In general, nonprofits can’t use restricted assets for purposes other than those specified by the original donor. Board-designated assets (or board-designated funds) are another matter. These are unrestricted funds that have been reserved by an organization’s leadership for a special purpose or a period of time. Your board can later decide to remove designations. But you should have a board-designated assets policy to help guide you.
Ready when needed
Board-designated assets are subject to self-imposed limits on their use — typically to ensure that funding is available when it’s needed. They can also play a role in fundraising by demonstrating an organization’s commitment to a specific plan or program. They may be designated for a special, one-off purpose or set aside on an as-needed basis for a certain period (for example, covering contingent liabilities that may or may not arise).
In most cases, funds are designated by the board. But in some situations, a board assigns the designation responsibility to the nonprofit’s chief financial officer or another executive with the requisite knowledge and judgment. In these circumstances, delegations should be formally recorded, and your board should regularly review the designations.
Taking the time to properly document board designations can make it easier to comply with financial reporting requirements. Nonprofits that follow U.S. Generally Accepted Accounting Principles must disclose board-designated net assets on their financial statements or in the statement’s notes.
Formal policies and procedures
If your board decides to designate assets, it should adopt formal policies and procedures for managing them. For example, your policy should require the board to establish objectives for designated assets, such as to:
- Provide an internal line of credit to better manage cash flow,
- Fund future programs or projects,
- Maintain operational or liquidity reserves, and
- Fund an endowment.
Your policy should also describe procedures for monitoring designated assets, including stating whether funds will be segregated. Procedures are needed to track expenditures and collect data to comply with reporting requirements.
If your board wants to remove original designations, make sure you hold a formal vote and document your reasons for their removal in your board meeting minutes. Your financial statements should also reflect the change.
A better source?
Why would you remove restrictions from board-designated funds? They could be a better source of funding to fill budget gaps or pay unexpected bills than dipping into an endowment or emergency reserves. If you’re facing an uncertain financial situation and aren’t sure what to do, contact us for advice.
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