Which Gifts Are Donor Restricted?

Identifying Them Is Challenge #1

by Dan Busby

When a church or other charity receives funds, it is essential that any donor-restricted gifts be identified, properly receipted and segregated in the accounting records, with related documentation retained for accounting and auditing purposes. It sounds so easy, but it can be so complex!

ECFA receives more questions about donor-restricted gifts than on any other topic. This is why Donor-Restricted Gifts has just been published and why a series of articles is being written to highlight various facets of this topic. The first article in this series focuses on the identification of donor-restricted gifts.

Unless a charity properly identifies donor-restricted gifts, the accounting for and the accountability of these funds will not be properly handled.

  • Accounting. A gift that is not donor-restricted may be recorded in the accounting records and in the audited financial statements as unrestricted. However, recording a donor-restricted gift must be consistent with the restrictions as either temporarily or permanently restricted. (There are certain exceptions for reporting donor-restricted gifts as unrestricted activity on the financial statements—this topic will be covered in a later article.)

  • Accountability. A gift that is not donor restricted is subject to general accountability requirements. But accountability is heightened for a donor-restricted gift because the funds must be expended consistent with the donor’s restrictions (ECFA Standard 7.2) and the charity must be prepared to provide a financial report on the restricted project (ECFA Standard 5).

Who can restrict a gift? Only donors have the power to restrict gifts. A recent audit report that came into the ECFA office reflected a subcategory of unrestricted net assets on the statement of financial condition as “board restricted.” This phrase is an oxymoron—boards cannot restrict unrestricted net assets. Boards have the power to designate unrestricted net assets and undesignate them but they lack the power to restrict a gift or unrestricted net assets generated from non-gift sources.

How are gifts restricted? Certain donor-restricted gifts are easy to identify. Here are a couple of examples:

  • A donor’s instructions accompanying an unsolicited gift. A gift that is received by a charity unrelated to a charity’s solicitation and is accompanied by a restriction as to purpose or to time clearly qualifies as a restricted gift.

  • A donor provides a gift for a certain project. If a charity accepts a gift for a specific project (such as a building or certain equipment), the gift must be recorded as a temporarily-restricted gift.

  • A donor specifies that the principal of the gift may never be spent. If the donor specifies that only the earnings from a gift may be expended but the principal, or the corpus, of the gift must be held for perpetuity, the gift must be recorded as a permanently-restricted gift. Difficulty in determining whether a gift is restricted or unrestricted often arises when there is “muddy” communication by the charity and/or the donor. The gift solicitation and the response form may be unclear as to a potential donor restriction. Likewise, the communication from the donor to the charity may lack clarity.

Gifts may be restricted based on the charity’s purpose. The relationship between the charity’s purposes(s) and certain gifts is a fundamental factor in determining whether gifts are restricted or unrestricted (see the example at the bottom of the page). If the purpose of the gift matches the overall purposes of a charity, the gift is generally unrestricted. However, if a gift purpose is more narrow than the overall purposes of a charity, the gift is restricted.

Examples of the impact of a charity’s purpose on gifts include:

  • Example 1. A gift relates to a specific country or region of the world and the charity’s purposes are broader than one country or one region of the world. This gift is temporarily restricted.

  • Example 2. A gift is preferenced to support the work of a particular missionary. The communications between the charity and/or the missionary and the donor clearly represent that the ministry will occur in Zambia, Africa. The charity’s purpose is to provide ministry in many countries around the world. Although the charity has the flexibility to use these funds for the preferenced missionary or another missionary—complying with the principle of discretion and control over preferenced gifts—the gift is temporarily restricted because the donor’s communication implies the gift is restricted for one country of the many countries served by the charity.  


Summary. While there are many other facets of properly handling donor-restricted gifts, which will be covered in later articles, the challenge of identifying whether or not a gift is donor restricted is certainly the starting point.


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