What Is a Restricted Asset?
A restricted asset is cash or another item of monetary value that is set aside to use for a particular stated purpose, primarily to satisfy regulatory or contractual requirements. Restricted assets, subject to special accounting procedures. They are segregated from other assets to mark clear delineations of their use.
Private sector companies, nonprofit organizations and government bodies all transact with various forms of restricted assets.
Key Takeaways
- Restricted assets are cash or other valuable item set aside for a specific purpose.
- A restricted asset can be collateral for a loan.
- An example of a restricted asset in a municipality would be revenue bond proceeds.
How a Restricted Asset Works
For a company, a restricted asset can take the form of collateral for a loan. The company must maintain the value of the restricted asset to support its borrowings, and if the company wants to sell the asset, it must obtain consent from the lender and replace it with another asset to collateralize the loan. Restricted cash and investments held by securities firms and trading and clearing exchanges for regulatory purposes are common in the finance sector.
Restricted assets are subject to special accounting procedures.
In the nonprofit world, restricted assets are funds that must be used for purposes specified by donors. Restricted assets would fund an endowed chair or department at a university. A donation to a homeless shelter for bathroom renovations would have to be segregated and accounted for separately from the general budget of that nonprofit organization. For the most part, however, donations to nonprofit groups are unrestricted, which means they are free to spend the funds as they see fit.
Government agencies also deal with restricted assets. A port authority of a city, for example, holds restricted assets in the form of lessee deposits. Another example of a restricted asset in a municipality is the proceeds from a revenue bond. The proceeds the city receives from this type of municipal bond must be used for their stated purpose such as improving roads, building a new high school auditorium, upgrading sewers, installing park lights, and so on—just as long as these projects are well defined with parameters regarding time, budget, rules, and personnel.
FAQs
A restricted asset is cash or another item of monetary value that is set aside to use for a particular stated purpose, primarily to satisfy regulatory or contractual requirements. Restricted assets, subject to special accounting procedures. They are segregated from other assets to mark clear delineations of their use.
What are examples of restricted assets? ›
A common type of permanently restricted asset is real estate. For example, an individual or organization may donate a large chunk of real estate to a nonprofit entity, such as a public university, with the restriction that the property only be used to house scientific research labs in perpetuity.
How do restricted funds work? ›
What are restricted funds? Restricted funds are any donations made and earmarked for a specific purpose by the donor. Donors have the legal right to restrict the donations they contribute to organizations (typically nonprofits) and require that their gifts be used only for very limited and specific purposes.
What does it mean when an asset is categorized as restricted? ›
Restricted cash could be set aside for a particular purchase or to repay a loan or debt. Cash that has been deemed restricted cannot be used for other purposes. Restricted cash is classified as either a current asset, which is used up within one year, or a non-current asset, which are long-term assets.
Where do restricted assets go on a balance sheet? ›
Restricted cash and restricted cash equivalents are usually presented separately on the face of the balance sheet, or within other assets or similar line items.
What does restricted asset mean? ›
A restricted asset is cash or another item of monetary value that is set aside to use for a particular stated purpose, primarily to satisfy regulatory or contractual requirements. Restricted assets, subject to special accounting procedures. They are segregated from other assets to mark clear delineations of their use.
What are permanently restricted assets? ›
Permanently Restricted:
Funds given to a perpetual endowment where only the earnings of the funds can be used for scholarships and the corpus of the gift cannot be invaded.
How to spend restricted funds? ›
Restricted funds can only be used for a particular purpose. You can't fundraise for a specific cause and decide to use the money in another way. Examples of restricted funds could include: beneficiary gifts.
Can you withdraw from a restricted account? ›
Restricted accounts
A restricted account is one in which the bank will not allow the money to be withdrawn without a court order. To make a withdrawal, the guardian or conservator must first ask the judge for a court order.
How to record restricted assets? ›
Include your restricted funds under revenue, and specify them as permanently or temporarily restricted. Then, tally everything up — by subtracting your liabilities from your gross assets — to arrive at your net assets.
Restricted Cash on the Balance Sheet
Cash that is restricted for one year or less is categorized under current assets, while cash restricted for more than a year is categorized as a non-current asset.
What is release of restricted assets? ›
The term “net assets released from restrictions” refers to the amount of these restricted funds that have met the donor's restrictions during the financial reporting period.
What are the 3 types of net asset restrictions? ›
These restrictions need to be reflected in the way your organization reports its net assets to remain accountable to the donors who imposed those funding restrictions. Let's look at the three types of nonprofit net assets—unrestricted, permanently restricted, and temporarily restricted—in more detail.
What happens to unused restricted funds? ›
If the money is temporarily restricted, any excess can become unrestricted once the purpose is fulfilled. If the money is permanently restricted, it must be kept intact in the form of an endowment, usually in perpetuity, and only the interest earned by investing the endowment may be spent in service of the purpose.
Are restricted funds assets or liabilities? ›
These funds are included in the total net assets on the balance sheet, but they are not actually available to the organization to use in any way except according to restriction.
Is restricted cash debt? ›
Putting restricted cash to use in your analysis
First, don't mistake it for a debt-like item. Although it's set aside for specific uses, it's not a liability. It is simply cash with a specific purpose and isn't available for general-purpose spending.
What are unrestricted and restricted assets? ›
Unrestricted net assets are donations to nonprofit organizations that can be used for general expenses or any other legitimate purpose of the nonprofit. Temporarily restricted net assets are usually earmarked by the donor for a specific program or project and must be used within a set time period.
What are the three types of restrictions on funds? ›
In the context of government funding and fiscal administration, the three types of restrictions on funds are typically defined as: 1) Purpose Restriction, 2) Time Restriction, and 3) Misappropriation Act Restriction. 1) The Purpose Restriction refers to funds that must be used for a specific, pre-determined purpose.
