Harvard University Policy:

Endowments and gifts are donations received by the University in the form of cash, securities, and other assets to provide income for the maintenance of its operations.

The donations are set up and accounted for as a fund and generally have donor restrictions as to their usage.

The funds are primarily established to provide a permanent source of income (permanent endowment) or to provide income for a specified period (term endowment).

The policy on accounting for endowments and gifts defines the accounting procedures and reporting requirements for assets donated to the University to support its operations.

The University has a complete policy statement relating to the solicitation and acceptance of gifts and bequests and a procedures statement relating the new endowments, unexpended income, departmental balances, current use accounts, expenditures of principal of funds, and use of funds for construction.

Information pertaining to accounting and financial reporting was taken from the University's Gifts and Bequests Policy and included in this policy document; however, this policy does not include all information necessary for establishing endowments.

Refer to the University's Gifts and Bequests Policy Statement for complete information.

For financial reporting purposes, this policy relates to the accounting procedures related to endowment funds, unexpended income from endowment funds, departmental balances, current use accounts, expenditures of principal of endowment funds, and use of funds for construction.

Endowments and gifts are donations of cash, securities, or other endowment assets to provide income for the maintenance and operation of the University. Donations are set up and accounted for as funds.

The use of the endowment and gift funds may be permanently restricted, temporarily restricted based on donor imposed restrictions, or unrestricted.

Endowment funds are, however, generally established as a donor-restricted gift or bequest to provide a permanent endowment (a permanent source of funds) or a term endowment (funds for a specified period of time).

Endowment funds that must be maintained permanently are classified as a permanently restricted net asset.

Endowment funds that must be maintained for a specified term are classified as a temporarily restricted net asset.

Endowment funds functioning as an endowment are board designated and are not subject to permanent restrictions.

Gifts that are available for current purposes are classified as "gifts for current use." Gifts that have been restricted by the donor or designated by the Corporation for construction, endowment, or similar purposes are classified as "gifts for capital."

The University has approximately 8,300+ endowment funds that have been created from gifts by individual donors. Most of the endowments created have terms that stipulate that the University maintains the principal balance of the endowment forever.

The University assigns the endowment funds to 39 operating units who take ownership of the fund and budgets and manages the funds according to the stipulation provided.

Establishment of Endowment Funds:

 

The Corporation has formally delegated authority to the Recording Secretary (RSO) to accept and administer the establishment of new endowment funds. RSO determines if the gifts and bequests are in accordance with the policies established by the University and formally notifies General Accounting to establish the fund.

Refer to Schedule A for financial requirements for establishing endowment fund accounts as outlined in the Gifts and Bequests Policy Statement.

When a new endowment gift is received, RSO enters the information into the Development Information System. The information is transferred electronically to the Office of Financial Systems.

RSO must indicate if the gift is for the following:

Endowment, principal, endowment income, or a current use gift

Specially invested, generally invested, or for other purposes

Cash (debit cash account) or security (debit suspense account)

RSO uses State Street bank's lockbox system to manage the collection of cash receipts. Upon receipt, the endowment fund is recorded as an asset (cash) and as gift revenue.

An automated journal is generated to record the inter-tub liability between the core and the perspective tub receiving the endowment.

Appreciation of Undistributed Endowment Fund Assets:

 

The market value of an endowment fund is calculated on the net asset balance. The increase or decrease in the market value (change in appreciation) is calculated as follows:

( Current market value per unit - current book value per unit = change in market value per unit

$525 - $500 = $25

( Change in market value per unit x # of units = change in market value in dollars

$25 x 4,000 = $100,000

The University maintains the endowment investments and reports appreciation of undistributed endowment fund net assets using an investment control (University) tub account, in addition to reporting investment asset balances at the Tub level for Tub Balance Sheet reporting. The accounting of investment balances and appreciation at the Tub level is achieved via mass allocation journal entries.

Interest on Unexpended Endowment Fund Income:

 

The University records interest on unexpended endowment fund income to the schools at the Tub-Org level via mass allocations.

Capitalization of Endowment Fund Income:

 

The Dean or authorized officer should submit a request to capitalize endowment income to the RSO. The Recording Secretary will then get approval from the University Development Office, the Office of Financial Systems, and the Office of General Counsel.

Once approved, the unexpended endowment income will be capitalized at the value per unit in effect as of the request date or at a future date specified in the request.

Unexpended endowment income is also sometimes capitalized per donor restrictions placed on the endowment funds.

Capitalization of Current Use Accounts and Other:

 

The recommendation to capitalize current use and other monies should be submitted directly to the Director of the Office of Financial Systems. The Recording Secretary and the University Development Office will also need to give approval before funds are capitalized.

Once approved, the current use funds and other monies should be capitalized at the value per unit in effect as of the date of the request or at a future date specified in the request.

Expenditure of Endowment Principal and Appreciation:

 

Request to expend $250,000 or less - recommendation should be submitted to the Financial Vice President for approval and forwarded to the Recording Secretary and the University Development Office.

Request to expend more than $250,000 - recommendation should be submitted by the Financial Vice President to the Corporation for approval and forwarded to the Recording Secretary and the University Development Office.

Distribution of Endowment Income:

 

The portion of investment returns earned on endowment, which includes dividends, interest income, and capital gains, is distributed each year to support current operations. The actual distribution is based on a rate that is approved by the Corporation. The rate is not set based on a specific formula nor tied to current investment returns.

It reflects expectations about long-term returns and inflation rates and seeks to maintain a distribution rate between 4.5% and 5%.

Assessment of Endowment Funds to the Dean:

 

The assessment allocation of endowment funds to the dean should only be allowed if:

• The fund allows an assessment

• The fund is not subject to a standing order to capitalize income

• The use of appreciation is needed to fund the assessment

• The fund allows for the use of appreciation

• There is sufficient appreciation left to fund the assessment

 

Treasurer's Distribution:

 

Earned income and a portion of appreciation are distributed to meet the treasurer's distribution.

Current accounting practice distributes all earned income and pays the remainder from appreciation. To cover the appreciation portion, a decapitalization entry should be made to each endowment fund to reduce the fund's units.

Decapitalization is the amount by which the endowment fund net assets are reduced to cover the excess of treasurer's distribution and assessment to deans over earnings.

The decapitalization calculation is as follows:

Treasurer's distribution per unit $19.05

Assessment per unit 1.50

Earnings per unit (16.55)

Decapitalization required $ 4.00

Treasurer's distributions are also sometimes capitalized per donor restriction placed on the endowment fund.

Establishment of Current Use Gift Funds

 

Gifts that are available for current purposes are classified as "gifts for current use." Gifts that have been restricted by the donor or designated by the Corporation for construction, endowment, or similar purposes are classified as "gifts for capital."

When departments receive cash gift checks, they should be forwarded along with supporting documentation to RSO. RSO then forwards the request to the Office of Financial Systems where new chart of account values are set up and maintained.

An Org. value is always required for gift transactions; however, an Activity value may be set up and used only if the Tub needs it. A default for these fields will be used unless the Tub designates an alternative at the time of the setup. RSO includes information on any alternative Org. and Activity in the set up documents sent to the Office of Financial Systems for chart of accounts maintenance. The Tub should send subsequent changes to alternative Org. and Activity values directly to the Office of Financial Systems. RSO does not maintain this information.

When new current use gifts are received, RSO enters it directly into the Development Information System. Gift advices are generated from the system daily, and a file is electronically transferred weekly from RSO to the Office of Financial System for processing into the general ledger.

If a gift received is for one Tub, but more than one Org., the department should prepare a journal entry to transfer the income from or to the proper Org.

If a gift received is for more than one Tub (or Fund), RSO should prepare multiple advices.

Non-cash gifts (securities), when received, are debited to an RSO suspense account and then reversed out and recorded as assets by the Harvard Management Company.

The Office of Financial Systems is responsible for writing, updating, and interpreting this policy.

The Financial Deans of the University are responsible for enforcing this policy.

For assistance in interpreting this policy, please call your Tub Financial Office.