Accounting for Restricted Funds in a Non-Profit | Meaden & Moore

Not-for-profit organizations often struggle with properly accounting for donor-restricted funds, especially when gifts are intended for capital assets. A common misconception is that these funds should be recognized as revenue in the same period the cash is spent. However, generally accepted accounting principles (GAAP) require a different approach.

Recognizing Donor-Restricted Contributions

When a non-profit receives a donor-restricted gift, it must recognize the revenue when the contribution is awarded, received, or otherwise confirmed—not when the funds are spent. The treatment depends on whether the funds will be used in the same reporting period:

• Funds spent within the same period – The organization may record them as unrestricted revenue.
• Funds used over multiple periods – The organization records them as temporarily restricted and releases them over time as the donor restriction is met.

Following clear internal policies for recognizing and releasing donor-restricted funds ensures proper financial reporting and compliance.

Accounting for Capital Asset Expenditures

When donor-restricted funds are used to purchase capitalizable assets, the expenditure follows fixed asset accounting rules. Instead of recognizing the full cost upfront, the asset is depreciated over its useful life, often spanning several years.

This creates a potential financial reporting issue:

• In the year of the donation, the organization records a large revenue surplus.
• In subsequent years, depreciation expenses reduce net income, creating the appearance of deficits.

While these accounting principles accurately reflect financial activity, they can cause confusion for donors and stakeholders.

Managing the Impact on Financial Statements

To mitigate the effect of large revenue spikes and future deficits, some non-profits choose to release a portion of restricted revenue each year to match depreciation expenses. This approach:

• Keeps unrestricted net assets stable year over year.
• Reflects the gradual use of the capital asset in financial reporting.
• Ensures transparency in fund allocation.

By structuring financial reports to align with depreciation, non-profits can provide a clearer picture of their financial health.

Communicating with Donors for Greater Transparency

Regardless of the accounting method used, clear communication with donors is essential. Organizations should:

• Explain their accounting policies for restricted funds.
• Provide context in financial reports to clarify how capital gifts are managed.
• Engage with donors regularly to ensure they understand how their contributions are being utilized.

Maintaining transparency in accounting for restricted funds in a non-profit helps build trust, enhances donor relationships, and ensures compliance with financial reporting standards. Meaden & Moore can help your non-profit navigate these complexities. Contact us today to learn more about best practices and compliance strategies.