FASB ASC 958: What Every Nonprofit Controller Needs to Know

If you work in nonprofit finance, FASB ASC 958 governs everything you produce. It defines which financial statements you must prepare, how net assets are classified, when revenue is recognized, and what disclosures your auditors will look for. Understanding it is not optional for anyone responsible for nonprofit financial reporting.

FASB ASC 958 is the accounting standard that governs how nonprofits report financial information — requiring specific financial statements and a two-category net asset classification system that replaced the former three-category model under the 2016 update.

This article covers what the standard requires, what changed with ASU 2016-14, and what it means for how your accounting system must be structured.

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What ASC 958 Covers

The Financial Accounting Standards Board's Accounting Standards Codification Topic 958 consolidates the accounting rules that apply to nonprofit entities under GAAP. It covers:

• Financial statement presentation — which statements are required and what they must show
• Net asset classification — how to categorize and report different types of equity
• Revenue recognition — when contributions and grants are recognized as income
• Expense classification — how costs must be allocated across functional categories
• Disclosures — what information must appear in the notes to financial statements

ASC 958 applies to all nonprofit entities that follow GAAP. This includes most organizations that have an independent audit, receive federal funding, or file a Form 990 using GAAP-basis accounting. Small organizations that use cash-basis or tax-basis accounting may not formally follow ASC 958 but should understand its requirements for audit readiness and grant compliance.

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The Major Update: ASU 2016-14

In August 2016, FASB issued Accounting Standards Update 2016-14, which made the most significant changes to nonprofit financial reporting in two decades. It became effective for fiscal years beginning after December 15, 2017.

The key changes:

1. Collapse of Three Net Asset Categories Into Two

The old model had three net asset categories:

• Unrestricted
• Temporarily restricted
• Permanently restricted

ASU 2016-14 replaced these with two:

• Net assets without donor restrictions (formerly unrestricted)
• Net assets with donor restrictions (combining formerly temporarily and permanently restricted)

The new model simplifies presentation in some ways and requires additional disclosures in others. Organizations must now disclose the nature and amounts of any significant restrictions within the "with donor restrictions" category, including which amounts are subject to purpose restrictions versus time restrictions versus permanent restrictions.

2. Liquidity and Availability Disclosures

ASU 2016-14 added a new requirement: disclosure of how an organization manages liquid resources and what financial assets are available to meet general expenditures within one year of the balance sheet date. This disclosure is designed to help statement users understand whether the organization has adequate unrestricted liquidity, not just a large overall net asset balance.

3. Statement of Functional Expenses Required for All

Before ASU 2016-14, the Statement of Functional Expenses was explicitly required only for voluntary health and welfare organizations. The update requires all nonprofits to present expenses by both natural and functional classification — though this can be done in the notes rather than a separate statement.

4. Investment Return Presented Net of Expenses

Under the prior standard, investment income and investment management fees were often presented separately. ASU 2016-14 requires investment return to be presented net of related expenses (internal and external) directly netted against investment income.

5. Underwater Endowments

Endowment funds whose fair value has fallen below the original gift amount (underwater endowments) are now classified entirely within net assets with donor restrictions, regardless of the governing law treatment. Additional disclosures about underwater endowment policies and the aggregate amount are required.

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Required Financial Statements Under ASC 958

ASC 958 requires four financial statements for a complete presentation:

Statement of Financial Position

The nonprofit equivalent of a balance sheet. Reports assets, liabilities, and net assets at a point in time. Net assets must be shown in the two-category format. The liquidity and availability disclosure is typically presented here or in the accompanying notes.

Statement of Activities

The nonprofit equivalent of an income statement. Shows revenues, expenses, gains, and losses for the period, and the resulting change in each net asset category. Revenue is presented by net asset category where it is initially recorded. Releases from restriction — when donor-restricted funds are spent on their designated purpose — flow through both columns.

Statement of Functional Expenses

A matrix showing each type of expense (rows: salaries, rent, supplies, etc.) distributed across functional categories (columns: program services, management and general, fundraising). This statement is the foundation for Form 990 Part IX and for overhead ratio calculations.

Statement of Cash Flows

Presents the sources and uses of cash during the period, typically using the indirect method starting from the change in net assets. The statement is classified into operating, investing, and financing activities.

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Revenue Recognition Under ASC 958

Revenue recognition for nonprofits is substantially different from for-profit accounting, and it is one of the most technically complex areas of ASC 958.

Contributions (unconditional transfers) are recognized as revenue in the period they are received or promised, in the net asset category appropriate to any donor-imposed restrictions. An unrestricted pledge is recognized as revenue immediately. A pledge restricted to a future capital campaign is recognized as revenue in the "with donor restrictions" category and released when the restriction is met.

Conditional contributions — grants or pledges where the recipient must meet a specific condition before the funds are theirs to keep — are not recognized as revenue until the condition is substantially met. This is a common audit issue: organizations recognize conditional grant revenue before earning it.

Exchange transactions (contracts for services, program service fees) are recognized when the performance obligation is satisfied, following ASC 606 rather than ASC 958.

The distinction between a conditional contribution and an unconditional contribution with a donor restriction is one of the most technically nuanced areas of nonprofit accounting. A restriction defines how funds must be spent. A condition defines whether the recipient gets to keep them at all.

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The Efficiency Gap: Manual Compliance With Generic Software

Producing ASC 958-compliant financial statements from QuickBooks or other commercial software requires significant manual effort at every reporting cycle. The Statement of Activities must be built in two net-asset columns — commercial software produces a single-column income statement. The Statement of Functional Expenses requires allocation of shared costs across functional categories that generic software does not track. Release-from-restriction entries must be manually calculated and posted each period.

The result is that most nonprofit Controllers maintain an Excel workbook that converts their accounting system's output into the format ASC 958 requires. This workbook is rebuilt or updated every month, is a single point of failure, and produces reports that are always somewhat stale.

sherbertOSOS generates the Statement of Financial Position, Statement of Activities, and Statement of Functional Expenses directly from the general ledger, with proper two-category net asset classification and release-from-restriction tracking built into the transaction recording process. The statements are not assembled from an export — they are live views of the underlying ledger data.

For the net asset classification mechanics, see Net Asset Classification Under ASC 958: With or Without Donor Restrictions. For how the Statement of Activities is structured, see Statement of Activities (SOFA): How to Read and Prepare It.

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Frequently Asked Questions

What changed with ASU 2016-14?

The biggest change collapsed three net asset categories (unrestricted, temporarily restricted, permanently restricted) into two: with donor restrictions and without donor restrictions. ASU 2016-14 also added liquidity and availability disclosures, required functional expense presentation for all nonprofits, changed investment return presentation to net-of-expenses, and modified the classification of underwater endowments.

What financial statements does ASC 958 require?

Statement of Financial Position, Statement of Activities, Statement of Functional Expenses (or equivalent note disclosure), and Statement of Cash Flows. These four statements, accompanied by notes to the financial statements, constitute a complete nonprofit GAAP presentation.

Does ASC 958 apply to all nonprofits?

ASC 958 applies to all nonprofit entities that follow GAAP. Organizations with independent audits, federal funding, or bond covenants typically follow GAAP. Smaller organizations using cash-basis accounting may not formally apply ASC 958, but understanding its requirements is important for any organization that may seek an audit or federal grant in the future.

What is the difference between a conditional contribution and a restricted contribution?

A restriction tells the organization how to spend the money (on a specific program, for example). A condition tells the organization whether it gets to keep the money (only if it raises a matching amount, for example). Conditional contributions are not recognized as revenue until the condition is met. Restricted contributions are recognized as revenue immediately, in the net assets with donor restrictions category.

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The Bottom Line

ASC 958 is not a compliance burden to be managed around — it is the framework that makes nonprofit financial statements meaningful to the stakeholders who rely on them. Donors, board members, auditors, and grantors are all reading your financial statements through this lens.

The organizations that produce clean, compliant financial statements with minimal effort are the ones whose accounting systems were designed for ASC 958 from the ground up — not the ones whose staff spend three days every month translating commercial accounting output into nonprofit-compliant format.

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