Net Assets are the organization’s surplus: assets less liabilities.
Net Liabilities are presented where there is a residual of liabilities after deducting assets.
Non-profit organizations may have several restrictions on the use of any surplus. These restrictions are both internally and externally imposed. Certain disclosures are required of these restrictions:
- Major categories of external restrictions must be disclosed either on the statement of financial position or in the notes. External restrictions arise when contributors desire that funds be spent on a specific purpose. Funds may also be externally restricted by law, or other authority.
- Major categories of internally imposed restrictions do not have to be separately disclosed.
- Endowment balances, at least the total of all other restricted balances, the total of unrestricted balances, and the investment in capital assets should be shown separately on the statement of financial position. (4400.19,.26,.28)
- An example of this presentation on the statement of financial position can be seen on SpringTime’s financial statements.
In the application of the preceding, it is worthwhile to note the following:
- Where the organization reports for all restricted contributions using the deferral method, all external restrictions, other than endowments, will be accounted for in the deferred contribution balance, a liability presented outside of net assets. The reader is presented with a different picture of the net assets of the organization, depending on the whether the organization follows the restricted fund method of accounting for contributions or the deferral method of accounting for contributions. Under the restricted fund method, the reader is presented with a higher net asset balance, albeit more of the net asset balance will be designated as externally restricted.
- It may be necessary to disclose external restrictions in the notes: a restricted fund balance as presented on the statement of financial position may contain internal and external restrictions. A fund may be designated as a "restricted fund," but this refers only to the method of accounting for revenues. Unrestricted contributions may be transferred to a restricted fund.
- Where the deferral method is used to account for capital contributions, the net investment in capital assets will be equal to the net book value of capital assets less any unamortized (as opposed to unspent) deferred capital contributions and any debt related to capital assets, see how this is proven for SpringTime.
- Where the restricted fund method is used to account for capital assets, the net investment in capital assets will equal the net book value of capital assets less any related debt.