Managing Restricted Net Assets in Nonprofit Accounting

If the organization is not producing surpluses, it will have a difficult time building balance sheet strength (i.e., reserves). Ideally, leaders should look at whether the organization is generating surpluses without restrictions, and ask if revenue without restrictions covers operating expenses. While this calculation is fairly straightforward, determining and applying insights about your net assets to your nonprofit’s unique situation can be challenging. For best results, we recommend reaching out to nonprofit accountants like the team at Jitasa. Our expert financial professionals will ensure your unrestricted and restricted net assets are calculated accurately and properly applied to your budget, chart of accounts, financial statements, tax returns, and more. Conversely, net assets with restrictions have to be used for a specific project, program, or other purpose at your nonprofit as stipulated by the donor or grantmaker who contributed the funding.

Net Assets vs. Equity for Nonprofits

Unrestricted net assets are financial resources that can be used by an organization at any time, without restrictions. How many months of cash does an organization have on hand to pay bills during both good times and bad? You may know from best practice in personal finance that many suggest having six months of expenses on hand in cash – just in case your income situation changes dramatically.

Unrestricted Net Assets and Key Financial Ratios Help Nonprofits Focus on their Financial Health

In other words, net assets are what remains when all debts and obligations are subtracted from the value of the organization’s assets. It is important to note that nonprofits do not have owner’s equity or retained earnings like for-profit businesses. Unrestricted net assets are funds that a nonprofit can use at its discretion.

Implications of Net Assets for Stakeholders

The management of endowment funds also involves adhering to legal and regulatory requirements, such as the Uniform Prudent Management of Institutional Funds Act (UPMIFA). This act provides guidelines for the investment and expenditure of endowment funds, emphasizing the need for prudence and care in managing these assets. Nonprofits must also provide detailed disclosures about their endowment funds in their financial statements, including information about the composition of the funds, investment strategies, and spending policies. These disclosures help stakeholders understand how the organization is managing its long-term financial resources to support its mission. Another critical aspect of ASC 958 is the requirement for enhanced disclosures.

Impact on Financial Statements

Managing these assets requires a long-term investment strategy to ensure that the principal remains intact while generating sufficient income to meet the donor’s objectives. This type of asset provides a stable, ongoing source of funding, contributing to the organization’s long-term sustainability. Donors and funders play a crucial role in the success of nonprofit organizations. Their contributions provide the necessary financial support for these organizations to carry out their missions and make a positive impact in the community. Donors are individuals or entities who voluntarily give money or resources to support a nonprofit’s activities. Funders, on the other hand, are organizations or institutions that provide grants or sponsorships to fund specific programs or projects.

• It wouldn’t be fair to subtract fixed assets from the equation in step two if you didn’t get to add the related liabilities back in.
• Permanently restricted assets often come in the form of a fund that must be maintained indefinitely, with the income generated by its investment to be used for a particular purpose.
• Two key ratios are Months of Cash and Months of Liquid Unrestricted Net Assets (LUNA).
• This article is not intended to provide tax, legal, or investment advice, and BooksTime does not provide any services in these areas.
• Permanently restricted net assets are a vital component of a nonprofit organization’s financial structure.

Example with Restricted Cash

Next, they will be reclassified as unrestricted and can be used to achieve its goals and mission. Nonprofits frequently encounter various scenarios where temporarily restricted net assets are released, each with its own set of implications and opportunities. One common situation involves the completion of specific projects or programs funded by donors. For example, a nonprofit might receive a grant to build a community center, with the stipulation that the funds be used solely for construction. Once the center is completed, the funds are released from their restrictions, allowing the organization to reclassify them as unrestricted net assets.

Another animal-lover may want to be certain that a gift will be used only to rescue cats from kill shelters, and never for mundane administrative purposes. Notice that the split between net assets with and without donor restrictions has changed. What if the $100,000 grant was restricted not for a building, but for use in running a counseling service? You’d have to check the details of the grant to see exactly what types of expenses are included. Likely there’s a budget that shows how much can be spent on payroll, technology, office expenses, etc. In that case, you would be in luck if you wanted to use the money for the counseling program.

Interestingly, nonprofits are required to classify their net assets as restricted or unrestricted on their financial statements. Anything your nonprofit owes—debt, payables, deferred revenue, etc.—is considered a liability. A nonprofit statement of activities is one of the key financial reports every leader should know how to read.

The release of net assets from restrictions has a profound effect on a nonprofit’s financial statements, influencing both the balance sheet and the statement of activities. When temporarily restricted net assets are released, they are reclassified as unrestricted net assets, which can significantly alter the organization’s financial landscape. This reclassification not only reflects the fulfillment of donor-imposed conditions but also showcases the nonprofit’s ability to effectively manage and utilize its resources. The Statement of Activities is an important financial statement for nonprofit organizations. It provides a detailed overview of the revenue and expenses of the organization for a specific reporting period.

Unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets all are listed on this statement. Once an agreement is in place, nonprofits must implement robust tracking systems to monitor the use of restricted funds. This often involves how to calculate unrestricted net assets setting up separate accounts or project codes within the accounting system to ensure that restricted funds are not commingled with unrestricted resources. Regular internal audits can help verify that funds are being used in accordance with donor intentions.

This statement helps stakeholders understand the financial health of the nonprofit and its ability to meet its obligations. They represent the organization’s financial resources and are essential for supporting its mission, ensuring the appropriate use of donations and grants, and providing transparency to stakeholders. When managing net assets released from restrictions, nonprofits must adhere to specific accounting practices to ensure transparency and accuracy. The process begins with recognizing when the conditions tied to temporarily restricted net assets have been met. This recognition is crucial as it triggers the reclassification of these funds from temporarily restricted to unrestricted net assets. For instance, if a donor’s contribution was intended for a project that has now been completed, the funds can be released and reallocated accordingly.

Categorised in: Bookkeeping

This post was written by vladeta