A reminder over the restriction of income for charities

Accounting for charitable funds held by a charity is a key feature of charity accounting. Fund accounting distinguishes between the two primary classes of charity funds being restricted funds and unrestricted funds.

On receipt of income, the Trustees of a charity have a responsibility to assess whether the income is subject to any specific restrictions over its application. Where restrictions exist, it is important that expenditure from the income is monitored to ensure that it is in line with the terms of the restriction.

Restrictions over the use of income could be imposed by the donor or grantor either within a funding agreement or other written documentation received to support the funding. It may however be the case that the donor has expressed a non-binding preference over the use of the funds and in those instances, income does not need to be restricted in the accounts.

Where a charity has carried out a fundraising appeal they may have specified that the funds will be used for a certain purpose. In these instances the funds received should be restricted. In some cases, however, the charity fundraising appeal documentation may state that where funds are raised in excess of the required level for a project the excess funds may be applied for any purpose. The excess funds would not then need to be restricted in the accounts.

Some trustees may have the power to declare special trusts over unrestricted funds and where such a power is available and is used, the assets affected will form restricted funds as part of a special trust. Where the trustee’s merely set aside funds for a specific project, the funds do not need to be classified as restricted funds in the accounts, but rather as designated fund balances.

Where income received can be spent or applied at the discretion of the trustees for any purpose, it should be recognised within the unrestricted funds of the charity.

For further information on this topic please contact a member of the charity team on 01772 821021.