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2.5 Presentation of net assets (equity)
Publication date: 27 May 2020
us NFP guide
Because NFPs are not owned by investors (see NP 1 for further background), the “equity” section of an NFP’s balance sheet is simply referred to as “net assets” (i.e., the residual of assets less liabilities). As described in ASC 958-205-05-6, it is comprised of two broad classes: net assets without donor restrictions (see NP 2.5.1) and net assets with donor restrictions (see NP 2.5.2).
General-purpose financial statements classify and report net assets in two groups—net assets with donor restrictions and net assets without donor restrictions—based on the existence or absence of donor-imposed restrictions.
At a minimum, ASC 958-205 requires that the amount of net assets with and without donor restrictions and the total of net assets be reported on the face of the balance sheet. As discussed in NP 2.5.1.1 and NP 2.5.2, certain disaggregated information must also be disclosed for each category, either on the face of the balance sheet or in the notes.
Figure NP 2-3 illustrates how an NFP might present this type of detail on the face of the balance sheet.
Figure NP 2-3
Presentation of net asset categories on the face of the balance sheet
Presentation of net asset categories on the face of the balance sheet
Net assets:
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With donor restrictions:
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Perpetual in nature
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$1,000
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Purpose restricted
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2,000
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Time restricted
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5,000
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Total net assets with donor restrictions
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$8,000
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Without donor restrictions:
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Designated by the Board for capital
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2,000
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Board-designated endowment
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2,000
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Undesignated
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5,000
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Total net assets without donor restrictions
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$9,000
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Total net assets |
$17,000
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Throughout ASC 958, the categories are captioned net assets without donor restrictions and net assets with donor restrictions. ASC 958-205 encourages the use of these labels but acknowledges that other captions are possible as long as they correspond with the meanings of the categories. For example, equity may be used in lieu of net assets (for example, “members’ equity” for a club). The term unrestricted net assets should not be used out of concern that it implies that the net assets are not subject to any restrictions or limitations resulting from laws, regulations, contracts, or governing board designations. ASC 958-210-55-3 indicates that captions such as “other” or “not donor-restricted” may be used with care to distinguish net assets with donor restrictions from net assets without donor restrictions.
For additional information on presentation of net assets, see AAG-NFP 11 and AAG-HCO 9.
2.5.1 Net assets without donor restrictions
Net assets without donor restrictions generally includes an entity’s working capital, property, plant, and equipment, and long-term debt. In some respects, it corresponds to the retained earnings reported in a business entity’s balance sheet. Figure NP 2-4 compares typical captions found in the equity section of a business entity’s balance sheet to similar balances in the net assets without donor restrictions component of an NFP’s equity.
Figure NP 2-4
Comparison of equity captions in a business enterprise to net assets without donor restrictions
Comparison of equity captions in a business enterprise to net assets without donor restrictions
Business entity
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NFP entity
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Capital stock
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Additional paid-in capital
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Retained earnings (deficit)
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Accumulated other comprehensive income (AOCI)
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Noncontrolling interests
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Dividends
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Disclosure about the amounts and purpose of one specific subcategory within net assets—governing board designations of net assets—is required, as discussed in NP 2.3.1.3. Other disaggregations may be voluntarily provided, for example:
- The amount of net assets invested in property, plant, and equipment (for example, PP&E less associated financing)
- In the case of clubs, the amount of net assets attributable to certain mandatorily redeemable membership interests
- Amounts that business entities would report as components of accumulated other comprehensive income (AOCI), for example, pension and OPEB actuarial gains/losses and prior service costs not yet recognized in changes in net assets. Displaying the impact on net assets of an individual component is acceptable even if the NFP has other AOCI-like components embedded within its net assets without donor restrictions that it chooses not to separately disclose.
2.5.1.1 Governing board designations of net assets
NFP governing boards sometimes take formal action (through a corporate resolution) to set aside a portion of net assets without donor restrictions for specific purposes, for example:
- long-term investing for total return (a board-designated endowment or “quasi-endowment”)
- replacement of long-lived assets (a capital reserve)
- reserving for specific future expenditures or risk exposures
- unexpected cash flow or liquidity needs (sometimes called an operating reserve, liquidity reserve, or rainy-day fund)
The concept is similar to appropriated retained earnings that might be established by a business entity’s board of directors. In NFP financial reporting, such amounts are referred to as board-designated net assets. The ASC Master Glossary defines board-designated net assets.
Board-designated net assets: Net assets without donor restrictions subject to self-imposed limits by action of the governing board. Board-designated net assets may be earmarked for future programs, investment, contingencies, purchase or construction of fixed assets, or other uses. Some governing boards may delegate designation decisions to internal management. Such designations are considered to be included in board-designated net assets.
According to the definition, board-designated net assets would include designations made by internal management in situations when the board has delegated those designation decisions.
ASC 958-210-45-11 requires that information pertaining to amounts and purposes of board-designated net assets be provided on the face of the balance sheet or disclosed in the notes.
Information about self-imposed limits also is useful, including information about voluntary resolutions by the governing board of an entity, such as resolutions to designate a portion of its net assets without donor restrictions to function as an endowment (sometimes called a board-designated endowment fund) or to designate a portion for a specific future expenditure (called board-designated net assets). Information about the amounts and purposes of board designations of net assets without donor restrictions shall be provided in notes to or on the face of financial statements in accordance with paragraph 958-210-50-3.
Figure NP 2-4 in NP 2.5 illustrates the reporting of board-designated net assets on the face of the balance sheet (along with the mandatory total for net assets without donor restriction). See also ASC 958-210-55-3. ASC 958-205-55-21 (Note DD) illustrates disclosure made in notes to the financial statements.
Board-designated net assets might or might not be funded by setting aside specific assets. NP 2.3.1.3 discusses classification and sequencing considerations for specific assets that are set aside.
2.5.2 Net assets with donor restrictions
Net assets with donor restrictions is a special component of equity that reflects activity involving donor-restricted contributions and related investment returns that are restricted. These resources can only be used for the purposes established by donors; they cannot be used to purchase goods or services or to settle liabilities that are outside the scope of the stipulations (and thus, are not available to an NFP’s creditors). As a donor’s restrictions are satisfied, a reclassification is made from the restricted component of equity to the component without donor restrictions.
Figure NP 2-5 illustrates the broad types of donor restrictions.
Figure NP 2-5
Examples of donor-imposed restrictions
Examples of donor-imposed restrictions
Nature of restriction
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Examples
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Donor-imposed restrictions that require the NFP to maintain the resources in perpetuity
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Donor-imposed restrictions that limit the NFP’s use of the resources to later periods of time or for specified purposes
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ASC 958-210-45-9 requires an NFP to provide information about the nature and amounts of different types of donor-imposed restrictions either by reporting their amounts on the face of the balance sheet or by including relevant details in the notes. See Note B in ASC 958-205-55-21 for an illustration of this disclosure.
The governing board of an NFP has a fiduciary responsibility to spend donor-restricted contributions in accordance with the donor’s instructions. This requires maintaining an appropriate composition of financial assets (usually cash and marketable securities) in amounts needed to carry out the donors’ instructions. If an NFP does not maintain an appropriate composition of assets (and thus, may appear to have spent the donated funds for purposes other than those specified), disclosure may be required under ASC 958-450-50-3. For additional information, see AAG-NFP 3.173 through AAG-NFP 3.175.
If the noncompliance result from an NFP’s failure to maintain an appropriate composition of assets in amounts needed to comply with all donor restrictions, the amounts and circumstances shall be disclosed.
2.5.3 Controlling and noncontrolling interests
If an NFP owns less than 100% of a consolidated for-profit subsidiary, the portion owned by others is referred to as the noncontrolling interest. In certain circumstances, noncontrolling interests can also arise in connection with relationships involving not-for-profit subsidiaries (see NP 5.2.5).
ASC 958-810 tailors the general guidance for reporting noncontrolling interests in subsidiaries to the NFP reporting model. ASC 958-810-45-1 states that noncontrolling interests in the equity (net assets) of consolidated subsidiaries should be reported in the consolidated balance sheet as a separate component of the appropriate class of net assets (for example, with donor restrictions or without donor restrictions). That amount should be clearly identified and described (for example, as “noncontrolling ownership interest in subsidiaries”) to distinguish it from the components of net assets of the parent (which includes the parent’s controlling financial interest in its subsidiaries).
Figure NP 2-6 illustrates the presentation of noncontrolling interests in the equity of a partially-owned subsidiary with no donor-restricted net assets.
Figure NP 2-6
Presentation of noncontrolling interests in net assets
Presentation of noncontrolling interests in net assets
Net assets without donor restrictions:
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Parent NFP
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$376,000
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Noncontrolling interests in subsidiaries
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94,000
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Total net assets without donor restrictions
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$470,000
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Net assets with donor restrictions
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250,000
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Total net assets
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$720,000
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If donor-imposed restrictions on the use of the subsidiary’s net assets exist, the related net assets and noncontrolling interest would be presented in net assets with donor restrictions.
ASC 958-810-55-17 through ASC 958-810-55-25 provides a comprehensive illustration of the presentation of noncontrolling interests.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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