When do restricted funds get released?

Why it matters

Restricted funds remain set aside in your financial statements until the donor's conditions have been met. If releases are recorded too early, too late, or not at all, the board may get a misleading picture of how much money is available for general use. Reserve calculations can be affected, too. Those errors may not be corrected until the year-end audit—after decisions have already been made using the monthly reports.

A common mistake is to release restricted funds when a bill is paid instead of when the expense is incurred. The accounting standard says a restriction is fulfilled "to the extent of the expense incurred". Payment timing doesn't enter into it.

How to work it out

1. Maintain a single schedule of restricted gifts and grants. Record the funder, amount, purpose or time restriction, and remaining unspent balance for each gift or grant.
2. Code expenses to the restriction they serve. Code staff time, supplies, and other eligible costs to the program or grant they support when you record the expenses.
3. Each month, release what was incurred. Total the qualifying expenses for the month, including expenses you've incurred even if the bills haven't been paid yet. Release that amount, up to the remaining restricted balance.
4. Release time restrictions on schedule. For example, a gift designated for next year's operations remains restricted until that period begins.
5. Reconcile the schedule to the balance sheet. Each month, the total unspent restricted balance on your schedule should reconcile to the restricted net assets reported on the balance sheet.

Consider this example: In January, a foundation gives $120,000 for a youth mentoring program. In March, the program incurs $14,000 in staff costs. It also receives a $3,000 invoice for program supplies on March 28, which is paid on April 10.

The $3,000 supply expense belongs in March, when it was incurred—not April, when the invoice was paid.

Two cases that need extra care

Multi-year grants. An unconditional $300,000 grant paid over three years is generally recognized in full when awarded, with discounting when payments are due more than a year later. Amounts tied to future periods remain time-restricted until those periods begin. As a result, the financial statements may show a strong year even when some of that funding isn't yet available to spend.

Reimbursement grants. Many government grants reimburse an organization only after it has incurred costs and submitted a claim. If an agreement includes a barrier you must meet and a right of return, the grant is treated as conditional. Revenue is recognized as the organization meets the condition, often by incurring allowable costs. Your auditor can help confirm how each agreement should be classified.