Statement of Changes in Net Assets

The statement of changes in net assets was created through the adoption and implementation of Statement of [Page 517]Financial Accounting Standards No. 117, Financial Statements of Not-for-Profit Organizations (FAS 117). The statement was created to provide financial reporting consistency among the various types of not-for-profit organizations. FAS 117 requires that not-for-profit organizations, including many hospitals and health care entities, prepare a statement of financial position (which is analogous to the balance sheet of for-profit entities), a statement of activities (income statement), and a statement of cash flows. The statement of changes in net assets is an integral part of the statement of activities. In fact, the “statement of activities” is typically named the “statement of activities and changes in net assets,” if the two statements are combined for reporting purposes. (See presentation examples A, B, and C.)

The primary purpose of the statement of activities and changes in net assets is to provide information about the events and circumstances that change net asset amounts. This statement and the related disclosures in the notes to the financial statements provide information to creditors, donors, and others to evaluate an organization's performance during a period; namely, to assess current service efforts, ability to continue services, and management's allocation of resources. The change in net assets measures whether an organization maintained its net assets, drew on resources provided in past periods, or added resources that can be used for future periods.

A review of the types of net assets is necessary to understand what events and circumstances may occur to change the dollar amount and nature of net assets. Net assets, which may also be referred to as net equity or fund balance, are classified as unrestricted, temporarily restricted, or permanently restricted for not-for-profit entities under Statement of Financial Accounting Standards No. 116, Accounting for Contributions Received and Contributions Made. Unrestricted net assets consist of those assets that have not been externally restricted by a donor. Temporarily restricted net assets are donor-restricted net assets that may be used by an organization once a certain event has occurred; that is, a restriction has been met or a certain amount of time has passed. Permanently restricted net assets (such as an endowment) are those assets with donor-imposed restrictions that do not expire with the passage of time. Such net assets are to be held in perpetuity by the entity, because the related restrictions cannot be removed.

The statement of activities and changes in net assets must report the amount of the change in net assets (unrestricted, temporarily restricted and permanently restricted) during a period. This change is highlighted on the statement of activities through a descriptive caption such as change in net assets or change in equity. The ending net assets should agree to the face of the statement of position (balance sheet) for each class of net assets. Generally, revenues and gains increase net assets, and expenses and losses decrease net assets. Revenues and gains are considered increases in unrestricted net assets unless the use of the assets received is limited by donor-imposed restrictions (purpose and/or time). In the absence of a donor's restriction, the asset is reported as an unrestricted revenue or gain. Assets with donor-imposed restrictions shall be reported as either increases to temporarily restricted net assets or permanently restricted net assets, depending on the type of restriction. Once the [Page 518]restrictions related to temporarily restricted net assets have been met, the assets are transferred from temporarily restricted net assets to unrestricted net assets, and are classified as net assets released from restrictions in an entity's statement of activities and changes in net assets. If donor-imposed temporary restrictions are met in the same reporting period in which the asset is recognized, the increase may be shown as unrestricted in that period, provided the organization reports consistently from period to period and discloses its accounting policy.

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