With the new guidance from FASB, one aspect of financial reporting that will change for nonprofits is how net assets are classified. Currently, there are 3 categories of net assets – unrestricted, temporarily restricted, and permanently restricted – depending on stipulations donors put on the money or assets they contribute. Once the new guidance takes effect, in fiscal years beginning after December 15, 2017, organizations will show 2 types of net assets – net assets with donor restrictions, and net assets without donor restrictions. This will impact 2 financial statements – the balance sheet, and the statement of activities.

Either on the face of the financial statements or in the notes, organizations will be required to provide information about the nature and amount of donor-imposed restrictions on net assets, as well as board designations or restrictions on net assets without donor restrictions. The information should include details such as the time period in which the assets may be used and/or if they must be used for a specific purpose or service performed by the organization.

These disclosures are targeted to help donors, grantors, creditors, and others in evaluating an organization’s liquidity, financial performance, ability to continue providing services, and availability of resources to meet cash needs in the coming year.

An organization can choose to report each category of net assets in multiple lines to show more detail, such as which assets are expected to be maintained in perpetuity, versus what is expected to be spent over time or for specific purposes. In these cases, the organization must still report the total amount for each type of net assets (with or without donor restrictions), as well as the total amount of net assets.

FASB’s goal in making these changes is to make financial statements less complex and easier to use by individuals and organizations evaluating a nonprofit’s position and health. It would also reduce some inconsistencies between organizations, since state laws vary on how endowments are handled, as far as how much of the original body of the gift must be maintained by the recipient organization, and if a piece of the original gift may be spent while the investment market rebounds, in the case of underwater endowments. Details like this, which are not always obvious on the face of financial statements, can be highlighted in the attached notes and disclosures.