Nonprofit restricted assets refers to the management of net assets: net assets with donor restrictions and net assets without donor restrictions. In order to avoid unintentionally misappropriate funds, it is important to understand the practical management of restricted funding.
What are nonprofit restricted assets?
Beginning in 2016, the Financial Accounting Standards Board (FASB) made several changes to not-for-profit (NFP) reporting criteria, including changes to the reporting of net assets with donor restrictions. In this article, we will take a deeper look at those changes and how they affect your management of restricted donations.
The ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities was put into effect by FASB for the fiscal years beginning after December 15, 2017. This changed the segregation of net asset disclosure from three groupings (previously temporarily restricted, permanently restricted, and unrestricted) to only two groupings: net assets without donor restrictions and net assets with donor restrictions.
- The previous grouping of “unrestricted net assets” was henceforth called “net assets without donor restrictions.” These are considered your “general purpose” funds which are unrestricted from donors and can be used for any and all programs or needs. The only restricted funding in this category is *board-designated net assets.
- What was previously known as “permanently restricted” and “temporarily restricted” net assets were then combined into “net assets with donor restrictions.” This includes all net assets restricted by donors alone, but does not specify if they are restricted in perpetuity, by time, by purpose, or in the form of underwater endowments.
*N.B. Board-designated net assets are those designated by the NFP’s board of directors rather than restricted by the donor. These can be earmarked for investment, future programs, or other fixed expenditures, but are nonetheless considered unrestricted by new FASB reporting guidelines.
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Specifying restrictions on funding
These changes were made with the goal of simplifying reporting for NFPs. However, it is still imperative for your record keeping to specify such restrictions, as well as the time that income or commitment of funds is received, regardless of when the related expenses are incurred.
This may require a re-tooling of your reporting system in order to accurately present financials in alignment with the new terminology. The timing of your received funding, as well as the specific restrictions of funding, should be recorded for your own purposes as well as to ensure legal, clear, and pragmatic reporting in the future.
Practical tips for managing funds
Once you understand the requirements of reporting your net assets, it’s time to look at the practical management of restricted and unrestricted funding so that you can avoid unintentionally misappropriating funds. Below are some practical tips and applications to help you better manage your restricted assets:
Fundraisers and proposals can create unintended restrictions.
Nonprofit restricted assets are beneficial, but they are not ideal. When creating a fundraiser or writing a proposal, you may unintentionally create restrictions by asking for funds for a specific purpose. For example, if you are requesting donations for a specific program, you will then be restricted from using those funds for ancillary or support expenses. Be cognizant of this when grant writing or fundraising for a specific program.
Be wary of “use it or pay it back” provisions.
Many grants have these policies in which you must either spend all of the funding received, or pay back the remainder. This can cause issues if you designate funds for a program that is delayed or planned after the end of the fiscal year. Prioritize your spending accordingly to avoid the reduction of these restricted funds.
Understand donations of stock or investments.
These types of donations are often restricted, and should be reviewed by the accounting team before being accepted. For example, you may be restricted on use of the investment principle or the income produced. There may also be special reporting or tax requirements based on the type of gift and the specific restrictions placed by the donor. Review and understand these aspects carefully before you begin using the funds.
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Bottom line
For all NFP asset reporting, diligent tracking of funds is paramount to show accountability and reduce risk. It is important that you not only understand these requirements, but put them into operational practice when it comes time to plan for fundraising or prepare for the tax season. Accounting for nonprofits doesn’t have to be complex as long as you take the time to learn the expectations and maneuver within a specific framework.
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