ASC 958: Financial Reporting for Not-for-Profits

The Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Topic 958 provides authoritative guidance for financial reporting by not-for-profit organizations (NFPs) in the United States. This standard brings consistency and transparency to financial statements, helping stakeholders like donors, grantors, and creditors assess an organization’s financial health. ASC 958 applies to a wide range of nongovernmental entities, including charities, foundations, colleges and universities, healthcare providers, and religious organizations.

The guidance complements U.S. Generally Accepted Accounting Principles (GAAP). NFPs must follow all applicable GAAP provisions unless ASC 958 provides specific alternative guidance for transactions unique to these organizations. Compliance with ASC 958 is necessary for obtaining clean audit opinions, securing grants, and maintaining the trust of the public and donors.

Required Financial Statements for Not-for-Profit Entities

ASC 958 mandates that a complete set of financial statements for a not-for-profit entity must include a Statement of Financial Position, a Statement of Activities, and a Statement of Cash Flows. These core statements are supplemented by detailed notes, which are a component of the financial reporting. This information helps donors, members, and creditors make decisions about providing resources.

The Statement of Financial Position acts much like the balance sheet of a for-profit business. It presents a snapshot of the organization’s assets, liabilities, and net assets at a specific point in time. This statement shows what the NFP owns and owes, and it categorizes net assets based on donor-imposed limitations.

The Statement of Activities is the NFP equivalent of an income statement and reports on financial performance over a period, such as a fiscal year. It details the changes in the organization’s net assets from revenues, support, expenses, and other gains or losses. This statement shows how the NFP’s resources are used in its various programs and supporting services.

The Statement of Cash Flows provides information about the cash receipts and payments of an NFP during a reporting period. It classifies cash flows into operating, investing, and financing activities, similar to for-profit entities. NFPs have the option to present their operating cash flows using either the direct or indirect method.

Understanding Net Asset Classification

A primary element of not-for-profit financial reporting under ASC 958 is the classification of net assets into two categories: net assets without donor restrictions and net assets with donor restrictions. This classification system communicates how an organization’s resources can be used. The distinction between these classes is based on the existence or absence of restrictions placed by a donor on their contribution.

Net assets without donor restrictions are resources free from any limitations imposed by donors. These funds are available for the NFP to use for any purpose that supports its mission. This category includes revenue from exchange transactions, such as ticket sales, and contributions for which the donor has not specified a use. The board may designate some of these funds for specific purposes, but these internal designations do not change their classification because the board can remove the designation.

Net assets with donor restrictions consist of resources subject to specific, donor-stipulated limitations on their use. These restrictions dictate how or when an organization may use the contributed assets. The limitations can be temporary, meaning they can be satisfied by the passage of time or by the NFP taking a specific action. For example, a donation might be restricted for use in a particular program; once the program is run, the restriction is released.

Some donor restrictions are perpetual, meaning the NFP can never spend the principal amount of the contribution. A common example is an endowment fund, where a donor stipulates that the initial gift must be maintained in perpetuity, while the investment income can be used by the organization. ASC 958 requires NFPs to provide detailed disclosures in the notes about the nature and amounts of different types of donor-imposed restrictions.

Accounting for Contributions and Revenue

Under ASC 958, recording incoming resources requires distinguishing between a contribution and an exchange transaction. A contribution is a nonreciprocal transfer in which the NFP receives value without giving commensurate value in return. In contrast, an exchange transaction is a reciprocal transfer where both parties receive something of approximately equal value, like tuition payments or sales of goods and services.

Once a transfer is identified as a contribution, the next determination is whether it is conditional or unconditional. An unconditional promise to give is recognized as revenue immediately. A promise to give is conditional if it includes both a barrier that must be overcome by the NFP and a right of return for the donor if the barrier is not met.

Barriers are specific, measurable performance-related requirements stipulated by the donor. For example, a foundation might promise a grant of $100,000 to a university, but only if the university raises a matching $100,000 from other donors. The matching requirement is a barrier. Revenue from a conditional contribution is not recognized until the conditions have been substantially met.

This distinction affects the timing of revenue recognition. For an unconditional contribution, the full amount is recorded as support in the period the promise is made, even if the cash will be received later. If the promise is conditional, the NFP does not record any revenue until the specified conditions are fulfilled.

Functional Classification of Expenses

ASC 958 requires that not-for-profit organizations report their expenses by their functional classification. This means grouping expenses according to their purpose, which helps stakeholders understand how the NFP uses its resources. The standard requires expenses to be categorized as either program services or supporting activities.

Program services are the activities that directly fulfill the organization’s mission and purpose. For example, for a food bank, program expenses would include the costs of acquiring, storing, and distributing food. For a university, program expenses would encompass the costs of instruction, research, and student services.

Supporting activities are all other expenses not directly identifiable with a specific program. These are broken down into two subcategories: management and general activities, and fundraising activities. Management and general expenses include oversight, business management, and administrative functions. Fundraising expenses are those incurred to induce potential donors to contribute, such as costs of mail campaigns or special events.

This analysis of expenses by function must be presented in one location, either on the face of the Statement of Activities, in a separate statement, or in the notes. This functional classification must be supplemented by an analysis of expenses by their natural classification, such as salaries, rent, and utilities. This dual presentation provides a detailed view of the NFP’s spending.

Liquidity and Availability Disclosures

ASC 958 mandates specific disclosures regarding an NFP’s liquidity and the availability of its financial assets. These disclosures provide users with a clear understanding of the resources the organization has to meet its near-term cash needs. This information is presented in the notes to the financial statements and includes both quantitative and qualitative components.

The quantitative disclosure requires the NFP to report on the financial assets available to meet cash needs for general expenditures within one year of the Statement of Financial Position date. This involves starting with total financial assets and then subtracting assets unavailable for general use due to internal or external restrictions. These restrictions include donor-imposed limitations or internal board designations.

The qualitative disclosure requires the organization to communicate how it manages its liquid resources to meet its cash needs for general expenditures over the next year. This narrative disclosure provides context for the quantitative information. For example, the NFP might describe its policies for investing excess cash or its plans to draw from a line of credit.