Securities that have donor-imposed restrictions create some exceptions to the general rule. (Securities with board-imposed restrictions are considered unrestricted and follow the general rule.) Most restricted assets are tied to an endowment fund (in which the principal amount is inviolable). Permanently restricted assets are most often related to a permanent endowment which requires that the original investment be maintained to provide a permanent source of income to the entity. Temporarily restricted assets are also often tied to an endowment. The restrictions may exist for a specific period or until a certain event occurs or action is taken by the entity. Although most securities held as restricted assets are related to an endowment fund, securities that are not part of an endowment may also have donor-specified restrictions. The nature of the restrictions, rather than whether the restricted assets are part of an endowment, is what determines the classification of cash flows.
Sales proceeds and expenditures to acquire securities held as restricted assets often follow the general rule and are reported as investing activities. An exception is if the proceeds are restricted for acquiring, constructing, or improving long-term assets. In this case, the proceeds are considered financing activities, regardless of whether permanently or temporarily restricted.
Classification of the dividends from restricted investments depends upon whether the restriction extends to the receipt of dividends. If the use of the dividends is unrestricted by the donor, then dividends received are classified according to the general rule as operating activities. However, if use of the dividends is restricted to increasing an endowment, they are classified as financing activities.
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Simply put: Restricted Funds
Grants or loans which are made for a clearly specified purpose and can be used for none other.
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