Documentation Required for Donor Release of Restriction

Thoughtware Article Published: Apr 17, 2020
COVID-19 Nonprofit

In light of the recent pandemic, many nonprofits (NFP) are experiencing decreased or ceased revenue from their typical sources. This includes fewer community donations, postponed or canceled fundraising events or closure of operations. 

With less revenue, NFPs are looking to use funds on hand to keep up with daily operating costs such as a mortgage payment. Often, NFPs have funds that are restricted by the donor for a specific purpose. They can’t use those funds for daily operations since they’re restricted. During these difficult times, NFPs are reaching out to donors, and donors are reaching out to NFPs to release the restrictions on their donations so the NFP can use the funds now. Other NFPs are asking donors to change the restriction to a “disaster relief fund,” which ultimately could allow the NFP to use the funds during the pandemic crisis. 

Generally accepted accounting principles classification requires verifiable evidence or documentation for restricted revenue when it’s received. Similarly, documentation is required for the release of the restricted funds. This is commonly in the form of a letter from the donor explicitly stating the effective date and amount of funds they’re releasing for the organization to use for operating costs. Retain the letter in accordance with your document retention policy for restricted donations. The evidence is required for a financial statement audit.     

As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. To connect on this or other matters affecting NFPs, reach out to your BKD Trusted Advisor or use the Contact Us form below.

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