You are closing out a multi-year donor agreement, the project spills into the following financial year, and your statutory auditor is asking how you have "ring-fenced" the resources not yet spent. For many NGO and CSO finance departments, the mechanics of restricted funds (French "fonds dédiés" regime) remain a sensitive issue: between accounting principles, donor requirements and operational realities in the field, the gap between theory and practice often surfaces at audit time. A recent discussion on our sector's professional network was a reminder: tightened controls on restricted resources and their traceability rank among the top focus areas for French and European public donors in 2026.

This article offers a comprehensive framework to master the accounting of restricted funds for NGOs: applicable rules, journal entries, notes to the financial statements, critical audit points, and best practices for implementation. We will also see how an integrated finance, operations and MEAL platform such as Abvius helps strengthen this monitoring between head office and the field, while guaranteeing a complete audit trail.

NGO Restricted Funds: Accounting and Donor Compliance

Reading time: ~12 min

1. Understanding restricted funds in an NGO
2. Regulatory framework and accounting obligations
3. How to record a restricted fund, step by step
4. Donor reporting and operational monitoring
5. Common errors identified in audits
6. Managing restricted funds with Abvius
7. Implementation best practices
8. Mini FAQ

1. Understanding restricted funds in an NGO

A restricted fund corresponds to the share of a resource earmarked by a third-party funder — public donor, foundation, private donor — for a specific project or activity, that has not been spent by the year-end close. Concretely, when you receive 600,000 EUR from the Agence francaise de developpement for a three-year intervention and you have committed only 180,000 EUR by the end of the first year, the remaining 420,000 EUR are not available "income": they remain earmarked for the project and must be carried forward to subsequent financial years.

The mechanism of NGO restricted funds allows this unused portion to be neutralized in the accounts so that it does not appear as a surplus in the income statement. Without this device, an organization could show an artificial profit one year, then a deficit the next when expenses are triggered — a misleading signal for trustees, donors and auditors.

Why this topic matters for NGOs and CSOs

Three reasons make restricted funds essential. First, they reflect compliance with the earmarking principle: a euro tagged for a purpose must fund exactly the expense for which it was obtained. Second, they provide a faithful reading of the accounts: the year's result reflects actual activity, not cash receipts mechanics. Finally, they secure the relationship with donors: traceability of the carry-forward demonstrates that unused funds are indeed dedicated to the continuation of the program and not absorbed by other expenses.

2. Regulatory framework and accounting obligations

In France, the reference framework is ANC regulation no. 2018-06 on the annual accounts of private not-for-profit legal entities, effective as of 1 January 2020. It applies to associations, foundations and endowment funds required to prepare annual accounts, whether or not they are subject to a statutory audit. This text overhauled the previous CRC 99-01 regulation and clarifies the treatment of earmarked and unused resources.

NGOs and CSOs operating internationally must also align this French framework with donor-specific requirements: eligibility rules from AFD, the Centre de crise et de soutien (CDCS), the European Commission (DG INTPA, DG ECHO), the UK FCDO, or UN agencies. While the restricted funds mechanism is French in origin, the principle of ring-fencing earmarked resources is found in most donor regulations under other names: restricted funds, deferred income, donor-restricted net assets.

Which resources fall within scope

The regulation distinguishes several types of resources. Resources earmarked by third-party funders fall within the scope of restricted funds when they have not been fully used by the year-end close. In-kind volunteer contributions do not give rise to restricted funds but to disclosure in the notes. Unrestricted resources — general donations, membership fees — flow through the year's result without specific ring-fencing. Lastly, contributions to association funds or with reclaim rights are treated differently (equity accounts).

3. How to record a restricted fund, step by step

The accounting mechanism for NGO restricted funds relies on accounts 19 (restricted funds on the balance sheet) and 689 / 789 (allocations and reversals in the income statement). At each year-end close, the unused portion of an earmarked resource is removed from the result via an allocation to restricted funds, then reversed back to the result the following year as spending progresses.

Standard journal entries

When the grant is awarded, you recognize the full amount as income in account 74 (operating grants) at the point when award conditions are met. At year-end close, you identify the unused portion and post the following entry: debit account 689 (commitments to be performed on earmarked resources) and credit account 19 (restricted funds). The following year, as expenses are incurred on the project, you reverse the restricted fund: debit account 19 and credit account 789 (carry-forward of unused resources).

Calculating the unused portion

The calculation draws on three data points from budget monitoring: the total amount of the earmarked resource, total eligible expenses incurred against this resource, and the co-financing share borne by other donors or own funds. The unused portion is derived by subtraction. Caution: only expenses actually incurred and eligible under the donor agreement may be charged. Legal commitments not yet executed (orders placed but invoices not received) must be treated separately according to your method (accrual to the period via accounts 408 or 4886).

A worked example

Take an NGO receiving 900,000 EUR from a European donor for a three-year project starting in January N. By year-end close N, eligible expenses amount to 240,000 EUR, of which 30,000 EUR are co-financed from own funds. The share attributable to the donor is therefore 210,000 EUR. The restricted fund as of 31 December N stands at 900,000 - 210,000 = 690,000 EUR. The entry posts an allocation to account 689 of 690,000 EUR and a credit to account 19 for the same amount. In the income statement, the net grant recognized for the period comes out to 210,000 EUR, in line with expenses incurred.

4. Donor reporting and operational monitoring

Recording restricted funds is only part of the equation. You also need to be able to produce, at any time, a detailed statement for each agreement: initial amount, cumulative expenses, residual restricted fund, expected consumption schedule. This is precisely what donors require for interim and final financial reports, and it is also what the statutory auditor verifies in the notes.

The notes to the annual accounts

ANC 2018-06 requires a restricted funds monitoring table in the notes, tracking for each donor or project: opening balance, period uses (reversals to the result), new allocations, restricted funds that have become without object (refunded or definitively unusable), and closing balance. This table is one of the first documents reviewed by controllers and donors when analyzing your financial statements.

Multi-donor monitoring in management

Beyond the notes, day-to-day management requires real-time tracking by agreement, by budget line and by currency. Head office finance teams must be able to answer at any moment questions such as: where do we stand on the AFD agreement? what share of the budget is consumed at end of April? how much remains to be spent by the end of the program? This monitoring is also essential to anticipate budget amendments and extension requests, two mechanisms that change the restricted fund base.

5. Common errors identified in audits

Audit assignments at NGOs reveal a recurring range of anomalies on restricted funds. Spotting them upstream avoids rework, observations in the report, or even risks of expense ineligibility.

The most common anomalies

First error: confusing a restricted fund with deferred income. Deferred income corresponds to billing prior to delivery of a service, whereas a restricted fund covers earmarked resources whose spending is deferred. Accounting treatment and presentation differ. Second error: reversing a restricted fund without supporting the corresponding expense. The reversal must always be backed by actual and eligible expenses, not by a target result. Third error: forgetting to neutralize co-financing when several donors fund the same project. Fourth error: failing to update the restricted fund following a budget amendment or extension. Fifth error: keeping a restricted fund indefinitely without reclassifying it as "unusable resources" when the project is closed and the agreement provides for the funds to be returned to the donor.

Impact on expense eligibility

A poorly documented restricted fund can lead, during a project's final audit, to expenses being reclassified as ineligible. The donor may then request partial refund of the grant. This situation, more common than one might think, illustrates why a digital audit trail — each expense linked to a supporting document and a budget line — is no longer optional but an operational requirement.

6. Managing restricted funds with Abvius

At Abvius, we design the all-in-one Finance, Operations and MEAL platform for NGOs and CSOs that want to strengthen donor compliance without overloading their teams. On the topic of restricted funds, we address four key points.

Real-time budget monitoring, by agreement, by line and by currency, allows the unused portion of an earmarked resource to be calculated at any moment. Head office and field teams work on the same data, eliminating gaps between accounting and project management.

Traceability and the audit trail are built in natively. Every expense is linked to an agreement, a budget line, a supporting document and a validation chain. At year-end close, the restricted funds statement is built automatically from this structure, with all supporting evidence available in one click.

Validation workflows and electronic signature secure expense commitments on donor projects. A field purchase request is approved according to the thresholds set by internal policy, signed electronically, and automatically charged to the right agreement — securing eligibility under donor regulation.

Finally, HQ-field centralization and automated donor reporting make it possible to produce on demand the financial reports expected by AFD, the EU, ECHO or any other donor, in their specific formats. Restricted funds are no longer reconstructed with great effort at year-end: they are visible continuously, controllable, and auditable. Learn more at abvius.org.

7. Implementation best practices

Setting up a robust restricted funds management framework is not just a year-end entry. Here are five operational steps to integrate into your management cycle.

• Step 1 - Map earmarked resources: list all active agreements and identify for each the earmarking conditions, the implementation period, eligibility rules and the amendment procedure. This mapping directly feeds your budget monitoring and your notes table.
• Step 2 - Define clear allocation rules: formalize in writing the principles for allocating expenses between donors (allocation keys, methods for shared cost allocation, treatment of co-financing). This documentation is invaluable during audits.
• Step 3 - Industrialize in-year monitoring: do not save the restricted fund calculation for year-end close. Monthly or quarterly tracking by agreement helps anticipate underspending, react with project managers, and avoid year-end surprises.
• Step 4 - Secure the digital audit trail: every expense charged to an agreement must be linked to a digitized supporting document, a tracked approval, and a budget line of the agreement. This traceability guarantees eligibility and auditability.
• Step 5 - Prepare the notes and the donor report in parallel: align the production of the accounting notes (ANC regulation view) and the donor report (agreement view) on the same source data. This is the best protection against gaps that worry controllers.

8. Mini FAQ

What is a restricted fund in an NGO?

A restricted fund represents the share of a resource earmarked by a third-party funder — donor, foundation, sponsor — that has not been used by the year-end close and must be carried forward to subsequent periods. It neutralizes this portion in the income statement so that it is not treated as available surplus.

What is the difference between a restricted fund and deferred income?

Deferred income corresponds to billing or a cash receipt occurring before a service is delivered. A restricted fund, by contrast, concerns earmarked resources whose consumption is deferred due to the multi-year nature of the project. ANC 2018-06 requires distinct treatment and presentation in the notes.

Should in-kind volunteer contributions be recorded as restricted funds?

No. In-kind volunteer contributions follow a specific treatment in the notes, without recognition as restricted funds. They are valued and presented separately, in line with the accounting framework for not-for-profit organizations.

What happens if a restricted fund is never used?

If the agreement provides for the funds to be returned to the donor, the restricted fund is cleared against a liability to the donor. If the donor authorizes redeployment to another project or decides to forgo the funds, the restricted fund becomes an "unusable resource" and is recognized as income under the negotiated conditions. This operation must be documented to withstand audit.

Conclusion

Mastering NGO restricted funds means combining accounting rigor, real-time budget monitoring and a complete audit trail. Organizations that equip themselves to continuously produce the status of their earmarked resources secure donor compliance, dialogue with the statutory auditor, and capacity to anticipate upcoming agreements. To go further, see our donor audit preparation guide and our guide to budget amendments, or contact us directly via the contact page to discuss your setup.