Lorman offers professional resources regarding COVID-19 and remote working best practices.  Learn more

Show navigation

Important Notices & Regulations That Nonprofits Should Know About Restricted Assets

» Articles » Nonprofit Articles » Article

April 04, 2018


Important Notices & Regulations That Nonprofits Should Know About Restricted Assets:

"Restricted Assets" pertain to donations that are made to a nonprofit with the condition that they only use those donations on specific company projects or for a specific (pre designated) purpose. An example of this would be when money is given to a school and is to be used for a scholarship for a student that meets certain specifications or requirements. 

How Are Funds Restricted When Nonprofits Receive Donations?

Continue reading below

FREE Nonprofit Training from Lorman

Lorman has over 33 years of professional training experience.
Join us for a special white paper and level up your Nonprofit knowledge!

Fraud Considerations in Nonprofit Organizations
Presented by Carol Barnard CPA, CFE

Learn More

Sometimes a donor will donate to a specific1 cause stating that funds can only be used for a certain project or purpose. Other times they will send a letter specifying that they will only donate money if it is used for a said purpose or a certain project or purpose. Sometimes grants will be received from a foundation or a charity that is specified for specific uses.

Regardless of how the funds are obtained, there are certain things that small nonprofits need to know2 about these pre designated funds and how they can be used. The following is a breakdown the different types of funds and how they can be used:

Temporarily Restricted Funds:

These funds are sometimes donated with time limit restrictions meaning that the gift may be used for anything related to a certain fund or project, but it has to be used within a specified period of time (i.e. within a certain quarter of the year, within a 6 month period, within a certain calendar year, within 12 months, etc.).

When the specific project is over or the specific funds will either stop being donated or they will become unrestricted to the company so they can do as they see fit with the donated funds. 

Examples of such types of funds will include grants, graduations of a scholarship recipient, or the completion of a specified building or expansion project.

Permanently Restricted Funds: 

Funds that are permanently restricted have a restriction on them that never expires. These funds will be restricted until they are all spent. These funds are often parts of endowments that sponsor or support specific nonprofit-related activities. From the time the fund is set up the nonprofit must track where their money goes and they have to report it appropriately via consistently documented financial statements. 

Some Grants May Include A Use It Or Pay It Back Provision: 

Many times grants will contain a "use it or pay it back" provision meaning that the nonprofit must give out the grant money or they will have to pay it back to the source which provided the funds in the first place. This can even be true if the project is put on hold or delayed and some funds go unused past the "deadline date" which was imposed when the monies were donated.  

Think Twice About Accepting Donations of Stock/Other Investments:

Accepting donations of things such as stock or bonds can be a dicey choice for a nonprofit. Have your accounting department review such investments before you accept such donations for your agency. The reviews should all be complete any such donations are accepted to ensure you are not getting into a sticky situation that you may not easily be able to get out of once the donations are accepted. Many of these donations have restrictions on the principal of the donation and what can be done with those funds while others restrict the interest (and profit) produced by the donations now. Know those restrictions before you jump into accepting such donations.

Be Aware Of Property Restrictions:

Some Housing & Urban Development (HUD) sometimes requires nonprofits to own property for up to 40 years. Be aware of this if you are being offered donations of land or buildings that have restrictive limits on them. Review the property and the buildings to identify any restrictive measures that might be in place on the property before accepting such donations. 

These are just a few situations that nonprofits must be aware of when accepting restricted assets that may affect how they can use not only the money and stocks, bonds, properties, buildings, and other assets that are donated to their cause. 

For more information on what nonprofits should know about these restrictive assets and the restrictions on each donation that is accepted please feel free to contact us

1. https://www.cof.org/sites/default/files/documents/files/foundations-fed-funds.pdf
2. https://www.bls.gov/bdm/nonprofits/nonprofits.htm


The material appearing in this web site is for informational purposes only and is not legal advice. Transmission of this information is not intended to create, and receipt does not constitute, an attorney-client relationship. The information provided herein is intended only as general information which may or may not reflect the most current developments. Although these materials may be prepared by professionals, they should not be used as a substitute for professional services. If legal or other professional advice is required, the services of a professional should be sought.

The opinions or viewpoints expressed herein do not necessarily reflect those of Lorman Education Services. All materials and content were prepared by persons and/or entities other than Lorman Education Services, and said other persons and/or entities are solely responsible for their content.

Any links to other web sites are not intended to be referrals or endorsements of these sites. The links provided are maintained by the respective organizations, and they are solely responsible for the content of their own sites.