Restricted and Unrestricted

Money that arrives with conditions attached is not the same thing as money that arrives without them, and treating the two as interchangeable is one of the more reliable ways to create a governance crisis. The distinction between restricted and unrestricted funds sits at the centre of nonprofit accounting, reporting and decision-making — and understanding it means understanding that a restriction is not a preference but a legal obligation.

Under generally accepted accounting principles as applied to nonprofits — governed by Financial Accounting Standards Board Accounting Standards Codification Topic 958, the framework that replaced the older SFAS 116 and 117 — net assets are classified in two buckets: those with donor restrictions and those without. The old three-way split (unrestricted, temporarily restricted, permanently restricted) was simplified to this two-category model when ASC 958 was updated in 2016 and the changes took effect for most organisations in 2018. The language on Form 990, Part X, now reflects the newer terminology, while filings from earlier years use the older, so staff working across multiple fiscal years need to hold both framings in mind.

Unrestricted net assets are exactly what they sound like: funds the board can direct to any purpose consistent with the organisation's exempt mission. General operating support, earned revenue, unrestricted donations — all of this sits in one pool and the board governs it through the budget. This is the most flexible money a nonprofit holds, and it is frequently the scarcest. Major funders have historically preferred to attach conditions, which means organisations with large grant portfolios can be simultaneously cash-rich and operationally constrained.

The mechanics of restriction

A restriction comes from the donor, not from the organisation. A board can designate unrestricted funds for a specific purpose — a capital reserve, a programme initiative — but that designation is revocable at the board's pleasure. It is a governance decision, not a legal obligation, and it should appear on internal financial statements as board-designated rather than donor-restricted. Conflating the two distorts the balance sheet and misleads anyone reading the financials.

Donor restrictions fall into two types. A purpose restriction specifies how the money is to be spent: a grant to fund after-school tutoring, a gift to conserve a particular collection, an endowment contribution to support a named chair. A time restriction says when the money becomes available: a pledge payable over three years, a gift available only after a matching condition is met. Many gifts carry both. Until the restriction is satisfied — the programme is carried out, the time elapses, the condition is met — the funds sit on the restricted side of the ledger, unavailable for other uses however pressing. When the restriction is satisfied, the funds are released to unrestricted net assets through a line called "net assets released from restrictions," and that release is what lets the organisation recognise the revenue as available.

A permanent restriction never releases. The endowment is the paradigm case: a donor gives a sum with the instruction that the principal be invested in perpetuity and only the income be spent, often for a stated purpose. The principal stays restricted forever. Many state laws codify exactly this obligation — the Uniform Prudent Management of Institutional Funds Act, adopted in some form in nearly every state, governs how organisations may invest and spend permanently restricted endowment funds, and it provides a mechanism called modification to allow a court or the attorney general to adjust restrictions that have become impractical or wasteful.

The practical burden of restriction is administrative. Every restricted grant requires its own accounting, its own reporting to the funder, its own documentation that expenditures were made for the restricted purpose. A large organisation with dozens of active grants may be tracking dozens of sub-accounts, each with its own balance, its own allowable expense categories, its own period of performance. Functional expense allocation — the split between programme, management and fundraising — intersects with this: costs charged to a restricted grant must actually relate to the restricted purpose, and an auditor will look at whether allocations are defensible.

What the return reveals

Form 990 Part X is the statement of financial position, and it reports net assets with donor restrictions and net assets without donor restrictions as line items. Part XI reconciles the change in net assets. Neither part, by itself, tells you the composition of the restricted column — whether it is a pile of purpose-restricted programme grants, a large permanent endowment, a collection of pledges, or all three. For that, a reader goes to the notes to the financial statements attached to an audited return, or to Schedule O, where organisations sometimes narrate their net asset structure.

Candid — the organisation formed by the merger of GuideStar and Foundation Center — aggregates 990 data and makes the net asset lines searchable across the sector, which means a funder, a watchdog or a competing organisation can see at a glance how restricted or unrestricted a given organisation's balance sheet is. An organisation sitting on a large restricted surplus while running an unrestricted deficit is sending a specific signal: it has won grants it can deploy only narrowly while its general operations are under stress. That pattern is common enough to have a name in practice, even if not in statute.

The public support test intersects here too. Contributions that are restricted to a specific individual or earmarked for a purpose controlled by the donor may be excluded from the support calculation, which affects whether an organisation qualifies as a public charity rather than a private foundation. The IRS rules on what counts as public support are detailed, and restricted gifts that look like broad public support may not be treated that way on Schedule A.

For organisations that receive government grants, the restriction framework overlaps with federal grant compliance rules under the Uniform Guidance (2 C.F.R. Part 200), which imposes its own cost principles, allowability standards and documentation requirements on top of whatever the donor restriction says. The National Council of Nonprofits has published plain-language guidance on how these layers interact, and the FASB's own summary of ASC 958 ↗ remains useful background on where the accounting framework originated.

The core discipline is simple enough to state, even if it is demanding to execute: restricted money is not yours to spend freely, and treating it as if it were creates liability to the donor, potential regulatory exposure — especially if state charitable solicitation rules are implicated — and the kind of balance sheet that tells sophisticated readers the organisation is in trouble before management has admitted it. The two columns on the net asset statement are not accounting convention. They are a map of who controls what.