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  • Eric Hittle

Beyond Temporary Restrictions


Most of the restrictions we will deal with in net assets classes and contributions are going to be temporary restrictions like what we spoke about in the last article. But, there are also times that a nonprofit may receive a contribution that stipulates a permanent (or perpetual restriction), or the board designates funds. In this article we will take a look at how to account for these and some of the stipulations to be aware of.


Net Assets With Restrictions in Perpetuity


When a nonprofit receives a contribution that restricts the use in perpetuity the nonprofit needs to ensure that it retains the agreement and documents all the stipulations within it. Most perpetually restricted donations are made to support something such as scholarships, or a specific program. Generally, with these types of restrictions the corpus (or initial donation and any additional donations) must remain untouched and are often required to be set apart in a separate investment account.


The earnings made from the investment of the corpus are generally expected to be utilized for the specified purpose. Earnings are temporarily restricted until used for the specified purpose. If there was no purpose specified, or the purpose was to provide organizational support, then these earnings become unrestricted as soon as they are earned.


Examples of Net Assets With Restrictions in Perpetuity


I think a great way demonstrate this is through a couple of examples:


The Leaf and Bean Conservatory received a contribution to provide internships to high performing horticulture students. The agreement stipulated that the donation of $1.5M, to be provided in three payments of $500k, be permanently restricted and that 20% of earnings for the previous year be reinvested into the corpus by Jan 31. The first payment was included with the agreement. How would we record the initial contribution?


The nonprofit records the payment received with a $500k debit to the checking account and records the remaining $1M to Pledges Receivable.


Also don’t forget that at the end of the period we will also make an entry to separate out the net assets with donor restrictions in perpetuity, similar to how we did in the previous article.


The Leaf and Bean Conservatory collects the final of the three payments.




For simplicity's sake, the next year on January 31 the Conservatory records the earnings (dividends and interest) for the prior year. It has earned a total of 7% (or $105k) on the entirety of the corpus. How would the Conservatory record these earnings?


First, we would record the cash and the revenue.


Next, we would classify the earnings as net assets with temporary restrictions and include the 20% in the corpus, which will be reinvested. That leaves us $84k that can be used to support internships.


There are other rules that also need to be considered if an endowment is setup. These have to do with state regulations and the Uniform Prudent Management of Institutional Funds Act (UPMIFA). We will not go into that here, but if you are looking for resources you can check out Prudent Management of Institutional Funds Act.


Board Designated Funds


It is not uncommon for the board of directors want to segregate funds for a specific purpose or for an operating reserve. There is sometimes confusion about whether funds designated for a purpose by the board of directors is restricted or unrestricted these funds full under net assets without donor restrictions. Since these assets are not restricted by a donor these fall under net assets without donor restrictions. It is also of note that these designated funds can be undesignated by the board as well.


When recording board designated or operating reserve it is best done as an entry to an account with a name such as Net Assets Without Donor Restrictions – Board Designated or Net Assets Without Donor Restrictions – Reserve. Recording them like this helps to avoid any confusion as to whether they are restricted or not.


In Summary

From time to time a donor may want to make a more lasting contribution to an organization. Oftentimes, these contributions are for a specific purpose and have certain terms that must be maintained. It is important to read the agreement and make sure notes are maintained to properly account for the corpus and any earnings.


Likewise, the board of directors may like to designate funds for a specific purpose. While not truly restricted, it is helpful to maintain these in an appropriately labelled account, and to maintain documentation of how the board intends to use or add to them.



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