What Is FASB ASC 958-205 for NFP Financial Statements?

The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 958-205 provides authoritative guidance for how not-for-profit (NFP) entities present their external financial statements. The primary purpose is to make financial reporting for these organizations more consistent and transparent, allowing stakeholders like donors and creditors to better assess an organization’s financial health. This standard improves the clarity of NFP financial statements, ensuring they provide relevant information about an organization’s resources and how they are used.

This guidance applies to all NFP organizations, including charities, foundations, private universities, health care providers, and trade associations. The core of the standard is to ensure that financial statements clearly communicate what an organization owns and owes, its sources and uses of funds, and its ability to continue providing services.

The Required Financial Statements for Not-for-Profits

Under ASC 958-205, a not-for-profit organization is required to present a complete set of financial statements. These include a statement of financial position, a statement of activities, and a statement of cash flows. Together, these documents offer a comprehensive view of an NFP’s assets, liabilities, revenues, and expenses for a specific period.

The statement of financial position, often called a balance sheet, presents a snapshot of the NFP’s assets, liabilities, and net assets at a specific point in time. The statement of activities reports the changes in an NFP’s net assets over a period from revenues, expenses, gains, and losses. This statement is the NFP equivalent of an income statement and shows how financial resources have changed through its activities.

The third required report is the statement of cash flows, which details how an NFP obtains and spends cash by classifying transactions into operating, investing, and financing activities. NFPs can prepare this statement using either the direct or indirect method. While statement titles can vary, the fundamental content requirements are standardized by U.S. Generally Accepted Accounting Principles (GAAP).

The information presented across these three statements is interrelated. For example, the change in total net assets on the statement of activities links the beginning and ending net asset balances on the statement of financial position. The statement of cash flows also explains the change in the cash balance reported on the statement of financial position.

Understanding Net Asset Classification

A central requirement of ASC 958-205 is how not-for-profit organizations must classify and report their net assets. The standard mandates a two-class system for the statement of financial position, grouping net assets into two categories: “net assets without donor restrictions” and “net assets with donor restrictions.” This classification framework communicates how an organization’s resources can be used based on its obligations to its donors.

Net assets without donor restrictions represent the portion of an NFP’s resources that are free from limitations imposed by donors. The organization’s board and management have discretion to use these funds to support any of its programs or administrative needs. These assets are generated from sources including unrestricted contributions, revenue from providing services, and investment income.

Conversely, net assets with donor restrictions are subject to specific stipulations placed on their use by the contributor that dictate how or when the assets can be used. Such limitations can be temporary, like a time restriction for a future period, or a purpose restriction for a specific program. Some restrictions are perpetual, as with an endowment where the principal must be maintained permanently while the investment return can be spent.

When a donor’s stipulation is satisfied, the NFP reports a “release from restriction.” For example, if an organization receives a grant restricted for a specific research project, the funds are initially recorded as net assets with donor restrictions. As the NFP incurs expenses for that project, it reclassifies a corresponding amount to net assets without donor restrictions. This reclassification is reported on the statement of activities and signifies that the donor’s requirements have been met.

This two-class system replaced a previous, more complex three-class model that separated net assets into unrestricted, temporarily restricted, and permanently restricted categories. The current approach was adopted to reduce complexity and improve the clarity of financial statements. This provides a more straightforward presentation of an NFP’s available resources and the constraints upon them.

Analysis of Expenses by Function and Nature

ASC 958-205 requires all not-for-profit entities to provide a detailed analysis of their expenses, classified by both their function and their nature. This dual classification provides a comprehensive view of spending, showing the purpose of the expenditures and the types of costs incurred. This analysis must be presented in one location within the financial statements.

Functional classification groups expenses according to their purpose, aligning them with the major activities of the organization. The primary functional categories are program services and supporting activities. Program services are the activities that directly fulfill the NFP’s mission, such as patient care or educational programs. Supporting activities are broken down into management and general expenses and fundraising expenses.

Natural classification categorizes expenses by their type, irrespective of the function they support. Examples of natural expense categories include salaries and wages, rent, utilities, and professional fees. By presenting expenses by both function and nature, an NFP can show how much it spent on salaries in total and how those costs were allocated among its various programs and supporting functions.

The standard provides flexibility in how this detailed analysis is presented. An NFP can choose to present it directly on the face of the statement of activities, as a separate supporting schedule, or within the notes to the financial statements. The chosen method must clearly show the relationship between the functional and natural classifications for all expenses.

Required Disclosures for Liquidity and Availability

The accounting standards require NFPs to provide specific disclosures about the liquidity and availability of their financial assets. These disclosures are intended to give users a clearer picture of an NFP’s ability to meet its short-term cash needs. The guidance mandates both qualitative and quantitative information to communicate how an organization manages its liquid resources and financial flexibility.

The qualitative component of the disclosure is narrative. It requires the NFP to communicate its strategy for managing liquid resources to cover general expenditures over the next twelve months. This might describe the organization’s policies for investing excess cash, any lines of credit it has available, or internal board policies that set targets for maintaining liquid assets.

The quantitative disclosure provides specific data on the financial assets available to meet cash needs for general expenditures within one year of the statement of financial position date. This disclosure is a reconciliation that starts with the total amount of financial assets held by the NFP. It then systematically subtracts those assets that are not available for general use due to various limitations.

To create the quantitative disclosure, an NFP begins with the total value of its financial assets, such as cash and investments. From this total, it deducts assets with donor-imposed restrictions that limit their use to long-term purposes, such as endowment funds. It also subtracts assets with internal limitations, like board-designated funds, which makes them unavailable for general expenditures. The resulting figure represents the financial assets available for general use within the next year.