Net Assets With Donor Restrictions

What is net assets with donor restrictions?

Net assets with donor restrictions is the portion of a nonprofit's equity that donors have limited to a specific purpose or time period. Everything else sits in net assets without donor restrictions. The two-class presentation replaced the older unrestricted, temporarily restricted, and permanently restricted categories. The split answers the question that matters most to a board: how much of what we hold can we actually use.

What creates a restriction and what does not

Only the donor can restrict a gift, and the restriction must be stated at the time of the gift. A grant for a named program, a pledge for a capital campaign, or an endowment gift are restricted. Funds the board sets aside for a reserve or a future project are not restricted; they are board designated and remain in the unrestricted class, because the board can reverse its own decision. Treating board designations as restricted overstates how constrained you are.

Releasing restrictions and reading the statements

When the purpose is fulfilled or the time period passes, the amount moves from restricted to unrestricted through a release line on the statement of activities. A large release with no corresponding program spending is a red flag. Boards should read the restricted balance alongside cash, because an organization can hold a healthy total net asset figure while having almost no spendable cash. That gap is where nonprofit liquidity crises begin.