7 things every nonprofit should know about restricted assets

Your nonprofit is on a mission. Like any other business, your work requires careful accounting and financial reporting. Unlike other businesses, your not-for-profit organization has special requirements on the use and reporting of restricted assets.

As an auditor specializing in the nonprofit sector, I get a lot of client questions about restricted assets. The following are some of the most common issues we encounter and tips for dealing with them.

Fundraisers can create unintended restrictions. Donors like to support programs and projects near and dear to their heart. Your fundraising staff is skilled at designing heartfelt appeals. If you’re not careful, overly specific fundraising language can create restrictions that limit your ability to operate. Keep your accounting staff looped into the fundraising communications planning and approval process to avoid problems down the road. When in doubt, run it by your auditor.

“Restricted cash” may include more than you think. Many nonprofits present cash and cash equivalents that have restrictions in multiple line items on their statements of financial position. In some cases, these line items are labeled something other than “restricted cash” or “restricted cash equivalents,” such as:

Advances of grant funds,

Pledged cash and cash equivalents,

Cash received with donor-imposed restrictions,

Contractual insurance reserves, and

Bond-sinking funds.

A new accounting standard gives guidance on how you should report the above items in your statement of cash flows.

Restrictions may not be released evenly throughout the year. Often organizations receive funds earmarked for programing in future periods. These restricted funds may also be tied to program deliverables rather than “evenly divided” across a period. Take meals, for example. A homeless shelter receives a donation for meals served in the 2018 calendar year. The shelter may serve significantly more meals during the fall and winter months. Generally, that donation’s release from restriction should vary by volume of meals served rather than be evenly divided across 12 months.

Grants may include “use it or pay it back” provisions. You receive a grant for a project or program in a particular fiscal year. The project or program is delayed and some grant funds have not been spent. Any “use it or pay it back” restrictions need to be identified early in the operational planning process. Prioritize that spending to ensure funds don’t need to be returned to the funder.

Insurance contracts and employee benefit plans may create asset restrictions. Sometimes organizations don’t realize that the language in their self-funded workers’ compensation or employee medical plans may place restrictions on assets. Finance/accounting needs to review the actual plan documents.

Donations of stock and other investments can be dicey. Investment asset donations for endowments, scholarships, and other purposes should be reviewed by accounting, preferably before they’re accepted—for sure before they’re budgeted or spent. Are restrictions only on the investment principal or are there restrictions on income it produces as well? Are realized capital gains treated differently from unrealized capital gains? Are there special reporting requirements? Tax implications?

Real estate property may have long-term restrictions. Some Housing and Urban Development (HUD) programs require recipients to own the property for 40 years. Your organization might be offered donations of buildings that have restrictive covenants. Property and equipment should be reviewed to identify any restrictions.

For more information on nonprofit finance, visit the AICPA Not-for-Profit Section website.

Jennifer Casacchia, CPA, is a member of the AICPA Not-for-Profit Advisory Council and a senior audit manager with Sikich LLP’s not-for-profit and higher education practices team at the firm’s headquarters in Naperville, Illinois.

7 things every nonprofit should know about restricted assets

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