FASB ASC 958: What Nonprofits Need to Know About Financial Reporting Standards

FASB ASC 958 is the accounting framework that determines how U.S. nonprofits present their financial information. It affects how grants are recorded, how restrictions are tracked and released, how overhead is disclosed, and what information stakeholders — including funders, auditors, and board members — receive about the organization’s financial health.

Scope of ASC 958

ASC 958 applies to entities that meet the definition of a not-for-profit organization: entities that receive significant resources from providers who do not expect proportionate economic returns, have operating purposes other than profit, and have no ownership interests that convey residual claims. This includes:

• Voluntary health and welfare organizations (social service organizations, family service agencies, organizations providing health and welfare services to the public)
• Other not-for-profit organizations (educational institutions, cultural organizations, civic and community organizations, religious organizations, trade associations)

It does not apply to governmental entities (which follow GASB standards), investor-owned entities, or entities that incidentally receive contributions.

The Two Net Asset Classes

The most operationally significant element of ASC 958 for most grant-funded nonprofits is the net asset classification system.

With-donor-restrictions: This class includes all resources subject to external conditions imposed by donors or grantors. Three sub-categories (tracked in notes and internal records, though not separately on the face of statements):

• Purpose-restricted: Funds restricted to a specific program, activity, or geographic area
• Time-restricted: Funds held for a future period (including grants received before the grant year begins)
• Permanently restricted: Endowment corpus that must be maintained in perpetuity; only investment income is expendable

Without-donor-restrictions: This class includes all resources the board can allocate to any purpose. This includes:

• General operating funds
• Board-designated reserves and funds (internal designations, not donor restrictions)
• Investment income from permanently restricted endowments that has been released for expenditure
• Net assets released from donor restrictions as conditions are met

The statement of financial position shows these two classes as line items in the net assets section. Notes to financial statements typically provide further detail on what comprises each class.

Required Financial Statements

Statement of Financial Position

The nonprofit balance sheet presents assets (current and non-current), liabilities, and net assets. Unlike a for-profit balance sheet where equity is a single total, nonprofit net assets are presented in two classes. A well-structured Statement of Financial Position shows liquidity clearly — listing current assets first, then property and equipment, then other long-term assets, followed by current and long-term liabilities.

Organizations with significant restricted fund balances will show a large with-donor-restrictions total that may be much larger than the without-donor-restrictions balance. This is normal and expected for grant-heavy organizations, but it means unrestricted net assets may be a small fraction of total net assets — a point that requires explanation in the liquidity disclosure.

Statement of Activities

The nonprofit income statement shows changes in each net asset class during the reporting period. Revenue (contributions, grants, program service fees, investment income) is reported in the column corresponding to its restriction status. Expenses are reported in the without-donor-restrictions column.

Net asset releases — the mechanism by which donor-restricted funds become available for program use — are shown as a deduction in the with-donor-restrictions column and an addition in the without-donor-restrictions column. They are not revenue; they are reclassifications.

For organizations with multiple grant sources, the with-donor-restrictions column can be complex: multiple contributions from different funders, each with different restrictions, all requiring separate tracking but aggregated in the statement presentation.

Statement of Cash Flows

The cash flow statement follows the same structure as for-profit entities: operating activities, investing activities, and financing activities. Nonprofits may use either the direct method (showing cash receipts and payments by category) or the indirect method (reconciling from change in net assets). Most audited nonprofits use the indirect method.

Grant receipts appear as operating cash inflows when they are received. Note that grant receipts may appear in the period before the spending occurs — which is why the Statement of Activities looks very different from the Statement of Cash Flows in years when large grants are received.

Statement of Functional Expenses

ASU 2016-14 requires all nonprofits to present a statement of functional expenses, either as a fourth financial statement or in the notes. This statement allocates expenses across three categories:

• Program services: Costs that directly support the organization’s mission programs (broken out by major program area)
• Management and general: Administrative overhead not attributable to specific programs
• Fundraising: Costs of soliciting contributions and conducting fundraising campaigns

Natural expense categories (salaries, rent, supplies, depreciation) are allocated across these functional categories. Salaries of employees who work across multiple functions must be allocated based on actual time, not arbitrary estimates.

For grant-funded nonprofits, the functional expense statement demonstrates to funders and regulators that the organization spends a meaningful portion of its resources on programs (as opposed to administration and fundraising). Program expense ratios derived from this statement are used by watchdog organizations like Charity Navigator.

Liquidity and Availability Disclosures

The liquidity disclosure added by ASU 2016-14 requires two elements:

Quantitative disclosure: The amount of financial assets available to meet general expenditure needs within one year. The calculation starts with total financial assets (cash, investments, receivables) and subtracts amounts that are not available for general use: donor-restricted resources, board-designated funds not available within one year, and resources contractually restricted for specific purposes.

Qualitative disclosure: A narrative description of how the organization manages its liquidity needs. This typically covers: how long the organization can operate from current liquid assets, whether a line of credit exists and its current status, what board-designated reserves are maintained and under what conditions they would be accessed, and any significant seasonal variations in cash flow.

The liquidity disclosure is intended to alert financial statement users to situations where an organization appears well-funded on paper but has limited freely available cash. A nonprofit with $5 million in net assets, of which $4.8 million is donor-restricted for future grant programs, has much less operational flexibility than the balance sheet number implies — the liquidity disclosure makes that explicit.

Implications for Grant-Funded Organizations

For nonprofits that are heavily grant-dependent, ASC 958 creates specific reporting dynamics:

Revenue timing volatility. Multi-year grants recorded when received (if unconditional) appear as large contribution revenue in the receipt year, even though the related program expenses occur over multiple years. This creates accounting periods that look very profitable followed by periods that look break-even or at a loss — even if the organization is managing its grant portfolio well.

Restricted fund balance growth. Organizations receiving grants before they are spent will accumulate with-donor-restrictions net asset balances. This can appear confusing to board members who see growing restricted net assets without a corresponding growth in unrestricted operational funds.

Functional expense allocation. Grant budgets typically specify direct program costs. The functional expense statement requires allocating shared overhead across programs — which means tracking time, space, and overhead usage by function in a way that many small nonprofits do not currently do.

Understanding these dynamics — and explaining them to board members and program staff — is part of the finance director’s job at any grant-reliant organization.