As we have written before, the Financial Accounting Standards Board (FASB) has issued its proposed Accounting Standards Update on the presentation of financial statements of not-for-profit entities. One of the significant proposals from the FASB is a significant change in the current three classifications of net assets, unrestricted, temporarily restricted, and permanently restricted, to two classes of net assets, with restrictions, without restrictions.
Not-for-profits have been using the three net asset classifications approach (unrestricted, temporarily restricted, and permanently restricted), since FASB Statement No. 117 was issued in June of 1993. Under the current guidance, organizations report net assets and changes in net assets under the three categories of net assets depending on the existence or absence of donor-imposed restrictions. Unrestricted net assets are those without donor-imposed restrictions. Temporarily restricted net assets are those that are subject to restrictions that are limited to a specific period of time or use, and permanently restricted net assets are those that are subject to donor-imposed restrictions in perpetuity.
The Proposed Guidance Changes to FASB's ASU on the Presentation of Financial Statements of Not-for-Profit Entities Regarding Net Asset Classification
The proposed guidance changes the classifications from three to two – without donor restrictions and with donor restrictions. Within the two proposed classifications, organizations will be required to disclose information relative to the availability of the net assets (i.e., spendable or non-spendable) either on the face of the financial statements or within the footnotes to the financial statements.
So why the changes? Ultimately, the FASB’s aim is to reduce complexity in financial reporting. The combination of temporarily and permanently restricted net assets to one category – with restrictions- will ultimately reduce confusion, particularly as changes in endowment laws have blurred the lines within the current net asset classification structure. Further, the FASB believes that the more detailed distinctions about the nature and types of donor-imposed disclosures, including availability of those resources, are more effectively presented in the notes to the financial statements. The proposal allows NFPs to present this information either on the face of the financial statements, or in the notes to the financial statements, which will give flexibility to the NFP.
Ultimately, the goal of the proposed changes is to allow the financial statement reader to gain a better picture of existing restrictions and the ultimate liquidity of an organization’s net assets.
Contact us for more information regarding FASB's proposed guidance to net asset classifications and visit our not-for-profit services page to learn about our industry group.
Read Part 2 of our NFP Reporting Model series about the treatment of endowments.
Read Part 3 of our NFP Reporting Model series about performance measurement.
Read Part 4 of our NFP Reporting Model series about measuring and disclosing liquidity.