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By Annmarie Novotney, CPA Senior Accountant

Accounting standards specific to nonprofit organizations require contributed income to be reported in three categories unrestricted, temporarily restricted, or permanently restricted. Income is differentiated into these categories based on either the absence or existence of donor-imposed restrictions. Below is a brief definition of each category:

  • Unrestricted funds for which there are no donor-imposed restrictions and are available for general use.
  • Temporarily restricted funds for which there are donor-imposed restrictions related to use in a future period or use for a particular purpose. These restrictions expire as time passes or as a purpose is fulfilled.
  • Permanently restricted funds for which the corpus must be maintained in perpetuity, with their purpose fulfilled using earnings. These restrictions do not expire with the passage of time nor purpose fulfillment.

In the nonprofit arena, organizational cash flow can be a daily battle when adequate unrestricted funds are not available. In some cases, organizations borrow from restricted cash to fund operational needs with the intent of converting another unrestricted asset, such as receivables, to cash and replenishing the restricted funds. This use of cash in this way presents a risk of noncompliance with restricted funds.

Nonprofits have an obligation, by law, to their donors to spend contributed funds as they have been designated. If restrictions have not been met and the related funds have been spent, donors can require that the funds be returned or may pursue legal action.

Given these challenges, management should consider guidelines related to restricted funds:

  • Develop and understand a simple and reliable way to track restrictions on funds. Educate staff and board members responsible for financial decisions to ensure they understand restrictions, know when restrictions are satisfied, and know how to release funds from restrictions. Implementing a tracking system will help decision makers understand how restrictions will impact cash flow and give a clear picture of availability of funds.
  • Be mindful of restrictions, both time and purpose, on funds during the budgeting process. Do not budget to spend funds that are restricted unless they are fulfilling their specified purpose. Pay attention to unrestricted funds and avoid making operational decisions based on the status of your restricted funds.
  • Many restrictions on contributed funds stem directly from grant requests made. Be aware of the implications of any restrictions when applying for grants; if these grants are awarded there may be restrictions with which you must comply.
  • Fundraising solicitations and appeals can also inadvertently place restrictions on contributed funds. Be certain that proper communication between development and finance departments is in place to ensure appeals have appropriate language to solicit for the desired purpose, whether that purpose be unrestricted or not.
  • Communicate with staff to understand the true cost of programming and operations within your organization. Ensure you are allocating all direct and indirect costs associated with programs when allowable to ease the pressure on limited general operating dollars.
  • Consider developing a formal gift acceptance policy that outlines treatment for specific types of contributions that can be accessed by all staff responsible for the solicitation and recording of contributed gifts.

Managing the composition and use of restricted funds within your organization may present challenges, however it is important to demonstrate accountability and ensure legal compliance with regard to restrictions. Proper use of restricted funds will promote transparency in your organization and support for your programs, and will demonstrate fulfillment of donor expectations and provide the most accurate financial perspective as possible for future planning.

We would be happy to assist you with tracking of restricted funds, allocation of expenses, or developing a formal gift policy. If you have any questions, please contact your Blue & Co. advisor.

Source: Nonprofits Assistance Fund Managing Restricted Funds


If you have any questions regarding the article above or any other issue affecting your not-for-profit organization please contact your Blue & Co. advisor or e-mail us at or call us at 800-717-BLUE


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CIRCULAR 230 DISCLOSURE: To ensure compliance with recently-enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including any attachments, is not intended or written by us to be used, and cannot be used, by anyone for the purpose of avoiding federal tax penalties that may be imposed by the federal government or for promoting, marketing or recommending to another party any tax-related matters addressed herein.


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