A question came through my in-box a while ago and made me realize that I should clarify some terms that I think we hear a lot in nonprofits. Here is the main part of the email:
When a member joins our nonprofit they are required to provide a membership fee which is refundable in full if they move out of the neighborhood. Because these fees are refundable (i.e., deposits), would they be considered restricted funds?
The short answer is no, and for several reasons. #1 – the monies received were probably not contributions with any donor restrictions on them so would not be restricted funds. #2 – These sound like deposits that they have to hold onto and not spend so they can give them back if need be. That would not be considered income so could not be restricted.
Restricted is a word we hear quite a bit in nonprofits when it comes to money. So is unrestricted, conditional, temporarily restricted among others, and with the above email in mind I thought I would define a few terms.
Restricted — as in restricted income, restricted donations, restricted revenue. The world of nonprofit accounting is made a touch more complex because donors can tell us exactly what they would like us to do with the money they give us. They can restrict the use of the funds for specific purposes. “I like your organization and I want to give you money to operate this program.” That is a restricted donation. Your nonprofit is given money for a purpose that is narrower is scope than your organizations overall purpose. You can ask for restricted donations, “Please help our organization by giving money to support this program.” The donor imposes any restrictions on the funds they give you. If they don’t the donation would be considered unrestricted. Earned revenue is unrestricted. Most government money is unrestricted – they are not giving you any money, they are hiring you to perform a service and will only pay you if you perform the service.
Conditional — not the same as restricted. Conditions are imposed by donors on funds they want to give you. Matching funds are a common example; you’ll get $20,000 if you raise $10,000. Even if you already have the $20,000 sitting in the bank it is not yours (it is in fact a liability — money you owe someone else) until you raise the other $10,000 and satisfy the conditions of the grant.
I’ll do some more terms in later posts but if you have any questions about the above items or have other question, use this form or leave them in the comments section below.
Thanks,
Alan
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We at Nonprofits Assistance fund also answer lots of questions about restricted funds. This also creates confusion in financial reports and many board members give up on trying to understand them. We’re written a pretty complete overview including example reports – link here.
http://www.nonprofitsassistancefund.org/files/MNAF/ArticlesPublications/Managing_Restricted_Funds.pdf
I am a staff (beginner) auditor in the midsize CPA firm. I have my first not-for profit organization audit in two week, so I was looking for the internet resources that provide information about not-for-profit accounting. This article that you provided the link for is very helpful for my general understanding. Thank you.
Thanks Kate. The Nonprofits Assistance Fund is a fantastic resource, I encourage everyone who deals with nonprofit finances in anyway to tale a look at their stuff.
Alan, I suggest the short answer is yes. You provide a good explanation about donor imposed restrictions and their classification in revenue and net asset presentation. But the use of the word “restrictions” is more global. Refer to AICPA’s AAG-NPO 3.07. It references FASB ASC 958-210-50-1, and states “information about the liquidity or maturity of assets and liabilities, including restrictions on the use of particular items, should be disclosed in the notes to the financial statements unless that information is provided on the face of the statement of financial position.” The original question concerned an asset – money held on deposit. Therefore the above regarding restrictions on the uses of assets applies.
Thanks for the comment Kevin, and you make an excellent point. I would hope that they are correctly disclosing these deposits in their financials and include a footnote for additional explanations. I did not think about this in my answer because they used the phrase ‘restricted funds’ in the question rather than ‘restricted assets’. But just to be on the safe side I’m going to let them know about your response so they can have more information to make their decisions.
Thanks for reading,
Alan
Please let me know if I gave $1000 to a church, specifically designated it to for the use of a new building project, under the leadership of S.A. Arnold. These funds were also listed separate from my tithes and offerings on my yearly contribution statements. The church Elders decided to cancel the project after the pastor resigned. I recently asked for a refund and was told “no”. Are there any laws I can utilize as it relates to this matter?
Thanks,
sd
Sharon, you pose a legal question on an accounting blog – that’s always dangerous. I’m not a lawyer. I suggest the laws you seek are state specific and your state’s office of attorney general may be a good place to start. I wonder, though, if you have already exhausted administrative remedies within the church and perhaps a system that oversees the church. It would be better to resolve the matter within the family rather than involving the state’s AG, assuming the AG’s office would even touch it. Often, “building funds” continue to exist even after a particular building project is shelved. The organization knows it will someday need a new building or wing, therefore the “building fund” is continued. I know you stated your contribution was restricted to a building under the leadership of a particular person, but your argument is weakened if the blanket “No” from the Elders was really, “No, it is in our building fund which is not tied to a particular leader”. Good luck.