Note: this blog covers contributions from individual donors. Grants will be addressed in a later post.
What are restricted donations?
A restricted donation is one that a donor gives to a nonprofit organization (NPO) to be used for a specific purpose. For instance, a donor gives a check to a nonprofit that includes a restriction to pay for a computer program. This would be a restricted donation since it has been given for a specific purpose. On the other hand, a check that is sent to the NPO without any note as to what it’s for is considered an unrestricted gift and can be used by the nonprofit at its discretion
A restricted gift may be either temporary or permanent in nature. A donation given to setup a scholarship fund that will be endowed and invested for an unlimited length of time (in perpetuity) is considered a permanent restriction. If the donor gives money which is to be used for a new building on a university campus, this donation is temporarily restricted since it will be spent at a future date.
Restricted gifts are booked as revenue to the NPO in the time in which they are received. Even though the nonprofit won’t necessarily use the gift during the fiscal year it was received, it must be recorded as revenue in that period. These restricted gifts will also increase temporarily or permanently restricted net assets.
How should restricted donations be tracked?
Fund accounting is used to track restricted funds. Fund accounting basically keeps separate pots of money so that at any time you can see how much money is in each fund on a report, and when and how it has been spent. For smaller gifts that are restricted but don’t have a fund setup, a “holding fund” can be setup and tracked with a spreadsheet. This is important for accountability and transparency of the nonprofit’s spending of restricted donations.
An example of some restricted funds that live inside a university foundation are:
- Athletic Funds for each sport
- Named Scholarship Funds
- Department Funds
- Building Funds
What are Restricted Net Assets?
Each restricted fund is assigned to either temporarily or permanently restricted net assets.
There are 3 net asset classes: unrestricted, temporarily restricted, and permanently restricted.
Permanently restricted net assets include funds which will live on indefinitely. In this case, most of the time the nonprofit can take the income and/or use a spending policy to take a percentage of the fund to spend in every year.
Temporarily restricted net assets hold funds that are restricted because the purpose or time period has not happened yet.
An unrestricted fund is for all other funds that aren’t restricted.
How do restricted donations show up on financial reports?
Restricted donations show up in either the temporarily restricted or permanently restricted portion of financial reports.
There are several financial reports that can be helpful to look at depending on what information is needed:
- Balance sheet by fund to see the balance in each restricted fund
- Statement of Activities by fund to see the revenue and expenses in each restricted fund
- Special Purpose Clearing Fund statement including the breakout in an excel report for restricted funds that are to be held for a shorter period or are smaller in nature and don’t meet the qualifications to have their own restricted fund
Here’s a look at the REVENUE section of the formal financial statement’s Statement of Activities which shows the restricted donations numbers (highlighted). Note that new accounting/reporting rules will only require donations to be broken out into “without restrictions” and “with restrictions” moving forward in 2017.
Here is an example of how the net assets are shown on an NPO’s 990 form (Form 990 Page 11, Part X):
Rebecca Tervo is a CPA and QuickBooks Online Proadvisor with 25 years of varied accounting, auditing, and training experience. During the final years of her career, she spent 5 years as the Director of Finance with the NMU Foundation. She now helps nonprofits setup their accounting systems properly, and teaches nonprofit accounting topics on her website at www.learnnonprofitaccounting.com. You can reach her by email by clicking www.membership.nonprofittrainer.com/contact-me.