Workflow: Year-End Release of Restricted Net Assets

The restricted net asset release is the accounting event that connects the development team’s promise to the finance team’s books. Done well, it demonstrates to auditors and funders that the organization tracked every restricted dollar to the expenditure that justified its release. Done poorly — or not done at all — it produces financial statements that do not reflect how the organization actually operated during the year.

When to run this workflow

Run this workflow at fiscal year-end as part of the close process, and run a lighter version monthly for grants with active reporting requirements. Monthly releases for actively-spending grants keep the restricted fund balances current and make year-end a calculation exercise rather than a three-day reconciliation.

Time-restriction releases should be booked on the date the restriction expires — not at year-end. A gift restricted for use in calendar year 2025 began releasing on January 1, 2025. Booking all time-releases at December 31 is technically incorrect and creates a misrepresentation of when the funds became available.

Common pitfalls

Releasing more than expenditure evidence supports. The most common error in purpose-restricted releases is releasing the full grant balance at year-end without verifying that expenditures equal or exceed the release amount. If $80,000 was received and $65,000 was spent, only $65,000 releases. The remaining $15,000 carries forward as restricted.

Using the entry date instead of the fulfillment date. The release should be dated when the restriction was satisfied, not when the accountant posted the entry. These are often the same, but for purpose restrictions that were fulfilled throughout the year, the release date should reflect the last qualifying expenditure, not the close date.

Conflating restriction release with grant draw. A cash draw from a federal grant system is not the same as releasing the restriction. Cash can be drawn before expenditures are incurred (for advance awards) or after (for cost-reimbursement). The restriction releases based on expenditure evidence, not draw timing.

Leaving expired restrictions on the books. Time restrictions that have lapsed and purpose restrictions whose purposes have been fulfilled should be released promptly. Leaving stale balances in restricted net assets overstates restricted funds and understates unrestricted funds — both misrepresentations.

Audit trail requirements

For each release from restriction, the audit file should include:

• The donor agreement or grant terms documenting the restriction type
• For purpose restrictions: the GL expenditure detail supporting the release amount, with each cost coded to the restricted fund
• For time restrictions: the date specified in the donor agreement and confirmation that date has passed
• The release journal entry dated accurately (at the date of fulfillment, not at close)
• The updated roll-forward schedule tying ending balances to the GL
• The financial statement footnote disclosing the nature and timing of remaining restrictions

Auditors testing restricted net assets will trace the release amount back to expenditure documentation. If the release exceeds the documented qualifying expenditures, it is an audit adjustment.

How GrantPipe automates this

GrantPipe tracks each restricted fund alongside the expenditures coded to it throughout the year. As program costs post to restricted grants, the available release balance updates in real time — so at year-end, the release calculation is already done. The roll-forward schedule and the board reporting package generate from the same live data, eliminating the manual reconciliation that typically consumes two to three days at fiscal close. Start a trial.

DEFINITION

Release from restriction

A reclassification entry moving net assets from the 'with donor restrictions' to the 'without donor restrictions' class when a donor-imposed time or purpose condition is satisfied. Recorded as a simultaneous debit and credit on the Statement of Activities.

DEFINITION

Purpose restriction

A donor-imposed condition limiting a gift's use to a specified program, function, or object of expenditure. Releases when qualifying expenditures in that category have been incurred.

DEFINITION

Time restriction

A donor-imposed condition limiting when a gift may be used — after a specified date, or during a specified period. Releases automatically when the time condition is met, regardless of whether expenditures have been incurred.

DEFINITION

Restricted fund roll-forward

A schedule showing beginning-of-year restricted balances, current-year additions and releases, and end-of-year balances for each restricted fund. Ties to the net assets with donor restrictions total on the balance sheet.