Net Assets Refresher: 5 Key Considerations

Tracking net asset activity of a not-for-profit organization can be complex, and it’s especially difficult if you’re a bit unsure about the accounting rules for staying in compliance. While it’s been a minute since the last major revamp from the Federal Accounting Standards Board (check out our series of articles from 2016), we can all use a refresher from time to time.

1. What are the classifications of net assets?

The two primary categories of net assets for not-for-profit organizations are with donor restrictions and without donor restrictions. As the names imply, the distinction lies in the source of income. If revenue is earned by providing goods or services, these are inherently without donor restrictions, as there was no donor involved in the revenue. However, contribution revenue can belong to either category, depending on the existence of any restrictions placed on the gift by the donor.

A subcategory of net assets without donor restrictions is board-designated. These are funds that were not received from a donor with restrictions; instead, the organization decided to set aside a portion of net assets separately from funds for general use. Board-designated net assets can be for a particular short-term purpose (such as a special projects fund) or long-term purpose (such as a quasi-endowment).

2. How are net assets generated?

All revenue recognized by an organization adds to its net assets balance. The determination of which category the revenue belongs to needs to be made upon recognizing the revenue. Communication between the development team and the finance team is critical to ensure all contribution revenue is properly reflected in net assets with or without donor restrictions. Earned revenue is all without donor restrictions. Special consideration should be made for investment earnings to assess if there are any donor restrictions on those income streams. For example, investment earnings on donor-restricted endowment funds likely should be categorized as with donor restrictions.

3. What are kinds of donor restrictions for net assets?

Donors can place restrictions on their gifts that require the organization to use the funds for a particular purpose (a “purpose restriction”), and/or that require the organization to use the funds in a future period (a “time restriction”). The accounting standards indicate that, unless otherwise instructed by the donor, organizations should assume that the future years’ payments in a multi-year pledge include a time restriction.

Purpose restrictions can be temporary or in perpetuity. Temporary restrictions are expected to be met by the organization, whether currently or in the future. Examples include gifts towards a scholarship fund for a private school, or a capital campaign for a social services organization looking to purchase a building for its operations. Any limitation on a contribution from a donor that restricts the use of the funds to something other than general operations is considered “with donor restrictions”. If it’s unclear if there is a donor restriction on a gift, ask yourself, “Could I use this gift to pay rent/HR salaries/IT costs/office supplies? Would the donor be okay with that?” If the donor is expecting you to use the gift for a particular program or expense, there’s probably a donor restriction on that contribution.

Net assets with donor restrictions in perpetuity primarily consist of endowment funds. Donor-restricted endowments are intended to be retained in perpetuity by the organization, with a portion of the investment earnings used to support the organization. Investment earnings on such funds are typically also categorized as “with donor restrictions”. The release of endowment funds is discussed further below.

It’s worth noting that donor-restricted endowments are subject not only to accounting rules, but also to state law. We recommend you work with an attorney familiar with such laws in your state, referred to as UPMIFA, the Uniform Prudent Management of Institutional Funds Act.

4. How are net assets reduced?

All expenses reduce net assets without donor restrictions. Net assets with donor restrictions are released from restrictions when the organization fulfills the donor’s purpose for the gift, and/or through the passage of time, depending on the type of donor restriction(s) in place.

Endowment funds have permanent restrictions on the corpus (original donor contributions), and temporary restrictions on the earnings thereon. Endowment earnings are released based on the entity’s spending policy. This is typically a percentage of the total endowment fund, calculated on a rolling-average basis over several years to smooth out the swings in the investment markets. For example, a spending policy may allow for releasing up to 4% of the endowment fund balance annually. The percentage used should be prudent and allow for the original corpus to maintain purchasing power over time.

A distinctive characteristic of board-designated funds is that they can be added to or “undesignated” at any time, depending on the organization’s policies. This is contrasted with net assets with donor restrictions, where the organization must meet all restrictions before releasing the funds into net assets without donor restrictions.

5. How do I track my net assets?

Most organizations structure their general ledger system, their donor database, or both, to identify contributions with donor restrictions. This can be through the use of funds, program codes, or other identifiers. The benefit of this kind of tracking is that the expenditure can also be tagged with these identifiers, enabling the organization to easily generate an income statement report for the particular donor restriction.

The contribution revenue increases net assets with donor restrictions, and the expenditure releases those restrictions. Keep in mind that if you “overspend” (incur more expenditures than you brought in with donor-restricted contribution revenue), you only reduce the net assets with that particular donor restriction to zero. Additional expenditures reduce net assets without donor restrictions.

Proper tracking and presentation of the categories and activity of net assets is a key part of reporting the financial picture of a not-for-profit organization.

Clark Nuber presents a series of classes and events covering a variety of Not-for-Profit Essentials most important to your organization. Learn more about Reporting of Contribution Revenue and Fundraising Events at our webinar on Apr. 28, 2026, and Financial Reporting for Endowments and Net Assets at our webinar on Oct. 7, 2026.

© Clark Nuber PS, 2026. All rights reserved.