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Classifying Net Assets

What do you do when you receive a contribution earmarked for a specific purpose?  How does the church keep track of it?

Prior to 1993, non-profit organizations developed their own systems for tracking restricted funds.  Since churches were exempt from most external reporting requirements, they developed their systems mostly on their own.

This changed in 1993 when the Financial Accounting Standards Board issued their Statement No. 116 (known as FASB116), which standardized non-profit financial reporting.  First, they consolidated various kinds of funds (operating, restricted, capital, endowment, etc.) and named only three types of funds.  Contributions may be:

  • Unrestricted — funds may be used for any purpose within the mission of the organization.
  • Donor-Restricted — the use of the funds is restricted by the donor at the time that the donation is made, and may be either:
    • Temporarily Restricted — the donor’s funds may all be spent, but only for a specific purpose or at a specific time.
    • Permanently Restricted — the donor stipulates that the funds must be invested in perpetuity, with the income used for either unrestricted or temporarily restricted purposes.

Contributions may be restricted either by purpose (contribution for the Organ Fund) or by time (a contribution for next year).

Note that a church board may not restrict funds — only donors can do so.  If a Board sets aside unrestricted funds for a specific purpose, they can be listed as “Board Designated Funds” — a subfund of the Unrestricted Fund.  The Board can also vote to remove the designation.