Definitions
Gift:
A gift is an unconditional donation to an institution for which the donor does not expect to receive any reciprocal benefit. For the purposes of this document, we focus on monetary gifts.
Endowment Gifts:
An endowed gift requires the gift corpus be held in perpetuity and only the income generated by investing the corpus may be spent. Most endowment gifts are invested in the endowment pool, and units of the endowment are assigned to the individual endowment fund. Units are, in effect, a share of the endowment. The number of units a fund receives is based on the gift value as well as the value of the endowment pool at that time. The University calculates the unit value of the endowment pool monthly. Units are then used to monitor the market value and to determine the annual treasurer’s distribution to the fund. Income distributed per university policy becomes available for current use spending. The funds must be spent in accordance with the terms set forth by the donor.
Endowment funds may be categorized as unrestricted or restricted:
- Unrestricted endowments must be used for general purposes of the tub holding the funds.
- Restricted endowments are funds established for a more specific purpose, such as a specific department or programmatic activity. An endowment fund for the general purposes of a particular department is considered “restricted” by the tub since it is restricted to the activities of a particular department. Endowment funds are also further categorized as either Quasi or Permanent Endowment funds:
- Quasi Endowments are gifts in which the principal may be spent down, but the University chooses to invest the gift in the endowment, therefore making only the annual treasurer’s distribution available for current use purposes. The unit holding the fund may decide from time to time to spend some of the principal. In cases when a portion of the principal is needed, the unit must submit a request to decapitalize a portion of the principal (see section on decapitalization of funds).
- Permanent Endowments prohibit the use of the original gift corpus; only the income generated from the investment may be spent.
Endowment funds appear in the General Ledger in fund range: 400000 to 699999.
Current Use Gifts:
A current use gift is a donation that may be spent down in its entirety. Like endowment gifts, current use gifts can either be unrestricted or restricted. An unrestricted gift may be used for the general purposes of the tub in which it is established, while restricted gifts are limited by the donor for a, defined purpose.
Current use gift funds appear in the general ledger in the fund range: 300000 to 399999.
Add to the Income (Endowment) Gifts:
Add to the income gifts are donations deposited to an endowment fund but are not added to principal. These are allowed in rare circumstances and are treated as current use gifts to be spent in the future according to the terms of the endowment fund. The decision to designate these as add to the income or current use gifts is made by the donor, not the Department or Center, in conjunction with the approval of the FAS Development and Financial offices. A donor makes this type of gift if the income expected to be generated by the fund corpus is insufficient to carry out the donor’s intent of the endowment fund. Add to the income gifts are common in recently established endowment funds where the fund has not yet received a full year’s distribution.
Construction Gifts:
Construction Gifts are gifts designated for construction projects and the entirety of the gift can be applied to costs of a construction project as specified by the donor.
Underwater Funds:
The term “underwater” is used to describe an endowed fund when its current market value is less than its historic dollar value (the historic dollar value = donor gifts and donor required capitalizations. The book value that appears in the general ledger is the current proxy for historic dollar value). While a fund is underwatering the annual income distribution may be limited.
Criteria for Defining Sponsored Gifts:
Non-federal external funding received by the University may be classified as a gift or a sponsored grant depending on several criteria. If it is determined that the funds are a gift, the fund is set up through the FAS Office of Finance and the Recording Secretary’s Office and must follow gift fund policy in the FAS. Please see the Policy on Distinguishing Gifts vs Sponsored Awards (Appendix A) for guidance on distinguishing between a gift and a sponsored award. External funds received may have characteristics that fall within different categories thus, all the factors in the appendix must be weighed to make a final determination.
Sponsored Award funds appear in the general ledger in the following fund ranges:
Federal Grants & Contracts: 100000-199999
Non-Federal Exchange Accounts: 200000-249999
Non-Federal Sponsored Gifts: 250000-299999
FUND ATTRIBUTES
Fund attributes are additional pieces of data that provide further information about the fund to ensure proper accounting and classification.
Gift/Interest Override Attribute:
This attribute serves two separate functions.
• It is used to specify both current use/endowment gift deposits to a specified string of coding.
• It is also used to specify what string of coding to post interest earned/charged on unexpended income balances.
For gifts: The ADS system posts gifts to two segments; tub and fund. When the information is submitted to the general ledger, the system looks at the gift override table to determine what org, activity, sub activity and root shall be used to credit the gift.
For Interest: The system uses the string of coding indicated by this attribute when posting interest earned on positive unexpended income balances. It also uses this string to charge deficit balances. The coding in this attribute table is used for current use, endowment, and unrestricted designated fund unexpended balances.
Treasurer’s Distribution Attribute:
This attribute directs the system to determine to which 33-digit code to post the annual endowment distribution.
Both the gift/interest override attribute and the treasurer’s distribution attribute are assigned to endowment funds, however only a gift/interest override is assigned to current use gift and unrestricted designated funds.
The FAS Office of Finance recommends using tub, org, and fund (please refer to the new gift account request form to determine the most appropriate option) when selecting default coding for these fields. Often, simpler is better.
The coding provided on the new gift account request form is used for these overrides. While it is not required, it is recommended to use the same coding for the treasurer’s distribution override and the gift/interest override.
Balance Forward Designation:
The balance forward attribute is used to specify to which level of coding the unexpended income or gift balance should carry forward to the next fiscal year.
Possible balance Forward Options:
B+O Basic segments + Org
B+OA Basic segments + Org & Activity
B+OAS Basic segments + Org, Activity & Sub
B+OASR Basic segments + Org, Activity, Sub & Root
B+OAR Basic segments + Org, Activity & Root
B+OR Basic segments + Org & Root
We recommend that you carry balances at the same level of segments as the gift and treasurer’s distribution overrides. This will ensure all segments carry forward in a consistent manner
If no balance forward designation is chosen, the FAS default of BO (Tub, Org, and Object and Fund) will be selected.
Override and the Balance Forward Designations can be changed at any time however, any gifts and treasurer’s distribution already posted to the general ledger will need to be updated via a journal entry. Balance forward changes also require journal corrections, which must be done by the FAS Office of Finance. Please submit a written request to Linda Kuros if you wish to change any of these attributes with respect to endowment and gift funds. Changes to unrestricted designated funds should be forwarded to FAS Application Administration at appsadmin@fas.harvard.edu.
Changes to gifts in endowment funds can only be processed by the Office of the Controller, with the approval of the ADS. Please submit a written request to Linda Kuros if you wish to modify an endowment gift segment.
Department and Centers may reallocate current use gifts, endowment distribution and interest on the balance forward, between orgs and activities, within a fund, by using the following object codes:
Object Code Description
4351 Gift Transfers Intra Fund^Current Use Gifts
4411 Treasurer's Distribution Transfers Intra Fund
4531 GOA Interest Transfers Intra Fund
Please note that both the debit and credit entry must use the same object code and the entry must be posted within the same fund.
Local Attribute #2:
This attribute gives departments the ability to further classify funds and can be useful for reporting purposes. For example: if a department wishes to group several of its funds together by purpose, a code can be added to this field allowing the department to query on this code. This attribute can be used for gift, endowment, and unrestricted designated funds. For funds under a faculty member’s direction, the faculty member’s root value is assigned so a department can easily report on a particular faculty member’s funds. Departments can also use this attribute to sort their funds. The attribute must be assigned to the fund through a chart maintenance request processed by the FAS Office of Finance. Please contact Linda Kuros or FAS Application Administration if your department has a need to organize funds in this manner.
Please note that the Funds, Gifts, and Unrestricted Unexpended Balances report is the only report that shows the local attribute #2 field.
Fund Purpose Code:
The fund purpose code indicates the purpose of an endowment or current use fund at a quick glance. This is useful for reporting purposes as it enables a unit to group similar funds using the purpose code. This attribute is defined at the University level and is most meaningful at the University and Tub level. Appendix B lists all the purpose codes available to FAS and Affiliates under the GL Code column. This code is assigned by the FAS Office of Finance when the fund is established and can also be found on the Funds, Gifts, and Unrestricted Unexpended Balances report (FGUUBR).
GIFT ADVICES
Gift advices are used to provide departments with more information about a gift deposited into one of the funds it manages. Gift information posted to the general ledger does not provide the donor’s name, address, or University affiliation, which is often important information for departments.
To obtain the donor’s name and other information about the gift, departments should run a gift advice report. To access this report, departments should log into the FAS Finance Reporting Hub/FINREPORT, sign in with your HarvardKey, select the Reports tab, top left side of the home page, then select the Gift Advices Report.
Tubs, Departments and Centers are notified via email when a new gift has been posted to one of their funds.
The Gift Advice report and HART transaction listing should be reconciled regularly by the managing department to ensure that gift information is recorded properly between the two systems. Many departments use gift advice information to thank donors for their gifts in addition to the acknowledgements sent by ADS.
ACCOUNTING FOR GIFT AND ENDOWMENT FUNDS
Fund Values:
There are two values that apply to endowment funds: Book Value and Market Value.
Book Value – This is the value of the actual gifts deposited to a fund at the time they are received, adjusted for transfers, capitalizations, or decapitalizations. You can obtain the book value of a fund through the general ledger in object codes – 3881 – Historical Dollar Value (HDV) and 3882 – Non-Historical Dollar Value (Non HDV). Unit values appear in object code 3880.
Together object codes 3881 and 3882 represent the total book value of the fund. Object code 3881 represents original donor gifts and any donor directed capitalizations or decapitalizations. Object code 3882 records non donor directed activity such as capitalizations of unexpended income or treasurer’s distributions or decapitalizations.
Market Value – This is what the endowment fund is worth today if you were to sell the investments it holds. The market value of the fund may be obtained by contacting the Manager of Gifts/ Endowments in the FAS Office of Finance and is only available as of the end of the fiscal year, once the year end audit is complete (this is usually in the Fall).
Treasurer’s Distribution:
The treasurer’s distribution is the amount of income distributed annually to each individual endowment fund. This income is available to spend for current year activity as specified by the fund terms. The distribution is determined annually by the Corporation during the next year’s budget process.
Base-line Distribution
The base-line distribution is the first distribution paid out to a fund and is posted to object code 4410. This distribution is based upon the average number of units held by the fund during the prior 12 months from June 1 through May 31 (Average Principal Units- APU) multiplied by the distribution rate as set forth in the budget process. If new gifts have been received in the current fiscal, they will not be entitled to a distribution. The following year a prorated amount will be included to determine the average number of units held in the past year (APU).
The distribution is funded by a combination of the earnings per unit from the previous year and decapitalization of appreciation from the endowment fund. In years where the University earned flat endowment returns, newly established funds may have had insufficient appreciation to cover the difference between earnings and the distribution. In these cases, only the earnings plus available appreciation is distributed (smaller than normal distribution).
Strategic Payout
Beginning in FY06, the Corporation approved a second distribution rate called the Strategic Payout. The purpose of this payout was to fund programmatic priorities as determined by the President of the University and Dean of each School.
From FY06 – FY09, only selected funds were chosen to receive this distribution to fund programmatic priorities as defined by the President and Dean. In FY10-FY12, all FAS funds received this distribution in addition to the baseline distribution. This payout grew at the same rate as the base-line distribution and was calculated in the same manner except the APU is multiplied by the strategic payout rate; this distribution was posted to object code 4415. Beginning in FY13, the baseline payout and strategic payout were converged; all funds now only receive the base-line payout which appears in object code 4410.
Assessments:
Endowment funds are subject to 3 assessments:
•Central Support Assessment (CSA)
•Academic Support Assessment (ASA))
•Administrative Expense Allocation (AEA)
Central Support Assessment
The Central Support Assessment, or CSA, was established by the Corporation in fiscal year 2002 and is equal to 10% of the total distribution of all funds. Income generated through this assessment support the cost of central administrative activities. The assessment is scheduled to continue through FY2031 and is subject to periodic review by the Corporation.
Academic Support Assessment
The Academic Support Assessment, or ASA, was established by the Corporation in 1993. This assessment is deposited to a school-level fund and supports school-level administrative costs for instruction and research activities (such as admissions, financial aid offices, libraries, and facilities management). The fund is commonly referred to as the “Dean’s sweep” and is equal to 9% of the gross distribution (10%of the total distribution, net of the CSA).
Administrative Expense Allocation (AEA):
The Administrative Expense Allocation, or AEA, was established by the Corporation in 1993. This assessment is designed to support administrative costs related to the maintenance of endowment and gift funds and their use in supporting the mission of teaching and research. The current AEA rate for FAS endowment funds is 11.1% of the annual treasurer’s distribution and is charged using object code 5930. The AEA charges are assessed once a year after the treasurer’s distribution has posted, usually by the end of August.
Current Use Gift Assessment:
The analogous administrative charge assessed on restricted current use gift funds is 15% of operating expenses. The 15% is applied to charges in expense object codes 6000-8999 (excluding direct student support - object codes 6140, 6401-6449, 6460, 6461, 6470-6473, 6490 and object code 8922) of the prior month and posted as an expense charge in object code 8922. AEA on current use funds is posted the middle of the following month.
Interest on Unexpended Balances:
Interest is paid annually on unexpended balances in endowment and gift funds. The interest rate is set annually during the annual budget process. Interest is calculated by multiplying the June 30 unexpended income balance carried forward by the interest rate. Interest income is posted in July using object code 4530. If a fund is overspent (carrying a deficit balance forward), an interest charge is applied against the fund. This charge is posted to object code 7630. The interest rate is also set during the annual budget process.
Spending within the Terms:
When the University accepts a gift and the accompanying terms, it is of critical importance to ensure compliance with the terms. It is the responsibility of the department authorized to spend from the restricted fund to ensure that all expenditures charged to the fund are for the activity specified by the terms, and that all expenses are properly documented. It is also critical for each department to maintain a record of terms for each fund it manages. The terms should be reviewed periodically with those responsible for spending from the fund. Fund terms can be found in the FinReport application. Sign in with your HarvardKey, select the Reports tab, top left side of the home page them select fund terms. Terms are accessible by designated individuals, within each department.
Each year the University’s Risk Management and Audit Services department and external auditors report misuse of donated funds. There may be funds that have very restrictive terms and/or are for an activity that no longer takes place at the University. In such cases, please call the FAS Office of Finance which will work with the FAS Development Office to determine if the donor or involved family members are living and therefore can request a formal change in terms. If that avenue is not possible, it may be necessary to act through the Office of the General Counsel. To explore this further, contact the Manager of Gifts/Endowments in the FAS Office of Finance.
In addition, there are several fund terms that specify a flat amount of spending for the given activity. For example, a prize fund may specify that the amount per prize recipient may not exceed $200. In these cases, it is acceptable to increase the flat amount by the Consumer Price Index (CPI) annually. The FAS Office of Finance can assist you with these calculations.
Transferring Funds:
Donations deposited to a restricted fund must stay in the restricted fund for compliance and stewardship purposes. Funds deposited into a restricted fund should never be transferred to another fund. Transferring funds makes it difficult to report accurately to donors on the use of the fund. It also leaves an inadequate audit trail and raises questions as to whether the funds were used according to the donor terms.
On occasion it is necessary to allow spending from a fund by another department. In those cases, funds may be transferred to another department’s coding within the restricted fund. This is accomplished by loosening the security rule (cross val) to allow another department to charge directly to the fund. In this case, you would also need to transfer the amount of funding you are authorizing to the other department using object code 5910 or 5921 (please see the internal transfer policy for determination of object code. Please contact the FAS Applications Security group when a cross val is needed. If a gift or endowment fund is involved, a brief description of how the fund will be used is required. This is to ensure that the transfer and use of the fund will comply with the terms of the fund.
Monitoring Balances:
As with all funds, balances should remain positive. Should a fund fall into deficit, it is the fiduciary responsibility of the department to transfer expenses out of the fund. Do not transfer income into the fund from other sources. As noted under the interest on unexpended balance section, funds with a deficit balance at the close of the fiscal year are charged an interest fee in July of the following year (object code 7630).
Non-Gift Receipts in Restricted Funds/Miscellaneous Receipts:
Financial managers have a fiduciary responsibility to ensure that spending from gift funds is done in accordance with donor terms. In FY01, the University established the Miscellaneous Receipt Policy which allows for up to $1,000 per year to be deposited to a restricted fund. This policy was established to allow for easy management of small dollar funds. Bear in mind that other income deposited to a gift fund (e.g., fee income, membership dues, etc.) is subject to the restrictions of the fund where the money is being deposited.
CAPITALIZATION AND DECAPITALIZATION OF FUNDS
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 of an endowed fund, and add to the endowment value (i.e. additional units are assigned) which 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 support current operations.
Required Capitalizations and Standing Orders:
There are many types of endowment funds established at Harvard, and many must reach a minimum balance before income earned can be used. Minimum balances are established 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.
- Distribution on funds that are established before the minimum balance is automatically capitalized until the donor’s giving receipts have reached the University minimum. To accomplish this, the RSO creates a standing order when the fund is first established. Standing order entries are processed by the General Accounting Office (GA) each July. GA also reviews the standing orders each month 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. The RSO 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 yearend. Standing orders for these mandates are processed in the same manner as university minimums.
Standing Orders are closely tied to university capitalizations. They are instructions (journal entries) 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. The Recording Secretary’s Office establishes the standing order based on the donor’s terms or University minimums. GA maintains the standing order list.
The FAS Office of Finance maintains a database of standing orders that have special arrangements established by the FAS Dean.
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 future. A Cap/Decap request form must be completed and approved by the appropriate departmental staff. The completed request form should be forwarded to Linda Kuros. If approved by the FAS Office of Finance, the request is then forwarded to the ADS for approval. Once approved, the request goes to the Controller’s Office for processing.
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 and there is enough appreciation accumulated in the fund after taking into consideration intergenerational equity.
Capitalizing and Decapitalizing funds is only recommended if the action has been reviewed and vetted in the context of 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.
ADDITIONAL LINKS
FAS Research Administration Services