Higher Education Foundation Case Study
The transformative potential of Financial Edge's three-dimensional net asset approach is best illustrated through a practical example. Consider a higher education foundation that has successfully implemented all three net asset dimensions to manage its endowment funds with precision and clarity.
Dimension 1: Account Number
This first dimension establishes the basic financial framework required for standard reporting. The Foundation chooses to structure its chart of accounts using a two-segment account number: a fund number and an account code. The fund number handles the GAAP requirement of distinguishing between with and without donor restrictions. Meanwhile, the account code tracks the natural classification of each transaction—whether it's cash, accounts receivable, travel expenses, etc.
Dimension 2: Project/Grant
Next, the Foundation employs the Project/Grant option to add a second layer to their net asset tracking. Each individual endowment is established as a separate project with its own unique project ID. The Foundation requires project coding on every transaction, enabling them to generate complete balance sheets and income statements for each endowment. This capability proves invaluable for accountability, as it allows financial staff to monitor and report on each endowment's performance independently.
Dimension 3: Transaction Codes
The third dimension—Transaction Codes—is where Financial Edge allows the Foundation's financial management to reach its full potential. Transaction codes are used to further dissect each endowment into three distinct categories:
- Principal – tracking the historical dollar value of the original endowment gift
- Reserved Earnings – monitoring the investment return generated by the principal
- Spendable – identifying funds available for the beneficiary to utilize
This comprehensive three-dimensional net asset structure enables the Foundation to achieve multiple critical objectives simultaneously. They can provide each donor with a focused statement showing yearly changes in their specific endowment's principal, earnings, and spendable amounts. Secondly, this structure facilitates tracking of gift utilization, encouraging effective deployment of funds. Finally and, perhaps most importantly, it enables ongoing compliance monitoring with the Uniform Prudent Management of Institutional Funds Act (UPMIFA), a critical regulatory requirement for endowment management.
Benefits Realized
Through this implementation, the Foundation has achieved several significant benefits:
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Donor-Specific Reporting: Each donor receives personalized statements detailing exactly how their endowment is performing, with clear separation between principal, earnings, and available funds.
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Regulatory Compliance: The three-dimensional structure makes UPMIFA compliance tracking straightforward, with clear visibility into each component of every endowment.
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Simplified Accounting: Despite tracking complex endowment structures, the Foundation maintains a streamlined chart of accounts that remains manageable and intuitive.
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Enhanced Decision-Making: Financial managers can quickly assess which endowments have available spendable funds and which are generating strong returns, informing investment and spending decisions.
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Efficient Gift Utilization: By clearly identifying spendable amounts for each endowment, the Foundation encourages beneficiaries to use available funds for their intended purposes.
Practical Implementation
The Foundation implemented this structure by first establishing their fundamental chart of accounts with clear fund designations for GAAP reporting. They then created project IDs for each endowment, ensuring unique identification across the organization. Finally, they defined transaction code types specifically for endowment management, with values for Principal, Reserved Earnings, and Spendable categories. Financial staff were trained to apply the appropriate codes to each transaction, with validation processes ensuring accuracy. Regular audits confirm the integrity of the coding structure, and the Foundation periodically reviews their approach to identify potential improvements. Without Financial Edge's multi-dimensional net asset capabilities, achieving this level of detailed tracking would require either an enormously complex chart of accounts or significant manual reconciliation work outside the accounting system—both error-prone and inefficient approaches.
