A Nonprofit’s Guide to Reporting Net Assets Correctly

Whether you’re preparing for an audit, presenting to your board, or applying for a grant, your Statement of Financial Position needs to reflect accurate, GAAP-compliant net asset categories. While internal financial reports aren’t required to follow GAAP presentation rules and can be formatted in whatever way is most useful for leadership, it’s still important to track donor restrictions behind the scenes. In this post, we’ll break down exactly where and how to report net assets, how to handle donor restrictions, and what disclosures you’ll need to include to stay compliant and build trust with stakeholders.

Understanding the Two Classes of Net Assets

Under GAAP, nonprofits categorize net assets into two classes:

With donor restrictions
Without donor restrictions

These two classifications replace the older three-part framework and better reflect how nonprofits are expected to manage, report, and disclose donor-imposed limitations. Getting this right ensures accurate reporting and builds confidence with your stakeholders.

Let’s take a closer look at each classification:

Net Assets With Donor Restrictions

These funds are earmarked by the donor for a specific purpose or time. They can’t be used freely until the restriction is met, and nonprofits must be able to prove they’ve followed the rules.

Examples include:

A $100,000 gift to build a new clinic
A $25,000 grant for next year’s education program
Endowments where only the investment income can be used

How to classify: When funds are received with a restriction, they must be recorded as net assets with donor restrictions. You should clearly track the restriction type (purpose, time, or both) and release the funds to unrestricted once the donor’s conditions have been satisfied.

Net Assets Without Donor Restrictions

These funds are available for general use and are not restricted by a donor. They’re essential for day-to-day operations, overhead, innovation, and organizational growth.

Examples include:

Monthly recurring donations with no specified use
Membership fees or tuition from program participants
Proceeds from unrestricted fundraising events

How to classify: These funds should be recorded as net assets without donor restrictions, even if the organization chooses to apply them to specific programs. Internal decisions don’t count as donor restrictions.

How to Report Net Asset Changes

Net assets don’t just sit on your balance sheet, they change throughout the year based on incoming contributions, program costs, and releases from restriction. For externally issued, GAAP-compliant financial statements, nonprofits are required to show how these changes occur and how restrictions are released.

Where to Report It: Statement of Activities

The Statement of Activities (similar to an income statement) is where you show how net assets have increased or decreased over the year. Rather than tracking every expense directly in both categories, GAAP presentation typically works like this:

With donor restrictions: This column generally reflects additions to restricted net assets (restricted contributions, grants, investment income restricted by donor intent) and releases from restriction when funds are used for their intended purpose.
Without donor restrictions: This column typically shows the majority of operating activity, including:
- Program and operating expenses
- Released restricted funds reclassified as unrestricted revenue
- Unrestricted contributions and other earned income

In practice, expenses almost always appear in the without donor restrictions column. Restricted activity flows into unrestricted net assets through a release from restriction, rather than expenses being recorded directly against restricted net assets. This structure allows stakeholders to clearly see what funds were restricted and why, when restrictions were satisfied, and how restricted funds ultimately supported operations and programs.

Reporting Releases From Restriction

When a restriction has been fulfilled, funds move from the “with restrictions” column to “without restrictions.” This is a key part of how you report net assets accurately.

Example: You receive a $30,000 grant for a youth summer program. After the program ends in August, you report that $30,000 as released from restriction in your Statement of Activities.

By showing these releases clearly, your reports demonstrate transparency and proper stewardship of restricted funds.

Still unsure about the difference between net assets with and without donor restrictions? Read our breakdown to better understand how each category impacts your financial strategy and reporting.

Learn More

Required Financial Disclosures for Net Assets

For GAAP-compliant, externally issued financial statements (such as audited or reviewed reports), nonprofits are required to include footnote disclosures explaining how net assets are classified, restricted, and released. While internal financial reports don’t need to follow GAAP, tracking this information internally is critical if you ever need an audit, grant reporting, or other external validation.

Your Organization’s Net Asset Policy

This section outlines how your organization defines, monitors, and uses restricted and unrestricted net assets. It should explain your process for determining when donor restrictions have been met and how funds are reclassified.

If your board has designated funds, like a capital reserve or strategic innovation fund, these should be noted as board-designated net assets without donor restrictions, and the policy around their use should be disclosed.

This section should address:

Who is responsible for evaluating restrictions and approving reclassifications
Internal policies for managing restricted gifts and grants
How your organization tracks and reports board-designated funds
Whether you have formal procedures for releasing restrictions

Tip: Be transparent about the criteria used to determine when a donor’s restriction is satisfied. This is especially important during audits or when receiving large, complex grants.

Breakdown of Restricted Net Assets

GAAP requires you to present a clear breakdown of net assets with donor restrictions by type. This helps stakeholders understand how much of your revenue is restricted and for what purpose.

Typical categories include:

Time-based restrictions (e.g., grants awarded for next fiscal year)
Purpose-based restrictions (e.g., funds designated for a specific program or initiative)
Permanent endowments (e.g., principal that must remain intact, with only investment income used)

For each category, include the dollar amount and a brief explanation if needed. This gives donors and reviewers a sense of how restricted funds are being managed and how much discretionary funding is available.

Summary of Releases From Restriction

Nonprofits must also disclose how much was released from donor restrictions during the reporting period and why. This shows that you’re honoring donor intent and using funds as promised.

Your financial statement footnotes should include:

Total dollar amount of restrictions released
General description of the programs or activities the funds supported
The method used to determine that the restriction was fulfilled (e.g., program completed, time period lapsed)

Why it matters: Tracking and disclosing releases not only satisfies GAAP, it also helps demonstrate accountability to funders, many of whom require follow-up reporting.

Liquidity and Availability of Resources

This required disclosure explains how much of your organization’s assets are available for operations within the next 12 months. It helps financial reviewers assess your short-term financial health and capacity to meet obligations.

Your disclosure should:

Describe how you manage liquidity risk
Quantify unrestricted cash and assets available for general use
Note any limitations on asset availability (e.g., donor restrictions, board designations, illiquid investments)

This is especially important for organizations with tight cash flow or significant restricted assets, as it reveals how much funding you can actually use in the near term.

Common Net Asset Reporting Mistakes (And How to Avoid Them)

Even experienced nonprofit leaders struggle to report net assets correctly. But the good news? Most errors are preventable with the right systems and attention to detail.

Here’s what to watch out for:

Mislabeling contributions: A donor’s preference is not a legal restriction. Only explicit donor instructions (in writing) require restricted classification.
Tracking restrictions manually: Spreadsheets are easy to get wrong. Use accounting software that supports fund-level tracking and restriction flags.
Forgetting to release funds: If the condition has been met, you must reclassify the funds. Leaving them in the wrong category can mislead funders or trigger audit findings.
Failing to update policies in disclosures: If your board adds a new reserve policy or changes how you release restrictions, update your footnotes accordingly.
Combining restricted and unrestricted assets: This obscures how much flexibility your organization actually has—and can raise concerns with grantmakers or lenders.

How to Avoid These Pitfalls

Implement fund accounting tools that let you track restrictions in real time
Review donor agreements carefully when classifying new gifts
Reconcile restricted balances quarterly, not just at year-end
Train staff on what counts as a restriction and how to document releases
Consider working with a nonprofit accounting expert to validate classifications and disclosures before an audit

Getting net asset reporting right protects your mission and your reputation.

Make Your Net Asset Reporting Audit-Ready With TCCFO

If your team is juggling spreadsheets, struggling with classifications, or unsure about disclosures, you’re not alone. The Charity CFO supports nonprofits across the country with accurate, GAAP-compliant financials, so you can walk into your next board meeting or audit with confidence. Contact our team today to get started.

A Nonprofit’s Guide to Reporting Net Assets Correctly

Understanding the Two Classes of Net Assets

Net Assets With Donor Restrictions

Net Assets Without Donor Restrictions

How to Report Net Asset Changes

Where to Report It: Statement of Activities

Reporting Releases From Restriction

Required Financial Disclosures for Net Assets

Your Organization’s Net Asset Policy

Breakdown of Restricted Net Assets

Summary of Releases From Restriction

Liquidity and Availability of Resources

Common Net Asset Reporting Mistakes (And How to Avoid Them)

How to Avoid These Pitfalls

Make Your Net Asset Reporting Audit-Ready With TCCFO

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A Nonprofit’s Guide to Reporting Net Assets Correctly

Understanding the Two Classes of Net Assets

Net Assets With Donor Restrictions

Net Assets Without Donor Restrictions

How to Report Net Asset Changes

Where to Report It: Statement of Activities

Reporting Releases From Restriction

Required Financial Disclosures for Net Assets

Your Organization’s Net Asset Policy

Breakdown of Restricted Net Assets

Summary of Releases From Restriction

Liquidity and Availability of Resources

Common Net Asset Reporting Mistakes (And How to Avoid Them)

How to Avoid These Pitfalls

Make Your Net Asset Reporting Audit-Ready With TCCFO

Share This Post

More Like This

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