Nonprofit Accounting Basics: Net Assets With Donor Restrictions Under ASU 2016-14

Net assets with donor restrictions are the part of a nonprofit's equity that a donor has limited by purpose, by time or in perpetuity. Under US GAAP, every not-for-profit balance sheet splits its net assets into two classes, with donor restrictions and without donor restrictions, and the statement of activities shows how each class changed during the year.

That two-class split is the core of nonprofit accounting basics. Getting net assets with donor restrictions right drives how you record gifts, when you move money into operations, what you disclose about liquidity and how your figures flow onto Form 990. This guide covers the FASB rules in ASU 2016-14 and ASU 2018-08, the IRS filing thresholds as of October 2026, and a worked example you can follow line by line.

How Nonprofit Accounting Differs From Business Accounting

A business reports owners' equity, and its income statement measures profit for owners. A nonprofit has no owners. Its "equity" is net assets, and its statement of activities measures the change in net assets, which is why a positive result is usually described as a surplus.

Three features set nonprofit books apart:

• Contributions are a major revenue source, and donors can attach conditions or restrictions that change when and where the revenue is recorded.
• Expenses must be reported by function (program services, management and general, fundraising) as well as by nature (salaries, rent, supplies).
• Users of the statements need to know how much of the reported resources are actually free to pay general bills over the next year.

Many organizations still track each grant or gift in its own fund inside the ledger. That internal fund accounting is a bookkeeping tool, and our guide to outsourced bookkeeping for nonprofits and fund accounting covers how to set it up. The external financial statements, however, roll every fund into the two GAAP net asset classes described below.

Net Assets With Donor Restrictions Under ASU 2016-14

FASB issued ASU 2016-14 to simplify not-for-profit financial statements. Before it, nonprofits reported three classes: unrestricted, temporarily restricted and permanently restricted. The update requires an NFP to "present on the face of the statement of financial position amounts for two classes of net assets at the end of the period, rather than for the currently required three classes" (FASB, ASU 2016-14). In FASB's words, the NFP "will report amounts for net assets with donor restrictions and net assets without donor restrictions, as well as the currently required amount for total net assets."

The update took effect for annual financial statements for fiscal years beginning after December 15, 2017, so every nonprofit following GAAP now uses the two-class model. If your chart of accounts or board reports still say "temporarily restricted" or "permanently restricted," they are using retired labels.

What goes in each class

The last row trips up many boards. A board designation is an internal decision, so it stays in net assets without donor restrictions. ASU 2016-14 instead requires disclosure of the "amounts and purposes of governing board designations, appropriations, and similar actions that result in self-imposed limits on the use of resources without donor-imposed restrictions." It also requires disclosure of the "composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources."

Releasing restrictions

When a nonprofit spends money on the restricted purpose, or the time limit passes, it reclassifies that amount from net assets with donor restrictions to net assets without donor restrictions. The line on the statement of activities is usually called "net assets released from restrictions." Expenses themselves are reported as decreases in net assets without donor restrictions (investment expenses netted against investment return are the exception), which is why the release is needed to match the funding to the spending.

For gifts of cash to buy or build a long-lived asset, ASU 2016-14 requires the placed-in-service approach, absent specific donor stipulations. The restriction is released when the asset is placed in service, and the old option of releasing it over the asset's useful life is gone.

Underwater endowment funds are also handled here. The update classifies deficiencies in endowment funds as part of net assets with donor restrictions and adds disclosures about the organization's appropriation policy for those funds.

The Functional Expense Requirement

ASU 2016-14 requires all nonprofits, not only voluntary health and welfare organizations, to show expenses by both function and nature. The analysis "is to be provided in one location, which could be on the face of the statement of activities, as a separate statement, or in notes to financial statements," and the NFP must disclose the "method(s) used to allocate costs among program and support functions" (FASB, ASU 2016-14).

Shared costs such as an executive director's salary or office rent need an allocation basis, typically time records for people and square footage for space. Our nonprofit guide to the statement of functional expenses covers allocation methods and joint costs in depth. The same split feeds Form 990 Part IX, where the IRS instructions state that "Section 501(c)(3) and 501(c)(4) organizations must complete columns (A) through (D)" (IRS, Instructions for Form 990).

The Liquidity Disclosure

Net assets with donor restrictions can make a balance sheet look healthier than the operating reality. ASU 2016-14 addresses that with a two-part liquidity disclosure:

• "Qualitative information that communicates how an NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date."
• "Quantitative information, either on the face of the balance sheet or in the notes, and additional qualitative information in the notes as necessary, that communicates the availability of an NFP's financial assets at the balance sheet date to meet cash needs for general expenditures within one year."

In practice, the quantitative piece starts with total financial assets and subtracts amounts that are not available for general use within a year: endowment corpus, unspent purpose-restricted gifts and board-designated reserves. The worked example below shows the arithmetic. A nonprofit CFO typically owns the liquidity policy that the qualitative piece describes, and the cash flow statement under the direct or indirect method is the companion statement. ASU 2016-14 also dropped the requirement to present the indirect method reconciliation when an NFP uses the direct method.

Contributions vs Exchange Transactions Under ASU 2018-08

Whether a grant lands in net assets with donor restrictions depends first on whether it is a contribution at all. ASU 2018-08 clarifies that the test is whether the resource provider receives commensurate value in return. FASB states that "a benefit received by the public as a result of the assets transferred is not equivalent to commensurate value received by the resource provider," and that "execution of a resource provider's mission or the positive sentiment from acting as a donor does not constitute commensurate value" (FASB, ASU 2018-08).

If the provider does receive commensurate value, such as a government agency buying a specific service for its own use, the arrangement is an exchange transaction accounted for under other guidance, such as Topic 606. Program service fees paid by participants are exchange revenue as well.

If it is a contribution, the next question is whether it is conditional. ASU 2018-08 requires an entity to decide "whether an agreement includes a barrier that must be overcome and either a right of return of assets transferred or a right of release of a promisor's obligation to transfer assets." Conditional contributions "are accounted for as a liability or are unrecognized initially," and once the barriers are overcome the gift is recognized and classified as either with or without donor restrictions. A matching grant that pays only after the nonprofit raises an equal amount from other donors is a common example of a barrier.

A useful order of questions for every new grant agreement:

1. Does the provider receive commensurate value? If yes, apply exchange guidance such as Topic 606.
2. If it is a contribution, is there a barrier plus a right of return or release? If yes, defer recognition until the barrier is met.
3. Once unconditional, did the donor limit purpose or timing? If yes, record it in net assets with donor restrictions.

Worked Example: Restricted Gift Release and Functional Allocation

The figures below are illustrative and belong to a hypothetical after-school literacy nonprofit with a calendar fiscal year. It starts the year with $180,000 of net assets without donor restrictions and $25,000 with donor restrictions (an unspent gift restricted to a library project).

During the year it records:

• a $120,000 unconditional foundation grant restricted to the tutoring program;
• a $50,000 endowment gift whose principal must be held in perpetuity;
• $210,000 of general operating gifts;
• $40,000 of program fees from families (exchange revenue);
• total expenses of $304,000, of which $84,000 was spent on the restricted tutoring program.

Step 1: allocate shared costs by function

Program services make up $210,000 of $304,000, or about 69 percent of total expenses.

Step 2: record the release and build the statement of activities

Ending net assets with donor restrictions of $111,000 break down as $36,000 of unspent tutoring grant ($120,000 less the $84,000 released), the $25,000 library gift and the $50,000 endowment. That composition goes in the notes.

Step 3: quantify liquidity

At year end the organization holds $310,000 of financial assets: $150,000 of cash, $20,000 of receivables and $140,000 of investments. The board has also set aside a $40,000 operating reserve.

With average monthly expenses of about $25,333 ($304,000 divided by 12), the $159,000 covers roughly 6.3 months of spending. The board reserve stays in net assets without donor restrictions on the balance sheet even though it is excluded here.

Form 990 Filing Thresholds and Due Dates

Most tax-exempt organizations file an annual information return, and the form depends on size. As of October 2026, the IRS lists these thresholds (IRS, Form 990 series):

The IRS states that Forms 990, 990-EZ and 990-PF "must be filed by the 15th day of the 5th month after the end of your organization's accounting period," which is May 15 for a calendar-year organization (IRS, return due date). Form 8868 requests "an automatic 6-month extension of time to file," and "the 990-N due date cannot be extended."

Two related filings often sit beside the 990. Unrelated business income above the filing threshold goes on Form 990-T for UBIT, and public charities report their support calculation on Schedule A, explained in our article on the public support test for 501(c)(3) organizations. Clean net asset records also make a first audit far easier, and a PBC request list for first-time audits shows the restriction schedules auditors usually ask for.

Controls Over Donor Restrictions

The accounting rules only work if restrictions are captured when the gift arrives. A short set of controls covers most of the risk:

• Read every gift agreement and grant letter before recording it, and log the purpose, time limit, conditions and reporting dates in a restriction register.
• Code restricted expenses to the matching fund or class so releases can be tied to actual spending each month.
• Have someone other than the person recording gifts approve releases and review the register against the ledger.
• Reconcile the register to net assets with donor restrictions at every month end.
• Keep board minutes that document reserve designations, since they explain the disclosure of self-imposed limits.

Small teams can adapt the ideas in our guide to internal controls testing for small businesses when one person handles several finance roles.

Frequently Asked Questions

What is the difference between net assets with donor restrictions and without donor restrictions? Net assets with donor restrictions carry a limit set by the donor on purpose, timing or permanence. Net assets without donor restrictions are free of donor limits, including amounts the board has chosen to set aside.

Are temporarily restricted and permanently restricted still used? No. ASU 2016-14 replaced the three classes with two for fiscal years beginning after December 15, 2017. Both former restricted classes now sit in net assets with donor restrictions, and the notes describe their composition.

Is a board-designated reserve a donor restriction? No. A board designation is self-imposed, so it stays in net assets without donor restrictions. ASU 2016-14 requires disclosure of the amounts and purposes of those designations.

When is a restricted grant released? It is released when the nonprofit incurs expenses that meet the donor's purpose or when the time restriction expires. For gifts to acquire long-lived assets, the release happens when the asset is placed in service unless the donor specifies otherwise.

When is Form 990 due? Forms 990, 990-EZ and 990-PF are due by the 15th day of the 5th month after the fiscal year ends, May 15 for calendar-year filers. Form 8868 gives an automatic 6-month extension, while the 990-N deadline cannot be extended.

Next Step

Madras Accountancy supports nonprofits and the CPA firms that serve them with bookkeeping, restriction tracking, functional expense allocation, financial statement preparation and Form 990 workpapers. To discuss your organization's needs, contact our team.