When auditing an organization, what we often find is that clients are not tracking their restricted net assets. Or if they are tracking it, it is not correct. Some common errors we find include:
- Board designated amounts are classified as restricted – Board designated amounts, including board designated endowments, should be categorized as unrestricted as they are voluntary. Some incorrectly figure that if management is “restricting” or setting aside funds, then it should be classified as restricted net assets. One thing to keep in mind is that restricted funds can only be restricted by the donor. Management setting aside or designating net assets can be changed and reversed at any time; therefore, they are not really “restricted”. Any un-designations should be noted in board minutes.
- Temporarily restricted amounts are not being released – If an expense is incurred for which both restricted and unrestricted funds are available, restricted funds must be used first. What we sometimes see are clients not releasing funds because they are applying unrestricted funds first to a program or an expense for which there are restricted funds available. This is incorrect. Restricted funds should be used/applied before unrestricted funds.
- Unspent endowment earnings are classified as unrestricted – Typically the earnings on endowment funds are either restricted for a specific purpose or unrestricted (to be used in general operations). Under the Uniform Prudent Management of Institutional Funds Act (UPMIFA) investment earnings on endowments are classified as temporarily restricted until it has been appropriated for expenditure. This applies even to those funds where the donor has not restricted the use of investment earnings. Naturally, most assume that since the donor has not restricted the earnings on the investments, then it should be classified as unrestricted. However, with endowments, we are also bound by UPMIFA laws. Endowment funds are tricky, so I get how errors with accounting for these funds can happen.
Tracking net assets can be confusing. If you ever have questions with tracking net assets or with classifying certain transactions, please reach out to your accounting professional. It is always easier to track these properly from the beginning than to have to reconcile these on the back end.
By Sharlynn Garza, CPA
