With the upcoming net asset classification changes to not-for-profit financial statements under ASU 2016-14, now is as good a time as ever for a refresher on the rules of restricted donations. First, let’s briefly touch on the net asset changes that are rapidly approaching.
Before this ASU went into effect, there were three net assets classifications: Unrestricted, temporarily restricted and permanently restricted. Under the new ASU, the net asset classifications will be condensed into two categories—”with donor restrictions” and “without donor restrictions.” The previously categorized unrestricted net assets will now be called “without donor restrictions” and the remaining categories of temporarily and permanently restricted net assets will now be known as “with donor restrictions.”
Board Designated Net Assets
You might be thinking what about board designated net assets? Since board designated net assets are internally designated and not restricted by the donor at the time of the donation, these should be categorized as without donor restrictions. However, board designated funds can be separately stated within net assets without donor restrictions on the face of the financial statements or in the notes to the financial statements.
This change is effective for annual financial statements issued for years beginning after December 15, 2017. Meaning that for not-for-profit organizations with June 30 year ends, this will be a requirement for their June 30, 2019 financial statements.
Restrictions on Donations
As a reminder, only the donor can impose a restriction on a donation. If your organization receives funds from a donor for general operating support and you internally earmark the funds for a specific purpose, such as an upcoming large capital improvement project, these funds must still be categorized as net assets without donor restrictions on the financial statements.
Maintain Accurate Records
Your accounting software may not be equipped to track the restricted funds and the subsequent spending of them easily. Because of this, you will have to create a record outside of your software. An easy way to accomplish this is by setting up an Excel spreadsheet. On a monthly basis as you are completing your month end close, update this spreadsheet for any new restricted grants and the spending against them. It is important to maintain accurate records of restrictions so that management or the board of your organization can make spending and fundraising decisions based on current balances.