Net Asset Release: When and How Nonprofits Release Restricted Funds

The net asset release mechanism is how nonprofit financial statements accurately reflect the progress of grant-funded work. When a grant is received, restricted net assets increase. As money is spent on qualifying program activities, those restrictions are released — moving from the restricted column to the unrestricted column in the Statement of Activities. The balance remaining in restricted net assets at any point in time represents unspent grant funds that must still be used according to their restrictions.

What Triggers a Release

Restrictions are released when one of three triggering conditions is met:

Purpose restriction satisfied. The funds have been spent on the activity specified by the donor or grantor. A grant restricted to “after-school tutoring for middle school students” has its purpose restriction released as qualifying tutoring program costs are incurred. The release tracks expenditure activity — each qualifying dollar spent releases an equivalent dollar from the restricted fund.

Time restriction expired. Some contributions specify a time period rather than a purpose: “these funds are for the 2026 fiscal year.” When the fiscal year begins (or when the specified date arrives), the time restriction is satisfied and the funds are released to the unrestricted class — even if they have not yet been spent. Note: a time restriction release does not change the purpose restriction; if the gift was time-restricted AND purpose-restricted, both conditions must be met.

Both conditions satisfied for combined restrictions. Grants that restrict both timing and purpose are released only when both the grant period is active and qualifying expenditures are made. A grant for “summer youth camp activities in 2026” cannot be released for spending in the summer if the activities were not qualifying summer camp activities.

The Journal Entry

The journal entry for a net asset release appears in two parts in a well-structured nonprofit accounting system:

Part 1 — Recording the release of restriction:

Debit:  Net Assets Released from Restrictions — With Donor Restrictions   $X
Credit: Net Assets Released from Restrictions — Without Donor Restrictions $X

Part 2 — Recording the program expense:

Debit:  Program Expenses (appropriate cost category)    $X
Credit: Cash or Accounts Payable                         $X

Some accounting systems combine these into a single workflow: when you code an expense to a restricted grant code, the system automatically generates the release entry alongside the expense entry. Others require manual journal entries. Either approach is acceptable as long as the accounting records clearly show both the restriction release and the related expenditure.

How It Flows Through the Statement of Activities

The Statement of Activities presents two columns: with-donor-restrictions and without-donor-restrictions. Here is how a $100,000 grant plays out over the grant period:

At grant receipt:

• With-donor-restrictions column: +$100,000 (contribution revenue — restricted)
• Without-donor-restrictions column: no change

As $40,000 in qualifying program expenses are incurred during the year:

• With-donor-restrictions column: -$40,000 (net assets released from restrictions)
• Without-donor-restrictions column: +$40,000 (net assets released from restrictions) and -$40,000 (program expense)
• Net change in without-donor-restrictions: $0 (release in equals expense out)

End of year restricted net asset balance: $60,000 remaining in with-donor-restrictions

The Statement of Activities shows that $40,000 was deployed toward programs this year and $60,000 of grant funds are committed but not yet spent. The remaining $60,000 shows up on the Statement of Financial Position as a with-donor-restrictions net asset balance.

This presentation is accurate and informative — a reader of the financial statements can see exactly what the organization has committed to deliver versus what it has already delivered.

Common Timing Errors

Releasing the full grant amount upon receipt. Recording the entire grant award as unrestricted income when the check arrives is the most damaging timing error. It inflates the organization’s apparent financial health, makes the funds appear available for any use, and creates a compliance exposure when the grant is later audited.

Not releasing restrictions as expenditures are made. The opposite error: leaving grant funds in restricted net assets even after qualifying expenditures have been made. This understates unrestricted net assets and makes the organization appear more financially constrained than it is. It also creates reconciliation problems at year-end when the grant balance in restricted net assets does not match the unspent grant balance in the accounting system.

Releasing based on budget rather than actual expenditures. Some organizations release restricted net assets based on the grant’s budget timeline rather than actual expenditures — releasing $25,000 per quarter of a $100,000 annual grant regardless of what was actually spent. This is incorrect. Releases must be driven by actual qualifying expenditures, not budgeted amounts.

Releasing before grant period begins. A grant covering fiscal year 2026 that is received in November 2025 has a time restriction that is not yet satisfied. The funds should sit in with-donor-restrictions until January 1, 2026 (or the grant’s start date), even if the award has been made.

Documentation for Net Asset Releases

Every net asset release should be traceable to specific documentation:

• The original grant agreement confirming the restriction terms
• Ledger entries for the qualifying expenditures that triggered the release
• Supporting documentation for those expenditures (invoices, payroll records, time sheets)
• A reconciliation of the restricted fund balance before and after the release

For organizations using a grant management system, the system should provide a report showing the total amount of the restriction, total released to date, and remaining restricted balance — updated with each qualifying expenditure. This report becomes the primary documentation for the net asset release activity.

For auditors, the documentation chain is: grant agreement (what is the restriction?) → expenditure records (was money spent on qualifying activities?) → accounting entries (was the restriction release correctly recorded?) → financial statement balances (do the balances reflect all releases made?).

Organizations that maintain this documentation contemporaneously move through the annual audit cycle without issues. Organizations that reconstruct it at year-end typically find discrepancies that require journal entry corrections and explanatory memos.