Net assets with and without donor restrictions under ASU 2016-14

In this lesson you will

Classify net assets as with or without donor restrictions
Distinguish donor restrictions from board designations
Record releases from restriction, including the placed-in-service approach
Test the net asset disclosures ASU 2016-14 requires

From three classes to two

Before ASU 2016-14, NFPs reported unrestricted, temporarily restricted and permanently restricted net assets. The FASB found the permanent versus temporary line had blurred, partly because state law changes on endowment spending made it less meaningful. ASU 2016-14, issued August 2016, requires two classes on the face of the statement of financial position: net assets without donor restrictions and net assets with donor restrictions, plus total net assets. The statement of activities shows the change in each class and in total.

The update was effective for annual statements for fiscal years beginning after December 15, 2017. Every NFP now reports this way, so your job is not adoption but classification and disclosure.

What a donor restriction is

A donor restriction limits the use of contributed resources by purpose (spend it on the food pantry) or time (spend it next year, or hold it in perpetuity). Donors create restrictions, and laws such as a state's enacted version of UPMIFA create them for donor-restricted endowment funds. A restriction is narrower than a condition: a restriction tells the NFP how or when to use a gift it is already entitled to, while a condition determines whether it is entitled at all. Lesson 4 covers conditions.

Board designations are not donor restrictions

When the board sets aside unrestricted money for a building reserve or a quasi-endowment, the money stays in net assets without donor restrictions. The board can reverse its own vote. ASU 2016-14 requires disclosure of the amounts and purposes of governing board designations, appropriations and similar self-imposed limits at period end, so the reader can see them without confusing them with donor limits. On Form 990, Part X, line 27 reports net assets without donor restrictions, so a board designation stays on that line.

Releases from restriction

A restriction expires when the purpose is met or the time passes. The NFP then reports a reclassification from net assets with donor restrictions to net assets without donor restrictions, shown on the statement of activities as net assets released from restriction.

Two points catch staff:

Placed in service. For gifts of cash or other assets to acquire or build a long-lived asset, ASU 2016-14 requires the placed-in-service approach unless the donor says otherwise. The restriction expires when the asset is placed in service. The old option to release the restriction over the asset's useful life is gone.
Simultaneous release. An NFP can elect to report donor-restricted contributions whose restrictions are met in the same period as support without donor restrictions, if it has a similar policy for investment gains and income, reports consistently and discloses the policy. ASU 2018-08 lets an NFP elect this for contributions that were initially conditional without electing it for everything else.

Disclosures to test

ASU 2016-14 requires the notes to show:

the amounts and purposes of board designations and similar self-imposed limits
the composition of net assets with donor restrictions at period end and how the restrictions affect the use of resources

A common layout lists restricted net assets by purpose (programs, time, endowment held in perpetuity, accumulated endowment gains not yet appropriated). Your work is to tie each line to donor documents and to the rollforward.

Audit approach

Build or obtain a rollforward of restricted net assets by donor or fund: beginning balance, new restricted contributions, investment return on restricted funds, releases and ending balance. Then:

vouch new restricted gifts to gift agreements or solicitation materials
test releases by matching qualifying expenses or the passage of time to the restriction
read board minutes for designations and make sure none were reported as donor restrictions
check that the face totals, the composition note and Form 990, Part X, lines 27 and 28 agree

The net asset rollforward template gives a layout for this work.

Worked example

Classifying year-end net assets: Hillcrest Animal Rescue

At December 31, 2026, Hillcrest Animal Rescue has total net assets of $3,400,000. The schedule management gives you shows:

General operating balance: $1,150,000
Board-designated building reserve: $600,000
Donor gift for a new kennel wing, construction 40% complete: $500,000
Gift restricted for 2027 operations: $150,000
Donor-restricted endowment corpus: $800,000
Accumulated endowment gains not yet appropriated: $200,000

Step 1, without donor restrictions: $1,150,000 plus the $600,000 board reserve = $1,750,000. The board can undo its designation, so it is not a donor restriction.

Step 2, with donor restrictions: kennel $500,000 (wing not yet placed in service) + 2027 operations $150,000 + endowment corpus $800,000 + unappropriated gains $200,000 = $1,650,000.

Step 3, check: $1,750,000 + $1,650,000 = $3,400,000, which agrees with total net assets.

Management had put the $600,000 building reserve in restricted net assets. That misstates both classes by $600,000. You propose a reclassification and note that the board designation must be disclosed by amount and purpose.

Self-check

Answer each question before you open the answer.

The board votes to set aside $250,000 of unrestricted cash for a future capital campaign. Which net asset class holds it?
Show answer
Net assets without donor restrictions. It is a board designation, which must be disclosed by amount and purpose, but it is not a donor restriction.
A donor gives $90,000 to buy a van. The van is bought and placed in service on March 1. When does the restriction expire if the donor said nothing else?
Show answer
On March 1, when the van is placed in service. ASU 2016-14 requires the placed-in-service approach absent explicit donor stipulations.
What must an NFP do to report restricted gifts whose restrictions are met in the same period as support without donor restrictions?
Show answer
Elect the policy, have a similar policy for investment gains and income, report consistently from period to period and disclose the policy (ASC 958-605-45-4A). ASC 958-605-45-4B, added by ASU 2018-08, allows the election for gifts that were initially conditional contributions without also electing it for other restricted contributions or investment gains and income.

Sources

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error