First Thoughts

Arts Finance. Building stronger nonprofits.

When is a surplus not a surplus?

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Your organization’s preliminary end of year financial statements become available and woohooo! The income statement is showing a $20,000 surplus!

It is remarkably easy to conclude, in such a case, that your organization is $20,000 stronger, or $20,000 healthier, or $20,000 more financially stable, than it was at the end of the year before.

But you have (at least!) one more place to check before resting in that conclusion. Review the income statement for any references to assets “Released from restriction”.

Temporarily restricted assets (i.e., the source contribution that constitutes a multi-year pledge, the future portions of which were booked into last year’s activity as a temporarily restricted gift) only benefit your org once: at the point the gift is made.

A portion of the original gift, having satisfied the restriction (be it time or purpose) will be released from temporarily restricted assets, and likely appears as an increase in revenue on the unrestricted income statement.

However, the other side of that transaction is a reduction in temporarily restricted revenue in an equal amount. Unrestricted net assets increase, temporarily restricted net assets decrease. In other words, a release of net assets has a net neutral impact on the financial condition of your organization.

Unfortunately, many organizations with restriction activity don’t regularly publish a temporarily restricted income statement. As a result, all that is seen by their constituency is a surplus on an unrestricted income statement, not the accompanying shortfall on the temporarily restricted income statement.

So let’s return to the unrestricted financial statement indicating a $20,000 surplus. If, upon further inspection, you note that there was a $25,000 release of assets from restriction, the appearance of only a $20,000 surplus in your unrestricted net assets could mean your organization’s financial condition actually deteriorated by $5,000 in that year.

The net asset section of your organization’s balance sheet is a much better barometer with which to monitor performance year over year.

The impact of restricted net assets on your income statement and balance sheet can be difficult to assess. Don’t hesitate to call or send a piece of e-mail with questions.

-Jed

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