What it means
A donor may give money for school books, equipment or a programme next year. The nonprofit holds the gift but cannot treat it as unrestricted for unrelated work.
When it spends eligible funds for the specified purpose or the time condition is satisfied, it records and reports that the restriction has been met under its policy. Read the original grant or gift evidence, identifying the purpose, timing, permitted costs, reporting duty and any right to reclaim unused money.
A funder requirement that is a condition precedent or refund obligation may require different accounting from a donor restriction, so do not apply one label to every limited gift. Link spending to evidence, since approved purchase orders alone may be commitments, not completed eligible costs, and an invoice for staff time may require allocation records.
A restricted project can also have both time and purpose conditions, so one completed activity may not release the full amount. Maintain a schedule from opening restricted amount through new gifts, eligible use, reclassifications and closing balance, and review it with programme owners.
If money is held in the same bank account as unrestricted funds, the restriction still matters, because separate banking is not the only way to preserve the trail. If plans change, ask the donor or competent authority for a documented amendment where permitted, and do not release a restriction internally because a different need seems more urgent.
For a particular charity's statements, apply its reporting framework and obtain accounting advice where needed. For managers, release means the promise has been satisfied in substance and supported by records, and it is not a device for moving a restricted balance into a favourable profit figure at month-end.
Some reporting systems distinguish restricted net assets from unrestricted resources, so a release should be tied to the actual donor condition, not inferred from a bank transfer between accounts. Keep the award letter and expenditure evidence linked to the entry.
In practice
Real-world examples.
Example
A donor gives $50,000 for textbooks; a charity documents $30,000 of eligible book purchases and assesses release for that part under its reporting policy. The remaining $20,000 stays restricted until further eligible purchases are evidenced.
Example
A gift is for use after 1 January. Staff do not treat it as freely usable in December simply because the cash is in the bank.
Example
A grant agreement requires a deliverable and allows refund if it is not met; finance checks whether it is an accounting condition rather than assuming a simple restriction release.
Formula
Calculation
Management restricted balance after eligible use = Opening restricted balance + New restricted gifts - Amount satisfying documented restrictions - Required returns.
Worked example. A fictional charity starts with $40,000 restricted for equipment. It receives $20,000 more, completes $35,000 of eligible purchases and returns $5,000 under the agreement. Closing management balance = $40,000 + $20,000 - $35,000 - $5,000 = $20,000. Of the $60,000 held in total, the $35,000 of eligible use is 35,000 / 60,000 = about 58% of the restricted funds, so roughly 42% of the money received remains restricted or has been returned.
Whether and how the $35,000 appears as a release in financial statements depends on the applicable accounting framework and the gift's terms.Case study
Seen in the real world.
This illustrative and entirely fictional example follows Harbour Learning, an invented education charity. A donor paid for a new computer room. The project team ordered equipment in March and finance marked the full grant as released, though half the order was cancelled and the room was not yet ready. A review compared the donor agreement with actual eligible invoices and delivery evidence.
Finance corrected its management schedule and consulted its adviser on the financial-statement treatment. The charity reported progress to the donor and kept the unused amount restricted pending completion or written change. Later purchases met the remaining purpose. The organisation documented the release rather than treating an intention to spend as completed use.
Watch out
Common mistakes.
- Releasing the full gift when only part of the purpose or time requirement has been met.
- Treating a purchase order or planned budget as proof of eligible spending without completed evidence.
- Assuming every grant condition is the same as a donor-imposed restriction under the chosen accounting standard.
Questions
People also ask.
Must the cash be in a separate bank account?
Not always. The gift agreement or law may require it, but a reliable fund-level schedule is still necessary.
Can management change the restricted purpose?
Not on its own. Use a permitted donor or legal amendment process and document the result.
Is restriction release a cash receipt?
No. It reflects satisfaction of a condition or purpose in the fund records; the cash may have arrived earlier.
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