Net Assets Released From Restrictions
“Net assets released from restrictions” is a term commonly found in the financial statements of nonprofit organizations. Nonprofits often receive contributions from donors that are restricted for specific purposes, certain time periods, or both. These are known as “restricted funds”.
The term “net assets released from restrictions” refers to the amount of these restricted funds that have met the donor’s restrictions during the financial reporting period. When the conditions of the restrictions are satisfied (e.g., the funds have been used for the purpose designated by the donor, or the specified time period has passed), these assets are reclassified from “restricted net assets” to “unrestricted net assets.
This reclassification is recognized in the nonprofit’s statement of activities (similar to an income statement in for-profit organizations) as “net assets released from restrictions. It shows a reduction in restricted net assets and an increase in unrestricted net assets.
This process does not involve any actual cash flow. It’s an accounting process that reflects the nonprofit’s fulfillment of the donor-imposed restrictions. It helps present a clearer picture of an organization’s resources that are available for its general activities.
Example of Net Assets Released From Restrictions
Let’s say a nonprofit organization, Charity ABC, receives a donation of $50,000 from a donor at the beginning of the year. The donor specifies that this donation must be used for building a new community center, so the $50,000 is classified as “restricted net assets” in the nonprofit’s balance sheet.
Over the course of the year, Charity ABC spends $30,000 on construction costs for the new community center. Because this spending aligns with the donor’s stipulation, these funds have now fulfilled their purpose restriction.
As a result, the nonprofit will reclassify this $30,000 as “net assets released from restrictions”. This will be reflected in the statement of activities, showing a decrease in restricted net assets and an increase in unrestricted net assets by $30,000.
After this reclassification, Charity ABC will have $20,000 remaining in restricted net assets (the original $50,000 donation less the $30,000 now released from restrictions) that should still be used in accordance with the donor’s original stipulation – continuing the construction of the community center.