The purpose of a nongovernmental not-for-profit (NFP) entity's statement of financial position is to report assets, liabilities, and net assets at a point in time. The two net asset classes are net assets with donor restrictions and net assets without donor restrictions.
The objectives of the statement of financial position include helping donors, creditors, and regulators assess liquidity, financial flexibility, stewardship, restrictions on resources, and the ability to continue programs. Those assessments consider both obligations due and the availability of assets for their intended use.
Under United States generally accepted accounting principles (U.S. GAAP), a not-for-profit entity's statement of financial position complements its other statements. The statement of activities explains changes in net assets over a period; the statement of cash flows explains changes in cash and cash equivalents over that period.
Net assets equal recognized assets minus recognized liabilities and occupy the residual position that ownership equity occupies in a business. A not-for-profit entity presents net assets with donor restrictions, net assets without donor restrictions, and total net assets.
Common mistakes
- Using the trial-balance balance. Harbor's opening restricted balance of $420,000 must become $550,000 through the recorded activity and supported release.
- Treating cash as support. Juniper's additional $30,000 conditional receipt belongs in refundable advances while its service barrier remains unmet.
- Following marketability alone. Juniper's $80,000 facility-acquisition investment belongs outside current assets despite being readily convertible to cash.
Bottom line
- The statement reports assets, liabilities, and two net-asset classes at a reporting date, supporting assessments of stewardship, liquidity, and service capacity.
- Contribution conditions determine recognition; remaining donor restrictions determine the net-asset class.
- Board designations and lender restrictions affect availability without independently creating donor-restricted net assets.
- Pledges appear net of applicable discounts and allowances, and asset placement reflects timing, restrictions, and intended use.
Exam shortcut
Read the trial-balance heading first. If balances are before closing, build both ending net-asset classes before copying figures into the statement. Mark each contribution document for entitlement, donor terms, and payment timing. A January receipt does not resolve whether a December receivable exists. Flag words such as board-designated, matching barrier, refundable, building acquisition, and repay. Route each fact to recognition, net-asset classification, or statement placement before calculating.
The full lesson (about 6,137 words, 41 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- I.B1
Browse all free CPA FAR lessons or jump into free CPA FAR practice questions.