Temporarily Restricted Net Assets: What the Old FASB Term Still Means in Practice

Prior to FASB ASU 2016-14, the Standard Form 424 budget template used by federal agencies, thousands of foundation grant agreement templates, and the working papers of auditors who trained under SFAS 117 all used “temporarily restricted” as a technical term with a specific meaning. The FASB update that became effective for fiscal year 2018 renamed the category - but it did not reach back and update those documents. As of 2026, a nonprofit finance director reviewing a 2015 grant agreement, a 2016 foundation report template, and a 2018 audit management letter will encounter three different terminologies referring to the same economic concept.

The translation is not difficult once you know it: “temporarily restricted” and “permanently restricted” both now live within “net assets with donor restrictions” under FASB ASC 958. The cost of not knowing it shows up as inconsistent terminology in your financial statement notes, GAAP classification errors on the Statement of Financial Position, and discrepancies that auditors flag under AU-C Section 265.

What Temporarily Restricted Net Assets Meant (Pre-2018)

Under FASB SFAS 117 (Statement of Financial Accounting Standards No. 117, superseded by ASU 2016-14), nonprofits classified net assets into three categories:

Permanently restricted - resources where the donor had stipulated that the principal be maintained in perpetuity. Classic endowment funds: the donor gives $500,000 to be invested, with only the investment income available for organizational purposes, and the principal never to be spent.

Temporarily restricted - resources subject to donor-imposed restrictions that could be satisfied, either by the passage of time (a time restriction: “use in fiscal year 2020”) or by performing specified activities (a purpose restriction: “use for after-school tutoring program”). Once the condition was met, the restriction was released and the net assets were reclassified to unrestricted.

Unrestricted - all remaining resources, including amounts the board had designated for specific purposes (which remained unrestricted because the board could rescind the designation).

“Temporarily restricted” was a technically precise term under SFAS 117. It did not mean “sort of restricted” or “restricted for now.” It meant resources subject to donor-imposed restrictions that would eventually be satisfied through time or purpose fulfillment. The word “temporarily” distinguished these funds from permanently restricted endowments, not from donor-restricted funds in general.

FASB ASU 2016-14: The Reclassification That Happened in 2018

FASB concluded in ASU 2016-14 that the three-class presentation created confusion rather than clarity. Users of nonprofit financial statements - board members, funders, regulators - struggled to understand the distinction between temporarily and permanently restricted, and the three-class model did not adequately distinguish between liquid unrestricted assets and illiquid board-designated reserves.

The update collapsed the three classes into two, effective for fiscal years beginning after December 15, 2017:

• Permanently restricted + Temporarily restricted = Net assets with donor restrictions
• Unrestricted = Net assets without donor restrictions

The underlying accounting did not change. Restricted funds are still restricted - the mechanism of recording them (recognition when conditions are met, release from restriction upon condition fulfillment) is identical under both frameworks. The distinction between time-restricted and purpose-restricted funds still exists and must be disclosed in the notes to the financial statements. The distinction between revocable board designations and irrevocable donor restrictions still exists and determines classification. What changed is the face-of-the-financial-statement presentation.

The update also required retrospective application - comparative prior-year statements in the first year of adoption had to be restated to show both years under the new two-class presentation. Organizations that adopted for fiscal year 2018 presented their fiscal year 2017 comparative statements in restated form, using “net assets with donor restrictions” for amounts that previously read “temporarily restricted” and “permanently restricted.”

The Current Term: Net Assets with Donor Restrictions

“Net assets with donor restrictions” includes, in a single line on the Statement of Financial Position, everything that was formerly spread across “temporarily restricted” and “permanently restricted.” The notes to the financial statements are where the detail lives: the nature and amounts of each type of restriction, the amounts by which endowment funds are underwater (if any), and information about liquidity and availability of funds.

For most nonprofits, the practical content of “net assets with donor restrictions” is dominated by purpose-restricted grant balances - grants received for specific programs that have not yet been fully expended. Endowment principal (formerly permanently restricted) typically appears as a subset with specific disclosure about the endowment’s investment policy, spending rate, and underwater provisions.

The note disclosure requirement added by ASU 2016-14 for underwater endowments is worth understanding. An underwater endowment is one where the fair value of the fund has fallen below the original gift amount (the “historic dollar value”). Under the old framework, underwater endowments had to be recorded as unrestricted net assets. Under the 2016-14 framework, underwater endowments remain in net assets with donor restrictions, but the underwater amount must be disclosed along with the organization’s policy for spending from underwater funds.

Why the Old Terminology Still Appears in Grant Agreements and Board Reports

Grant agreements are legal documents. A foundation that issued a grant agreement in 2014 using the SFAS 117 terminology “temporarily restricted for the Environmental Literacy Program” has not amended that agreement simply because FASB issued an accounting update. The legal restriction is unchanged; only the accounting classification term has been renamed.

Federal agency grant terms and conditions issued before fiscal year 2018 - and many legacy templates from HHS, DOJ, and HUD remain in active use - may reference “temporarily restricted funds” in their accounting requirements sections. State pass-through agency grant agreements often derive their templates from federal Notice of Award boilerplate and similarly may use outdated SFAS 117 terminology alongside current 2 CFR Part 200 compliance language.

Board report templates built before 2018 - particularly those designed by board members with CPA credentials or corporate finance backgrounds who trained under SFAS 117 - may include columns labeled “temporarily restricted” because that is the terminology encoded in their spreadsheet models. A board member who learned nonprofit accounting after FASB ASU 2016-14 took effect will see the disconnect and ask whether the organization’s financial statements are current with GAAP.

How to Explain the Change to Non-Finance Stakeholders

The two-sentence explanation that works for board members and non-finance staff: “FASB - the accounting rule-setting body for nonprofits - renamed some categories on our financial statements in 2018. What used to be called ‘temporarily restricted’ and ‘permanently restricted’ funds are now both called ‘net assets with donor restrictions.’ The actual rules about how we can use these funds did not change - only the label.”

For funders who ask about your “temporarily restricted fund balance” when reviewing your financial statements: their question is typically asking about the balance of their specific grant. The answer is to provide the fund-level balance for that award, with the clarifying note that this appears in “net assets with donor restrictions” on the current statements.

For auditors who encounter a grant agreement that uses the old SFAS 117 terminology: the audit workpaper should document the translation - citing both the grant agreement’s language and the corresponding FASB ASC 958 classification - and confirm that the accounting treatment in the client’s books is consistent with the economic substance of the restriction, regardless of the label in the grant document. This prevents audit findings based on terminology inconsistency rather than accounting substance.

Practical Accounting Treatment: What Changed and What Stayed the Same

The accounting mechanics for restricted funds did not change under ASU 2016-14. Revenue from restricted grants is still recognized when conditions are substantially met (for conditional contributions under ASU 2018-08) or when received (for unconditional restricted contributions). Expenses charged to restricted grants still trigger the release-from-restriction reclassification entries. The notes must still disclose the nature and amounts of restrictions.

What changed: the line items on the face of the Statement of Financial Position combine what were formerly three separate line items into two. The line items in the Statement of Activities similarly combine the formerly separate columns or sections for temporarily restricted and permanently restricted activity into a single “with donor restrictions” column.

This means that an organization’s Statement of Activities under the current framework shows revenue appearing in either the “without donor restrictions” or “with donor restrictions” column - not three columns - and expenses appearing only in the “without donor restrictions” column. Net assets released from restrictions appear as a positive amount in “without donor restrictions” and a negative amount in “with donor restrictions,” netting to zero effect on total net assets.

Common Confusion Points in Audits When Old and New Terminology Mixes

Confusion point 1: Prior-year comparative statements restated vs. not restated. When an organization first adopts ASU 2016-14, comparative prior-year statements must be restated to conform. An organization whose fiscal year 2018 financial statements include a restated fiscal year 2017 comparative should have both years showing “with donor restrictions” / “without donor restrictions.” If the comparative year shows the old three-class presentation, the statements are not in conformity with GAAP for the periods presented.

Confusion point 2: Grant agreement terminology used in financial statements. Finance staff who manually build financial statement schedules sometimes copy grant agreement language into their financial statement notes or board reports. If a note disclosure uses the phrase “temporarily restricted for the XYZ Program,” an auditor will flag it as inconsistent with ASU 2016-14 terminology.

Confusion point 3: Board-designated amounts incorrectly classified in “with donor restrictions.” Organizations that maintain “restricted reserves” by board resolution sometimes present these in the same category as donor-restricted funds. Under FASB ASC 958, board designations belong in “net assets without donor restrictions” with a separate disclosure. Placing them in “with donor restrictions” overstates donor-imposed restrictions and understates organizational discretion over those resources.

Confusion point 4: Underwater endowment reclassification not completed. Organizations with endowment funds that went underwater before 2018 under the old framework had to reclassify those funds from unrestricted to net assets with donor restrictions upon adoption of ASU 2016-14. Organizations that missed this adjustment carry a GAAP error in their balance sheet.

Confusion point 5: Prior-year audit reports used as current-year reference. An organization that provides a prior-year audit report (with old three-class presentation) to a current-year funder who compares it to the current-year two-class statements may face questions about apparent “missing” balance sheet categories. A brief translation note - “our financial statements were restated in fiscal year 2018 to conform to FASB ASU 2016-14, which collapsed temporarily restricted and permanently restricted into the ‘with donor restrictions’ category” - resolves this.

For a full overview of FASB ASC 958’s reporting requirements, see FASB ASC 958 Nonprofit Reporting. For a glossary definition with examples, see Net Assets With Donor Restrictions. For the complete framework covering restricted fund accounting from receipt through release, see Restricted Fund Accounting Basics.

DEFINITION

Net assets with donor restrictions

The current FASB ASC 958 term for resources whose use is limited by donor or grantor stipulations. Includes amounts formerly classified as temporarily restricted (purpose or time restrictions) and permanently restricted (endowment principal in perpetuity) under the pre-2018 framework. Required disclosure includes a description of the nature and amounts of different types of donor-imposed restrictions.

DEFINITION

Net assets without donor restrictions

The current FASB ASC 958 term for resources not subject to donor-imposed restrictions. Includes amounts formerly classified as unrestricted under the pre-2018 framework. Board-designated amounts (set aside by internal board resolution) are included here, not in 'net assets with donor restrictions,' because the limitation is internal and revocable.

DEFINITION

FASB ASU 2016-14

Accounting Standards Update 2016-14, 'Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities,' effective for fiscal years beginning after December 15, 2017. The update made six significant changes to nonprofit financial reporting: (1) simplified net asset classification from three classes to two; (2) added liquidity and availability disclosures; (3) required functional expense information for all nonprofits; (4) changed the presentation of investment return; (5) changed the method used for presenting operating cash flows (the direct method is now required if used); and (6) changed the accounting for underwater endowment funds.