Restricted Assets and How They Affect Non-Profit Organizations


For some non-profits, contributions from donors are a major source of revenue. Proper accounting for these contributions is key and includes tracking, monitoring and reporting of restricted funds.

What type of restrictions can there be in the non-profit industry?

Contributions from donors may have temporary or permanent restrictions which limit the use of the contributions. Temporary restriction occurs when a donor requires that the contribution to be used for a specific purpose or in a specific time period. For example, a donor may impose that the contribution be used in a certain fiscal year (time) or contribution be used to provide scholarships or purchase certain assets (purpose). The organization may also raise funds for an important building renovation. The donor may restrict the use of the donated funds for both time and purpose, which is a common scenario in the context of grants. These types of restrictions eventually expire when the set period of time lapses or the purpose is fulfilled.

Permanently restricted funds, on the other hand, never expire. Permanently restricted funds must be indefinitely retained by the organization, per restrictions set by the donor. These funds include assets such as endowments and real estate. The organization can invest the endowment and receive the interest, but cannot spend the principle.

It is important for the organization to identify what the donor’s intent was at the time of the donation in order to determine if a restriction exists.

Why is it important to keep track of the restrictions? 

Once the restriction is satisfied, either through passage of time or purpose fulfillment, then the restriction is released into unrestricted net assets whereby temporarily restricted net assets decrease and unrestricted net assets increase. Under ASC 958, the guidance does allow for donor restricted contributions whose restrictions are met in the same reporting period to be reported as unrestricted support.

It’s important to monitor purpose fulfillment and to track whether the purpose is accomplished. This may become a useful marketing tool that provides a clear picture of how a particular contribution can make a difference. This can also attract prospective new supporters. Some grants may include “use it or pay it back” provisions. If funds are not properly tracked, a portion of the grant may be lost because it wasn’t spent according to the grant. Lastly, there may be legal consequences if the donor’s restrictions are not satisfied such as recall of the grant, loss of exempt status and a tarnished reputation.

What are board-designated funds?

There are a few common misconceptions on classification of temporarily restricted funds. One of the misconceptions is that a board-designated fund is restricted. Sometimes, the board of directors of an organization may designate funds for a specific program, building project, or investments; however, only the donors can place restrictions on the use of their contributions while the board can only designate unrestricted funds.

What is a conditional contribution?

Another area of confusion when it comes to classifying net assets as restricted or unrestricted is a conditional contribution. It is important to clarify the difference between a condition and a restriction. A condition specified by the donor means that, to qualify for the funds, the organization has to meet certain requirements, as designated by the donor; for instance, to be able to receive funds, a particular program has to have 50 or more participants and have a 70% completion rate for all participants enrolled. This is not a restriction but a condition. Any such condition grants the donor the ability to retake the property or other funds granted or not provide the funds promised if a certain specified event occurs or fails to occur; therefore, conditional grants and contributions are reported as unrestricted if the funds are ever received.

This type of contribution should not be confused with a reimbursable grant. A reimbursable grant is a grant where the organization receives money after it incurs costs for a particular program. This type of the grant is restricted for purpose since the funds must be first spent as specified by the donor.

With the proper internal controls in place, the process of tracking, monitoring and reporting of restricted funds is stress-free and efficient.

New reporting requirements?

It’s important to note that in late 2016, FASB released its long-awaited accounting update specifically impacting the way nonprofits present their net assets categories. The day-to-day accounting treatment for the net assets is unchanged, as are the laws surrounding the use and protection of the assets. The only change affecting the organizations is the reporting and presentation in the financial statements. An overview on the Accounting Standards Update (ASU) No. 2016-14, Presentation of Financial Statements of Not-for-Profit Entities can be found here.

bgr CPAs has a competent team to advise you on restricted net assets or any other non-profit accounting topic. Join us on September 20th for a seminar answering some of the most common questions received from the nonprofit industry. Additional details regarding the seminar can be found here.