Being responsible for the financial health of a not-for-profit organization is a challenge when working with limited resources. It gets even more confusing when you're handling donor-restricted grants, which have conditions on how you can (or can't) spend the funds.

Donor-restricted grants can be a great way to fund your organization, but they can also be challenging. In this article, we'll look at the details related to restricted grant usage, how to navigate the complexities, and proactive steps you can take to address them in the future.

What is a Restricted Grant?

With a restricted grant, the donor imposes strict guidelines on how the funds can be spent, and if you don't follow those restrictions, your organization could end up in hot water. Not only can a restricted grant tell you how to spend the donated money, but it can tell you when to spend the money and how you should maintain it.

If a not-for-profit organization doesn't use the restricted funds according to the instructions, the donor can demand the return of their entire donation. The donor can even sue the organization for misuse of the funds. Therefore, your organization must carefully handle restricted grants and track accounting for them meticulously and separately.

It's also important to note that according to new guidance in ASU 2016-14 (Topic 958), Presentation of Financial Statements for Not-For-Profit Entities, the terminology is now "funds with donor restrictions" and "funds without donor restrictions" instead of restricted and unrestricted funds.

Challenges of Restricted Grants

With the conditions held by restricted grants, tracking their progress is no easy feat. Keeping track of all the different reporting requirements can be difficult without adequate staff. In addition, restricted grants often have shorter time frames than general operating funds, meaning there is less time to gather data and prepare reports. Unfortunately, with so many complexities involved, there is less room for error.

Another challenge companies face with restricted grants is that the grants often don't pay for staffing or overhead expenses. Yet, implementing those funds requires using employee hours and other costs. Ironically, sometimes restricted donations cause a not-for-profit organization to spend even more money, especially if the restricted fund is specified to carry out a particular event.

Addressing Restricted Grants

Communication is vital when it comes to maintaining budget and accounting for a restricted grant. Everyone involved with the grant—from CFOs to accountants—must be informed of its details and conditions. This information includes the gift amount, start and stop dates for spending the funds, the specified purpose, unallowable expenses, and reporting requirements.

As you look ahead, you can take steps to overcome the complexities involved with restricted grants.

First, when reviewing your upcoming fundraising and campaigning events, be prepared to ask for your organization's most significant needs. Additionally, update your solicitation materials and communications to reflect those needs.

Also, be transparent with grantors and other donors to help them understand your organization's specific needs and challenges. Ask them if there can be flexibility in how and when their funding may be used.

Accounting for Restricted Grants

Accounting for restricted grants can come with obstacles, but there are some best practices that organizations can follow to alleviate difficulties.

First, it’s important to designate your restricted grant: is it a temporarily restricted grant or a permanently restricted grant? A temporarily restricted grant must be fulfilled either within a defined period or by performing a defined activity. After that, the funds become unrestricted. A permanently restricted grant is restricted for a designated purpose or period that does not expire.

You must track restricted and unrestricted funds separately to help prevent commingling of funds and ensure that all expenses are properly allocated. Second, any expenses incurred should be clearly documented and tied to the relevant grant. This will make it easier to demonstrate compliance if audited.

Finally, it's crucial to have a system in place for monitoring restricted grant funds, such as a software program. This will help ensure that the money is being spent as intended and that the organization is meeting its financial obligations. Plus, when the time limit or purpose of a temporarily restricted fund is met, automation software can remind staff when those funds are able to be transferred to an unrestricted account for other uses.

Don’t hesitate to contact professional accountants to help you navigate restricted grants, especially if your finance team feels in over its head. It can help prevent errors and keep your finances above board.

Next Steps

At CBIZ, we understand the unique challenges that not-for-profits face. Our team of experts has the knowledge and experience to help your organization navigate its accounting needs. For more information or assistance regarding restricted grants or other not-for-profit accounting issues, please contact us.

Published on July 27, 2022