Fund Accounting: Nonprofit Net Assets vs Governmental Funds Explained

Fund accounting is a way of keeping records in which resources are tracked in separate self-balancing groups, called funds, according to the purposes for which they can be used. Each fund has its own assets, liabilities and fund balance or net assets. It was built for entities that answer to donors, grantors or taxpayers for how restricted money was spent.

The term means different things in two parts of the practice, and mixing them up leads to wrong financial statements. For nonprofits under ASC 958, funds are an internal tracking tool and the external statements present net asset classes. For state and local governments under GASB, funds are the structure of the fund financial statements themselves. This guide explains each and how to audit them.

Nonprofits: funds internally, net assets externally

Since ASU 2016-14, nonprofit financial statements present two classes of net assets: net assets without donor restrictions and net assets with donor restrictions. The statements do not present a separate column for each fund. Many nonprofits still keep fund-level records, because donors and grantors want a report showing how their gift was used, and the board needs to know what is available.

Board designations are not donor restrictions. A board can reverse a designation, so designated funds stay in the without-donor-restrictions class, with the designation disclosed. See net assets with and without donor restrictions, donor restrictions and nonprofit financial statements under ASC 958.

Worked example

All numbers are illustrative. A nonprofit receives a $50,000 grant restricted to a youth program. Received in cash, the entry is:

During the year the program spends $32,000 on eligible costs. The restriction is met as costs are incurred, so $32,000 is released from restriction:

The unreleased balance is 50,000 - 32,000 = 18,000, which stays in net assets with donor restrictions. The program costs of 32,000 are expensed in the without-restrictions class. For conditional contributions, where there is a barrier and a right of return, revenue is recognized as the conditions are met rather than on receipt. See conditional vs unconditional contributions and nonprofit contributions and grants.

In QuickBooks

QuickBooks does not have a fund module. Nonprofit clients usually use classes, sometimes with sub-accounts, to track grants and restrictions. The auditor should check that classes reconcile to the net asset classes in the statements, that released amounts agree to qualifying expenses, and that unclassified transactions are not left in a catch-all. See QuickBooks cleanup before the audit.

Governments: funds are the statements

GASB Statement 34 requires two sets of statements: government-wide statements on the full accrual basis, and fund statements. Fund statements are organized by fund type under three categories. See GASB 34.

Under modified accrual, revenue is recognized when measurable and available to pay current-period liabilities, and expenditures are generally recognized when the liability is incurred. Governments define "available" in a policy, often a short period after year end, and disclose it. Capital outlay is an expenditure in the governmental fund, then capitalized and depreciated in the government-wide statements. That difference is why a reconciliation between the two sets of statements is required.

Major funds are reported in separate columns using size tests: generally, a governmental or enterprise fund is major when its assets, liabilities, revenues or expenditures are at least 10 percent of the category total and at least 5 percent of the combined governmental and enterprise total. The general fund is always major.

Governmental example

A city collects a $500,000 grant for a road project and spends $420,000 on construction. In the capital projects fund, the $420,000 is an expenditure. In the government-wide statements it becomes a capital asset and is depreciated. The reconciliation adds $420,000 of capital assets (less depreciation) to move from fund balance to net position. See governmental audits.

Comparison

Audit checks

1. Restrictions. Read gift agreements and grants and agree the classification of each. Test that releases match qualifying expenses and timing.
2. Designations vs restrictions. Make sure board-designated amounts are not shown as donor-restricted, and the reverse.
3. Fund balance or net asset reconciliation. Agree internal fund balances to the net asset classes.
4. Interfund activity. Look at transfers and due to/from balances between funds: eliminate in government-wide statements and ensure they balance.
5. Compliance. Check spending against grant terms, and consider a single audit when federal awards exceed the threshold. See single audit walkthrough.
6. Government reconciliation. Test the fund-to-government-wide reconciliation.

Common mistakes

• Presenting funds as columns in a nonprofit's external statements as if ASC 958 required it.
• Treating board designations as donor restrictions.
• Recognizing conditional grants as revenue on receipt.
• Releasing restricted net assets before the qualifying expense is incurred.
• Using the wrong measurement focus for a governmental fund.
• Spending restricted funds on general costs and not repaying the fund.

FAQ

Is fund accounting required for nonprofits?

Not by US GAAP for external reporting. ASC 958 requires net asset classes. Many nonprofits keep funds internally to track restrictions.

What are the fund types in government accounting?

Governmental, proprietary and fiduciary. Governmental funds include the general, special revenue, capital projects, debt service and permanent funds.

What is the difference between modified accrual and accrual?

Modified accrual, used for governmental funds, recognizes revenue when it is measurable and available to pay current liabilities. Full accrual recognizes revenue when earned and expenses when incurred.

Can QuickBooks do fund accounting?

It has no fund module, but classes and sub-accounts can track grants and restrictions. The tracking should reconcile to the net asset classes.

What is a board-designated fund?

A reserve the board sets aside for a purpose. It is not donor-restricted, so it stays in net assets without donor restrictions, with disclosure.

Sources

• FASB ASC 958-210 and 958-205 (as amended by ASU 2016-14), Not-for-Profit Entities, net asset classes; ASC 958-605 on contributions
• GASB Statement No. 34, Basic Financial Statements and Management's Discussion and Analysis for State and Local Governments; GASB Statement No. 84, Fiduciary Activities; GASB Codification Section 1300 on fund accounting, gasb.org

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