Many donors appreciate the occasion to designate their giving to special purposes or projects, doing so presents the unique opportunity to honor or remember an attribute of a beloved individual and support a cherished organization at the same time. 
Assets with donor restrictions are donor designated monies for a particular purpose. These funds are restricted for the purpose elected and cannot be used for other expenses of the nonprofit. Many organizations will designate their regular operating revenue for different purposes; however, these funds may be reallocated as they are not restricted in the same sense as a donor restriction. Should an organization find themselves in a situation when they are in dire need of the restricted funds, the organization can approach the donor to request the restriction be removed. Many times, the donor will agree to release the restriction or repurpose its originally restricted funds.
Financial reporting of restricted funds is vital to help readers of financial statements obtain an accurate understanding of the breakdown of cash available and restricted. Income must be recognized in the year that the commitment is received, regardless of when the related expenses will occur. Financial statements generally have separate columns or sections for activity with donor restrictions and without donor restrictions, helping make the breakdown clear.
If an organization is not careful, assets with donor restrictions may cause cash flow issues within the organization. Organizations should ensure they have sufficient cash flows from other revenue sources to cover its normal operating expenses to continue to serve their purpose. If an organization solely receives donations with donor restrictions, it may not be able to continue operations.
Generally, a nonprofit organization does not want to turn down a gift, regardless of if it comes with restrictions or not. However, if accepting the gift puts the organization in jeopardy, the organization should reconsider. Many nonprofits have a gift acceptance policy in place to assist with this decision making process.
As an organization, it is extremely important that you monitor and use your funds with donor restrictions properly. Improper use of restricted funds can result in severe penalties or loss of exempt status by the IRS. The officers and/or board members can be sued by donors for misuse of funds.
Assets with donor restrictions are fundamental in creating new programs, expanding current programs, and furthering the mission of nonprofit organizations. With clear reporting and understanding, organizations can maximize the benefit of these funds, while also ensuring sufficient cash flows from other sources to cover regular operating expenses.
Please contact the Not-for-Profit Niche team at Gilliam Bell Moser LLP for further guidance.
