23.1 Not-for-Profit Net Assets and Restrictions

Blueprint Focus

The 2026 AICPA Financial Accounting and Reporting (FAR) Blueprint includes nongovernmental not-for-profit (NFP) reporting in Area I, Financial Reporting. The tasks are practical: recall the purpose of the statement of financial position and the statement of activities, prepare those statements from a trial balance, and adjust them to correct errors. For NFPs, most classification errors begin with net assets, so this is high-yield simulation territory.

An NFP does not report retained earnings, additional paid-in capital, or shareholders' equity. Under Accounting Standards Codification (ASC) 958 (as amended by ASU 2016-14), it reports just two classes: net assets without donor restrictions and net assets with donor restrictions. The pre-2018 three-class model (unrestricted, temporarily restricted, permanently restricted) is gone — a common trap if you trained on older material.

Net Asset Classification Table

Note the change from the old model: a perpetual endowment is no longer its own "permanently restricted" class. It is reported within net assets with donor restrictions, with disclosure of the perpetual nature, amounts, and donor-imposed restrictions.

Restriction, Designation, or Condition

A donor restriction limits how or when already-recognized resources may be used. A board designation is an internal management plan applied to otherwise unrestricted resources. A condition affects whether the contribution is recognized at all (covered in 23.2). FAR punishes candidates who collapse these three distinct ideas into one bucket.

Worked Example: Release From Restriction

A donor gives $100,000 today restricted for a summer program that runs next year, and the gift is unconditional. The NFP recognizes $100,000 of contribution revenue with donor restrictions now. When the program runs next year and qualifying costs are incurred, the NFP records a release from restriction: net assets with donor restrictions decrease $100,000 and net assets without donor restrictions increase $100,000. The program expense itself is then reported as a decrease in net assets without donor restrictions. Net assets do not change twice — the release moves resources between classes; the expense consumes them.

Contrast a board action. If the board later votes to set aside $100,000 of unrestricted cash for the same program, nothing reclassifies. The board can reverse itself, so the amount stays in net assets without donor restrictions, though the designation may be disclosed.

Statement of Activities Logic

The statement of activities reports changes in both net asset classes. Contributions appear with or without donor restrictions depending on donor language. Expenses are generally reported as decreases in net assets without donor restrictions, because expenses show how the NFP used resources to carry out its mission. The release line connects the two: restricted resources flow to the unrestricted class as the restriction is satisfied, and the expense is then recorded in the unrestricted column.

Simulation Workflow

Use this sequence on net-asset simulations:

1. Confirm the entity is a nongovernmental NFP under FASB (ASC 958), not a government under GASB.
2. Separate donor language from board or management language.
3. Decide whether the contribution is already recognized or still conditional (a condition blocks recognition entirely).
4. Classify recognized support as with or without donor restrictions.
5. Record a release only when the time period elapses or the restricted purpose is fulfilled.
6. Tie ending net assets on the statement of activities to the statement of financial position.

Exam Traps

• The phrase "restricted cash" alone is not enough. Ask who created the restriction. A bank covenant, a board reserve, a donor time limit, and a donor purpose limit all constrain cash in plain English, but only donor-imposed limits drive the two NFP net asset classes.
• Do not split expenses across net asset classes. Expenses are reported in the without-donor-restrictions column; satisfying the donor's intent is handled by the release line, not by booking the expense as restricted.
• A perpetual endowment's investment return follows the donor's instructions or applicable law (UPMIFA); the return is not automatically unrestricted.

Liquidity and Availability Disclosure

ASU 2016-14 added two required disclosures that FAR can probe in the notes. First, the NFP must disclose qualitative information about how it manages its liquid resources to meet cash needs within one year of the balance-sheet date. Second, it must disclose quantitative information showing the availability of financial assets at the balance-sheet date to meet those near-term needs, reduced by amounts unavailable because of donor restrictions, board designations, or contractual limits.

A donor-restricted gift usable only after a future date is not available for general expenditure this year, so it is removed from the availability measure even though it is recorded as an asset. This disclosure is a frequent simulation hook because it forces the candidate to re-test which resources are truly free of donor and board limits, reinforcing the same who-imposed-the-limit analysis that drives net asset classification.