The pandemic, ongoing economic insecurity and uncertainty about the future have prompted some nonprofits to make board designations of unrestricted assets. What are board designations, why are they worth considering and how does the process work?
“Board-designated assets” refers to funds that haven’t been restricted by donors but are subject to self-imposed limits on their use. They’re typically intended to ensure that funding is available when needed. Board-designated funds also can play a role in fundraising by demonstrating an organization’s commitment to a specific plan or program.
They may be designated for a special, one-off purpose or set aside on an as-needed basis for a specified period of time (for example, covering contingent liabilities that may or may not arise). Unlike restricted funds, where only the original donor may remove the restrictions, designated funds can be undesignated at the discretion of the board of directors.
In most cases, funds are designated by the board, but, in some cases, the board assigns the responsibility to management — ideally, to specific positions (such as chief financial officer) that possess the requisite knowledge and judgment. In such circumstances, these delegations should be formally recorded, and your board should regularly review the actual designations.
Financial reporting obligations
One benefit of taking the time to properly document board designations is that the practice can make it easier to comply with the financial reporting requirements. Financial Accounting Standards Board Accounting Standards Update (ASU) 2016-14 requires nonprofits that follow U.S. Generally Accepted Accounting Principles to disclose board-designated net assets on their financial statements or in the statement’s notes.
Bear in mind that designating assets can affect the amounts in the mandatory disclosures related to liquidity and the availability of financial assets. Allocating a large chunk of cash to a capital project, for example, could reduce liquidity.
Policies and procedures
If your board decides to designate assets, it should adopt formal policies and procedures for managing them. For example, the policy should require your board to establish objectives for designated assets. These might include providing an internal line of credit to better manage cash flow; funding future programs or projects; maintaining operational or liquidity reserves; or funding an endowment.
The policy should clearly delineate who can designate and undesignate funds. Under what circumstances would exceptions be allowed? In addition, it should describe procedures for monitoring designated assets, including stating whether funds will be segregated. Procedures are needed to track expenditures and collect data to comply with reporting requirements.
Advantages and responsibilities
Designating assets isn’t a decision to make lightly. Discuss with your financial advisor the advantages and responsibilities of designations and whether they make sense for your organization.