Temporarily restricted net assets are a portion of a nonprofit organization’s net assets that are subject to donor-imposed restrictions on their use, but only for a certain period of time or until a specific event occurs. Donors may place restrictions on their contributions to ensure that the funds are used for a particular purpose, program, or project that aligns with their philanthropic goals.
For example, a donor may contribute funds to a nonprofit organization for the purpose of building a new community center. The donor may specify that the funds can only be used for construction expenses and that they must be spent within two years. In this case, the contribution would be classified as temporarily restricted net assets until the construction project is completed or the time limit specified by the donor has expired.
Nonprofits must carefully track and report on their temporarily restricted net assets to ensure that they are used for their intended purpose and in compliance with donor requirements. They must also track the passage of time or the occurrence of specific events that will release the restrictions on the net assets.
Once the donor-imposed restrictions are satisfied, temporarily restricted net assets are reclassified as unrestricted net assets and can be used for any lawful purpose that is consistent with the nonprofit’s mission. It’s important to note that temporarily restricted net assets can represent a significant source of funding for nonprofits, but they can also create additional administrative burdens and financial reporting requirements.