What is a Restricted Grant and How to Handle It? – A Nonprofit Guide

The restricted grants in Nonprofits are the reserved funds designated by donors to be utilized only for specific purposes. The purpose and the time to use the funds are determined by the donor, giving them assurance their gifted money is being used as they wish. If you donate money to a Nonprofit today and want that money to be used for a particular event next year, the organization records your donation as a restricted fund in their books.

If the Nonprofit fails to use the restricted funds as per the donor’s desire, the donor can demand the return of their entire donation. The Nonprofit organization is legally entitled to return the donation. The donor can also legally sue the organization for misappropriated use of restricted funds, putting the organization into much trouble. Hence, Nonprofits handle restricted grants very delicately and account for them separately in their books.

Also, there are two types of restricted funds: Temporarily restricted funds, and permanently restricted funds.

Temporarily Restricted

Temporarily restricted funds are restricted for a particular period of time and can be used for donor desired purposes within the period. Like, a fund designated to use for a specific event is restricted until the event is finished. After that, the fund becomes unrestricted. The donor can also choose to restrict the donation and assign it to another desired cause once his gifted money becomes unrestricted. Once the fund becomes unrestricted, the organization can use it for any of their needs.

 Permanently Restricted

Permanently restricted fund is forever restricted, and only the interest or investment returns from the fund can be used to support the donor’s desired cause. The permanently restricted funds are usually a huge sum of money or real estate assets donated to the Nonprofit organization, which can only be used as per the donor’s desire and cannot be resold for capital gains.

Accounting for Restricted Grants

Designation

Every fund that enters a Nonprofit organization’s accounting books must be determined either if it is a restricted or unrestricted fund. The donor has the complete authority to decide how they want their donations to be used. Nonprofit organizations usually offer the choice to their donors while receiving donations. However, Nonprofit organizations mostly request unrestricted grants to have the freedom to utilize the donation for the most needed purposes of the organization. The donor also receives an acknowledgment of what type of donation is received.

Tracking

According to the FASB guidelines, all donor donations towards the Nonprofit organization should be classified as either unrestricted, temporarily, or permanently restricted funds. The funds are also grouped and recorded separately in the accounting books, making tracking and managing funds easy. When the timeline of any restricted fund is expired or the purpose is fulfilled, the funds can be moved to the unrestricted grants account and utilized and accounted for other organizations’ other needs.

Accounting and Budgeting

Fund accounting solutions like Denali Fund allow Nonprofit organizations to track and maintain the three funds separately in different ledgers and generate individual and consolidated reports, making the auditing process easy.  This also enables the organization to know his usable or unrestricted cash in hand and budget accordingly. If not tracked separately, there are chances the restricted funds are utilized for purposes which do not comply with the donor’s desires.

Automated control

Modern AI-based fund accounting software allows the Nonprofit organization to set up and automated control over the available funds. When the time-period or the purpose of any restricted fund completes, the organization is reminded that the funds can be transferred to unrestricted accounts and utilized elsewhere. Employing accounting staff who knows to handle Nonprofits funds is critical as if any mistakes are made, the organization might have to face legal problems.