Restricted Asset

What Is a Restricted Asset?

A restricted asset is cash or another item of monetary value that is set aside for a particular purpose, primarily to satisfy regulatory or contractual requirements. Restricted assets, subject to special accounting procedures, are segregated from other assets to mark clear delineations of their use. Private sector companies, nonprofit organizations and government bodies all transact with various forms of restricted assets.

How a Restricted Asset Works

For a company, a restricted asset can take the form of collateral for a loan. The company must maintain the value of the restricted asset to support its borrowings, and if the company wants to sell the asset, it must obtain consent from the lender and replace it with another asset to collateralize the loan. Restricted cash and investments held by securities firms and trading and clearing exchanges for regulatory purposes are common in the finance sector.

Restricted assets are subject to special accounting procedures.

In the nonprofit world, restricted assets are funds that must be used for purposes specified by donors. Restricted assets would fund an endowed chair or department at a university. A donation to a homeless shelter for bathroom renovations would have to be segregated and accounted for separately from the general budget of that nonprofit organization. For the most part, however, donations to nonprofit groups are unrestricted, which means they are free to spend the funds as they see fit.

Government agencies also deal with restricted assets. A port authority of a city, for example, holds restricted assets in the form of lessee deposits. Another example of a restricted asset in a municipality is the proceeds from a revenue bond. The proceeds the city receives from this type of municipal bond must be used for their stated purpose such as improving roads, building a new high school auditorium, upgrading sewers, installing park lights, and so on—just as long as these projects are well defined with parameters regarding time, budget, rules, and personnel.

Key Takeaways

  • Restricted assets are cash or other valuable item set aside for a specific purpose.
  • A restricted asset can be collateral for a loan.
  • An example of a restricted asset in a municipality would be revenue bond proceeds.