SimplyCPA
CPA/FAR/Not-for-Profit Accounting

Not-for-Profit Accounting

Net asset classification and contribution recognition for nonprofit entities.

Medium 1 hrArea I: Financial Reporting

Two net asset classes

Since ASU 2016-14, not-for-profit entities classify net assets into just two categories (down from three):

  • Net assets without donor restrictions
  • Net assets with donor restrictions (purpose-restricted, time-restricted, or restricted in perpetuity — e.g., a permanent endowment)

Contribution recognition

Unconditional contributions are recognized as revenue when received (or promised, for unconditional pledges), at fair value. Conditional contributions — where a barrier must be overcome and a right of return/release exists — are not recognized until the condition is substantially met.

EXAMPLE: A donor pledges $100,000 "if the organization raises a matching $100,000 from other sources by year-end." This is a conditional promise (the match is a measurable barrier) — no revenue is recognized until the matching funds are actually raised.

Required statements

NFPs present a Statement of Financial Position, a Statement of Activities (showing changes in each net asset class), a Statement of Cash Flows, and a Statement of Functional Expenses (breaking expenses into program, management & general, and fundraising categories) — either on the face of the statements or in the notes.

EXAM TIP: When a donor-restricted purpose is satisfied in the same period the contribution is received, the NFP may elect to report it directly in net assets without donor restrictions, avoiding a same-period reclassification.