FASB ASC 958
FASB ASC 958 is the US GAAP standard for not-for-profit entities. It requires a statement of financial position, a statement of activities and a statement of cash flows, with net assets split into two classes and expenses analyzed by nature and function.
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Under FASB ASC 958, as amended by ASU 2016-14, a nonprofit presents a statement of financial position, a statement of activities and a statement of cash flows, with net assets split into "with donor restrictions" and "without donor restrictions," an analysis of expenses by nature and function, and liquidity disclosures.
Definition
ASC 958 is Topic 958, Not-for-Profit Entities, in the FASB Accounting Standards Codification. It sets how nonprofits recognize contributions, classify net assets and present their financial statements. Its presentation rules were overhauled by ASU 2016-14, effective for fiscal years beginning after December 15, 2017. That update cut the three net asset classes (unrestricted, temporarily restricted and permanently restricted) to two: net assets with donor restrictions and net assets without donor restrictions. It also added required disclosures on liquidity and on how expenses are allocated across functions.
Which financial statements does ASC 958 require?
A complete set of nonprofit financial statements under ASC 958 includes a statement of financial position (the nonprofit balance sheet), a statement of activities (the nonprofit income statement, showing changes in each net asset class), a statement of cash flows and the accompanying notes.
Every nonprofit must also present an analysis of expenses by both nature and function. Nature means what the money was spent on, such as salaries, rent or supplies. Function means why: program services, or the supporting activities of management and general, and fundraising. The analysis can sit on the face of the statement of activities, in a separate statement (often called the statement of functional expenses) or in the notes.
For the statement of cash flows, ASU 2016-14 lets nonprofits use the direct or indirect method, and those using the direct method no longer have to present the indirect reconciliation.
Net assets, liquidity and other disclosures
Net assets with donor restrictions are resources a donor has limited by purpose or time, including endowments that must be held in perpetuity. When the restriction is met, for example when a program grant is spent on that program, the amount is released and reclassified to net assets without donor restrictions.
Liquidity disclosures have a qualitative part, explaining how the organization manages liquid resources to meet general expenditures within one year, and a quantitative part, showing the financial assets available for those needs within one year of the balance sheet date. Board designations on unrestricted net assets must also be disclosed.
Other ASU 2016-14 requirements include disclosing the methods used to allocate costs among program and support functions, and specific disclosures for underwater endowment funds, whose deficiencies are classified within net assets with donor restrictions.
Why It Matters
Audited financial statements prepared under GAAP are often required by funders, lenders and state charity regulators, and ASC 958 is the GAAP for nonprofits. The standard reaches into daily bookkeeping: every bill must be coded so it can be reported by function, and every restricted gift must be tracked until its restriction is released. If that coding is not done when transactions are recorded, the year-end statements take weeks of reclassification and the audit takes longer.
Examples
Releasing a restriction
A foundation gives $60,000 restricted to an after-school program. It is recorded as revenue in net assets with donor restrictions. During the year the program spends $45,000. The statement of activities shows $45,000 released from restriction, and $15,000 remains in net assets with donor restrictions at year-end.
Analyzing an expense by nature and function
An $8,000 monthly rent bill covers a building where 70% of the space runs programs, 20% is the finance and admin office and 10% is fundraising. Using square footage, the rent appears as $5,600 program, $1,600 management and general, and $800 fundraising, all under the natural line "occupancy." The square-footage method is disclosed in the notes.
Liquidity disclosure
At year-end a nonprofit has $900,000 in cash and receivables. $350,000 is donor-restricted for future years and $100,000 is board-designated for a reserve. The note shows $450,000 of financial assets available for general expenditure within one year and explains how the organization manages that cash.
Common Mistakes
Still using three net asset classes
Temporarily and permanently restricted were combined into net assets with donor restrictions. Use the two-class presentation and disclose the nature of restrictions in the notes.
Allocating functional expenses only at year-end
Reconstructing functions from a year of bills is slow and hard to support. Code program, management and fundraising when each bill is entered, using classes or tags.
Treating board designations as donor restrictions
A board can change its own designation, so the amount stays in net assets without donor restrictions. Disclose it, but do not reclassify it.
Forgetting to release restrictions
If spending on a restricted purpose is not matched to its gift, restricted net assets are overstated. Review restricted balances monthly and record releases as the purpose or time condition is met.
Leaving the allocation method undocumented
ASU 2016-14 requires disclosure of how shared costs are allocated. Write down the basis, such as time records or square footage, and apply it consistently.
In Practice
- Set up net asset tracking with two classes, and track each donor restriction, by fund or grant, in your accounting system.
- Add functional coding (program, management and general, fundraising) to every expense line, using QuickBooks classes or an equivalent field.
- Agree an allocation basis for shared costs such as rent, IT and the executive director's salary, and document it.
- Each month, review restricted balances and record releases from restriction for spending that met the donor's purpose.
- At year-end, prepare the statement of financial position, statement of activities, statement of cash flows and the analysis of expenses by nature and function.
- Draft the liquidity note: financial assets at year-end, less restricted and board-designated amounts, and how liquidity is managed.
- Give the auditor the allocation method, restriction schedules and release support with the trial balance.
How Aequo AP Helps
Aequo Fund, in early access with a waitlist, keeps QuickBooks Online as the ledger and assigns each bill, expense and journal line to an unrestricted or restricted fund using rules on class, vendor, account or description. It produces a statement of activities, a statement of financial position and a statement of functional expenses, on an accrual or cash basis. Your auditor or accountant still reviews the statements, releases and disclosures.
Start Free TrialFrequently Asked Questions
What is FASB ASC 958?
It is Topic 958, Not-for-Profit Entities, in the FASB Accounting Standards Codification: the US GAAP rules for how nonprofits recognize contributions, classify net assets and present financial statements.
What financial statements does FASB ASC 958 require for nonprofits?
A statement of financial position, a statement of activities, a statement of cash flows and notes, plus an analysis of expenses by nature and function. That analysis can be on the statement of activities, in a separate statement of functional expenses or in the notes.
What are the net asset classes under ASC 958?
Two: net assets with donor restrictions and net assets without donor restrictions. ASU 2016-14 replaced the old three classes of unrestricted, temporarily restricted and permanently restricted.
What did ASU 2016-14 change?
It moved to two net asset classes, required an analysis of expenses by nature and function for all nonprofits, added qualitative and quantitative liquidity disclosures, allowed either cash flow method without an extra reconciliation, and expanded underwater endowment disclosures. It applied to fiscal years beginning after December 15, 2017.
Is a statement of functional expenses required?
The analysis of expenses by nature and function is required for every nonprofit under ASC 958. A separate statement is one of three ways to present it; it can also go on the statement of activities or in the notes.
Does ASC 958 apply to small nonprofits?
It applies to any nonprofit that prepares GAAP financial statements. Many small organizations prepare cash or tax-basis statements instead, but funders or state rules that require an audit usually require GAAP.
How does ASC 958 affect accounts payable?
Each bill needs a natural account and a function, and spending on restricted purposes must be traceable to the fund or grant so restrictions can be released correctly.
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