Helen R. Duvall, CPA
A common question I encounter in working with Not-For-Profit organizations (NFP) relates to whether net assets (equity) are RESTRICTED or DESIGNATED. As you know, the simple calculation of NET ASSETS is the difference between an NFPs assets and liabilities (we used to call this fund balance). The FASB Accounting Standards Codification (ASC) 958-210-45 requires the classification of net assets into three categories: 1) PERMANENTLY RESTRICTED, 2) TEMPORARILY RESTRICTED, AND 3) UNRESTRICTED. The classification is based on “the existence or absence of donor-imposed restrictions.” Abbreviated definitions for these net asset classifications are as follows:
- PERMANENTLY RESTRICTED NET ASSETS are generally donor-restricted resources whose principal must be maintained in perpetuity. Think endowment. There are other permanently restricted scenarios but this is the most common.
- TEMPORARILY RESTRICTED NET ASSETS are donor-restricted resources whose use is limited as to purpose and/or time. An example of this would be a contribution received by the NFP that must be used for the purchase of library books. When the books are purchased, the restriction is satisfied.
- UNRESTRICTED NET ASSETS are resources with no restrictions as to how and/or when they must be used.
Notice that both restricted-type classifications include only resources that are donor-restricted. From time to time, the governing body of an NFP will set-aside a portion of net assets to be used for a specific purpose. These internally-restricted funds are DESIGNATED and remain a portion of unrestricted net assets. This is true even of board-restricted endowment funds (quasi-endowments).
I cannot over-emphasize the importance of maintaining the separate identity of each restriction and designation, as well as the associated gains and losses. With the advent of FAS 117-1 (which is an epic discussion for another day), I have found that some of my clients encounter difficulties in determining the funds that were restricted by outside parties versus those that were designated by the board.
In summation, funds that are restricted as to use and/or time by an outside party (the donor) will generally be classified as either temporarily restricted or permanently restricted, while those that are internally-restricted should be classified as UNRESTRICTED – DESIGNATED net assets.
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