Not-for-profits play a vital role in addressing community needs, relying primarily on donor generosity. Effective financial management hinges on accurately tracking asset restrictions, which are critical for decision-making. This article outlines net asset classifications, highlights best practices for their management, identifies common challenges, and suggests resources for future guidance.
Defining Net Asset Classifications for Not-For-Profits
Following Accounting Standards Update 2016-14, effective from December 15, 2017, not-for-profits have simpler net asset classifications: assets with donor restrictions and those without. Previously, classifications were inconsistently applied, causing confusion. Currently, net assets are classified as:
- With donor restrictions: These are assets with specific donor-imposed restrictions, such as earmarked funds for specified projects or grants with defined usage.
- Without donor restrictions: These assets have no specific donor-imposed stipulations, allowing organizational discretion in their use. This category includes internally designated funds, like those set aside by a board for capital projects.
Implementing Net Asset Classifications: Best Practices
Accurate tracking begins with a well-structured accounting system. Without this, financial reporting may be inaccurate and impact decision-making. From the moment a donation is received, any restrictions should be documented in specific donor-restricted revenue accounts. Similarly, expenses meeting these restrictions should be recorded in corresponding expense accounts, ensuring transparency and accountability.
Overcoming Common Challenges
Challenges in tracking restrictions typically arise from inadequate accounting systems or a lack of proper procedures. Ensuring that staff are well-trained, and processes are in place is crucial for accurate recording and management of funds.
The Collaborative Path Forward
Maintaining donor trust requires rigorous tracking and management of restricted funds. Mismanagement can lead to a loss of donor confidence and financial discrepancies, potentially impacting future donations and budgeting. At Rea & Associates, we specialize in aiding not-for-profits with accounting setups, staff training, and correcting misclassifications. We are dedicated to helping you be effective stewards of your donors’ contributions.
For assistance with managing your net asset classifications, please contact us. We are here to support your commitment to financial clarity and donor trust.
By A.J. Knapp (Millersburg Office)