As we discussed in “What is the Difference between For-Profit Accounting and Fund Accounting for Nonprofits”, there are just as many similarities as differences when accounting for businesses and nonprofit organizations. While nonprofit organizations (unlike businesses) have to adhere to strict accounting and financial reporting guidelines, both nonprofits and for-profits have similar basic accounting statements and reports. As we mentioned in the article referenced above, the statement of financial position (or “balance sheet” as for-profit organizations call it) is an integral part of fund accounting for nonprofits. While you may have heard the term before, many nonprofit startups have questions about the necessity of this statement.
Nonprofit organizations are required to produce the statement of financial position by FASB Statement 117. This statement summarizes the financial position of an organization and addresses the restriction in net assets that the balance sheet does not. The balance equation, however, remains the same:
Assets = Liabilities + Net Assets
Like a balance sheet for for-profit organizations, the statement of financial position lists assets in the order of liquidity, liabilities in the order that they are due, and the difference between the assets and liabilities is the net assets.
Because nonprofit organizations are funded by donors and other organizations such as grantors, donors may place restrictions on their contributions to the organization. Assets need not be reported on the basis of donor-imposed restriction unless they are designated for long-term purposes or received with donor-imposed restrictions that limit their use for long-term purposes. In those cases, there are guidelines for breaking out and reporting the assets designated for long-term use.
- Net Asset Restrictions
Nonprofits can report information about the nature and amounts of the restrictions on net assets by using a separate line for each type of restriction. The information on restrictions can also be included in the notes section for the financial statements.
- Permanently Restricted Net Assets
Permanently restricted net assets are assets that the donor has instructed the organization to maintain in perpetuity. An endowment would be an example of this type of asset. Commonly, a donor contributes funds for an endowment with instructions that the principal may not be spent but the income generated by the endowment fund may be used by the organization.
- Temporarily Restricted Net Assets
A temporarily restricted net asset has either a donor-imposed time or purpose restriction. For example, a school may receive money to be used within a specific school year. A building fund is another example of a temporarily restricted net asset.
- Unrestricted Net Assets
Unrestricted net assets are assets that have neither a permanent or temporary restriction placed on them. In the absence of donor restrictions, net assets are unrestricted.
The statement of financial position offers unique insights into the special circumstances of a nonprofit organization. The statement can give you thorough insight and help you answer the following questions pertaining to your nonprofit:
- What is the state of our cash flow? Is there enough cash to pay the bills?
- Are vendors being paid in a timely manner? Are receivables being collected in a timely manner?
- How long have liabilities been on the books?
- Are tax liabilities being met in a timely manner?
- Are our restricted funds protected?
Producing the proper statements is crucial in fund accounting for nonprofit organizations. Because nonprofit organizations are faced with so many rules and regulations, it’s important to stay up to speed on the reports you’ll need to produce. Investing in a fund accounting software solution can help your organization stay on top of government and private donor requirements, as well as assist you in creating important reports and statements.
Contact us today to learn more about how a fund accounting system can help you produce the statement of financial position and other important reports. Stay tuned to our blog for more tips on fund accounting for nonprofit organizations.