Often non-profit organizations will receive a contribution with an indication from the donor noting those funds are to be used for a specific time or purpose.
This a restricted contribution, but now what? First, the Organization must determine the method by which it records its restricted net assets via the gross or net method.Gross Method
The gross method tracks the usage of all restricted contributions received and utilized during the year. A release is the usage of restricted contributions. Releases can be for time or purpose depending on the donor stipulation. For example, under the gross method, a donor contributes $200,000 for a specific program of the Organization, but during the fiscal year, the Organization utilizes $100,000 for said program. Total restricted contributions are $200,000 and ending restricted net assets are $100,000 ($200,000-100,000).Net Method
The net method releases only the portions of restricted contributions from the prior year that are used in the current year. It also only reports the portions of restricted contributions that are still restricted at year-end.Using the previous example, if the Organization utilizes $100,000 of the $200,000 donation, total restricted contributions at year-end are $100,000 and releases are zero, resulting in ending restricted net assets of $100,000. See the table below:Gross Method | Net Method | |
|---|---|---|
Beginning Balance | $ – | $ – |
Restricted Contributions | $ 200,000 | $ 100,000 |
Releases | $ 100,000 | $ – |
Ending Restricted Net Assets | $ 100,000 | $ 100,000 |
Once the Organization determines which method to account for its restricted contributions, it must consistently apply the method each year and for each transaction. During the audit, your auditor will request to see various documentation to support restrictions and releases. Organizations should retain documentation from the donor to support the donor’s restrictions such as grant/award letters, email notices, or notations on the checks received. Donor restrictions should be supported in writing. Releases often take the form of expenses for purpose restrictions or the passage of time and should also have supporting documentation.
The tracking of restricted contributions, releases, and net assets is the responsibility of the Organization. This is NOT the auditor’s responsibility. If the Organization has excess restricted funds which the purpose has already been fulfilled, for example, a donor contributes funds for the purchase of a vehicle and the Organization purchases the vehicle for less than the net assets restricted for the purchase, the Organization can hold those funds for another vehicle purchase in the future or it could reach out to the donor for permission to unrestrict those funds or move the restriction for another purpose if the Organization has been granted variance power over the donation.
It is important for a nonprofit to track its restricted net assets because it has an effect on the organization’s liquidity. Net assets with restrictions are not liquid, meaning unless the Organization meets the purpose or time stipulations, the funds cannot be used. For example, if an Organization has $500,000 in total net assets, but $400,000 are restricted for various stipulations, only $100,000 is liquid and can be used to meet general operating needs.
The most common mistake nonprofits make is under reporting and missing restrictions. It is best practice for the Organization to actively track contributions with restrictions and releases throughout the year as the information is received and utilized. Understanding restrictions, releases, and net assets can be challenging, but it doesn’t have to be intimidating. The nonprofit experts at Wegner CPAs are here to answer any questions and assist in any way we can.
