Tag Archives: Restrictions

What Restricted Means

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 questions leave them in the comments section below.

More Questions and Answers

Questions and AnswersHere are some more nonprofit accounting and financial questions that have come to from this site and from my workshops and my answers.

Question – Should the donor know?

I am curious to know if FASB 116 or FASB 117 prohibit the use of endowment as collateral against a line of credit without donor’s acknowledgment or knowledge of this action.

Answer – I do not believe that either of those prohibit the use of endowment funds as collateral. But unless the donor has told you it is OK to use the funds in that fashion I would be very wary of doing so without the donor’s consent. It has happened before that nonprofits have used the funds as collateral and then lost those funds. You could be in for some hard times if that happens.

Question – SAS 112 issues

For the past two years, our auditor firm has noted material weakness in the management letter due to the fact that there are adjustments made to deferred membership revenue, interest revenue, depreciation, etc. We were told that this could impact us getting grant monies and these “weaknesses” need to be corrected.

It was my understanding that an audit was to make necessary adjustments so that the books balance and reflect the current financial state. We were told by our auditing team this year that there are not allowed to make adjustments to our books and that is why there are material weaknesses. This has never been an issue before last year nor was it an issue with other auditing firms. Any guidance?

Answer – Those SAS rules for risk assessment kicked in at the end of 2006. As these weaknesses are listed in the Management Letter and become a part of the audit, a funder who asks for a copy of the audit might question what those weaknesses are. The SAS rules change what auditors are allowed to do. Making changes to your books may infringe on their independence, which under the new rules is a pretty big issue.

The purpose of an audit is to verify the quality and soundness of your organization’s financial reporting. The errors they find are now up to you to fix. If they can give you some direction on how to fix them and then how to do the entries correctly going forward you should not have anymore problems.  Otherwise, if the auditors keep finding the same mistakes the language gets more severe.

Question – Remote Employees

Do you know of any best Practices with regards to remote employees or employees who work from home?

Answer – Here are two articles that may be of help:

More questions answered in the next post!

Financial Management

MFMP-logoI have written before about creating policies for your nonprofit. Now nonprofits have a new tool they can easily use to create their own financial management policies and plans. The Nonprofit Risk Management Center has a new tool called My Financial Management Plan where users can go through up to 21 different modules on nonprofit financial and accounting topics to create a variety of policies and procedures to help manage, organize and streamline their financial operations. From the Risk Management Center:

Nonprofit leaders have spent countless hours developing the necessary components of a financial management plan. But for many organizations the components, from an annual budget, return on investment strategy, cash flow planning tool and more, remain disparate. The nonprofit lacks a cohesive plan that reflects the organization’s commitment to the effective stewardship of its assets. My Financial Management Plan was created to guide leaders in updating the components of their financial management systems and integrating these components into a cohesive plan. This powerful system features covers topics such as Board Fiduciary Obligations, Managing Fraud Risk, Managing Cash Flow, Return on Investment Analysis, Cost Allocation, Classifying Net Assets, Managing Cash Flow, Budgeting, the form 990 and Grants and Contributions.

My Financial Management Plan is a powerful tool to turn financial management strategies, policies and protocols into a plan that will help your nonprofit demonstrate both competence and accountability. Use the “Plan Modules” feature to go through the 22 system modules. Each module offers the opportunity to upload existing material from your financial management system, create new content (based on our templates or created “on the fly”), or skip sections you don’t wish to use. Use the “Manage My Plan” feature to edit your draft plan, upload supporting PDF files and view/download your plan. The system also features a classroom with easy-to-understand articles and resources on a wide range of financial management topics.

I was fortunate enough to work on this project and create a lot of the module content. I know that this will be a great tool for nonprofits to learn about what they need know about with regards to their nonprofit’s finances and creating the appropriate policies and procedures to ensure good financial stewardship. For those not ready to buy access to the program you can register with the site to receive periodic email updates on nonprofit financial issues.

If you have any questions or comments about the program please let me know via email or in the comments below.