United States

Designated Funds


For many clubs, audit time is quickly approaching and with it is the perennial topic of designated funds. These are the funds set aside internally, typically by the board of directors at a club, as opposed to restricted funds, which, from an accounting standpoint, are restricted as to their purpose by a donor who provides the funds. In addition, some clubs may be subject to statutory restrictions on the use of certain funds that fall under the title of designated, but those statutory restrictions will be left for another day.

Defining designated funds
Defining designated funds for a specific club is not an activity in which someone outside of the club, particularly its auditors, should be engaged. It should be defined by the club and documented in one of its permanent documents (e.g., minutes or even bylaws). The definition should explicitly outline the sources and uses of designated funds (i.e., how they are accumulated and spent).

Tracking designated funds
Designated funds should be considered their own self balancing set of books. The fund assets should equal the sum of fund liabilities and fund equity. The ins and outs of the fund should be supported by detailed analysis working papers. This should be part of monthly reporting to the finance committee and the board—not something that is done at year-end when the auditors ask for it.

Making sense of the fund balance
How can a club have $1 million of designated fund balances when it does not even have $500,000 in cash in the bank? How can a club have designated funds if it has negative working capital (current liabilities exceed current assets)? These questions are rhetorical but they are not posed haphazardly. Remember to ensure the balance of funds is sound and simply makes sense.

Reporting designated funds externally
Consider whether the club expects to have detailed disclosures regarding the designated funds in the footnotes to its audited financial statements. If detailed monthly internal reporting is provided to the finance committee and the board, consider whether it necessary to show such detail to all readers of the audited financial statements.

Considering the perspective of the bank
As part of its decisions regarding funds, clubs should also consider whether adjustments to designated funds weaken their debt covenant compliance or make them less attractive to prospective lenders.