Navigating Requirements for Donor-Restricted Funds

Nonprofits face unique legal, ethical, and accounting challenges due to requirements for complying with donor restrictions on donations. A failure to adhere to agreed-upon donor restrictions can result in damaging publicity and even lawsuits against an organization. Thus, it is imperative to properly track restricted gifts and spend funds in accordance with donor wishes. A key to doing so is to ensure your organization has adopted a reasonable gift acceptance policy and make certain you understand and track restricted gifts properly.

In evaluating your organization’s process for accepting and tracking restricted gifts, it is important to ensure a gift acceptance policy is in place to determine which gifts will (and won’t) be accepted.

• Gift Acceptance Policy – A common gift acceptance policy includes requirements related to restricted donations, such as refusing to accept restricted gifts under a certain dollar threshold (such as $1,000) and requiring Board approval for certain types of gifts with attached agreements. Oftentimes, an organization will not want to accept gifts that would be costly to maintain or lead to legal obligations. Examples of gift acceptance policies are widely available online. Periodically evaluating your existing policy can help ensure it reflects your organization’s goals.

For received gifts, it’s important to understand accounting restrictions to ensure the gifts are tracked properly. For purposes of tracking, gifts can be separated and maintained in three categories: Unrestricted, Temporarily Restricted, and Permanently Restricted (*see note).

• Unrestricted – Free from external restrictions. Contributions and grants for general operating purposes are unrestricted. Board-imposed restrictions are unrestricted for financial statements; however, these are tracked separately for Board use and/or disclosure in the financial statements.
• Temporarily Restricted – Gifts that contain donor-imposed restrictions that can be met either by passage of time (time restriction) or by performing activities defined by donor (purpose restriction).
• Permanently Restricted – Funds that are restricted by a donor that will never expire. The intent of the donor is for the principal balance to remain intact forever, and interest and investment returns on the investment will be used by the nonprofit.

Once you’ve determined the correct classification for a gift, you can track the activity accordingly. For instance, if a donor gives $100,000 to conduct research, and the nonprofit spent $25,000 doing research this year, the ending, temporarily-restricted balance would be $75,000. Most organizations track restricted revenue and expenses on a spreadsheet; however, some accounting software suites offer options for tracking restricted gifts. Tracking endowment gifts is a little more complex. Ensure your donor objectives are met by setting up your system to properly track these gifts.

If your organization is just starting to receive contributions, or if you’re uncomfortable with how restricted gifts are tracked, please contact Forge. We can help you set up a system to ensure you’re meeting the legal, accounting, and ethical challenges associated with restricted donations

*Effective with the new standard (ASU 2016-14) applying to nonprofit organizations that has been issued by the Financial Accounting Standards Board (FASB), Organizations will report net assets (equity) on the face of the financial statements in two categories – net assets with donor restrictions and net assets without donor restrictions. This standard is effective for nonprofits with years ending December 31, 2018 and later. However, further information on endowments must be reported in the notes to the financial statements, so tracking permanently restricted funds separately will still be necessary under the new standard and to maintain compliance with donor wishes.