Nonprofit Restricted Funds: Real World Answers on Management

Managing nonprofit restricted funds can be challenging due to strict rules. Our advisor answers questions on donor restrictions placed on donations and grants.

What Are Nonprofit Restricted Funds?

By definition, a restricted fund is revenue set aside for a donor designated purpose. Restricted funds have strict legal obligations and cannot be used for other programs or expenses.

Managing Nonprofit Restricted Funds: Answers to Challenging Questions -

Editor’s Note: The following questions and answers represent real world challenges nonprofits encounter managing nonprofit restricted funds. Our advisor column is intended to provide basic advice on questions related to the topic. Answers to these questions are simply the view and opinion of our nonprofit accounting pros. Nonprofit Accounting Pro shall not be liable, answerable or accountable for any loss or damage resulting from the advice given by our advisor.

Q&A on Nonprofit Restricted Funds

Question: If donor restricted funds are available to release but you do not need the funds in the current year, do you need to report them as available or released on the statement of activities report and other financials?

Answer: If the designation of the restriction has been met, then you need to match the restricted revenue against the expense. Even though you don’t need it, you need to recognize the revenue. The revenue would then be incorporated in your unrestricted net assets carry over to the next fiscal year.

Question: When a donor makes a three year pledge for a specific purpose, would you restrict the future portion to time or to purpose? When the cash is received, does the purpose restriction kick in?

Answer: The restriction is based on the donor’s intent for the use of the funds. If the funds are used before the three year period, you can release the revenue to match the revenue against the expenses.

Question: What is the best practice for accepting restricted funds from a donor? Should the organization be collecting some type of designation letter from the donor? I have a nonprofit with an executive director who tells me what the donor specified, but then also says “we can use it any where for the organization.” That just doesn’t sound like that could pass an audit. Are there templates somewhere for this?

Answer: When receiving a donation and the donor specifies the intent for the donation, then it is restricted for that specific intent. For example, if the donation is designated for your counseling center, then the donation should be credited to the charitable donations income account linked to the counseling center. You cannot use a designated gift as you see fit. If your donation forms list specific areas that the donor can designate where their donation is used, then that constitutes as ‘restricted – designated’ gift.

Question: When a nonprofit receives a grant where the purpose of the grant is to fund the general operation of the nonprofit as long as XYZ is completed and where XYZ are not going to be specific expenses but rather are simply things that get done by the nature of the fact that the nonprofit employees are doing their job, how do you go about tracking that in terms of class tracking for restricted donation? They are not limited to what they can spend it on. Most of the things they will spend it on will be more general fund type expenses. They are just limited in the fact that they cannot have it if they don’t get certain things done.

Answer: If your intent is to match the expenses against the grant, then all expenses should be classified using the same class code used when recording the grant revenue.

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Bottom Line

In the normal course of navigating the myriad of issues related to restricted funds, you may have encountered some of these questions. It is essential to follow the restrictions placed on donated funds in order to remain compliant and accountable to your funding sources.

We hope our answers provide clarification. We welcome your questions and feedback. Feel free to comment below.

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