TLDR
The fiscal year-end close for a nonprofit managing restricted grants is harder than a standard business close because net asset classification, restricted-fund releases, and grant schedule reconciliation must all tie out before the books can be considered closed. Most first-pass close failures trace back to the restricted fund release schedule not reconciling to the grant activity schedule — a single discrepancy that forces restatements across multiple financial statements.
BLUF
The nonprofit fiscal year-end close is a sequenced process: grant schedule reconciliation first, net asset releases second, accruals third, trial balance fourth, financial statements fifth, audit support last. Reversing this order — drafting financials before reconciling grants — generates restatement work that doubles the close timeline. The restricted fund release calculation depends entirely on an accurate grant schedule, and the grant schedule must tie to the general ledger before any release entries are posted.
TL;DR
- Start with: grant schedule-to-GL reconciliation
- Critical step: net asset release entries for all purpose-restricted awards
- Required financial statements: statement of financial position, statement of activities, statement of functional expenses, statement of cash flows
- Audit prep: trial balance + grant schedule + net asset rollforward ready before fieldwork starts
- Common failure point: restricted fund release doesn’t reconcile to grant activity schedule
Why nonprofit close is harder than it looks
A for-profit entity closes its books by reconciling bank accounts, posting accruals, and producing an income statement and balance sheet. A nonprofit doing the same close must additionally:
- Classify net assets correctly between with and without donor restrictions
- Record net asset releases for every purpose-restricted grant where expenditures occurred during the year
- Reconcile those releases to individual grant agreements
- Assess conditional contributions for revenue recognition eligibility
- Prepare a statement of functional expenses showing expenses by both nature (salaries, supplies, rent) and function (programs, management, fundraising)
Each of these steps depends on the one before it. Start out of sequence and the restatements compound.
The grant schedule: why it comes first
The grant schedule is the master list of every active and recently closed award: award amount, cumulative expenditures, unexpended balance, period of performance start and end, and restriction type. At year end, every balance on this schedule must reconcile to the corresponding GL account.
If the grant schedule shows a $120,000 unexpended balance on a restricted award, the GL must show the same balance in the restricted fund account for that award. If it shows $110,000, a $10,000 discrepancy exists that will affect both the net asset release calculation and the balance sheet. Resolving it requires tracing individual transactions — time-consuming work that cannot be skipped.
Net asset releases: the most misunderstood close entry
Net asset releases are the entries that convert restricted funds to unrestricted as restrictions are satisfied. The entry structure is:
- Debit: Net assets with donor restrictions (reduces restricted balance)
- Credit: Net assets without donor restrictions (increases unrestricted balance)
On the statement of activities, this appears as “Net assets released from restrictions” — a line item that shows funds moving between columns.
Under FASB ASC 958-605, releases are recorded when restrictions are satisfied. For purpose-restricted grants, the release happens as qualifying expenses are incurred. For time-restricted grants, the release happens at the passage of time. Both must be complete by year-end close for an accurate financial picture.
Required accruals for grant accounting
Grant receivable accruals
For cost-reimbursement grants, costs are often incurred before invoices or draws are submitted. At year end, record a grant receivable for costs incurred but not yet reimbursed:
- Debit: Grant receivable (balance sheet)
- Credit: Grant revenue or contribution revenue (statement of activities)
The credit is contribution revenue for unconditional grants where costs have been incurred. For conditional grants where the barrier has not been overcome, the credit is deferred revenue.
Conditional grant assessment
Review every advance payment received from grantors during the year. Each advance must be assessed: has the barrier been overcome? If yes, the amount can be recognized as revenue. If no, it remains in deferred revenue on the balance sheet. The answer affects both net asset classification and the statement of activities.
Statement of functional expenses
FASB ASC 958-720-45-2 requires nonprofits to present expenses by both their nature and their function in the notes to the financial statements, or as a separate financial statement. Most audited nonprofits present it as a separate statement.
Function categories: program services (by program), management and general, fundraising.
Nature categories: salaries, benefits, occupancy, professional fees, supplies, depreciation, and other.
The functional allocation — especially the split between program and management and general — is an area of auditor attention. The allocation must be based on a documented, reasonable methodology applied consistently year over year.
Audit preparation tasks
Auditors request the following at the start of fieldwork. Having these prepared before the engagement begins reduces the time auditors spend waiting, which directly affects audit fees:
- Signed trial balance as of fiscal year end
- Grant schedule reconciled to trial balance
- Net asset rollforward (opening balance, additions, releases, ending balance by restriction)
- Copies of all new grant agreements signed during the year
- Confirmation of significant accounting estimates (useful lives, allowance for doubtful accounts, etc.)
- Functional expense allocation methodology document
- Board minutes for the fiscal year
Form 990 and state filing coordination
For calendar-year organizations, the Form 990 due date is May 15. Most organizations file with an automatic 6-month extension (to November 15). The year-end close must be substantially complete before 990 preparation begins — the 990 pulls revenue and expense figures directly from the audited financial statements.
State charitable registration renewals for many states also key off fiscal year end. California’s RRF-1, New York’s CHAR-500, Illinois’s AG990-IL, and others are all due within 4-6 months of fiscal year end. Building state filing deadlines into the close calendar prevents them from surfacing as surprises during an already compressed audit season.
How GrantPipe helps
GrantPipe maintains the grant schedule as a live record throughout the year, not a spreadsheet reconstructed at close. Every draw, expenditure, and net asset release is recorded against the award in real time. At year end, the grant schedule-to-GL reconciliation is a verification step, not a reconstruction. Board reporting on restricted fund balances is available on demand. Audit support documentation lives in the award record. Start with a free trial to run your next fiscal year-end close from a system where the grant schedule is never a month behind.
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- Net asset release
- The accounting entry that transfers funds from net assets with donor restrictions to net assets without donor restrictions when a purpose or time restriction has been satisfied. Recorded on both the statement of financial position and statement of activities.
DEFINITION
- Grant schedule
- A supporting schedule listing all active and recently closed grants, their total award amounts, cumulative expenditures, unexpended balances, and period of performance. Must reconcile to the general ledger restricted asset balances at period end.
DEFINITION
- Conditional contribution
- A grant or gift that comes with a barrier that must be overcome before the nonprofit can recognize revenue. Common conditions include spending requirements and matching requirements. Distinguished from a restriction, which limits how revenue already recognized may be used.
DEFINITION
- Net assets with donor restrictions
- The FASB ASC 958 term for funds that have been contributed with explicit donor-imposed restrictions on their use, either as to purpose or to time. Formerly called temporarily restricted or permanently restricted net assets in the pre-2016 standard.
DEFINITION
- Trial balance
- A listing of all general ledger accounts and their balances at a point in time. The foundation of financial statement preparation. At close, the trial balance must be agreed to by the finance team before financial statements are prepared.
DEFINITION
Q&A
What order should the year-end close tasks be completed?
The correct sequence is: (1) complete all grant reconciliations and update the grant schedule; (2) record all net asset releases for the fiscal year; (3) post all accruals including grant receivables and deferred revenue; (4) reconcile all bank and investment accounts; (5) produce the trial balance; (6) prepare draft financial statements; (7) prepare audit support package. Skipping ahead to financial statement preparation before step 1 is complete guarantees restatement work.
Q&A
How do conditional grants affect the FY close?
Conditional grants — those with a barrier before revenue can be recognized — must be reviewed at close to determine what portion, if any, can be recognized. Under FASB ASC 958-605, a conditional contribution becomes unconditional (and recognizable as revenue) only when the barrier is overcome. Year end is the point to assess each conditional grant against the actual activity during the year.
Q&A
What does 'closing the books' mean in practice?
Closing the books means locking the accounting period so no additional entries can be posted without an adjustment memo. For nonprofits, this typically happens in phases: a soft close where all known entries are posted and reviewed, followed by a hard close after final reconciliations and audit entry adjustments are complete.
Frequently asked