For those that are familiar with the for-profit accounting world, restricted funds may be a foreign concept. A nonprofit was given a donation – how can it be that you can’t use it any way you want? In the nonprofit accounting world, donors can indeed tell you what to do with their donations, and not following their requests can be extremely detrimental to the nonprofit recipient.
Imagine a local church. Churches frequently solicit their congregations for certain reasons – buying flowers for a holiday, purchasing altar supplies, or taking a collection for a member going through tough times. These are all restricted funds: donations that are received by a nonprofit that the donor says you must use a certain way. Restricted funds all have one thing in common: the donor has decided that there are certain limits and parameters for the nonprofit to follow in the use of their donation.
Restricted funds generally fall into two main categories:
- Purpose-restricted: the donor wants the nonprofit to use their donation for a certain project, item, or event. Besides the examples above, another common purpose-restricted fund is the Capital Campaign: donations are solicited for large building projects, such as a new youth center or repairs to a historic landmark.
- Time-restricted: the donor wants the nonprofit to fulfill the obligations over a set period, or the donor will give the donation in periodic portions. An example of a time-restricted donation would be a 5-year Promise To Give where the donor gives the nonprofit the same amount on a specific day each year. While revenue is recognized in full immediately by the nonprofit, the company will not receive the majority of the funds until a later date.
As the restriction requirements are fulfilled, the funds become Unrestricted, able to be used for any purpose at the nonprofit.
On a nonprofit’s Statement of Financial Position, restricted funds are presented in the Net Assets section near the end of the report. The section is presented in two parts: Net Assets With Donor Restrictions, the summation of all of the funds that have not met their donor-imposed obligation, and Net Assets Without Donor Restrictions, which contains funds that have met their donor obligations and changes in net assets from ongoing company activities. In addition to donor restrictions, the nonprofit’s board of directors may also restrict assets for a purpose. However, since these restrictions are put forth internally and not by outside donors, they are presented on the Statement of Financial Position as Net Assets Without Donor Restriction.
Prior to 2018, restricted net assets were presented with different parameters: Temporarily Restricted Net Assets, which meet their obligation by way of time- or purpose-fulfillment, and Permanently Restricted Net Assets, for which the principal of the donation may not be spent. Frequently, endowments were set up to be permanently restricted; donations of property, stock, and other appreciable investments were placed in the endowment and given to the nonprofit with the imposed restriction that the original balance of the investment may not be spent. After the implementation of FASB Accounting Standards Update 2016-14, Temporarily Restricted and Permanently Restricted Assets were merged to create Assets With Donor Restrictions in an effort to reduce the complexity of the nonprofit’s financial statements.
What happens when a nonprofit does not follow the donor’s wishes?
The donor can demand their donation returned! In Wisconsin, the Department of Financial Institutions allows reporting of violations of improper or deceptive fundraising practices. Violations can lead to asset forfeiture and legal action against the nonprofit. It is incredibly important that a nonprofit tracks the use of restricted funds to protect themselves against legal action and potentially losing their nonprofit status.