Sometimes donors put restrictions on their donated funds, and in other instances, not-for-profit boards place limits on certain assets. Board-designated net assets can prove critical to the survival of programs, projects — or even your organization itself. Let’s take a closer look.

What they are

The term “board-designated net assets” generally refers to funds that have not been restricted by donors but are subject to self-imposed limits on their use. They are typically intended to ensure that funding is available when needed. Board-designated funds also can play a role in fundraising by demonstrating your 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 specified period of time (for example, covering contingent liabilities that may or may not arise). Unlike net assets with donor restrictions, where only the original donor may remove the restrictions, designated funds can be undesignated at the discretion of your board of directors and therefore are considered to be unrestricted.

In most cases, funds are designated by a board, but, in some organizations, a board assigns this  responsibility to management. Ideally, it is assigned to specific positions (such as chief financial officer) that possess the requisite knowledge and judgment, rather than to specific individuals. In such circumstances, be sure to formally document these delegations. In addition, have your board regularly review actual designations made by management. And, of course, properly document every net asset designation.

When to disclose them

There are benefits to taking the time to properly document board designations. For example, the practice will make it easier to comply with financial reporting requirements in Financial Accounting Standards Board Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. ASU 2016-14 requires not-for-profits that follow U.S. Generally Accepted Accounting Principles to disclose board-designated net assets and their purposes on their financial statements or in the notes to those statements.

Also bear in mind that designating net assets can affect the amounts in your liquidity and the availability disclosure. Designating a large chunk of cash for a capital project, for example, could reduce your liquidity.

How to manage them

Your organization should adopt formal policies and procedures related to managing board-designated net assets. For example, your policy should require your board to establish objectives for designated net assets. That might include providing an internal line of credit to better manage cash flow and allow financial flexibility. Other objectives could be related to funding future programs or projects, maintaining reserves, or funding an endowment.

Be sure your policy clearly delineates authority. Document whether it’s your board or management that can designate and undesignate funds, and under what circumstances exceptions are allowed.

Finally, describe procedures for monitoring designated net assets, including stating whether funds will be segregated. Procedures are necessary to track expenditures and comply with applicable reporting requirements as well.

Take a closer look

Board-designated net assets have their own obligations and responsibilities. If your organization is considering this option, consult with your CPA to help with the details.

For more information, contact Jason Gierhahn at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.  Sign up here to receive our blogs, newsletters and Client Alerts.