ASC 958 is the FASB Accounting Standards Codification topic that governs how every U.S. not-for-profit organization prepares its external financial statements. It requires three primary statements, a two-class net asset structure, a one-year liquidity disclosure, specific rules for classifying contributions and exchange transactions, and expense reporting by both function and nature. The framework was significantly reshaped by ASU 2016-14, effective for fiscal years beginning after December 15, 2017, which collapsed net asset classes from three to two, added the liquidity disclosure, and standardized functional expense presentation.
The Three Required Statements
Every nonprofit must produce a Statement of Financial Position, a Statement of Activities, and a Statement of Cash Flows, together with notes. Each has NFP-specific rules that differ from a for-profit balance sheet and income statement.
Statement of Financial Position
This is the nonprofit balance sheet. Assets generally appear in order of liquidity, and liabilities split into current and noncurrent. Net assets must be shown in two classes: net assets without donor restrictions and net assets with donor restrictions. The older three-class model (unrestricted, temporarily restricted, permanently restricted) is gone, though the underlying tracking of permanent endowments and time-limited gifts still happens in the notes.
Statement of Activities
The Statement of Activities reports changes in total net assets and in each of the two classes over the period. Revenues and expenses are reported gross rather than netted, with one exception: investment return is presented net of related investment expenses. All expenses must be reported by functional classification on this statement or in a companion presentation. The change in net assets shown here has to reconcile to the beginning and ending balances on the Statement of Financial Position; any mismatch is an immediate audit issue.
Statement of Cash Flows
Cash flows are categorized into operating, investing, and financing activities. Nonprofits may use either the direct or the indirect method for the operating section. If you use the direct method, you also present a reconciliation of the change in net assets to net cash flow from operating activities.
One nonprofit-specific rule matters here: contributions restricted for long-term purposes, such as an endowment gift or a contribution earmarked for a building purchase, are classified as financing activities rather than operating. This keeps a capital campaign from distorting the operating cash flow picture.
Net Asset Classification
The two-class structure runs through nearly every line of the financial statements, and misclassifying a restricted gift as unrestricted is one of the most common audit findings in the sector.
Without Donor Restrictions
These are resources the organization can spend on anything consistent with its mission at the board’s discretion. The board may internally designate portions for a reserve fund, a quasi-endowment, or another specific purpose. Board-designated funds remain classified as net assets without donor restrictions because the board can reverse its own decision at any time. The designation is disclosed in the notes.
With Donor Restrictions
When a donor attaches conditions the organization cannot override, the gift falls into this class. Restrictions come in two forms:
- Purpose restrictions, where the donor specifies what the money must fund, such as a scholarship program or equipment purchases.
- Time restrictions, where the donor requires the gift to remain unspent until a future date or a triggering event.
Permanent restrictions also fall within this class. An endowment gift where the donor requires the principal to be maintained indefinitely is reported as net assets with donor restrictions, with the perpetual nature disclosed in the notes. Investment earnings on that endowment stay classified as restricted until the organization appropriates them for spending.
Releasing Restrictions
A restriction releases when the donor’s stipulation has been substantially met. For purpose restrictions, that means incurring qualifying expenses. For time restrictions, it means the specified date arrives or the triggering event occurs. On the Statement of Activities, the release appears as a reclassification that decreases net assets with donor restrictions and increases net assets without donor restrictions.
The standard presumes a restriction is satisfied when the qualifying expenditure is made, regardless of which bank account funded the purchase. A $10,000 grant restricted to educational supplies is released when $10,000 in supplies is bought, even if unrestricted cash paid the invoice.
For long-lived assets like buildings or equipment, the organization must adopt and disclose one of two policies: release the restriction when the asset is placed in service, or release it gradually over the asset’s useful life. The chosen policy must be applied consistently.
Simultaneous Release Election
Organizations can elect to report a donor-restricted contribution directly as support within net assets without donor restrictions when the restriction is met in the same reporting period the revenue is recognized. This avoids the mechanical exercise of recording a restriction and immediately releasing it. The election must be applied consistently and disclosed. ASU 2018-08 expanded this option so an organization can make the election specifically for restricted contributions that were initially conditional, without having to apply it to all other restricted contributions and investment returns.1Financial Accounting Standards Board. ASU 2018-08 Not-for-Profit Entities (Topic 958) Staff Implementation
Liquidity and Availability Disclosure
ASU 2016-14 added a disclosure that forces nonprofits to show whether they can actually pay their bills. A Statement of Financial Position can show millions in net assets while the organization struggles to cover next month’s payroll if the assets are all tied up in restricted endowments or illiquid investments.
The disclosure has two components. The quantitative piece must show the amount of financial assets available to meet general operating expenditures within one year of the balance sheet date. It can appear on the face of the Statement of Financial Position or in the notes, and it must account for factors that reduce availability: donor restrictions, contractual limitations, and board designations.
The qualitative piece must explain how management handles liquidity risk, including borrowing arrangements, lines of credit, and policies for maintaining cash reserves. Unusual circumstances such as loan covenants that restrict cash use or requirements to hold funds in separate accounts also have to be disclosed.
Contributions Versus Exchange Transactions
Nonprofit revenue splits into two categories governed by different accounting rules, and misclassification can change both the amount and the timing of recognized revenue.
Exchange Transactions
An exchange transaction is a deal where both parties receive roughly equal value: ticket sales, tuition, consulting fees, membership fees that come with specific benefits. Revenue follows the same framework for-profit businesses use under ASC Topic 606. You identify the contract, determine the transaction price, and recognize revenue as you satisfy performance obligations.
Contributions
A contribution is a voluntary, nonreciprocal transfer. What the donor receives, such as the satisfaction of supporting a cause, is not treated as commensurate value. Recognition depends on whether the promise is unconditional or conditional.
An unconditional promise to give is recognized as revenue in the period the promise is received, even if cash arrives years later. Promises collectible beyond one year are discounted to present value. It is the promise, not the cash receipt, that triggers recognition.
A conditional promise is not recognized until the condition is substantially met. A condition requires two elements: a barrier the organization must overcome, and a right of return (or release from obligation) for the donor if the barrier is not met. Assets received before the condition is met sit on the balance sheet as a refundable advance liability, not as revenue.
Barrier Indicators
ASU 2018-08 provides three indicators for judging whether an agreement contains a barrier:1Financial Accounting Standards Board. ASU 2018-08 Not-for-Profit Entities (Topic 958) Staff Implementation
- A measurable performance requirement or other measurable barrier, such as a specific service level, output quantity, outcome, or matching requirement.
- Limited discretion on how to conduct the activity, such as required allowable expenses, specific personnel, or a detailed research protocol.
- Purpose-related stipulations tied directly to the agreement’s purpose, as opposed to routine administrative tasks like filing a progress report.
No single indicator is determinative. Routine reporting requirements and trivial administrative tasks generally do not constitute barriers. An agreement lacking either a barrier or a right of return is typically an unconditional contribution with a donor-imposed restriction, not a conditional promise.
Government Grants
Government grants are a frequent source of classification headaches. The question is whether the grant is a contribution (nonreciprocal) or an exchange transaction (reciprocal), and the answer depends on who receives the primary benefit. If the agency is essentially purchasing services for its own direct use or receiving commensurate value, it is an exchange transaction under ASC 606. If the agency is funding mission-driven work and any public benefit is indirect, it is a contribution under ASC 958-605.
A grant funding a university’s independent research where the government retains no proprietary rights is generally a contribution. If the government retains patent rights or exclusive access to outcomes, the transaction looks reciprocal. Many grants sit in a gray zone, and classification often hinges on whether the funder receives direct benefits proportionate to the funding.
Non-Cash Contributions
Donated services are recognized as contribution revenue only if they create or enhance a nonfinancial asset, or if they require specialized skills the organization would otherwise need to purchase. Pro bono legal and accounting services qualify. General volunteer time does not, however operationally valuable it is.
Donated materials and other gifts-in-kind are recognized as contribution revenue and expense at estimated fair value on the date received. The organization must document a reasonable basis for the valuation through published market prices, dealer quotes, or independent appraisals. Contributed long-lived assets like land or buildings are recorded at fair value, with any donor-imposed time restriction released over the asset’s useful life or upon disposal.
Investment Return
Investment return appears on the Statement of Activities as a single net figure combining interest, dividends, realized gains and losses, unrealized gains and losses, and related investment expenses. Investment management fees and direct internal costs of managing the portfolio are deducted before the investment return line hits the statement.
Because those expenses are netted against return on the Statement of Activities, they are excluded from the total on the Statement of Functional Expenses. This is the one exception to the general rule that expenses netted against revenue on the operating statement must also appear in the functional expense totals. Organizations no longer have to disclose gross investment income and related expenses separately in the footnotes, a simplification from ASU 2016-14.
Investment earnings on donor-restricted endowments stay classified as net assets with donor restrictions until the organization appropriates the funds for spending under its spending policy or until any applicable time restriction expires. The classification of investment return across the two net asset classes must be presented on the Statement of Activities or in the notes.
Expenses by Function and Nature
ASC 958 requires nonprofits to show expenses from two perspectives at once: what the money was spent on (natural classification) and why it was spent (functional classification). This dual view is one of the most distinctive features of nonprofit reporting.
Functional Classification
Functional classification sorts expenses by purpose. The two main categories are program services and supporting activities. Program services are costs tied to carrying out the mission, such as education, healthcare delivery, or research. Supporting activities include management and general expenses (accounting, human resources, executive oversight) and fundraising expenses.
Natural Classification
Natural classification groups expenses by economic type: salaries and wages, benefits, occupancy, supplies, travel, depreciation, and so on. Combining the two perspectives produces a matrix showing how much of, say, the salary line went to program delivery versus administration versus fundraising.
The dual presentation can appear on the face of the Statement of Activities, in a separate Statement of Functional Expenses, or in the notes. Most larger organizations use a standalone Statement of Functional Expenses because it provides the clearest detail.
Cost Allocation
Shared costs are where the work gets hard. When an executive director splits time between managing programs and overseeing administration, that salary must be allocated across functional categories using a rational, systematic method. Time tracking is the most defensible approach for personnel costs. Square footage works for shared occupancy expenses like rent and utilities. Whatever method you use, apply it consistently, and describe the methodology in the notes.
Joint Activities
When a nonprofit combines program delivery with fundraising in a single activity, such as a direct mail piece that both educates the public and solicits donations, costs must be split carefully. Allocating any portion of joint activity costs away from fundraising requires meeting all three of these criteria:
- Purpose: the activity must accomplish a genuine program or management function, with a specific call to action that benefits the audience or society.
- Audience: the target audience must be selected for reasons other than likelihood to donate. A mailing list drawn primarily from prior donors fails this criterion.
- Content: the content must support the program function, not merely educate about a cause as a prelude to an ask.
If any one of the three fails, the entire cost of the activity must be classified as fundraising.
Endowment Disclosures
Organizations holding donor-restricted endowment funds must disclose the composition of endowment funds by net asset class, the spending policy and return objectives, and a rollforward schedule showing how endowment balances changed during the period through investment return, new contributions, appropriations for spending, and other changes.
Underwater Endowments
An endowment is underwater when its current fair value has dropped below the original gift amount the donor contributed, or the amount required to be maintained by donor stipulation or law. When underwater endowments exist, the organization must disclose:
- How the board interprets the applicable state law, typically a version of UPMIFA (the Uniform Prudent Management of Institutional Funds Act), regarding the ability to spend from underwater funds.
- Policies for appropriating from underwater endowments, including any actions taken during the period.
- The aggregate fair value of all underwater endowment funds, the aggregate original gift amounts, and the aggregate deficiency.
Losses that push an endowment underwater are reported as reductions to net assets with donor restrictions. The organization does not reclassify the deficiency into net assets without donor restrictions. Most state UPMIFA statutes allow continued prudent spending from underwater funds, but the board must document its analysis and rationale, which is what the disclosure captures.
How This Connects to Form 990
The functional expense classifications required by ASC 958 map directly to Part IX of IRS Form 990, which requires exempt organizations to report expenses across four columns: total, program services, management and general, and fundraising.2Internal Revenue Service. Instructions for Form 990 Return of Organization Exempt From Income Tax (2024) Form 990 does not require organizations to follow ASC 958, but the instructions explicitly reference the codification and permit its use for reporting.3Internal Revenue Service. Instructions for Form 990 Return of Organization Exempt From Income Tax (2025)
Organizations that maintain their books under ASC 958 find Form 990 preparation substantially easier because the functional allocation work is already done. Organizations that do not follow ASC 958 internally still have to perform the functional expense analysis for Form 990, which often duplicates effort. One divergence to keep in mind: Form 990 does not require reporting volunteer time as contribution revenue, even for specialized services that qualify for recognition under ASC 958. Volunteer time is described in Part III (program accomplishments) but excluded from the revenue and expense sections.4Internal Revenue Service. Exempt Organizations Annual Reporting Requirements – Form 990, Part VIII-IX and Schedule D (Financial Information)