Restricted expenditures are common among non-profit organizations. The money donated is to solve a specific program or was contributed to be used after a particular time or event like an anniversary. It's the money assigned for specific projects as agreed by the organization and the donor. The donor insisted that the organization should use the donated money for what was agreed upon.
The money sent by a donor to a non-profit organization is categorized as restricted or unrestricted. The latter allows the organization to use the funds as they please, but if the expenditures are restricted, the party must spend the money according to the assigned purpose. But permanent restriction makes the donor the principal holder and only awards interest to charity. They also decide the steps in which the interest is spent. The donor can sue or demand a refund if the charity does not use the money according to an agreement. Restricted expenses include but are not limited to;
The overall expenses of the fund
The Advisor's fees, the administrator's fee, if any, the dividend-paying agent's, and the custodian fees, if any.
The registration fees, cost, and expenses to make the fund eligible for offer and sale under the juridical law, where the shares are categorized from time to time.
Restricted expenditures exclude but are not limited to;
Registration and filing fees, the fees and expenses used outside the counsel
Independent accountant's fees and expenses
The fees and expenses charged by the director and reimbursed by the fund
If any, distribution fees and costs are paid under Rule 12b-1 under the 1940 Act.
The gift instrument defines the type of donation made to the organization. A gift instrument is how the fund will be spent as written or instructed by the donor or foundation. There are two types of restricted expenditure:
Temporarily Restricted
A temporarily restricted fund is assigned for a specific reason within a particular time duration. The money is considered unrestricted to end after the funds are disbursed as agreed or the duration has passed. For instance, a scholarship donation is stopped when the student graduates from the institution. Or, if the funds were meant for construction, the expenditure is stopped when the construction is completed.
Permanently Restricted
A permanently restricted fund allows the organization to invest the money and use the interest to fulfill the donor's desire. The donated money is saved in an endowment account that holds money for such projects or the non-profit organization. The charitable organization can utilize only the interest and ROI for a specific purpose. However, permanently restricted expenditure is not bounded by time.
All funds are categorized as either restricted or unrestricted. The rule holds dear to current funds but also affects the fund groups.
From the Audit Guide Statement of Position (SOP):
Current expenditures are classified as restricted and unrestricted. Restricted current funds are donated but guided for specific purposes, programs, or schools as said by the donor or external organizations. Unrestricted funds are contributed by the donor or external organizations with no particular rules on how the spending should be disbursed.
The funds are maintained under different accounts to make an accurate stewardship report to the donor or external organizations. The difference is explained to governmental boards and other financial supporters on the available types of resources under the Current fund group assigned to fill the institute's demands or objectives. Sometimes, the expenditure is placed in separate accounts for auxiliary enterprises, independent operations, and hospitals. These expenditures are deposited in the Unrestricted Current Funds, the Restricted Current Funds subgroups, or both.
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