Permanently Restricted Net Assets

Assets are the resource that the company owns and can generate future economic benefits. These assets are recorded on the company balance sheet which represents the accounting equation. They have included both current assets and non-current assets.

Assets can help the company to generate future sale or cash flow, decrease expenses, or other benefits.

Net assets represent the company funds which are the assets less total liabilities. It is the company assets that are left over after paying off the liability. It is also equal to the company equity component.

Net Assets for NGO

The assets held by the NGO may be restricted differently depending on the source of fund or the donor requirement.

  • Unrestricted Assets: Most of the assets that an entity receives are mostly from the donor donation. It is the assets that donors donate to the entity without a specific purpose. They call it the general donation which has no real purpose. It is usually used to support the basic expense of the entity such as rental, utilities, salary for office staff, and other overhead costs.
  • Temporarily Restricted assets: are the assets that the entity received from a donor who specifically provides the fund to support the exact project. The entity usually conducts several projects with a specific purpose, so these assets are donated to support such kind of project. The donor cannot use assets for other purposes or projects. The donor has stated the purpose of the fund in the agreement with the entity. The management has to keep a proper record of the fund usage so that the auditor can review it to prevent any misuse of funds.
  • Permanently Restricted assets: are the fund of the non-profit entity that the donor has imposed the restriction forever. The entity can only use the interest or income from the fund in a designed way. They are not able to touch the principle. By doing so, the fund will generate interest for the entity forever.

Restrict Assets

Restrict Assets refer to the cash or other assets that are reserved for a specific purpose project. For the normal company, the restricted assets are mainly kept to comply with the law and regulation or any contractual requirement. The bank must keep a certain fund to comply with the central bank of each company. They will not allow using the fund under normal circumstances

For the nonprofit entity, restricted assets refer to funds or assets received from the donor who allows use for a specific project. So the entity cannot use the fund to support other activities besides that. For example, the donor donates $ 50,000 to support the project which helps to develop the education of a village in Africa. The entity can only use this money for this purpose. They cannot use this money to support other activities such as climate change, food, or other projects even if they are under the same entity.

Permanence Restricted Assets

These are the assets that have the strongest restrictions on usage. The donors have provided the fund to the entity but it attaches with a strong restriction.

It happens when the donor contributes a large amount of fund which enable them to have a strong influence over the entity. The amount of cash donate has a strong influence on the entity’s future. The entity needs this huge fund, so they are willing to follow the requirement of the donor.

The donor put the restriction in order to ensure that the company can take the benefit from the fund in a long term. They want to sustainable the entity rather than spend on any project in the short run.

The donor provides a large fund to the entity, but they are not allowed to use this fund. They are allowed to use the interest or return that generate from the fund.

They want to ensure that the entity can have enough funds to operate almost forever. The interest or return can be a minimum amount that entity need to operate. It means that the entity will be able to survive in almost every circumstance.

The example of a fund can be an investment in stock, real estate, fixed deposits, and other low-risk investments.