Net assets, presented in the nonprofit Statement of Financial Position report, reveal total revenue, assets and liabilities. The statement of the nonprofit financial position report provides an overview of what an organization is worth and a birds eye view of the health of the organization.
Net Assets and Liabilities: Statement of Financial Position
Likewise, for-profit businesses and nonprofit organizations both prepare financial statements showing assets and liabilities. While for-profit businesses show owner’s equity made up of retained earnings and stock. Nonprofits do not have owners. As a result, nonprofits do not nave owner equity. In both cases, net assets equal the difference between the total assets and total liabilities. However, nonprofits generate the Statement of Financial Position which only presents revenue, assets and liabilities.
Similarly, the calculation of retained earnings and net assets is essentially the same. However, it is the cumulative difference between revenue and expenses.
Revenue is classified as:
- net assets without donor restrictions
- net assets with donor restrictions
Most importantly, net assets represent the net worth of the organization. It includes fixed, liquid (cash), long term, tangible and intangible assets.
Explanation of Nonprofit Net Assets
Only two classes required for nonprofit financial statements. The two new classes replace the older classes of: unrestricted funds, temporarily restricted funds and permanently restricted funds
Net assets with donor restrictions combine the temporarily restricted and permanently restricted classes. Net assets without donor restrictions replace the unrestricted funds class.
Donors determine the net assets class at the time of their donation. Donations without donor restrictions allows the nonprofit use for whatever purpose it needs to fulfill its mission. Donations with donor restrictions mandates use for its designated purpose.
- When a donor does not specify restrictions on their contribution, the donation is recorded as an asset and revenue. This type of revenue will result in an increase in the total net assets without donor restrictions.
- When a donor imposes restrictions on their donation, the revenue is recorded as donor restricted contribution revenue. This results in an increase in net assets with donor restrictions.
New Classes Simplify Reporting
Moreover, the new classes simplify the treatment of assets in the Statement of Financial Position. It now focuses on the existence or absence of donor imposed restrictions instead of the types of restrictions.
Above all, the new treatment of assets in accounting have improved reporting in the following ways:
- Reduces complexity in net asset grouping
- Clarifies information regarding liquidity and availability of resources
- Demonstrates transparency in reporting of financial performance
- Shows consistency in reporting expenses
- Utilizes the statement of cash flows
For nonprofits, the Statement of Activities report replaces the income statement generated by for-profit businesses. However, it presents revenue and expenses according to the two classes of net assets.
Statement of Financial Position Breakdown
Depending on whether you use cash versus accrual accounting for nonprofits, the statement breaks it down into three categories:
- Net Assets
This section categorizes assets by current, fixed and other assets.
Current Assets contain cash, investments, accounts receivable, and prepaid expenses.
Fixed Assets contain buildings, vehicles, furniture and large equipment and their accumulated depreciation, which helps you determine the net value of your fixed assets.
And other assets, which include long term receivables.
This section categorizes liabilities by current and long term liabilities.
Current liabilities contain your payables, accrued expenses, payroll tax liabilities and short term loans.
Long term liabilities contain the long term payables, such as mortgages, or loans.
Essentially assets are what your organization owns and liabilities are what your organization owes.
Net Assets Section
And the difference between your assets and liabilities are your Net Assets, or the net worth of your organization.
This amount calculates cumulative difference between revenue and expenses over the course of your organization’s life. But, the nature of nonprofit revenue requires that revenue be classified as either unrestricted, or with donor restrictions or designations.
So the this section of your statement of financial position has unrestricted funds that can be used for the general benefit of the organization. It includes designated funds used in compliance with the restrictions placed on the revenue by the donor.
Recognizing net assets with donor restrictions on financial statements help decision makers be aware of obligations in the future. Changes in net assets without donor restrictions shows whether an organization operated with a gain or a loss. Subsequently, this provides a birds eye view the nonprofit’s cash flow.
The debt to equity ratio measures liquidity and shows how much debt versus revenue is being used. To clarify, the new financial statement presentation of net assets provides improved information for donors, grant makers and other funding sources. Above all, t also reduces the complexities and costs of financial reporting.
So, when reading a statement of financial position a healthy nonprofit will have assets that are greater than their liabilities and their net assets will have a large surplus to be used to achieve its goals in the future. As a nonprofit, your mission is your main goal, however a net asset surplus is key to the growth and sustainability of the organization.
True fund accounting for nonprofits tracks assets and comply with restrictions imposed by donors. However, they are no longer required to distinguish between temporarily and permanently restricted funds. Most importantly, nonprofit leaders need to communicate and understand these calculations over time to gain insight into their financial trends.
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