Question

Per FASB standards, not-for-profits must classify their net assets into three classes. What is the basis for distinguishing the three classes? What is the rationale for this basis? How is each class defined? 3.

Answer 1

Under the FASB issued statement No. 117, a not-profit organization is required to issue 3 primary statements which consists the balance sheet, the statement of activities, and the statement of cash flow. Their net assets are classified into three classes: unrestricted, temporarily restricted and permanently restricted net assets. The basis of the classification is done on the absence or existence of donor- imposed restrictions

-- Unrestricted net assets: These assets are donated to without any subject to usage restrictions

-- Permanently restricted net assets: These assets need to be used for specific purposes as designated by donors.

-- Temporarily restricted net assets: These assets are donated subject to restrictions which is limited to a specific time period.

Unrestricted net assets would show unrestricted donations in monetary value to the organization and it's cumulative excess of revenues over expenditure. The permanently and temporarily restricted net assets are related to the existence of restriction imposed by the donor. Usually the permanently restricted net assets uses the income of the fund and are of an endowment nature as the amount of principal cannot be utilized to fund any purpose.