Temporary restriction definition
/What is a Temporary Restriction?
A temporary restriction is a stipulation attached to a donation that controls its use for a certain period of time. These restrictions tend to be associated only with larger donations; nonprofits try to steer donors away from requiring such restrictions, since they can require a moderate amount of time to monitor, to ensure that the donor’s wishes are followed.
Examples of Temporary Restrictions
Here are several examples of temporary restrictions:
Scholarship fund for a specific academic year. A donor gives $50,000 to a university to fund scholarships, but specifies it must be used for students attending in the 2025–2026 academic year. The university holds the funds in a temporarily restricted account until that academic year begins. Once the scholarships are awarded, the restriction is lifted and the funds are considered released.
Donation for a future building project. A nonprofit receives a $100,000 donation to support the construction of a new community center, with the condition that the funds can only be used once construction begins in 2026. Until then, the funds must be set aside and cannot be spent. When construction starts, the restriction ends and the organization can begin using the money.
Grant to support a three-year program. A foundation awards a $300,000 grant to a health nonprofit to run a mental health outreach program over the next three years. The nonprofit is required to spend the funds in equal annual installments during the program's lifespan. The unspent funds are temporarily restricted each year until they are released in accordance with the timeline.
Funding for time-limited research. A university receives a $200,000 donation to conduct cancer research, with the stipulation that the funds must be used within five years. The university cannot divert the funds to other departments or use them after the specified period. Once the five years pass or the research concludes, the restriction expires.
Seasonal event sponsorship. A donor contributes $25,000 to sponsor an annual holiday event held each December. The nonprofit must wait until the event season to use the funds, even if the donation is received in advance. After the event takes place, the restriction is lifted, and the funds are recorded as released from restriction.
Accounting for a Temporary Restriction
When a nonprofit receives a donation that has a temporary restriction, it is recorded as an asset and as temporarily restricted contribution revenue.