Elements of the Change in Net Assets

According to Statement of Financial Accounting Concepts (SFAC) 6, Elements of Financial Statements, each item presented in the statement of activities may be categorized according to one of the following components:

1. Revenues—Cash inflows (or the equivalent) from delivering or producing goods, rendering services, or other activities that have occurred or will eventuate as a result of an entity's major or central operations. The cash inflows may be actual cash receipts or expected cash receipts.
2. Expenses—Outflows or other using up of assets or incurrences of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations.
3. Gains—Increases in net assets from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from revenues.
4. Losses—Decreases in net assets from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from expenses.
5. Reclassifications—Increases to one net asset class and decreases to another give rise to reclassification. These occur as donor restrictions become satisfied either because of the passage of time or are fulfilled and removed by actions of the organization in compliance with those stipulations. In this case, net assets with donor restrictions would be reclassified to net assets without donor restrictions. (Reclassifications, accordingly, do not involve inflows, outflows, or other changes in assets or liabilities.)

Classifying amounts as revenues, expenses, gains, or losses varies depending on the nature of each organization's operations and historical accounting practices. Importantly, the statement of activities must show these classifications of increases and decreases in net assets for each of the two categories of net assets.

Classification of Revenues, Expenses, Gains and Losses, and Reclassifications

The statement of activities reports revenues as increases in net assets without donor restrictions unless the use of the assets received is limited by donor-imposed restrictions. For example, fees from rendering services and income from investments generally are unrestricted; however, income from donor-restricted endowments may be donor-restricted and increase net assets with donor restrictions. The essence of this discussion was not changed by ASU 2016-14. Donor, organizational, and legal requirements as to the spending of the earnings on endowments is not changed by the changes in the accounting rules. Not-for-profit organizations will continue to need to keep underlying records of the types of donor restrictions that exist on their donor-restricted net assets to ensure compliance with these requirements.

In the absence of a donor's explicit stipulation or circumstances surrounding the receipt of the contribution that make clear the donor's implicit restriction on use, contributions are reported as unrestricted revenues or gains (unrestricted support), which increase net assets without donor restrictions. Donor-restricted contributions are reported as restricted revenues or gains (restricted support), which increase net assets with donor restrictions. However, donor-restricted contributions whose restrictions are met in the same reporting period may be reported as unrestricted support provided that an organization reports consistently from period to period and discloses its accounting policy. Accounting for contributions is more fully discussed in Chapter 9.

The statement of activities also reports gains and losses recognized on investments and other assets (or liabilities) as increases or decreases in net assets without donor restrictions unless their use is temporarily or permanently restricted by explicit donor stipulations or by law. For example, net gains on investment assets, to the extent recognized in financial statements, are reported as increases in net assets without donor restrictions unless their use is restricted to a specified purpose or future period. If the governing board determines that the relevant law requires the organization to permanently retain some portion of gains on investment assets of endowment funds, that amount shall be reported as an increase in net assets with donor restrictions. Accounting for investments is more fully discussed in Chapter 10.

The statement of activities reports expenses as decreases in net assets without donor restrictions.

Classifying revenues, expenses, gains, and losses within the two classes of net assets does not preclude incorporating additional classifications within a statement of activities. For example, within a class or classes of changes in net assets, an organization may classify items as operating or nonoperating, expendable and nonexpendable, earned and unearned, recurring and nonrecurring, or in other ways.

Expirations of donor-imposed restrictions that simultaneously increase one class of net assets and decrease another are referred to as “reclassifications.” According to FASB ASC 958-225-45-3, reclassifications are required to be reported as separate items on the statement of activities.

Information about Gross Amounts of Revenues and Expenses

To help explain the relationships of a not-for-profit organization's ongoing major or central operations and activities, the statement of activities reports the gross amounts of revenues and expenses. In other words, revenues are not reported net of related expenses and expenses are not reported net of related revenues. However, investment income may be reported net of related expenses, such as custodial fees and investment advisory fees, as well as direct internal expenses, such as the cost of a chief investment officer. This author strongly recommends disclosure of investment expenses, either on the face of the statement or in a note.

A statement of activities may report gains and losses as net amounts if they result from peripheral or incidental transactions or from other events and circumstances that may be largely beyond the control of the organization and its management. Information about their net amounts generally is adequate to understand the organization's activities.

Information about an Organization's Operations

FASB ASC 958-225 permits not-for-profit organizations to include additional classifications of revenues, expenses, gains, and losses within the statement of activities. The most common classification seen in practice is the segregation of operating items from nonoperating items. Many not-for-profit organizations find this helpful in reporting the results of their operations separately from items such as investment gains and losses or gains and losses from the sale of property or other fixed assets that are unrelated to the day-to-day operations of most not-for-profit organizations. FASB ASC 958-225-45-9 provides additional examples of segregating expendable items from nonexpendable items, earned items from unearned items, and recurring from nonrecurring items. GAAP neither specifically encourages nor discourages the use of these further classifications of revenues, expenses, gains, or losses.

When a not-for-profit organization does report results of operations separately from nonoperating items (such as reporting the excess of operating revenues over operating expenses, or vice versa), these amounts should be reported within a financial statement that, at a minimum, reports the change in unrestricted net assets for the period. In addition, if an organization's use of the term “operations” is not apparent from the details presented on the face of the financial statements, a note to the financial statement should be provided that describes the nature of the reported measure of operations or the items excluded from operations. Essentially, GAAP requires two things—that a stand-alone statement presenting only operating items is not appropriate and that a reader be able to understand the types of items that are considered operating and nonoperating.

Information about an Organization's Service Efforts

One of the more important uses of a not-for-profit organization's financial statements, in particular the statement of activities, is to determine how much of the total of an organization's expenses was spent on program activities, management and general activities, and fundraising activities. GAAP contains specific guidance on reporting expenses in these classifications. ASU 2019-14 requires all not-for-profit organizations to provide this additional natural expense classification information. These specific requirements are discussed in Chapter 14. In addition, Chapter 11 describes how to account for expenses that relate to more than one activity, particularly program activities that contain a fundraising appeal.