Let’s face it, not many people like change – especially when it comes to their daily routines and their jobs. Change can cause confusion and frustration. I want to take a little time to discuss one of the changes that has affected nonprofit organizations recently. The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities on August 18, 2016. This new accounting standard is effective for fiscal years beginning after December 15, 2017. There are several financial reporting changes under this new accounting standard, but the one that I want to talk to you about and focus on is net asset classifications.
Old standard vs. new standard
Under the old standard, net assets were reported as unrestricted, temporarily restricted or permanently restricted depending on the existence and/or nature of any donor restrictions. Under the new standard, net assets are reported as either net assets with donor restrictions or net assets without donor restrictions. Basically, permanently restricted and temporarily restricted net assets are combined into “net assets with donor restrictions” and unrestricted becomes “net assets without donor restrictions.”
The only change this new standard has on net assets is going from three classifications to two. The change affects the way net assets are presented on the financial statements; it does not change the way net assets are accounted for when it comes to donor restrictions.
To put this in perspective, any contribution that is received from a donor that has either a purpose restriction or a time restriction would be a contribution with donor restrictions and would be classified in net assets with donor restrictions.
- Time restriction: A time restriction is a stipulation imposed by a donor that a contributed asset (i.e. cash) must be used within a specific period of time (i.e. contributions received in 2019 for calendar year 2020).
- Purpose restriction: A purpose restriction is a stipulation imposed by a donor that a contributed asset must be used for a specific purpose (i.e. cash must be used to purchase a vehicle for one of its programs).
Contributions can be time restricted, purpose restricted or both depending on the donor’s intentions. It is important that contributions received with restrictions are tracked properly and used according to the donor’s wishes. If funds are set aside internally, most often initiated by the Board, these funds would be Board designated net assets and are classified as net assets without donor restrictions. The key term in differentiating between the two net asset categories is donor.
Steven Taylor, CPA