TLDR
Net assets with donor restrictions are contributions whose use a donor has limited by purpose, time, or in perpetuity — reported as a single class on the balance sheet under FASB ASU 2016-14, which replaced the old temporarily/permanently restricted categories.
Net assets with donor restrictions are contributions whose use a donor has limited by purpose, time, or in perpetuity. They appear as a single line on the nonprofit balance sheet under FASB ASC 958-210-45, a classification introduced by ASU 2016-14 that replaced the prior “temporarily restricted” and “permanently restricted” categories.
How it works
FASB ASC 958 requires nonprofits to classify their net assets — total assets minus total liabilities — into two classes based on whether donor restrictions exist. Net assets with donor restrictions represent the subset of net assets where the donor has placed conditions on how or when the resources may be used.
Three restriction types exist:
Purpose restrictions limit the gift to a specific program, activity, or geographic area. A grant to fund after-school tutoring can only be charged against tutoring program costs. When qualifying expenditures are made, the restriction is released and the corresponding amount moves to net assets without donor restrictions on the statement of activities.
Time restrictions make funds unavailable until a future period or event. A five-year pledge with $100,000 due each year carries a time restriction on the installments not yet receivable. Multi-year pledges are recognized at present value at the time of the pledge, with the full restricted balance released as each installment becomes due.
Perpetual restrictions require the organization to maintain the principal in perpetuity — the defining characteristic of a true endowment. Only the investment income generated from the endowment corpus is released from restriction, according to the donor’s stated purpose or the organization’s spending policy.
When donor conditions are satisfied, the organization records “net assets released from restrictions” — a line on the statement of activities that decreases the restricted balance and increases the unrestricted balance by the same amount.
When it applies
Net assets with donor restrictions arise whenever a gift carries explicit donor-imposed stipulations. The conditions must come from the donor — not from the board, not from a grant agreement’s reporting requirements, not from internal policy.
A common test: if the organization can legally spend the gift for any operating purpose by board vote alone, it is unrestricted. If only meeting a donor’s stated condition frees the funds, it is restricted.
Conditional contributions — where the donor has reserved the right to cancel the gift if a specific condition is not met — are not recognized as revenue until the condition is substantially met. These differ from restricted contributions, which are recognized when received.
Common misconceptions
Board-designated funds are not donor-restricted. A board that sets aside $200,000 as an operating reserve by resolution has created a designation — not a restriction. That $200,000 lives inside net assets without donor restrictions, not in the restricted class. Boards can rescind designations; donors’ restrictions cannot be unilaterally removed by the organization.
Reporting requirements do not create restrictions. A grant that requires a progress report, an audit, or specific financial documentation does not automatically become restricted merely because it imposes conditions. The restriction must limit how the money is spent, not just what the organization must do to retain it.
The old terminology still circulates. Many board reports, grant agreements, and accounting systems still use “temporarily restricted” and “permanently restricted.” These categories were eliminated by FASB ASU 2016-14 for fiscal years beginning after December 15, 2017. Using the old language in audited financial statements is an error.
Underwater endowments remain in the restricted class. When an endowment fund’s fair value drops below the original gift amount, it is underwater. Under ASU 2016-14, underwater endowments stay in net assets with donor restrictions — the organization discloses the underwater amount separately but does not reclassify the fund.
Related terms
- Net assets without donor restrictions — the complementary class covering resources the organization controls without donor stipulations.
- Restricted contribution — a gift that creates net assets with donor restrictions when received.
- Net assets released from restrictions — the statement of activities line recording the release when donor conditions are met.
- FASB ASC 958 — the accounting standard governing nonprofit financial reporting, including the two-class net asset system.
- Endowment — a fund where perpetual donor restrictions on principal create a permanent component of net assets with donor restrictions.
How GrantPipe handles donor restrictions
GrantPipe tracks every restricted fund balance by donor, restriction type, and expiration against the underlying contribution records. When expenditures are posted to a restricted fund, the system calculates the remaining available balance and confirms the spend is within the donor’s stated purpose. As restrictions are released, the release is documented with the qualifying expenditure — giving Finance Directors a clear audit trail from contribution to release without a separate reconciliation spreadsheet.
Free resource
Get the FASB ASC 958 Quick Reference
A plain-language guide to FASB ASC 958 for nonprofit Finance Directors and Development staff: net asset classification, restricted fund disclosures, contribution recognition rules, and the audit findings auditors flag most often. Delivered by email.
Source: American Institute of CPAs, Not-for-Profit Entities Audit and Accounting Guide
- Purpose restriction
- A donor-imposed stipulation limiting the use of a contribution to a specific program, activity, or geographic area. Released when qualifying expenditures are made.
DEFINITION
- Time restriction
- A donor-imposed stipulation making a contribution unavailable until a future date or event. Includes multi-year pledges where future installments are recognized at present value but not yet receivable.
DEFINITION
- Perpetual restriction
- A donor-imposed stipulation requiring the organization to maintain the principal of a contribution in perpetuity — as in a true endowment. Only income generated by the fund may be released from restriction.
DEFINITION
- Net assets released from restrictions
- The statement of activities line recording the reclassification of net assets with donor restrictions to net assets without donor restrictions when donor conditions are satisfied. Equal in amount to the restrictions satisfied in the period.
DEFINITION
- FASB ASU 2016-14
- The FASB accounting standards update that replaced the three-class net asset system (unrestricted, temporarily restricted, permanently restricted) with a two-class system (with donor restrictions, without donor restrictions). Effective for fiscal years beginning after December 15, 2017.
DEFINITION
Q&A
What are net assets with donor restrictions?
Resources contributed to a nonprofit whose use is limited by donor-imposed stipulations — purpose restrictions (specific programs), time restrictions (future periods), or perpetual restrictions (principal must be maintained intact). Classified separately under FASB ASC 958.
Q&A
How do net assets with donor restrictions differ from board-designated funds?
Board designations are set by the organization's own governing body — not by donors. They remain within net assets without donor restrictions, even if labeled internally as 'restricted.' Only external donor stipulations create net assets with donor restrictions.
Q&A
When are net assets with donor restrictions released?
When the donor-imposed condition is satisfied: for purpose restrictions, when expenditures are made for the specified use; for time restrictions, when the required time period elapses or the specified event occurs; for perpetual restrictions, never for principal (only income is released).
Q&A
What replaced temporarily and permanently restricted net assets?
FASB ASU 2016-14, effective for fiscal years beginning after December 15, 2017, replaced both classes with the single 'net assets with donor restrictions' class. The practical effect is the same — the reporting is consolidated into one line with disclosure.
Q&A
Must a nonprofit disclose the components of net assets with donor restrictions?
Yes. ASC 958-210-50 requires disclosure of the nature and amounts of different types of donor restrictions. The balance sheet shows one aggregate line; footnotes break it down by restriction type and, for endowments, by fund.
Frequently asked