What Are Unrestricted Net Assets?
Let me tell you directly: unrestricted net assets are donations to nonprofit organizations that come with no strings attached. You can use these assets for general expenses or any legitimate expenditure your organization needs.
Key Takeaways
Understand this: unrestricted net assets are donations that nonprofits can apply to general expenses or any other legitimate purpose. In contrast, temporarily restricted net assets are typically designated by the donor for a specific program or project and must be used within a certain time frame. Permanently restricted net assets are often funds meant to be invested forever, with only the proceeds available for a specified purpose.
Most donations fall into the unrestricted category, but donors can choose to make them temporarily or permanently restricted, setting rules for how the money is used.
Understanding Unrestricted Net Assets
Organizations like yours typically prefer unrestricted net assets because they give you the most flexibility to spend as you see fit—whether that's hiring more staff or expanding services.
A restricted net asset can actually become a burden for the receiving organization. For instance, if your animal rescue group gets a donation restricted to caring for crocodiles but you lack the facilities or expertise, you might end up spending more than the donation amount just to comply with the terms.
Important Note on Watchdog Groups
Keep this in mind: watchdog groups such as Charity Navigator and Give.org assist donors in selecting worthy causes for their assets, whether restricted or not. They provide valuable oversight.
The Incentive of Restricted Gifts
That said, the option to restrict a gift can be a strong motivator for donors. Imagine an animal lover who insists their donation goes only to rescuing cats from kill shelters and not to administrative costs—they get assurance through restrictions.
Temporary or Permanent Gifts
Temporarily restricted assets are usually given for a specific purpose and must be used by a set date, like within a year. Think of a donation to the Red Cross for hurricane relief in Puerto Rico—that's a clear example.
Permanently restricted assets often take the form of a fund that you must maintain indefinitely, using only the investment income for a particular purpose. Scholarship funds commonly work this way. Additionally, donations to museums, such as art or artifacts, frequently include restrictions like bans on selling the items.
Reporting Unrestricted Net Assets
Nonprofit organizations in the U.S. produce a Statement of Financial Position, which is essentially the equivalent of a business's balance sheet. On this statement, you'll list unrestricted net assets alongside temporarily and permanently restricted ones.
IRS Form 990 serves as a template for creating both the Statement of Financial Position and a Statement of Activities, which resembles an income statement.
Monitoring Nonprofit Performance
A legitimate, well-managed nonprofit will share Form 990s, annual reports, and auditor's reports with prospective donors for review.
These documents also get scrutinized by watchdog groups, which rate and review charities. They highlight issues like nonprofits that overspend on salaries or marketing instead of their core missions.
Key Watchdog Groups
- Charity Navigator uses a numbers-based rating system to review more than 9,000 nonprofit groups.
- Give.org, operated by the Better Business Bureau, accredits charities that meet its standards.
- CharityWatch rates charities on an A through F scale and provides financial details on them.
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