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.

Examples of Board-Designated Restrictions

Here are several examples of board-designated restrictions:

Operating reserve fund. Used to set aside funds to ensure the organization can continue operations during periods of reduced revenue or unexpected expenses.
Capital projects fund. Used to allocate funds for future capital expenses, such as building renovations, equipment purchases, or new construction.
Endowment-like fund. Used to establish a quasi-endowment where the principal is invested, and only the income or a set percentage of the fund is used annually to support operations or programs.
Program-specific initiatives. Used to reserve funds to expand or sustain a specific program or service, such as launching a new community outreach program or funding scholarships for underprivileged students.
Technology upgrade fund. Used to designate funds for future technology needs, such as upgrading software, purchasing new hardware, or implementing cybersecurity measures.
Debt reduction fund. Used to set aside funds to pay down existing loans or other financial obligations.
Emergency response fund. Used to allocate money to address potential emergencies or crises, such as natural disasters, pandemics, or economic downturns.
Strategic growth fund. Used to designate funds to pursue strategic opportunities like mergers, expansions, or entering new markets.
Board training and development fund. Used to set aside money to support ongoing education, workshops, or retreats for board members.
Future grant matching fund. Used to prepare funds in advance to match potential grant opportunities that require matching contributions from the organization.