Governmental and Not for Profit entities follow a different form of accounting. An accounting form that is modified and tailored to fit the needs and goals of the entity; hence the modified accrual basis. Since governmental and not for profit entities are not focused on generating revenues, the assets they purchase and liabilities they are in debt to are treated and classified differently. The following is a brief description on how governmental and not for profit entities distinguish, recognize and classify assets.
According to GASB, Governmental entities must classify net assets (assets – liabilities) into three different classes: Unrestricted, Invested in Capital Assets net of related debt, and Restricted. These three categories depend upon the restriction that is placed on the asset by the donor.
- Unrestricted Net Assets are assets that do not have any restrictions placed upon them by donors. They can be expended at any time, freely without any limitations.
- Invested in Capital Assets net of related debt refers to all the capital assets that a government owns minus the accumulated depreciation. The balances of invested in capital assets account is attributed to the acquisition, construction and improvement of its capital assets.
- Restricted Net Assets are assets that are subject to external restrictions enforced upon them by creditors, grantors, donors and or other governments. They cannot be expended freely.
According to FASB not for profit entities must classify net assets (assets – liabilities) into three different classes: unrestricted net assets temporarily restricted net assets & permanently restricted net assets. These three categories depend upon the restriction that is placed on the asset by the donor.
- Unrestricted net assets are assets that do not have any restrictions placed on them by donors and can be used at any given time. They are the exact same as unrestricted net assets If funds are internally designated by the board, they are still considered unrestricted.
- Temporarily restricted net assets are similar to permanently restricted net assets; however there are certain time restrictions and/or action requirements placed on the organization before it can re-classify the assets as “unrestricted” and is allowed to be expended by the organization. Sometimes there is a time restriction, or a financial restriction placed on the entity.
- Permanently restricted net assets are those assets donated by a donor that cannot be expended either by the passage of time or fulfillment of an obligation.
