Donors or sponsors of given nonprofit organizations or institutions may specify or put some conditions on how their donations should be used. That is to support given functions or to fund specific projects. A matching example is when a student gets a scholarship to a university where the donors direct their funds directly to the university administration.
Unrestricted expenditure is just the donations received by the nonprofit organization and they can put it to any use. Such funds normally go to the management expenses or any given project which the organization in question chooses.
How Are Restricted Expenditure Designated?
It is a sole responsibility of the donor to mark the donations as either restricted or unrestricted. This process is done by the donor through writing a letter declaring the same or a verbal agreement with the nonprofit organization involved.
In many cases, grants or donations from foundations are marked as restricted and channeled to a particular program or goes to a given project. The restriction, in this case, is done through a documentation which comes with the award.
Most nonprofit organizations prefer unrestricted funds and they state it in writing either by email or letter at the time when they are soliciting for donors. A section is normally set aside to explain this on the donation form as well as on the gift acknowledgment letter. There are also some cases when donors are asked to fund a particular project such as building fund, capital for a campaign, or scholarship funds.
The nonprofit organization which is also the beneficiary of the donations must state clearly when asking for gifts. Some charity organizations have received hostile responses when the donors realized that they spent their funds which was meant for a particular project in an unrestricted way. That has brought misunderstanding and loss of sponsorship.
An intelligent way to avoid such confusion is to offer different options for the donors at the time when they are to give the funds. In that case, the donor will also clearly state that they a donating to a particular project. For example, the American Red Cross provides many options for their donors on their official page. Such options include Disaster Relief and Your Local Red Cross.
A number of solicitations done by mail incorporate a clause indicating that the donor is donating an unrestricted expenditure. As an example, let us examine this extract of a letter by Partners In Health: “YES! It is my belief that every child has a right to grow and healthy life. Here I give my donation to support them and put a stop to untimely death of children from malnutrition.”
What Are the Legal Responsibilities of a Restricted Donation?
The charity farms have various reasons to lay things bare on how they intend to use the funds when they are sourcing them from well-wishers. They are required by law, let alone the moral obligation which comes with it, to appreciate the donors by putting the donations to good uses.
The Types of Restricted Expenditure
Restricted funds fall into two broad categories, as stated in the “gift instrument. That is a compiled document which clearly states how donated funds should be put to use. This famous gift instrument is none other than an award letter usually from a foundation or an individual donor.
The two major categories as outlined below.
Temporary Restricted
Donors may decide to put time-limited restrictions on their funds. Time-restricted simply means that the funds received by the nonprofit should be used to support a given project or program within a specified period of time.
In the event that the specified time elapses, that fund becomes unrestricted or the donor stops giving out the funds if it was not a one-time fund. The same is done when the project is completed before the time elapses. Good examples can be the funds donated for building projects, offering a scholarship to a recipient, or a grant.
Permanent restricted
These funds never expire once given to the nonprofit organizations. This implies that the charity puts the fund in a business and uses the profit or interest earned forever and ever. The permanently restricted fund normally goes to a benefaction financing a given activity or for the general operation of the organization.
The nonprofit is expected to keep the record in its financial statement regarding the usage of the fund, whether the fund is restricted or unrestricted. For detailed information, refer to the Accepted Accounting Principles (GAAP) at the Financial Accounting Standards Board (FASB).
