Permanently restricted net assets are a portion of a nonprofit organization’s net assets that are subject to donor-imposed restrictions on their use, and these restrictions are permanent in nature. Donors may place restrictions on their contributions to ensure that the funds are used for a specific purpose or program in perpetuity.
For example, a donor may contribute funds to a nonprofit organization for the purpose of establishing an endowment to support a particular scholarship program. The donor may specify that the funds must be invested in perpetuity and that only the investment earnings can be used to support the scholarship program. In this case, the contribution would be classified as permanently restricted net assets.
Nonprofits must carefully manage their permanently restricted net assets to ensure that they are used in compliance with donor requirements. They must also invest these funds prudently to generate a sustainable source of income that can support the intended program or purpose over the long term.
It’s important to note that permanently restricted net assets are not available for general use by the nonprofit organization. Instead, they are set aside and must be used only for their intended purpose or program. Nonprofits must also report on their permanently restricted net assets separately from their other net assets in their financial statements.
Permanently restricted net assets can represent a significant source of funding for nonprofits, but they can also create ongoing administrative burdens and financial reporting requirements. Therefore, nonprofits must carefully consider the potential benefits and challenges of accepting permanently restricted contributions.