Limited assets have specific usage restrictions that must be followed, with consequences for non-compliance. Nonprofits and educational institutions commonly accept restricted resources, which are reported separately in accounting records. Municipal bonds and wills can also involve tied assets.
A limited asset is an item of value that can only be used for a specific purpose. Failure to use the asset in accordance with the limitations attached has contractual or legal consequences which may include the asset reverting to a previous owner. Restrictions on an asset can be permanent or temporary. Both require special accounting procedures to properly value the asset in light of restrictions on its use and to monitor compliance with restrictions in business records.
The notion of an activity limitation was developed as a way to assure a party to a transaction that certain requirements would be met and would continue in effect for as long as necessary to honor a party’s underlying intent. Restrictions tend to be around the use of the asset, but they can also involve related issues, such as continued ownership by a particular party or an owner holding a specific status. There are no limits to the nature of the restrictions that can be placed on an asset when it is transferred to a third party. As long as the receiving party accepts the good with knowledge of the restrictions, they must comply with them or give up the good.
Nonprofit organizations and educational institutions are the most common types of entities that will accept a limited resource. Donations are often made with specific usage provisions. Institutions are required by law to honor these provisions or risk being forced to return the donation. For example, a university might receive a donation specifically targeted by the donor for a new building. Similarly, a youth organization might receive a specific donation to fund a scholarship.
A restricted asset is reported in the books in a separate section. The resources section of the balance sheet for these entity types will show two separate categories, restricted activities and unrestricted activities. An accountant must apply special valuation rules to restricted assets because limiting use affects transferability and value.
Another circumstance that typically involves a tied asset is the sale of municipal bonds. A municipality offers bonds for public sale to raise funds for specific projects, such as the construction of a new convention center. This creates an implied contract that funds raised will only be used for this purpose. The government can’t just reallocate those funds to a different project.
Sometimes, a person will limit an asset in a will. For example, an individual could restrict the transfer of assets in the name of a minor child until they come of age. This is a temporary restriction. Comparatively, a will might limit ownership of property to a son-in-law as long as he remains married to the person’s daughter. This is a permanent restriction and failure to comply will result in the property being returned to ownership.
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