures.
• Part 3: When the Market Drops: Managing, Reporting & Spending from Underwater Endowments
  (coming next) A deeper dive into market volatility, spending discipline, and required disclosures when values fall below principal.

Endowment Funds Demystified: How to Properly Account, Track & Report Endowments

Endowments are designed to fuel mission longevity—but only if they are managed with precision. Misclassification, unclear spending policies, or incomplete disclosures can quickly create audit issues and, worse, donor trust concerns.

Let’s walk through how to set up, classify, track, and report endowments in a way that is both UPMIFA-aligned and audit-ready.

1. Correct Setup: Where Compliance Begins

Classify Upon Receipt

Every endowment must be classified at inception, not at year-end:

Establish Separate Tracking

Each endowment should have:

• Original gift/principal value
• Cumulative earnings (realized + unrealized)
• Spending/appropriations
• Market fluctuations

Your auditors (and donors) should be able to clearly follow every dollar.

2. Ongoing Accounting & Investment Activity

Track Both Book Value & Market Value

You must distinguish:

• Historical/Book Value: original gift plus authorized additions
• Market Value: current investment value, fluctuating daily

Both values matter for disclosure—especially when determining whether a fund is underwater.

Pooling Investments? Use Unitization

Pooling increases diversification but requires accurate allocation:

• Each fund owns units of the pooled portfolio
• Returns and market changes are allocated based on unit shares

This method supports equity, transparency, and audit clarity.

Record Investment Returns & Appropriations

Track:

• Dividend/interest income
• Realized/unrealized gains and losses
• Spending per board-approved policy

A written, annually reviewed spending policy is essential. The absence of one is a governance red flag.

3. Reporting & Disclosure Requirements

UPMIFA expectations and audit standards require full transparency:

Provide a Detailed Rollforward

Show how beginning balances move to ending balances:

• Contributions
• Earnings and gains/losses
• Fees
• Appropriations
• Market fluctuations

Disclose Spending Policies & Donor Alignment

Readers must understand:

• How spending is calculated
• How donor intent is honored
• Whether policies change based on market conditions

Flag Underwater Endowments

If market value dips below original gift value:

• Identify the fund
• Quantify the deficit
• Explain spending approach going forward

This will be the focus of Part 3 of the series.

Actionable Checklist for Finance Leaders

✔ Classification documented at inception
✔ Separate accounting for each fund, even in pooled investments
✔ Book vs. market value tracked independently
✔ Spending policy formalized and board-approved
✔ Clear rollforward included in financials
✔ Underwater positions evaluated and disclosed

Next Up in the Series

Part 3: When the Market Drops — Managing, Disclosing & Spending from Underwater Endowments

We’ll explore:

• What qualifies as “underwater”
• Required note disclosures
• How to adjust spending policies without violating donor intent
• Strategies to restore principal over time

If you’d like help reviewing your current endowment accounting structure or strengthening disclosures before year-end, we’re here to support you.