A nonprofit's financial statements follow ASC 958, Not-for-Profit Entities, as amended by ASU 2016-14. The statements look like a business's, but the emphasis is different: what resources the organization has, what limits donors have placed on them, how the money was spent by function, and whether the organization can meet its obligations in the coming year.
This guide covers the required statements, then net assets, functional expenses and liquidity. For when an audit is required and for the single audit threshold, see nonprofit audit requirements. For grant and contribution revenue, see contributions and grants under ASC 958-605.
The complete set of statements
A not-for-profit presents:
- a statement of financial position
- a statement of activities, which reports the change in net assets for each class
- a statement of cash flows, under ASC 230, using the direct or indirect method
- an analysis of expenses by function and nature, which can be a separate statement, on the face of the statement of activities or in the notes
- notes to the financial statements
Comparative statements are optional. Many organizations present prior-year totals, and where they do, the auditor must consider the effect on the opinion and on the report under AU-C 700 and AU-C 710.
Net assets: two classes
Since ASU 2016-14, net assets are reported in two classes.
Net assets without donor restrictions
These are net assets not subject to donor-imposed restrictions. They include operating resources and amounts the board has set aside for a purpose, such as an operating reserve or a quasi-endowment. A board designation is a management or governing board decision, not a donor restriction, so those net assets remain without donor restrictions. The organization must disclose the amounts and nature of board designations, either on the face of the statements or in the notes.
Net assets with donor restrictions
These are net assets subject to donor-imposed restrictions. A restriction can be:
- a purpose restriction, for example for a scholarship program
- a time restriction, for example a gift received for use in a future year
- both, or a perpetual restriction, as with the corpus of an endowment fund
The notes break the total into major categories, such as purpose, time and perpetual endowment, and describe the nature of the restrictions.
Releases from restrictions
When a purpose is met or a time passes, the amount is released from restriction and moves from the with-donor-restrictions column to the without-donor-restrictions column. Check that the release was correctly recorded, that expenses released are those allowed by the donor, and that the order of release respects the donor's terms. ASC 958 also allows a policy election for a restricted contribution received and spent in the same period, so the organization may report it as without donor restrictions. If it makes the election, it must apply it consistently and disclose it.
Endowments
For organizations with endowment funds, the notes must describe the governing law, usually the state's version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), the spending policy and the investment policy. They also need a rollforward of the endowment by class. An endowment whose fair value has fallen below the amount required to be retained, an "underwater" fund, requires specific disclosure. Check the state law and the gift documents.
Statement of activities
Operating measure
ASC 958 allows an organization to present an intermediate measure of operations but does not prescribe the definition. If an operating measure is presented, the organization must disclose how it is defined. Auditors should look at how the measure is built and whether it is consistent between periods.
Investment return
Investment return is reported net of external and direct internal investment expenses. Realized and unrealized gains and losses are included. Return on donor-restricted funds is reported in the class that the donor's terms or law direct.
Contributed nonfinancial assets
ASU 2020-07 requires contributed nonfinancial assets, such as donated supplies, professional services and use of facilities, to be presented as a separate line item in the statement of activities, with disclosures of the types, the valuation techniques, the policy on monetization and any donor restrictions. See nonprofit audit requirements for more on contributed nonfinancial assets and the criteria for recognizing donated services.
Functional expenses
All not-for-profits report an analysis of expenses by function and by nature. Natural classifications include salaries, benefits, occupancy and professional fees. Functional classifications include program services, management and general, and fundraising. Many organizations show this as a matrix, with natural classes in rows and functions in columns.
Allocation methods
Costs that benefit more than one function, such as salaries, rent and utilities, have to be allocated. The notes must describe the methods used. Common methods are time studies, square footage, headcount and direct charges.
Ask the following:
- Is the allocation basis documented and consistent with the facts? A flat percentage that never changes may mean the allocation was done once and never revisited.
- Are fundraising costs complete? Costs of joint activities, such as a mailing that educates and asks for money, have separate rules.
- Does management and general include costs that should be in program or fundraising, and are the totals plausible against prior years?
- Do donors, grant agreements and the Form 990 use the same classifications?
Donors, grantors and regulators read functional expense data, so the allocation should be supportable.
Liquidity and availability disclosures
ASC 958 requires information about the organization's liquidity in two parts.
Qualitative information
Notes explain how the organization manages its liquid resources to meet cash needs for general expenditures within one year of the balance sheet date. Many organizations describe their operating reserve policy, lines of credit and the timing of major receipts.
Quantitative information
The organization communicates the availability of its financial assets at the balance sheet date to meet general expenditures within one year. This is usually shown as a table that starts with total financial assets and deducts:
- amounts not available because of donor restrictions
- amounts not available because of contractual limits or illiquidity
- board-designated amounts, which are internal limits on use; organizations often show them as a separate line or subtotal and explain whether the board could draw on them
The result is financial assets available within one year. The requirement may also be met in part by information on the face of the statement of financial position, such as by presenting assets in order of liquidity and liabilities by maturity, and by the notes.
When testing, tie every line to the balance sheet, check that restricted amounts equal the restricted net assets less amounts that are not financial assets, such as contributed property, and compare the result with the liquidity narrative. Do the assets described as available really convert to cash within a year?
Issues to look for
- Net assets classified by habit, for example putting a multi-year grant received in advance entirely in without-donor-restrictions.
- Board designations disclosed as restrictions or the reverse.
- Releases from restrictions that exceed the amount spent for the purpose, or cover periods before the gift.
- Functional allocations set once at year-end with no support.
- A liquidity table that does not tie to the balance sheet or ignores restricted cash.
- Prior-year columns that do not agree to the prior audited statements.
- Contributed services recorded without an assessment of whether the criteria for recognition are met.
A statement-by-statement disclosure checklist helps. The GAAP disclosure checklist is a starting point to adapt for ASC 958 items.
Frequently asked questions
What are the two classes of net assets under ASC 958?
Net assets without donor restrictions and net assets with donor restrictions. Board designations remain in the without-donor-restrictions class, but the organization discloses them.
Are board-designated funds restricted?
No. A board designation is an internal decision and does not create a donor restriction. The amounts stay in net assets without donor restrictions, with the nature and amount disclosed.
Who must present a statement of functional expenses?
All not-for-profit entities must report an analysis of expenses by function and nature. Voluntary health and welfare organizations had a separate statement before ASU 2016-14, and the analysis can now appear on the face of the statement, as a separate statement or in the notes.
What must the liquidity disclosure include?
Qualitative information on how liquid resources are managed to meet needs within one year, and quantitative information on the financial assets available within one year after considering donor restrictions, contractual limits and board designations where applicable.
Do nonprofits present a statement of cash flows?
Yes, under ASC 230. The organization may use the direct or indirect method, and restricted cash and cash equivalents are included in the reconciliation under the current cash flow guidance.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- FASB ASC 958-205 (presentation of financial statements, net asset classes, endowment disclosures, releases), ASC 958-210 (liquidity and availability), ASC 958-225, ASC 958-720; FASB ASU 2016-14
- FASB ASU 2020-07 (contributed nonfinancial assets); ASU 2016-18 and ASC 230 (restricted cash and cash flows)
- Uniform Prudent Management of Institutional Funds Act (UPMIFA), Uniform Law Commission
- AICPA, AU-C Sections 700 and 710
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