Using Your System to Track Restricted Net Assets

In our experience, most of our clients use elaborate spreadsheets to track their restricted revenues and releases from restriction, and subsequently record these in their general ledger, typically with a year-end allocation of net assets that may or may not pass the auditor’s test.

The great news is that there is a way to have your system do this work for you if two basic requirements are met– 1) proper system set-up, and 2) proper accounting of restricted revenues and releases.

System Setup

The first step is to use a modern dimensional general ledger system to create the proper reporting structure, so that your restrictions can be on a separate dimension from your grants and your general ledger (GL) accounts. That’s right, the restriction is not solely defined by the grant or the GL account.  Here’s why – while grant revenues may be donor restricted, the expenditures associated with those grants are not. Expenses are always unrestricted according to generally accepted accounting principles (GAAP). Using separate dimensions for your grants and related restrictions allows you to tag revenue transactions against that grant as restricted and the expenses against the same grant as unrestricted. By keeping your restrictions on a separate dimension from your GL accounts, it also allows you to maintain a streamlined ledger to account for your revenue, accounts receivable, and net asset accounts, instead of having to expand each by every type of restriction. Believe it or not, this also simplifies and streamlines reporting, as well.

Another system tip would be to require the use of the restriction dimension on all income statement transactions.  This will result in your change in net assets always being impacted as either restricted or unrestricted, allowing you to track net assets by restriction. If you can default all expenses as unrestricted, for one less data entry step and further control, even better!

Accounting Process

As you transact, you will want to make sure that any restricted revenues are being tagged as such at the point of recognition. Periodically, ideally monthly, you would create releases of these restrictions for those grants that have been expended against. Using a single Release from Restriction revenue account, this can be a simple reclass across that general ledger account and the grant dimension – a debit to restricted and a credit to unrestricted – effectively “moving” the revenues from restricted to unrestricted for that grant.

If your system offers a dynamic allocation capability, grants could be queried monthly for associated expenses, and the journal entry to release the restrictions can be automatically generated, further reducing any manual intervention.

Financial Reporting

The end result is that, as you transact, the restricted revenues will increase restricted net assets, and the revenue releases will decrease restricted net assets. This set up and process will allow your system to track and produce the following reports:

• Statement of Activities by Restriction
• Statement of Financial Position with Net Assets by Restriction
• Net Asset Roll Forward

If you need assistance with chart of accounts set up and/or design of transaction process, reach out to us. We’re here to help!