Understanding Nonprofit Financial Statements

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Nonprofit financial statements can be difficult to understand. In particular, it can be confusing to determine what resources are available to your organization, and where your obligations lie. Knowing how donor restricted assets and net assets need to be used and managed can create significant issues if not understood properly.

GAAP (short for "generally accepted accounting principles,” a collection of commonly followed accounting rules and standards) now requires funds to be split into two different classifications - net assets with donor restrictions, and net assets without restrictions. These donor restrictions are presented on your Statement of Financial Position (Balance Sheet). Unspent funds that came with restrictions will show up under the Net Assets (Equity) section. Even though these funds are restricted - and it is the organization’s obligation to ensure they are spent on a specific purpose - they are not presented as a liability on your Statement of Financial Position.

To further the confusion, if the restricted purpose is permanent or long term in nature, the asset side should be set aside as well. This provides clarity, by allowing a reader to clearly see the assets that have been set aside to achieve the restriction. However, assets to achieve donor restrictions defined as temporary are much harder to spot.

Our nonprofit accountants see many different approaches to tracking donor restricted funds throughout the year. Your method of tracking can change how you interpret your financial statements. If your organization experiences continued unrestricted losses or issues in covering administrative costs, it is especially important to have a full and complete understanding of your financial statements. This will allow your board or management to make well-informed decisions regarding the future of your organization.

A true understanding of your financial statements takes time and effort. The National Council for Nonprofits provides a number of excellent resources for financial literacy. If you need further assistance, we recommend having a targeted conversation with your accounting team or CPA to clarify your understanding of your organization’s financial statements.