Capitalization and Decapitalization

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To capitalize a fund is to add endowment income earned, or accumulated fund balances, to the principal of the fund. These additions increase the principal value and units assigned to an endowed fund, and increase the endowment value (i.e. additional units are assigned) which increases the market value and allows the fund to earn more income in future years.

Decapitalizations occur when a portion of the principal of the fund is divested and made available to spend in support current operations per the terms of the fund.

Required Capitalizations and Standing Orders:

There are many types of endowment funds established at Harvard, and many accounts must reach a minimum balance before the fund is activated and the income earned can be used. Minimum balances are established by the University and each School so funds can generate sufficient income to support the intended purpose. The minimum balance to establish a general endowed fund within the FAS is $100,000.

Income Distribution on funds that are established before the minimum balance is reached are capitalized (added to the principal) until the donor’s giving receipts have reached the University minimum. To accomplish this, ADS creates a standing order when the fund is first established. Standing order entries are processed by the University Controller’s Office (OC) each July. The OC and ADS reviews existing standing orders quarterly to determine if the fund has reached its minimum balance and can be activated. The standing order is removed once the fund has signed terms and has reached its minimum gift balance. ADS submits a request to remove the standing order and the owning department is notified by the FAS Office of Finance that the fund has been activated and is available for use.

Income capitalization may also be donor mandated as part of the terms of the endowment fund. Such mandates may require capitalizing set amounts annually, percentages of current year income, or any unexpended income at fiscal year-end. Standing orders for these mandates are processed in the same manner as University minimums. But are processed in September and June, respectively, each FY.

Standing Orders are closely tied to University capitalizations. They are instructions that create journal entries, that are imposed by the donor or the University as to the disposition of income earned on an endowment fund. A standing order may require the return of current or unexpended income to principal and/or the transfer of current year income between University Departments.

There are three types of standing orders:

 

  • University minimum balance – transfers of income directly to principal. The OC posts these in August each fiscal year.
  • Transfers (per terms) of income to different departments or schools – Posted by the OC in September each fiscal year. Standing orders of this type are posted via object code 5900.
  • Unexpended Income (per terms or University policy) – these standing orders are posted during 4th close each fiscal year end (FYE) by the OC.

 

The FAS Office of Finance maintains a database of standing orders that have special arrangements established by the FAS Dean. These are maintained by the Manager of Accounting.

 

Optional Capitalizations:

A Tub, Department or Center, by written request to the FAS Office of Finance, may also request to capitalize unexpended income (if not prohibited by the terms) if there are no plans for the use of the funds in the near future (on a quarterly basis). A Capitalization request form must be completed and approved by the appropriate departmental staff. The completed request form should be forwarded to the Gift/Endowment Manager in the FAS Finance Office. If approved by the FAS Office of Finance, the request is then forwarded to ADS for approval. Once approved, the request goes to the Controller’s Office for processing.

All requests sent to the FAS Office of Finance will be carefully reviewed to determine if capitalization is the best use of the department’s unexpended income. The FAS Office of Finance may approve the request after long term fiscal and programmatic implications have been considered and analyzed.

 

Decapitalizations:

Decapitalizing funds allows a department to divest a certain portion from principal and use it for current expenditures. A department may only divest from principal if the terms of the fund allow.

A request form to decapitalize principal can be found on the FAS Office of Finance website. Please complete the Decap request form and forward it to the Gift/Endowment Manager in the FAS Office of Finance by March 15th, each fiscal year, in time for the May Corporation Meeting.

Just an FY!…the same form is used to request a capitalization or decapitalization.

Requests must include the following information:

 

  • The fund(s) that you propose to decapitalize.
  • The amounts you propose to decapitalize (this can be stated as not to exceed a certain $ amount).
  • The planned use of the decapitalized proceeds.
  • An explanation of how the Department will manage with less income, as a result of the proposed decapitalization, in the following years.

Upon review and initial approval by the FAS Office of Finance, the request is forwarded to ADS, the University Budget Office for further review and approval. Office of the Controller will process the decapitalization upon both parties’ approval in the 3rd close each FYE. Requests that exceed $250,000 must also be approved by the University Corporation.

Capitalizing and Decapitalizing funds is only recommended if the action has been reviewed and vetted in the context of a a long-term assessment of the department’s needs. To capitalize income for only a short-term period is discouraged since the investment strategy for the endowment is based on long term results.