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Which Gifts Are Donor Restricted?

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 easy, but it can be so complex!

Evangelical Council for Financial Accountability (ECFA) receives more questions about donor-restricted gifts than on any other topic. This is why Donor-Restricted Gifts has been published by ECFA and why a series of articles is being written to highlight various facets of this topic. This 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 is covered in other articles that can be found at www.efca.org.)
• 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 7.3) 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.

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