Clarifying donor restrictions

New reporting of net assets starting soon

New rules set to take effect for the fiscal year after Dec. 15, 2017 (with early adoption permitted) will change the way nonprofits report and describe their net assets. These changes will reduce the number of net asset classes from three to two and require separate subtotals for activities with and without donor restrictions.

Nonprofits today must report three kinds of net assets on their financial statements: unrestricted, temporarily restricted and permanently restricted. This requirement will be replaced by a new one in which organizations must present only two classes: net assets acquired with donor restrictions, and net assets acquired free of restrictions.

Donations received with restrictions usually limit their purpose and time frame. Financial statements must still offer such information, either on the face or in notes.

Endowment funds

These may fall into either of the new classes. Donor-restricted endowment funds may seem self-explanatory, but a nonprofit must consider other factors as well, such as whether the fund is subject to trust or prudent-management laws.

On the other hand, boards may create “quasi-endowment funds” from unrestricted assets, usually for long-term investment. These also must be reported with information about any self-imposed limits on activities or timely use.

An underwater donor-restricted endowment fund is a fund whose fair value is less than the original donation, or less than the amount that must be maintained either by donor or legal requirements. Nonprofits must report the deficiency amounts for all such funds.

Statement of activities

Like the financial statement, your nonprofit’s statement of activities must present the new classes of net assets, including:

• The total change in net assets for the period,
• The change in net assets without donor restrictions, and
• The change in net assets with donor restrictions.

Further, for the change in unrestricted net assets, the statement of activities must present two subtotals:

• A subtotal of operating revenues, support, expenses, gains, and losses before internal transfers; and
• A subtotal showing the effects of internal transfers.

Note that the new rules involve reporting, and they don’t change the substantive factors nonprofits must consider in classifying their net assets. The standards are designed to reduce complexity, add clarity and improve understanding for all of your nonprofit’s stakeholders, both internal and external.

Other scheduled FASB rules involve changes in how nonprofits report cash flow, resource liquidity, investments and expenses.

For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.