TLDR
Despite the 2018 accounting change, 'temporarily restricted net assets' still appears in pre-2018 audited financial statements, older grant agreements, and internal board reports that haven't been updated. Grants managers need to understand both frameworks to explain financial statements to funders, interpret grant agreement language, and reconcile predecessor statements with current ones.
Temporarily restricted net assets was the balance sheet classification used by nonprofits under the pre-2018 FASB framework to report net assets that donors had restricted — either to a specific purpose or to a future time period — but where the restriction was expected to expire. The term appeared in every nonprofit Statement of Financial Position from the 1990s through fiscal years ending before December 15, 2018.
Why the Term Was Replaced
FASB Accounting Standards Update 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, eliminated the three-class net asset structure that had been in place since FASB Statement No. 116 (1993). The old framework divided net assets into:
- Unrestricted net assets — no donor restrictions
- Temporarily restricted net assets — donor restrictions expected to expire with the passage of time or accomplishment of purpose
- Permanently restricted net assets — donor restrictions that are intended to be maintained in perpetuity (typically endowments)
FASB replaced this with a two-class structure, effective for fiscal years beginning after December 15, 2017 (calendar year 2018 for most nonprofits):
- Net assets with donor restrictions — consolidates temporarily and permanently restricted into one line
- Net assets without donor restrictions — replaces unrestricted
The rationale for consolidation: the old “temporarily” versus “permanently” distinction was confusing to financial statement users who couldn’t easily determine the nature of the restrictions from the face of the statement. The new framework requires more robust disclosures in the notes — including the amounts and purposes of donor restrictions and the amounts released from restriction — which provides richer information than the binary classification did.
Why the Old Terminology Still Appears
Despite the 2018 effective date, the old terminology persists in three common places:
Grant agreements. Many federal, state, and private foundation grant agreements were drafted before 2018 and have not been updated. Language like “these funds shall be maintained as temporarily restricted until expended for the stated program purpose” still appears in active awards. For financial reporting purposes, the funds are classified as net assets with donor restrictions; the grant agreement language does not change the accounting.
Board reports. Organizations that migrated their accounting software but not their board reporting templates may still produce internal reports referencing “temporarily restricted.” This creates a terminology disconnect between external financial statements and internal management reports — an issue auditors sometimes flag.
Predecessor financial statements. When funders request multi-year financial data, audited statements from years prior to 2018 will show the old three-class structure. Grants managers should be prepared to explain the presentational difference without implying the underlying accounting changed.
Accounting Treatment Under Both Frameworks
The underlying accounting for donor-restricted gifts did not change with ASU 2016-14 — only the presentation changed.
Under the old framework: A $100,000 restricted grant was recorded as an increase to temporarily restricted net assets. When spent for the restricted purpose, the organization recorded a “net asset release” — a reclassification that decreased temporarily restricted net assets and increased unrestricted net assets. The spending appeared in both net asset classes in the Statement of Activities.
Under the current framework: The same $100,000 grant increases net assets with donor restrictions. When spent, the release from restriction decreases net assets with donor restrictions and increases net assets without donor restrictions. The mechanics are identical; only the label on the line items changed.
What “Release from Restriction” Means
Under both frameworks, a restriction is released — and the funds reclassified — when the condition specified by the donor has been satisfied:
- Purpose restriction: The funds have been spent for the designated program. A $50,000 workforce development grant is released when workforce development expenses are incurred.
- Time restriction: The specified time period has arrived. A pledge payable next year is reclassified from net assets with donor restrictions to net assets without donor restrictions in the year it becomes due.
- Simultaneous release rule: Under 2 CFR 200 and most foundation grant terms, restricted grants are typically recorded and released in the same period they are expended — they never sit in net assets with donor restrictions on the balance sheet if the organization follows the simultaneous release election permitted under FASB ASC 958-605-45-4.
Common Misconception: “Temporarily Restricted Means Spendable Anytime”
The most persistent misconception about temporarily restricted net assets (and its successor, net assets with donor restrictions) is that funds in this category are simply “not yet spent” and will automatically become available once the organization decides to use them. In reality, restricted funds can only be reclassified to unrestricted — and spent as unrestricted — when the specific donor-imposed condition is met. An organization cannot voluntarily release a purpose restriction by deciding to spend the money on something else, and it cannot release a time restriction early by anticipating the passage of time. The restriction is a legal obligation, not an accounting convention.
A related misconception: that board-designated reserves are the same as donor-restricted funds. They are not. Board designations are self-imposed and can be reversed by a board vote. Donor restrictions can only be removed by donor consent, by satisfaction of the condition, or by a court order.
Common Audit Issue: Mixed Terminology
The most frequent audit finding related to this terminology shift is inconsistent classification in the notes to financial statements. An organization may correctly present two net asset classes on the face of the Statement of Financial Position but then use the old three-class language in Note 1 (Summary of Significant Accounting Policies) or in the restricted net assets rollforward disclosure. Auditors cite this as a departure from FASB ASC 958 presentation requirements. The fix is a comprehensive update of all note disclosures, not just the primary statements.
GrantPipe and Net Asset Tracking
GrantPipe tracks each grant and restricted fund against its donor-imposed restrictions — purpose, time period, and any sub-restrictions on specific budget line items. When expenditures are recorded against a restricted fund, GrantPipe calculates the released amount and updates the fund balance in real time. Reports export in current FASB ASC 958 terminology (net assets with donor restrictions / net assets without donor restrictions), with a reconciliation showing opening balance, receipts, releases, and closing balance by restriction.
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