Definition
Following ASU 2016-14, a not-for-profit entity classifies net assets into two classes. Net assets with donor restrictions are subject to donor-imposed purpose or time restrictions, or are perpetual in nature. Net assets without donor restrictions have no such limits, and include board-designated amounts, which remain without donor restrictions because the board can change them. Restrictions are released to the without-donor-restrictions class when the purpose is met or the time passes. Entities disclose the nature of the restrictions and liquidity and availability of financial assets.
Why it matters in an audit or review
Auditors test the classification of contributions, the release of restrictions, and compliance with donor intent, using gift agreements and grant documents. A misclassification can hide that cash is committed to a specific purpose.
Example
(Illustrative) A donor gives $100,000 for a scholarship program. It is recorded with donor restrictions. When the organization spends $40,000 on scholarships:
Release: reduce net assets with donor restrictions by $40,000 and increase net assets without donor restrictions by $40,000, then record the expense.
Common mistakes
- Treating board designations as donor restrictions.
- Releasing restrictions on purpose spending before it occurs.
Sources
- FASB ASC 958-210-45 and 958-205-45 (net asset classes and release of restrictions)
- FASB ASC 958-210-50 (liquidity and availability disclosures)
- FASB ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error