Since the advent of Statement of Financial Accounting Standards No. 117 (SFAS 117) back in the mid-1990s, non-profit organizations have been required to segregate their net assets between "unrestricted", "temporarily restricted", and "permanently restricted" balances.
Although a theoretically simple concept, in practice there has often been confusion about when to classify net assets as permanently restricted.
For example, Organization A received a $1,000,000 contribution and initially classified the contribution as permanently restricted. Several years later, Organization A has a new Executive Director (ED) who reviews the entity's finances. She decides that a strong argument can be made that the donor did not intend for the $1,000,000 to be permanently restricted. Rather, the ED believes the contribution should be reclassified and presented as part of temporarily restricted net assets. The donor is now deceased, so short of holding a successful seance, further clarification of the donor's intent is not possible.
The question naturally arises, "So what happens if we make this reclassification? Do the permanently restricted police kick down our door?"
This has always been a tough question to answer. There are state laws governing the stewardship of charitable gifts, but from a pragmatic perspective, it can be difficult for non-accounting (aka "normal people") to see the real impact of making an ostensibly "paper entry" to the entity's financial records.
Schedule D of the revised Form 990 will serve to give more weight to SFAS 117's definition of unrestricted, temporarily restricted, and permanently restricted net assets. Part V of Schedule D now requires organizations to give an overview of its "endowment funds". In Part V, organizations will be required to report: (1) a five year history of revenues and expenses related to the endowment funds, (2) the allocation of the endowment funds by net asset class, and (3) the intended use of the endowment funds.
Thus, an entity will now be officially "on record" with the IRS as to what is being treated as permanently restricted, temporarily restricted, and board-designated (quasi-endowment).
As a result, it will be even more important for non-profits to carefully consider the classification of donations. It's not just a matter of making a "paper entry". Rather, it is part of the public record on file with the IRS. The IRS will likely take a dim view of entities that "shuffle" their net asset classifications from one year to the next.
Doug Boedeker
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