Permanently Restricted Net Assets

DEFINITION:

Permanently restricted net assets are donations that must be kept intact forever, typically as endowments, with only their income available for use as specified by the donor.

Permanently restricted net assets refer to funds provided to a nonprofit organization that must be maintained indefinitely, according to donor-imposed stipulations. These restrictions typically require the principal amount to remain intact, while any income generated from these assets may be used for purposes specified by the donor. Common examples include endowment funds or gifts that must be held in perpetuity. The organization is responsible for adhering to the donor’s wishes, and these funds are reported separately in the financial statements. Proper tracking ensures that the nonprofit honors its obligations and maintains donor trust, as violating restrictions may have legal and reputational consequences.

Key Takeaways

Must be maintained intact per donor instructions
Commonly associated with endowments
Income may be used if allowed by donor
Reported separately in financial statements
Helps build long-term financial stability

Why It Matters

Real World Example

A university receives a $1 million endowment from an alumnus, who stipulates that the principal must remain untouched permanently. The university invests the funds, and each year, uses the earned interest to provide scholarships to students in financial need, as specified by the donor. The $1 million remains recorded as permanently restricted net assets on the university’s balance sheet, while only the investment returns are used for the scholarships. This approach honors the donor’s intent and provides ongoing support for students year after year.

How Aplos Helps

Aplos Fund Accounting software allows organizations to easily track permanently restricted net assets, ensuring compliance with donor intentions. Users can create separate funds and generate reports that clearly distinguish permanently restricted amounts from other asset categories, streamlining audit preparation and organizational transparency.

Frequently Asked Questions

What are permanently restricted net assets?

These are donations that must be kept intact forever, usually as endowments, with only their income used for donor-specified purposes.

How are permanently restricted net assets reported?

They are reported separately from other assets in a nonprofit’s financial statements to ensure clarity and compliance.

What is an example of a permanently restricted net asset?

An endowment gift where only the investment earnings can be spent, but the principal must stay intact, is a common example.

How does Aplos help track these assets?

Aplos lets users set up dedicated funds and track restrictions, making it easier to manage compliance and reporting for permanently restricted assets.