Posted on Wednesday, June 19, 2013
When an organization receives a contribution, it is either recorded as unrestricted, temporarily restricted or permanently restricted depending on the donor’s intent. Only a donor can temporarily or permanently restrict a contribution. An organization’s board can designate funds for specific purposes, but it cannot restrict funds. Restricted funds and designated funds are not the same. Designated funds are included as unrestricted contributions, as they have not been restricted by an outside donor.
Unrestricted contributions are those gifts that lack any type of restriction. The donor makes no requirement as to what the gift should be used for. Nonprofits like these types of gifts because they can be used wherever the organization sees fit. Unrestricted contributions can be used to pay the salary of the Executive Director, or buy ink for the printer or purchase snacks for the after school program.
Temporarily restricted contributions have been restricted by the donor for either a specific purpose or for a period of time. For example, a donor could make a contribution to support the after school program or to purchase new computers. Therefore, the gift could only be used for costs related to the after school program or to purchase computers, respectively. Gifts can also be restricted to time. A donor could make a donation in 2012 to support the organization’s 2013 calendar year operations. This gift would have to be spent for next year’s operations, not this year’s operations. Temporarily restricted contributions can be tricky because the donor might not come right out and state this gift is for a specific purpose. The restriction might be implied. For example, if an organization holds a fund raiser dinner to raise money for its capital campaign, it is implied that all money raised at the fund raiser is intended to be used for the capital campaign. Restrictions on temporarily restricted contributions expire after an action by the organization (the contribution is spent for the designated purpose) or after the passage of time (the organization’s 2013 calendar year is completed).
Permanently restricted contributions never expire. These types of gifts are most commonly endowments. For example, a donor makes a $25,000 gift to an organization to invest. The organization cannot spend any of the original $25,000 contribution but can spend the earnings from the investment for program services or operations, depending on the donor’s requirements. The $25,000 is said to be permanently restricted; it can never be used by the organization. The earnings from the investment are either unrestricted or temporarily restricted based on the donor’s intent.
Often times both temporarily restricted and unrestricted money is available to pay for an expense. In this case, temporarily restricted money which has been designated by a donor must be spent before the unrestricted money. It is important for nonprofits to properly track restricted money so that they can be sure the donor’s wishes are being followed.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.