Tracking and Managing Restricted Funds

Social Solutions Blog

Tracking and Managing Restricted Funds

Bringing in a generous donation or winning that big grant is always a reason to celebrate. If you don’t have processes in place for managing restricted funds, you can set yourself up for an administrative headache or legal action. Of course, every nonprofit will tell you the best funds are unrestricted. However, grantmakers and donors often have strong feelings and valid reasons for offering restricted grants or designated gifts. Plus, you have probably discovered that giving donors the option to specify how their donation is used can incentivize giving.

Even then, tracking and managing those restricted contributions once they’ve been received comes with an added layer of administration. Being a good steward (and obeying the law) means you need to understand when funds are restricted and make sure you are managing restricted funds as you spend them. So, let’s make sure you can!

Types of Funds

In 1996, the Financial Account Standards Board (FASB) issued the primary guidance relating to the recording of contribution revenue by nonprofit organizations (known as FASB116). Under these standards, all contributions must be classified as either unrestricted, temporarily restricted or permanently restricted funds.

  • Unrestricted Funds have no donor-imposed restrictions.
  • Temporarily Restricted Funds are gifts with restrictions that either limit the purpose for which funds can be used or that require them to be used in a certain time period.
  • Permanently Restricted Funds must be maintained permanently, such as an endowment, but may permit the organization to receive income derived from the asset.

How Do Funds Get Restricted?

First, the basics. When a donor or grantmaker gives funds and stipulates a specific purpose or timeframe for their use, those funds are restricted. (Internal restrictions such as those imposed by the board are considered “unrestricted” under nonprofit fund accounting standards.)

As the Charity Lawyer blog explains,

Donor restricted funds are created when gifts are received subject to donor stipulations or a binding understanding with the donor. Donor-restricted funds are similar to an irrevocable gift subject to conditions. By agreeing to accept the gift on the terms and conditions specified by the donor, the charity essentially enters into a contract with the donor to adhere to the stated terms and conditions of the gift.

In short, honoring donor restrictions is not just good stewardship, but a legal requirement.

Restricted grants will spell out limitations in the request for proposal (RFP), the award letter and/or grant agreement. Individual donors can express their stipulations in several ways. A donor may include a formal “gift instrument” – essentially a written document outlining their express wishes for the use of the donated funds. A donor may verbally articulate stipulations when providing the gift or during the solicitation process. Or, a donor may have an expectation of restrictions based on the terms of the solicitation material.

Clarifying Donor Intent

As you can see, restrictions can be a bit tricky. It’s important to make sure that you and your funders are on the same page when it comes to restrictions. In fact, the Donor Bill of Rights, developed by Association of Fundraising Professionals, includes the right to be assured that donor intent will be honored.

So, how do you make sure that you know when you are getting a restricted contribution?

  • Have a written policy about what types of designated gifts you will accept and how gift restrictions will be documented.
  • Making sure fundraising staff are well trained and clear in their communication when soliciting gifts.
  • Reviewing solicitation materials (including online donation content) to make sure that they directly state that donations will be considered unrestricted unless donors explicitly indicate otherwise (and provide a clear and simple way for them to do so).
  • Document restrictions on gift acknowledgment forms and thank you letters.
  • Make sure you update your donor contact info regularly. If the funds can no longer be used for their intended purpose, you can ask them to release or modify the restrictions.
  • Before applying for any restricted grant, take time to review and analyze how restrictions might impact or limit program activities, add administrative burdens, or conflict with plans, policies, and best practices.

Restricted Fund Tracking and Management

Generally, restricted contributions do not need to be physically placed in a separate bank account; they just need to be tracked separately in the books. If you are using accounting software, that usually means setting up separate accounts for each type of funds (unrestricted, temporarily restricted and permanently restricted). When time or purpose restrictions are met for temporarily restricted funds, a journal entry can be made indicating such and the remaining funds can be transferred to the unrestricted account.

As the Nonprofit Assistance Fund clarifies, at the core of the nonprofit fund accounting requirements are two key principals. First, as suggested above, restrictions are imposed when a designated gift is made or a restricted grant is awarded. Second, funds must be recorded in the accounting records in the year that they are received (or, in the case of restricted grants or certain gift instruments, in the year that an unconditional commitment for the funds is received). This has important implications for your financial reporting, so make sure you’re fundraising team is documenting and communicating gift details to your accounting staff.

Finally, expressly address restricted contributions in your budget, expenditure, and reporting processes. For example,

  • Separate unrestricted and restricted funds during the budgeting process so you are not making decisions based on larger numbers than you actually have access to.
  • Train program staff and administrative staff so they know how to identify and record expenditures that should be allocated to restricted funds (especially when certain types of expenses might neede covered by both types of funds).

  • Create a system for identifying when restrictions are satisfied and funds can be transferred to unrestricted accounts. There’s no reason to keep your hands unnecessarily tied once the donor’s wisre met!

  • Let administrative and program managers know how fund-restrictions will impact cash flow and availability of funds.
  • Train staff responsible for tracking, reporting and using restricted funds on the details of each restriction.
  • Make sure your internal controls include a way to monitor the use and tracking of restricted contributions.

Tracking Is Paramount for Reporting

Tracking and managing restricted funds can feel a little overwhelming. But, for the most part, it really comes down to creating and implementing systems that make sure that restrictions are addressed at every step along the way. Once you have those systems in place, it should become a natural part of your program and business activities.

The final step, of course, should be presenting the outcomes of the funding. This is especially important with restricted funds that are tied to a certain program or initiative. Donors want to give back to organizations they trust and see impact with. If you can effectively show that the funds went to the right place and made a difference, you are primed for additional gifts.

Did you know?

Apricot’s reporting platform allows you to create and share reports securely within the system. Reporting happens in real time so that you can monitor results and be responsive when it matters.

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Apricot is hosted on a best-in-class Amazon Web Services (AWS) environment so your data is secure, backed up, and compliant. User-based permissions and audit trails further enable secure access to data.

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Apricot allows you to easily track volunteers as well as clients. Utilize guest user modules and webforms to further engage your constituents.

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