New Take on Net Assets

We keep getting “the question.” Hint — it’s not “Would you be our treasurer?” Though we get that one a lot, too.

No, the question we refer to is when our client points to the net assets section of the organization’s balance sheet and asks, “Is that the money we have to spend?”

It’s a little bit more complicated than that.

Net assets is what’s left after you subtract liabilities from total assets.  Put another way, net assets is the amount of the organization’s assets not financed with debt.

It’s even possible, if liabilities exceed assets, for net assets to be negative. Negative net assets would be bad.

A positive number for net assets is looking better, but before you can give a thumbs up, you need to look more closely. Are any of the net assets restricted?

New Language for Net Assets

The Financial Accounting Standards Board (FASB) decided the language around net assets was too confusing. Imagine that, a bunch of accountants agreeing nobody could understand them. So they came out with Accounting Standards Update (ASU) 2016-14 that defines two types of net assets:

  1. Net assets with strings attached
  2. Net assets without strings attached

Just kidding! The actual language they use is:

  1. Net assets with donor restrictions
  2. Net assets without donor restrictions

First subtract liabilities from total assets to come up with total net assets. Then remove net assets with strings attached, er, make that with donor restrictions. Any positive number remaining is net assets without strings attached; er, we mean without donor restrictions.

What are net assets with donor restrictions?

The new rules define net assets with donor restrictions as “the portion of net assets subject to donor-imposed restrictions.” That’s what we just said.

Maybe a few examples will help.

Net Assets with Donor Restrictions as to Purpose

Net assets with donor restrictions can be temporarily restricted as to purpose. For example, you receive a grant to provide transportation for visually impaired individuals or to conduct a summer theatre program for teens.  As you spend the funds on the specified program, the temporary restrictions are released. Any UNspent purpose-restricted funds would be part of net assets with donor restrictions.

Net Assets with Donor Restrictions as to Time

Net assets with donor restrictions can also be restricted as to time. For example, you receive a pledge to be paid over five years. The portion to be paid in future years is considered time restricted since it’s not available to be spent until you receive it. You may also receive a grant with explicit restrictions on when the funds are to be used. In this case the restrictions are released with the passage of time. Funds to be received and/or spent in future years would be part of net assets with donor restrictions.

Net Assets with Donor Restrictions for Endowment

Another type of donor-imposed restriction is “permanently restricted.” Permanently restricted funds under the new accounting standard are now called endowment funds. (Actually we’ve always referred to such funds as endowment; now it’s just official.) Per the FASB Glossary, the purpose of endowment funds is to provide income for the maintenance of a not-for-profit organization. Endowment funds may provide income in perpetuity (permanent endowment) or for a specified period (term endowment). Endowment funds are also part of net assets with donor restrictions.

Net Assets Without Donor Restrictions

So if part of the organization’s net assets are comprised of net assets with restrictions, these net assets need to be pulled out and presented separately from total net assets. The remaining balance is net assets without donor restrictions. If net assets without donor restrictions is a positive number (and it should be) that’s a good thing. Unfortunately it still does not represent the money you have to spend.

In a future post we’ll delve into determining the money you have to spend!

1 Comment

  1. Smithk401 on May 28, 2018 at 2:10 pm

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