Non-Profits Organization – Releases From Restrictions – Accounting

Accounting is usually boring and non-dramatic, except when accountants are faced with releases from restrictions when dealing with non-profits. This is when you see accounting types, such as CPAs and auditors, especially those with no non-profit background, laughing a bit too nervously. Blame it all on FASB 117!

“Net assets released from restrictions” (NARFR) is not just one account. You have these accounts in all the net assets or funds. Basically these accounts are part of a FASB 117 mechanism to decrease temporarily restricted net assets, since most if not all expenses are presented in the unrestricted fund.

For example, you received a donation of $5,000 to be used for a program happening in the following year.

Debit Cash-Temp Restricted 5,000
Credit Revenue- Temporarily Restricted- 5,000

Next year comes up and now you can use that money for expenses. Money kept in separate account may be transferred. Three journal entries may be created:

Debit Cash-Unrestricted 5,000
Credit Cash- Temp Restricted 5,000
Debit Expense- Unrestricted 5,000
Credit Cash- Unrestricted 5,000

Debit NARFR- temporarily restricted- 5,000

Credit NARFR- unrestricted – 5,000

When the organization doesn’t follow this setup and at year-end it needs to convert to FASB 117, things can get confusing. Usually accountants sum up all expenses showing up as restricted and use that number for NARFR.

Year end reports may be prepared in a different style than regular books. Many non-profits do that because it is easier to understand expenses as part of each temporarily fund, rather then to show NARFR entries. You can compile a year-end report and leave the books as they are. That way, the NARFRs show up only at reporting level.

*** The NARFR accounts ALWAYS zero out and have a zero impact in the organization’ s financial statements seen in consolidated form. It ALWAYS increases one net assets and decreases another for the same amount.