Restricted Contribution: Treatment in books

You will often come across the term ‘restricted contribution’ or ‘restricted net assets’ in balance sheet of nonprofit organizations. Not a very common sight in financial statements of ‘for-profit organizations’.

This article explains meaning and treatment of ‘restricted net assets’ in the books of non-profit organizations.

Meaning:  restricted asset or restricted contribution meaning and accounting treatment

Some donors place restrictions on their contribution. Many donors like to ensure that their contributions are restricted to be used only for specific purposes and/or during a given time frame. The restrictions generally pertain to:

a) Purpose (how/ how not) for which contribution can be used

b) Time (when/when not) after which the contribution can be used.

Some contributions may have both time and purpose restrictions. All such donations create restricted net assets in the books of the organization.

Categories of Restricted Contributions

I) Permanently restricted net assets: Donations in the permanently restricted category are generally meant to provide a permanent source of income for the organization.

Examples of Permanently restricted net assets:

1) Some contributions come with a life long restriction. “Sales of the donated assets are prohibited” is the most common example of ‘permanent restriction’.

2) Donations that can be used only for a certain purpose. For e.g Gifts that require the organization to set up a permanent endowment fund (funds where the principal is to remain intact – expenses are to be borne only out of income from investing the funds) are examples of “restricted contributions”

2)  Temporary restricted net assets: Restrictions which become inapplicable upon completion of certain time or upon happening of certain events are called Temporary restricted net assets. For example, your donor may require you to use the contributions only to support a specific program, or invest it for a specific term, or allow it usage at a designated future time. Term endowments are the most common kind of temporary restricted contribution

3) Unrestricted net contribution: Unrestricted net contribution refer to those net assets which either have no restrictions or those where the restrictions have been met. It has no pre-imposed terms and can be deployed into anything that the organization wants.

Some organizations put self-imposed restrictions on contributions received from certain category of donors. Such contributions are called ‘board-designated contributions’ or ‘designated unrestricted contributions’. All designated unrestricted contributions must be disclosed in the notes to financial statements.

Restricted Assets: Treatment in books 

It is the responsibility of the members of the organization to honor the terms under which a donation has been made.

If a nonprofit organization receives restricted contributions, it should be NOT be classified with cash or other unrestricted assets. Restricted assets must not be mixed with unrestricted asset as it would give a false picture of the financial position of the organization.

Further, all restricted contributions must be reported in the statement of financial position under a separate heading titled ‘restricted assets’. Descriptive information about each restricted contribution must be included as notes to the financial statements.