Temporarily Restricted vs. Permanently Restricted: Financial Statement Presentations

At a recent workshop given by CPA Karen Kowgios for executive directors and board members, confusion arose as to the difference between unrestricted, temporarily restricted, and permanently restricted assets and how they appear on an organization’s financial statements.

What nonprofits have to remember is that if a donor gives funds with a stipulation on purpose or time frame — whether or not there is an actual gift instrument (i.e., a written document), oral contracts will probably count as much as a written grant letter — those funds should be segregated in the organization’s books, and you are not supposed to use those funds for another purpose (e.g., meeting payroll). Kowgios notes that funds don’t have to be physically segregated in a separate bank account, they just have to be segregated in the organization’s general ledger.

There are three classifications of assets for financial reporting purposes:

Unrestricted are those items that have no donor-imposed restrictions.

Temporarily Restricted are those items that were received with a donor-imposed restriction that will be satisfied in the future (generally within one year). The donor’s restriction may be for a particular purpose or program or for use in a specified time period.

Permanently Restricted items are those received with a donor-imposed restriction that states that the donation must be maintained permanently, but may permit the organization to use up or expend part or all of the income derived from the asset.

Kowgios strongly recommends that organizations that have restricted funds produce their financial reports in columnar format showing the three asset categories. While you are not required to have a columnar report, a one-column statement with all asset classifications combined (unrestricted, temporarily restricted and permanently restricted) will not give a true picture of the organization’s finances, and details, either negative or positive, will be buried.

A board restricted fund is not the same as an endowment fund, although many groups mistakenly call it such. Technically, a board designated fund will appear on the financial statement as “unrestricted” because the limitation was imposed by the board of directors rather than the donor.

Endowment funds as well as other charitable gifts are overseen by the NYS Attorney General’s Office. Generally, an organization is allowed only to use the interest generated by the funds and it may not spend the principal.

To read more about endowment funds, go to www.CharitiesNYS.com/pdfs/Endowment%20Guide.pdf.

Karen Kowgios is a partner with FK Partners LLP and can be reached at 212-490-2200 or kkowgios@fkpartnersllp.com.

This article originally ran in the January 2010 issue of New York Nonprofits, the monthly publication of the Nonprofit Coordinating Committee of New York, Inc. www.npccny.org