Board-designated restriction definition
/What is a Board-Designated Restriction?
A board-designated restriction is a restriction on the use of an asset that is imposed by the board of directors. If this is a for-profit entity, the restriction is monetary; the amount of the restriction is shifted from the retained earnings account to a separate equity account that identifies the asset. If this is a non-profit entity, then the restriction applies to a specific asset; if so, the asset is still classified as an unrestricted net asset, since only a donor can impose a real restriction on an asset.
Reasons for a Board-Designated Restriction
There are several reasons why a board might implement an asset restriction. For example, it might want to set aside funding for a specific program that it feels will further the mission of the organization. Or, it might anticipate a decline in cash flows or a revenue drop, and so sets up a reserve to keep the organization operating through this difficult period. Another possibility is that it wants to set aside funds for a major capital project that is important to the board, and which will require a substantial amount of cash to complete. Yet another reason, if the business is a nonprofit, is to set up an endowment that is intended to produce dividend or interest income in order to fund its general operations or more targeted programs.