Accounting for Private Not-for-Profit Organizations | CPA Exam FAR

This page covers the three classes of net assets: unrestricted, temporarily restricted, and permanently restricted as well as Statement of Financial Position and Statement of Activities.

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Three Classes of Net Assets Private not-for-profits report both current and long-term assets and liabilities and measure revenues and expenses using the accrual basis of accounting. The financial statements of these organizations do not report by fund, and the excess of assets over liabilities is termed net assets, not fund balance.

The FASB has identified three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. To be restricted, resources must be restricted by donors or grantors; internally (Board) designated resources are considered unrestricted.

Permanently restricted net assets include permanent endowments (resources that must be invested permanently) and certain assets such as land or artwork that must be maintained or used in a certain way. As the term indicates, these resources are expected to be restricted as long as the organization has custody.

Temporarily restricted net assets include unexpended resources that are to be used for a particular purpose or at a time in the future and resources that are to be invested for a period of time (under a term endowment). Temporarily restricted resources might also be used for the acquisition of fixed assets.

Temporarily restricted net assets come from contributions with donor-imposed restrictions and are released from restriction at some point in the future either through the passage of time or as a result of the organization using the resources according to the donor’s wishes.

Unrestricted net assets include all other resources such as unrestricted contributions, revenues from providing services, and unrestricted income from investments. Resources are presumed to be unrestricted unless there is evidence of donor-imposed restrictions. Donor-restricted contributions whose restrictions are satisfied in the same accounting period that the contribution is received may also be reported as unrestricted. F

Financial Reporting The required financial statements include (1) Statement of Financial Position, (2) Statement of Activities, and (3) Statement of Cash Flows. Certain note disclosures are also required and others are recommended. In addition, voluntary health and welfare organizations are required to report a Statement of Functional Expenses that shows expenses by both function and natural classification. A great deal of flexibility is permitted in statement preparation, as long as certain requirements are met. The Statement of Financial Position reports assets, liabilities, and net assets (residual equity). Assets and liabilities are reported in order of liquidity, or a classified statement may be prepared. Net assets must be broken down into unrestricted, temporarily restricted, and permanently restricted classes. It is not necessary to identify which assets and liabilities are restricted. The Statement of Activities reports revenues, expenses, gains, losses, and reclassifications (between classes of net assets). Organization-wide totals must be provided. Separate revenues, expenses, gains, losses, and reclassifications are also provided for each class of net assets. (Expenses are reported as decreases in unrestricted net assets.) The Statement of Cash Flows uses the standard FASB categories (operating, investing, and financing). Either the indirect or the direct method may be used. The indirect method (or the reconciliation schedule for the direct method) reconciles the change in total net assets to the net cash used or provided by operating activities. Restricted contributions or restricted investment proceeds that will be used for long-term purposes (endowments or plant) are reported as financing activities. A Statement of Functional Expenses is required for voluntary health and welfare organizations. It presents a matrix of expenses classified, on the one hand, by function (various programs, fund-raising, etc.) and, on the other hand, by object or natural classification (salaries, supplies, travel, etc.).