Restricted vs Unrestricted Funds: How Nonprofits Track Net Assets
GAAP does not require a net asset rollforward. The required set is three statements and the notes, and a rollforward schedule is not one of them.
It is still the first thing your auditor will ask for, and the reason is worth understanding. Your statement of activities is a rollforward, presented in summary. The schedule you keep in the back office is the same articulation at the level of detail the face of the statements does not show.
This post is about building and proving that schedule. For the rules behind it, what makes a restriction a restriction, why a board cannot create one, and the difference between restricted and conditional, see our guide to fund accounting for nonprofits. This one assumes you know those and covers the mechanics.
What the Face of the Statements Must Show
Three requirements, and the citations are worth getting right because the usual ones are slightly off.
Note that ASC 958-205-45-1 itself neither prescribes nor prohibits a particular format. You have latitude in how the statements look. You have none on those three amounts appearing.
On terminology: GAAP's own words here are expiration of a donor-imposed restriction and reclassification of net assets. "Net assets released from restrictions" is a near-universal caption and a perfectly good one, but it is convention rather than a mandated label. What the standard actually compels is that the reclassification be visible in the change in each class. Reviewers who police the wording and never check whether the line nets to zero are checking the wrong thing.
Not sure your restricted balance would survive a reconciliation?
The Rollforward, and Its Two Built-In Checks
Lay it out with the net asset classes as columns:
Two rows must net to zero, and that is the point of building it this way.
- Releases net to zero across the classes. A release moves money between classes. Nothing enters the organization. If that row does not sum to zero, something is wrong before you look at anything else.
- Board designations net to zero too, because a designation moves money around within the unrestricted class and never crosses into the restricted one. If a designation shows up in the restricted column, the error is conceptual rather than arithmetic.
Then three tie-outs. The ending balance by class equals the two amounts on the face of the statement of financial position. The change by class equals the change-in-each-class lines on the statement of activities. And the opening balance by class equals last year's audited closing balance, keyed from the audited statements rather than rolled forward from the accounting system, which is how you catch a prior period error on day one instead of in March.
Why expenses never sit in the restricted column
This confuses people coming from governmental fund accounting, where you spend directly out of a fund.
ASC 958-205-45-11 provides that a donor-imposed restriction is fulfilled to the extent of the expense incurred, unless the expense is directly attributable to another specific external source. So the sequence is: you incur the qualifying expense, that fulfills the restriction, the money releases into the unrestricted class, and the expense is recorded there. Expenses are a single column.
The same paragraph carries a detail that catches people out. A time restriction is not released by a qualifying expense. Time-restricted amounts are not available to support expenses until the time restriction expires, so spending on the right purpose does not free up a gift that is restricted to next year.
Proving the Restricted Balance
The rollforward proves the classes move correctly. It does not prove the restricted balance is real. For that you need a schedule with one row per donor or grant: opening balance, receipts, releases, closing balance, with the total agreeing to the general ledger restricted net asset control account.
Run it monthly. Everything below is professional practice rather than a rule, but these are the four failure modes and each has a distinct fingerprint.
The third one is the serious one. A net asset schedule can be internally perfect while the money is gone. That is precisely the condition the next section is designed to expose.
What Is Actually Available
This is the most useful disclosure in nonprofit reporting and the one most often treated as a compliance chore.
ASU 2016-14 requires two things, both on a one-year horizon from the balance sheet date: qualitative information on how the organization manages its liquid resources available to meet cash needs for general expenditures, and quantitative information on the financial assets available to meet those needs, either on the face of the balance sheet or in the notes.
Three things limit availability, and the standard names them as the asset's nature, external limits imposed by donors, grantors, laws and contracts, and internal limits imposed by governing board decisions.
Four operational points that are routinely missed:
- It covers financial assets, not current assets. Inventory, prepaid expenses, fixed assets and intangibles are out by their nature however current they look. Only cash, contractual rights to receive cash, and equity ownership in another entity count. The filter is two-stage: is it a financial asset at all, and if so is it available within a year.
- The noncurrent portion of a multi-year pledge is out on the horizon test, as is an investment under a lock-up.
- Board designations are measured at the balance sheet date. If the board de-designates in January, your December 31 figure still excludes those funds. You can explain the later release qualitatively, but the number does not move. This is a point-in-time measurement, not a forward-looking liquidity statement.
- "Available for general expenditure" is not defined in GAAP, and that is deliberate. The illustrative disclosures treat all donor-restricted financial assets as unavailable, but an organization may include restrictions that are general relative to its mission provided it explains its approach. The consequence: two honest organizations with identical balance sheets can report materially different figures, so the qualitative paragraph is not boilerplate. It is what makes the number mean anything, and anyone benchmarking this figure across organizations without reading it is comparing two different measurements.
So how much can a nonprofit hold? There is no legal ceiling. The nearest benchmark is the BBB Wise Giving Alliance standard asking that available unrestricted net assets not exceed three times the past year's expenses or the current year's budget, whichever is higher, and that is an accreditation standard from a charity watchdog rather than law. Reserve targets are covered in our nonprofit budget guide.
Underwater Endowments
An endowment fund is underwater when its fair value at the reporting date is below either the original gift amount or the amount required to be maintained by the donor or by law.
The classification changed and the new answer is counterintuitive. Under ASC 958-205-45-13H, the accumulated losses are included together with that fund in net assets with donor restrictions. The deficiency does not touch the unrestricted class at all.
Before ASU 2016-14 it did: a fund below its original gift amount was charged against unrestricted net assets. Two consequences follow, and both run against instinct:
- A bad market year no longer reduces your unrestricted class through underwater endowments. An organization reporting a healthy unrestricted balance through a market decline is not necessarily doing anything wrong.
- A finance manager who "fixes" an underwater fund by charging it to unrestricted is creating a GAAP error while believing they are being conservative. This is a common legacy pattern in files that were relabeled rather than rebuilt after 2016-14.
And there are four required disclosures, not three. Most summaries list the three numbers and stop:
- The fair value of the underwater endowment funds.
- The original gift amount or level required to be maintained by donor stipulations or by law.
- The deficiency, which the standard defines arithmetically as the first figure less the second.
- The organization's policy, and any actions taken during the period, concerning appropriation from underwater endowment funds. This one sits in a different paragraph from the other three, which is why checklists built from the common summaries miss it.
One related point on endowments generally: the old split, where a donor-restricted endowment was divided between the perpetual portion and the accumulated earnings portion across classes, is superseded. The whole fund sits in net assets with donor restrictions until the board appropriates for expenditure, at which point the restriction expires. Organizations that implemented 2016-14 by renaming columns without rebuilding the endowment schedule are often still running the old split.
The appropriation mechanism itself interacts with state law, since UPMIFA is enacted state by state with variations and the meaning of appropriation turns on the enacted statute and on your own board resolutions. Confirm your state's position rather than assuming.
Where Net Assets Appear on Form 990
Useful both for reading your own return and for looking up a peer's. Line references below are from the 2025 Form 990; the form has been renumbered historically, so check against the form for the year you are reading.
Lines 29 to 31 carry capital stock, paid-in surplus and retained earnings. Those are for organizations that do not follow ASC 958, so a typical charity leaves them blank.
Two things worth knowing about Part XI, because it is widely described as a net asset reconciliation without its limits being stated.
First, it reconciles the total only. Its tie-outs run to Part X line 32 at both ends, not to lines 27 and 28. So the 990 will happily accept a return where the total is right and the split between the two classes is wrong. Part XI cannot catch a misclassification between classes.
Second, lines 5 through 9 exist precisely because the 990's revenue and expense definitions do not match GAAP. A nonzero line 9, "Other changes in net assets or fund balances", is normal rather than a red flag. What is worth a second look is a return where line 9 is carrying a large number with a thin Schedule O explanation, which usually means the preparer could not reconcile and plugged the difference.
And a genuine trap for preparers. Schedule D, Part V still uses the older endowment taxonomy, and its instructions direct you to report term endowment funds as "temporarily restricted endowment" for the purpose of completing that line, while the same instructions say the Part V definitions are governed by ASC 958 and should be consistent with your ASC 958-205 footnote. That caption was eliminated from GAAP in 2016-14. The resolution: Schedule D terminology is a tax form taxonomy, not a GAAP caption. Following it on the 990 does not license using it on your financial statements.
What the Board Should See
Audited statements answer what the organization's financial position is under GAAP. The board wants to know what it can spend. Those are different questions, which is why handing trustees the audited statements alone reliably produces the wrong conversation.
Lead the board report with spendable, not with net assets. This layout is professional practice rather than a requirement:
Show board designations as their own line. Both designations and restrictions reduce what is available, so lumping them together is arithmetically correct and governance-wrong: only one of them can be reversed by the board's own vote. That is also why the amounts and purposes of board designations are a required disclosure rather than a courtesy.
Then, separately, the restricted balances by donor or grant with their purposes and spend-by dates, presented as obligations to deliver rather than as a reserve.
Notice that this is the same arithmetic as the liquidity disclosure. Build the board report this way every month and the year-end disclosure falls out of it, instead of being constructed once a year from scratch.
Bottom Line
- The rollforward is not required by GAAP, but the statement of activities is one in summary form, so build the schedule that proves it.
- Two rows must net to zero: releases, and board designations. That is the cheapest error check you have.
- Expenses never sit in the restricted column, because the restriction is fulfilled to the extent of the expense incurred and the money releases first.
- Reconcile the restricted balance by donor every month, and compare it to actual cash. A perfect schedule over an empty bank account is the failure that matters.
- Four underwater endowment disclosures, not three. The fourth is your appropriation policy and any actions taken.
- An underwater deficiency stays inside the restricted class. Charging it to unrestricted is an error, not prudence.
- Form 990 Part XI reconciles the total only and will not catch a misclassification between the two classes.
Orbit Accountants maintains net asset schedules, monthly restricted fund reconciliations and board reporting packs as part of our nonprofit bookkeeping service, including the liquidity figure built through the year rather than assembled at audit. Where grant tracking is the underlying problem, our guide to grant accounting covers the award side, and if the records are behind, our catch-up bookkeeping team starts there.
Also read: Fund Accounting for Nonprofits: What It Is and How It Works
Frequently Asked Questions
What are net assets for a nonprofit?
Net assets are the nonprofit equivalent of equity: total assets less total liabilities. They are reported in two classes, net assets without donor restrictions and net assets with donor restrictions, and both amounts plus the total must appear on the face of the statement of financial position. The statement of activities must show the change in each class and in total.
Is a net asset rollforward required by GAAP?
No. GAAP requires a complete set of three financial statements, the statement of financial position, the statement of activities and the statement of cash flows, and a rollforward schedule is not among them. It is nonetheless standard practice, because the statement of activities is itself a rollforward in summary form and the schedule is how you prove the required figures. Expect your auditor to ask for it.
Where can I find net assets on a Form 990?
On the 2025 Form 990, Part X line 27 is net assets without donor restrictions, line 28 is net assets with donor restrictions, and line 32 is the total. Part XI is a reconciliation of net assets running from revenue and expenses to the closing total. Note that Part XI reconciles the total only, tying to Part X line 32 at both ends rather than to lines 27 and 28, so it cannot detect a misclassification between the two classes. Line numbers change between years, so check against the form for the year you are reading.
Why do expenses only appear in the unrestricted column?
Because ASC 958-205-45-11 provides that a donor-imposed restriction is fulfilled to the extent of the expense incurred, unless the expense is directly attributable to another specific external source. The qualifying expense releases the restriction, the money moves into net assets without donor restrictions, and the expense is recorded there. Spending directly out of a restricted fund is the governmental fund accounting model and does not apply to nonprofits under ASC 958.
What is an underwater endowment and how is it reported?
An endowment fund is underwater when its fair value at the reporting date is less than the original gift amount or the amount required to be maintained by the donor or by law. Since ASU 2016-14 the accumulated losses are included with the fund in net assets with donor restrictions and no longer reduce the unrestricted class. Four disclosures are required: the fair value of the underwater funds, the original gift amount or required level, the deficiency between them, and the organization's policy and any actions taken on appropriation from underwater funds.
What is the liquidity and availability disclosure?
A requirement introduced by ASU 2016-14 to disclose both how the organization manages its liquid resources and the amount of financial assets available to meet cash needs for general expenditures within one year of the balance sheet date. Availability is limited by the asset's nature, by external limits from donors, grantors, laws and contracts, and by internal limits from board decisions. It covers financial assets rather than current assets, so inventory and prepaid expenses are excluded whatever their maturity, and board designations are measured at the balance sheet date so a later de-designation does not change the figure.
Are temporarily restricted net assets still a thing?
Not as a reporting class. ASU 2016-14 replaced the previous three classes with two, so using temporarily restricted or permanently restricted as the required class headings on financial statements is incorrect for periods after it took effect. Voluntary disaggregation within the restricted class is permitted and often useful. Confusingly, the Form 990 Schedule D instructions still direct preparers to report term endowments using the temporarily restricted label for that line, which is a tax form taxonomy rather than a GAAP caption.
How much money can a nonprofit have in the bank?
There is no legal limit. The nearest benchmark is the BBB Wise Giving Alliance accreditation standard asking that available unrestricted net assets not exceed three times the past year's expenses or the current year's budget, whichever is higher, and that is a charity watchdog standard rather than law. The more useful internal measure is the liquidity and availability figure, which strips out donor restrictions, board designations and assets that are illiquid by nature to show what could actually be spent within a year.
Can Orbit Accountants maintain our net asset schedules?
Yes. We maintain the rollforward and the by-donor restricted fund reconciliation monthly, tie both to the general ledger control accounts, build the liquidity figure through the year rather than at audit, and produce a board pack that separates donor restrictions from board designations so trustees can see what is genuinely available. That sits within our nonprofit bookkeeping service on a fixed monthly fee.
Legal Disclaimer
This article is for general information only and is not accounting, audit, tax or legal advice. It reflects US GAAP for not-for-profit entities and IRS forms as of [publish date]. Form 990 line references are to the 2025 form and the form is periodically renumbered, so confirm against the form for your own year. Endowment appropriation interacts with state law, which varies, and the treatment of a particular gift depends on the terms of the gift instrument behind it. Please speak with a qualified professional about your own position. Reading this article does not create a client relationship with Orbit Accountants.
