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, presented in the nonprofit Statement of Financial Position report, reveal total revenue, assets and liabilities.
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.
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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.
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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.
What is a Statement of Financial Position?
A statement of financial position is a financial statement that lists an organization’s assets, liabilities, and the difference between them. The structure of the statement of financial position is similar to the basic accounting equation. The statement of financial position must reflect nonprofit accounting principles and guidelines.
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
The difference between total assets and total liabilities equal net assets. This is 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.
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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.
Did you find this article useful? We welcome your thoughts and comments.
Angie Anderson says
For assets of a heritage center, do we have to value our individual artifacts or just property and buildings? If so, do we hire and appraiser to do that? Seems overwhelming. Thank you!
Joseph Scarano says
Yes, it would be necessary to value each of your artifacts for capitalization for assets on your balance sheet. You will also need this valuation for insurance purposes.
Is church building considered both Fixed Asset and NET Asset?
Joseph Scarano says
No, the Church Building a Fixed Asset, not a Net Asset. Net Assets is the cumulative excess or deficiency of a fund’s income and expenses from the beginning of the organization to the current date.
Roger Real says
For non profits are Net Assets and Retained Earnings the same thing?
Joseph Scarano says
Technically, the calculation to arrive at Retained Earnings and Net Assets is the same. It is the cumulative Income over Expenses for the life of the organization. But, a nonprofit does not have retained earnings, since they are nonprofit. That is why it is called Net Assets. There are no earnings that can be distributed to owners, since there are no owners. Also, Net Assets must be classified as either Without Donor Designations, or With Donor Designations.
Prenthis Aguilar says
How do you record a loan from officers/director to the non-profit on the 990-PF balance sheet (part II)? It is a covered exclusion.
Joseph Scarano says
Any payable from officers, directors, trustees and other disqualified persons should be listed on Line 20 of the Balance sheet (Part II).
Under a non-profit organization
How are donations, grants and Fee for Service ( FFS) contracts categorized under the following; with donor restrictions, purpose, single period of time, and time over a period?
Joseph Scarano says
All donor restrictions should be posted to the With Donor Designated Net Asset Class (fund). Once the donor restrictions have been met, whether it is single purpose, or a period of time, an entry should be made to transfer the funds from the With Donor Restricted Net Asset Class to the Without Donor Restricted Net Asset class using the Revenue Released from Restrictions income account.