Restricted Funds and Assets

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Restricted Fund

A restricted fund is a reserve of money that can only be used for specific purposes. Restricted funds provide reassurance to donors that their contributions are used in a manner they have chosen. When a donor gives money to a nonprofit organization, he or she may specify whether the gift is unrestricted and can be used for any purpose the organization sees fit. If the funds are temporarily restricted, they must be used for a specific purpose. With permanently restricted funds, the donation acts as principal on which interest can be earned (and only the interest is to be spent).

If a donor restricts a nonprofit organization to allocate their restricted funds to a specific purpose, it is required to do so by law. Failure to comply may result in the donor taking legal action and reporting the nonprofit to the Office of the Attorney General. Usually, endowments are considered restricted funds. Their principal usually cannot be spent, and only a specified percent of the interest they earn can be spent per year. Furthermore, there are restrictions on how the interest can be spent. For example, it may be used only to fund scholarships and professorships.

Designation of a Restricted Fund

The donor determines if the funds are to be restricted. Typically, fund designation is specified in writing or through an understood agreement with the nonprofit. Foundations that provide restricted funds often describe how they want their money allocated when they distribute the award. Nonprofit organizations can avoid confusion about how they intend to spend a donor’s funds by offering a choice of designation. For example, a cancer research nonprofit could give donors a choice to allocate their funds to either breast, skin or brain cancer clinical trials.

Restricted Fund Management for Nonprofit Organizations

Typically, restricted funds are not required to be placed into a segregated bank account, but must be accounted for separately in a nonprofit’s financial statements. When budgeting, nonprofits should separate restricted and unrestricted funds so that they allocate the money they have to spend correctly. For example, if $100,000 is budgeted for restricted funds, it cannot be mistakenly spent for unrestricted purposes.

Nonprofit organizations could implement an internal system that alerts management when restricted fund obligations have been met; once the donor’s wishes are satisfied, excess money can be transferred to unrestricted funds. Nonprofit employees should be trained to identify expenditures that require allocation to restricted funds. Staff correctly allocating money keeps donors satisfied and helps avoid legal disputes.

Restricted Asset

Restricted assets are money or other items of value received by or promised to an organization, the use of which is legally or contractually restricted. Restricted assets are also subject to special accounting procedures. Collateral can be viewed as a restricted asset, especially when the lender requires that it maintain its current value.

An example of a restricted asset is the proceeds from a revenue bond. The proceeds the city receives from this type of municipal bond must be used for their stated purpose (e.g., improving roads, building a new high school auditorium, upgrading sewers, etc.). The opposite of a restricted asset is an unrestricted asset.

Permanently Restricted Assets

Assets of a not-for-profit organization that come with certain restrictions. Permanently restricted assets are any assets that are given to a not-for-profit by an outside individual or agency with restrictions on their use or purpose. Donations of such assets are not uncommon, as individuals or organizations making the donations may have certain preferences as to how the assets donated are used by the not-for-profit.

A common type of permanently restricted asset is the donation of real estate. For example, an individual or organization may donate a large chunk of real estate to a not-for-profit, such as a public university, with restrictions on the land to be only used for biological research rather than have the property resold for a capital gain at the university’s discretion.

Unrestricted Net Assets

Unrestricted net assets are a group of items owned by the government with commercial or exchange value that have no external restrictions regarding their use or function. Unrestricted net assets appear in government accounting and are government-owned assets that can be utilized for any decided-upon purpose. This is in contrast to restricted net assets that are assigned to specific purposes.

Government accounting includes the principles and procedures used by local, state and federal governments for accounting purposes. Rules are established by the National Council on Governmental Accounting. Assets of local, state and federal governments are typically restricted to specific uses and purposes, however, unrestricted net assets fall outside this limitation.

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