ASC 958-205 Net Assets Released From Restriction and Liquidity Disclosures: Worked Entries

A nonprofit receives $50,000 for an after-school program. It records the gift as restricted. A year later the program has spent the money, the restricted balance is still on the books, and the statement of activities shows an operating deficit that does not exist. Releases from restriction are the bookkeeping step that moves resources into the net asset class that can fund operations, and they are a frequent source of errors in nonprofit audits.

This guide covers two ASC 958 topics that sit side by side in the financial statements: the release of net assets from donor restrictions, and the liquidity and availability disclosure. Endowments are a separate subject, covered in /us/blog/nonprofit-endowment-and-donor-restrictions-audit-guide.

What are the two net asset classes?

Not-for-profit activity is reported in two classes: net assets without donor restrictions and net assets with donor restrictions. The statement of activities reports the change in each class and the total change in net assets. NFP health care organizations also report a performance indicator in the statement of operations (ASC 954-225-45-4, FASB ASU 2016-14).

What is a release from restriction?

When a donor's restrictions are satisfied, a reclassification is made from net assets with donor restrictions to net assets without donor restrictions. It increases one class and decreases the other by the same amount. The restriction is satisfied, for example, when the stipulated purpose is carried out or the stipulated time period has elapsed.

A release is a reclassification between classes, not revenue or an expense. It appears as a separate line on the statement of activities, often captioned "net assets released from restriction."

Other NFPs may present an intermediate measure of operations, such as the excess of operating revenues over expenses. ASC 958-225 neither encourages nor discourages it, but if one is reported it appears in a statement that at a minimum reports the change in net assets without donor restrictions, and if the use of the term operations is not apparent from the face of the statement, a note describes the nature of the measure (ASC 958-225-45-10 and 45-12, FASB ASU 2016-14).

Worked entries

All figures are illustrations.

A purpose restriction

In year one the organization receives a $50,000 gift restricted to an after-school program.

In year two the program spends $50,000. Where both classes of net assets are available for a purpose, a donor restriction is fulfilled to the extent of the expense incurred (ASC 958-205-45-11, FASB ASU 2016-14). The expense is recorded in the class without donor restrictions, and the release is a pair of lines.

The two release lines offset in total net assets. Net assets with donor restrictions fall by $50,000. Net assets without donor restrictions rise by the $50,000 release and fall by the $50,000 program expense.

A time restriction

In December the organization receives a $36,000 gift that the donor says may not be used until the next fiscal year begins. The gift is recorded in the class with donor restrictions. The time restriction expires on the first day of the next fiscal year.

Equipment

A donor gives $20,000 to buy a van. The organization records $20,000 of restricted contribution revenue, buys the van, and releases the $20,000 when the van is placed in service, using the same pair of release lines. Unless donor stipulations limit the use of the asset for a period of time or a particular purpose, the restriction expires when the asset is placed in service (ASC 958-205-45-12). ASU 2016-14 eliminated the earlier option to release such restrictions over the asset's useful life.

What does the liquidity and availability disclosure require?

NFPs disclose information about liquidity and the availability of assets (ASC 958-210-50-1A, FASB ASU 2016-14). There are two parts.

Qualitative. Give qualitative information in the notes that is useful in assessing the entity's liquidity and that communicates how the NFP manages its liquid resources to meet cash needs for general expenditures within one year of the balance sheet date. The ASU's example notes mention a policy of holding financial assets to cover a stated number of days of operating expenses and committed lines of credit.

Quantitative. Communicate the availability of financial assets at the balance sheet date to meet cash needs for general expenditures within one year, either on the face of the statement of financial position or in the notes. Availability can be limited by the nature of the asset, by external limits imposed by donors, laws and contracts, and by internal limits imposed by governing board decisions (ASC 958-210-50-1A). In the ASU's Case A example, prepaid expenses are left out of the available amount. Fixed assets, intangibles and inventory are not financial assets. Deduct:

• financial assets that will not be converted to cash within one year of the balance sheet date, such as pledges due beyond a year,
• assets with externally imposed limitations, and
• board designations. The ASU's illustrative note includes a board-designated liquidity reserve as a reconciling item because the designation was meant to support unanticipated liquidity needs and not general expenditures. Say so in the note if the board could release the amount.

The measure is as of the balance sheet date. There is no prescribed format for the quantitative information, and the ASU says there may be several ways to meet the requirement. A common table starts with total financial assets and deducts the unavailable amounts.

An illustrative table

The note would add that the board could release the quasi-endowment for an unexpected need, and describe a $100,000 line of credit.

Audit angle

1. Restriction inventory. Obtain the schedule of restricted gifts, with the donor letter or pledge agreement for each. Test that the restriction is correctly read as purpose or time.
2. Release support. For each release, agree the amount to qualifying expenditures, the placed-in-service date for equipment, or the date the time period lapsed. Releases should not run ahead of spending.
3. Rollforward. Reconcile the beginning and ending balance of net assets with donor restrictions to contributions, investment return and releases.
4. Presentation. Confirm the release is a separate line and not revenue, and the required class totals appear on both statements.
5. Liquidity table. Tie financial assets to the balance sheet, recompute each deduction from the donor schedule and board minutes, and check that nonfinancial assets are excluded.
6. Qualitative note. Compare the liquidity policy to the board minutes and to the credit line agreement.
7. Operating measure. If one is reported, read the note that defines it and test consistency across periods.

Common misstatements: releasing a restriction on receipt instead of on satisfaction, never releasing small restricted balances, counting board-designated funds as available without the explanation, and including fixed assets or prepaid expenses in financial assets.

For the broader statement set, see /us/blog/nonprofit-financial-statements-asc-958, /us/blog/nonprofit-contributions-and-grants-asc-958-605 and /us/blog/fund-accounting-guide.

CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.

Sources

• FASB, ASU 2016-14, Not-for-Profit Entities (Topic 958) (text of ASC 958-205-45-11 and 45-12, 958-210-50-1A, 958-225-45-10, example liquidity notes, elimination of the useful-life release option): https://storage.fasb.org/ASU_2016-14.pdf
• PwC Viewpoint, Not-for-profit entities guide, 2.4 Disclosures about liquidity and availability: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/not-for-profit-entities/Not-for-profit-entities/Nfp02_1/24_Disclosures_about_6.html
• PwC Viewpoint, Not-for-profit entities guide, 3.4 Applicability of certain sub-totals and captions: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/not-for-profit-entities/Not-for-profit-entities/Nfp03_1/34_Applicability_8.html
• PwC Viewpoint, Not-for-profit entities guide, 3.2 Core model, statement of activities: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/not-for-profit-entities/Not-for-profit-entities/Nfp03_1/32_Core_model.html
• PwC Viewpoint, Not-for-profit entities guide, 3.1 Statement of activities overview: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/not-for-profit-entities/Not-for-profit-entities/Nfp03_1/31Overviewofthestatement.html
• PwC Viewpoint, Not-for-profit entities guide, 2.3 Presentation of assets and liabilities: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/not-for-profit-entities/Not-for-profit-entities/Nfp02_1/23_Presentation_of_assets_4.html
• PwC Viewpoint, Not-for-profit entities guide, 2.1 Statement of financial position overview: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/not-for-profit-entities/Not-for-profit-entities/Nfp02_1/21_Statement_of_financial_2.html

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error