Board-Designated Restriction

A board-designated restriction, more precisely called a board designation, is an action by a nonprofit organization's governing board to earmark part of its unrestricted resources for a particular purpose, such as a building reserve, an operating reserve or a quasi-endowment. The resources remain legally unrestricted: the same board that set them aside can release them for other uses by a later vote.

Under US GAAP for not-for-profit entities, as amended by the Financial Accounting Standards Board's 2016 update that took effect for most organizations in 2018, a nonprofit organization reports two classes of net assets: net assets with donor restrictions and net assets without donor restrictions. Board-designated amounts belong to the second class. They are not donor restrictions and must not be presented as if they were, but their amounts and purposes are disclosed so readers understand that the board intends to use them in a particular way.

Imagine a family that puts $5,000 from its savings into a separate pot labelled "new roof". Nobody else has told them to; they chose to do it, and if the car breaks down, they can decide to spend the roof money on repairs instead. That is a board designation.

A donor restriction is different. It is like a grandparent giving money on the condition that it be spent only on a grandchild's college fees. The family cannot change that condition on its own, because the promise was made to someone else.

• Source of the limit. A board designation is an internal decision; a donor-imposed restriction is a condition set by a donor or grantor outside the organization.
• Reversibility. The board can remove or change its designation at any time. Only the donor, or in some cases a court, can change a donor restriction.
• Net asset class. Board-designated funds are part of net assets without donor restrictions; donor-restricted gifts are part of net assets with donor restrictions until the restriction is met.
• Legal exposure. Spending donor-restricted funds for the wrong purpose can breach the gift agreement and state law. Spending board-designated funds differently requires only a properly documented board decision.

• Operating reserves, held to cover a set number of months of expenses in an emergency.
• Capital or facilities reserves, for future building repairs, equipment or expansion.
• Quasi-endowments, also called funds functioning as endowment, in which the board chooses to invest unrestricted money and spend only a portion of the return, managed like an endowment fund but without a donor's permanent restriction.
• Program initiatives, setting aside money for a new service the board intends to launch.

A board designation does not require a journal entry that moves money between net asset classes, because both the designated and undesignated amounts are without donor restrictions. Many organizations track the designation in a separate equity sub-account or fund within net assets without donor restrictions, and may hold the related cash or investments in separate accounts. The designation itself is recorded in the board minutes, which auditors review, and it does not create restricted cash in the accounting sense. The statement of financial position may show the designated amount on its own line within net assets without donor restrictions, or the notes may disclose the amounts and purposes.

For example, a charity with $2.4 million of net assets without donor restrictions might show $1.6 million as undesignated, $500,000 as a board-designated operating reserve and $300,000 as a board-designated quasi-endowment. If the board later releases $100,000 of the operating reserve for a new program, the designated balance falls to $400,000 and the undesignated balance rises, with no effect on total net assets.

Since the 2016 update, nonprofits must disclose qualitative and quantitative information about the liquidity and availability of their financial assets to meet general expenditures within one year. Board-designated funds are often excluded from the amount described as available, with a note explaining that the board could release them if needed. Readers of the financial statements, and of the IRS Form 990 filed by many 501(c)(3) organizations, therefore need to look past the headline unrestricted figure: an organization may appear to have large unrestricted reserves, but much of it may be committed by the board. The parallel concept in business corporations is appropriated retained earnings, where a board earmarks retained earnings without changing total equity.

• Financial Accounting Standards Board
• IRS: Charities and Nonprofits