What Are Net Assets With Donor Restrictions and How Do They Release?

What Are Net Assets With Donor Restrictions and How Do They Release?

Net assets with donor restrictions are the part of a nonprofit's net assets that a donor has limited to a specific purpose or to a later time. A nonprofit reporting under US GAAP shows them separately from net assets without donor restrictions, because a restricted gift is not unrestricted cash, even when the money is sitting in the bank.

This is a general explainer, not advice on your statements. How a particular gift is classified depends on its terms, so your auditor or CPA confirms the treatment.

System Six, a Seattle bookkeeping and fractional CFO firm whose live profile lists Non-Profit Organizations among its specialties, is one firm to ask about keeping restricted funds straight in the books. System Six is a vetted Sam's List member and a paying member of our featured program; payment does not buy the language we use or its reviews.

Net Assets With Donor Restrictions: Two Classes Under Current US GAAP

Since ASU 2016-14, a US GAAP nonprofit presents two classes of net assets: without donor restrictions and with donor restrictions. Before that standard there were three, and the old temporarily restricted and permanently restricted labels are now folded into the single with donor restrictions class.

The split matters because a board and a lender read the statements to see what the organization can spend freely. A balance sheet that shows $2 million of net assets can hide that most of it is committed to a purpose or to a future year.

The limitation: two classes make the picture simpler, not complete. The class tells you whether a donor limited the money, not how much cash is on hand or when it will be spent.

What Counts as a Donor Restriction, and What Does Not

A donor restriction is a limit set by the donor on how or when a gift is used. It can be a purpose restriction, such as funding a scholarship program, or a time restriction, such as a gift meant for use in a future year. Some restrictions are temporary and lift once the condition is met. Others are perpetual, such as an endowment gift whose principal the donor says must be kept.

A board designation is a different thing. When the board sets money aside for a reserve or a building project, that is a self-imposed internal choice, not a donor restriction. Those amounts stay within net assets without donor restrictions, and the board can change its mind. A donor's limit generally cannot be changed by the board alone.

The limitation: the line is not always obvious. A grant letter or appeal that suggests how a gift should be used may or may not create a restriction, so read the exact language and ask your auditor when it is unclear.

Release From Restriction: How Net Assets With Donor Restrictions Move

Release from restriction happens when the restriction is met. If the restriction is a purpose, the money is released when the organization spends it on that purpose. If it is a time restriction, the money is released when the time passes. At that point the amount moves out of net assets with donor restrictions and into net assets without donor restrictions.

The release is shown in the statement of activities as a reclassification between the two classes. It is not new income. Assuming the gift was unconditional, it was recorded when it was received, and the release only changes its label, so total net assets are unchanged.

An example, with invented and rounded numbers. A donor gives $100,000 for a youth literacy program. The gift is recorded as net assets with donor restrictions. During the year the organization spends $60,000 on that program, and $60,000 is released. At year end, $40,000 remains with donor restrictions and the release of $60,000 appears in the statement of activities.

The limitation: release follows spending that meets the terms, not the passage of the fiscal year. If the money went to something outside the purpose, it is not a release, and it is a conversation to have with the donor and your auditor.

Nonprofit Restricted Funds Accounting: Why a Restricted Gift Is Not Operating Cash

The bank balance does not know which dollars are restricted. A nonprofit can show plenty of cash and still be unable to cover payroll from it, because the cash belongs to a program the donor named. Spending restricted money on rent or salaries that the donor did not cover can create a problem with the donor and with the auditor.

The practical fix is tracking. Many organizations tag each restricted gift by donor and purpose in the accounting system, record the spending against it, and report remaining balances to the board each month. That lets a treasurer see how much of the cash is free to use.

The limitation: tracking only works if the restriction is captured when the gift arrives. A restriction that lives in an email thread and never reaches the books is the usual cause of an awkward year-end.

Disclosure and the Limits of the Face Statements

The notes to the financial statements are where an organization describes the nature of its donor restrictions, such as the purposes and time periods involved, and what is in the with donor restrictions class. The statements and notes together should let a reader see what the restricted money is for and what was released during the year.

Required disclosures go beyond what this article covers, including liquidity and availability information and endowment details where they apply. Your auditor can confirm what your statements must include for your size and type of organization.

The limitation: the face of the statements shows the totals, and the notes carry the detail. A treasurer who reads only the first page can miss that a large share of net assets is committed.

Where System Six Fits

System Six is a bookkeeping and fractional CFO firm based in Seattle. It was founded in 2009, has about 41 employees and serves clients nationwide. Its live profile lists Non-Profit Organizations, Professional Service Firms and Real Estate Investors as specialties. It says it serves small businesses generating between $1 million and $10 million of revenue and helps organizations modernize a finance function after an acquisition.

System Six does not yet have enough reviews on Sam's List for us to cite a count, so we describe the firm by what its profile says instead.

The limitation, plainly: the profile does not mention donor restrictions, release from restriction or fund accounting, so ask what it includes. It lists a $1 million revenue minimum, so a smaller organization may fall outside it. How a gift is classified is a decision for your auditor and CPA, and a bookkeeping firm would sit on the recording side.

Frequently Asked Questions

What are net assets with donor restrictions?

They are the portion of a nonprofit's net assets that donors have limited by purpose or by time, and under ASU 2016-14 they are one of two classes on a US GAAP nonprofit's statements. Some restrictions are temporary and some perpetual. Your auditor or CPA confirms how a gift is classified.

What is release from restriction?

It is the reclassification of an amount from with donor restrictions to without donor restrictions when the purpose is met or the time passes. It appears in the statement of activities and is not new income. Ask your auditor how your gift terms apply.

Is a board designation the same as a donor restriction?

No. A board designation is a self-imposed internal choice and stays within net assets without donor restrictions. A donor restriction is set by the donor and the board generally cannot lift it alone. Both should be tracked, and the notes should describe them.

Can a nonprofit spend restricted funds on operations?

Not unless the gift terms allow it. Restricted money should be used for its stated purpose or period. If an organization needs to use it differently, talk to the donor and your auditor before spending, not after.

Before your next close, list each restricted gift with its purpose, its amount and what has been released, and ask your auditor to confirm the classification. You can browse fractional CFOs on Sam's List, including System Six, and ask how each tracks restricted funds.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.