Net Assets

The net assets of a nonprofit organization are equivalent to the net worth of the organization. Net assets can be liquid (comprising cash and short-term receivables), or fixed (furniture, fixtures, equipment, inventories, and land & buildings net of long-term debt), or long-term. Generally accepted accounting principles (GAAP) call for an organization’s net assets to be classified as unrestricted (UR), temporarily restricted (TR), or permanently restricted (PR).

Small and midsize nonprofit organizations usually do not have PR net assets such as endowments, and it is usually not advisable, as having an endowment ties up a lot of cash that is not accessible to the organization for operations or program delivery. It is far more advisable for small and midsize nonprofits to build a working capital or operating cash reserve fund before attempting to create an endowment. If a small or midsize nonprofit does have PR net assets, such as an endowment, these net assets usually comprise long-term investments and are not considered liquid.

TR net assets comprise contributions received or promised to the organization that carry a donor imposed restriction as to when (time restriction) or for what purpose (purpose restriction) the funds can be used. Funds that are “carried over” to the subsequent fiscal year for either restriction are shown as TR net assets.

All net assets that are not PR or TR are Unrestricted (UR) and can be used by the organization as its board sees fit. It is useful, at least for internal financial management purposes, to separate liquid from non-liquid UR net assets in order to have a better idea of the organization’s liquidity, the financial resources it can use for day-to-day transactions. A single UR line item balance does not always tell the full story.

For instance, the total UR net asset balance in all three examples below is $100,000.

Nonprofit Org A shows total UR net assets as $100,000 without distinguishing between available vs. fixed (non liquid) net assets. It would be easy to assume the organization was in decent shape with a positive $100,000 in UR net assets. However, with a deeper look at more detailed information as to the composition of the UR net assets as in Examples B or C, different conclusions about those organizations’ financial health would be reached.

Nonprofit Org B shows $75,000 in undesignated net assets that one could assume comprises cash, receivables, and investments available for operations. In addition Org B shows net fixed assets of $25,000, totaling $100,000, a more accurate picture of the organization’s financial position. This organization’s board might want to consider designating some of the $75,000 into a cash reserve fund and an equipment maintenance and replacement fund.

Nonprofit Org C also shows a positive $100,000 in total net assets as well, but its financial picture is very different. In this scenario the organization has spent all its available cash on equipment or its facility and has an accumulated operating deficit of $20,000. Showing the net assets in this greater detail would help this organization’s board to understand why the organization has positive net assets but is still struggling to pay the bills on time.

The above distinctions could be reached by “doing the math” using other totals on the balance sheet, but the objective is to present clear and easily readable reports, and not to make the reader work so hard to figure it out. Accounting for and reporting net assets in these more detailed categories for internal reports is valuable and recommended and gives a clearer picture of the organization’s actual financial position.