Net assets are total assets minus total liabilities. The terms net assets and equity both name that same residual interest in the assets of an entity that remains after deducting its liabilities (FASB Concepts Statement No. 8, Chapter 4, paragraph E61), and on a not-for-profit’s statement of financial position the caption over that whole section is Net assets.
There is nothing else in the subtraction. Rearranged, it is the identity that makes a balance sheet balance, since assets equal liabilities plus equity, which is the arithmetic under debits and credits.
The Two Classes on a Not-for-Profit’s Books
FASB ASC 958 divides net assets into two mutually exclusive classes according to the existence or absence of donor-imposed restrictions: net assets with donor restrictions, which is the part subject to donor-imposed restrictions, and net assets without donor restrictions, which is the part that is not (FASB, Accounting Standards Update 2016-14).
Two classes, not three. The three they replaced were unrestricted, temporarily restricted and permanently restricted net assets, and the two-class presentation took effect for fiscal years beginning after December 15, 2017 (FASB, Accounting Standards Update 2016-14, paragraph 958-10-65-1).
The pair is a minimum classification scheme rather than a cap, so an organization may disaggregate further (FASB, Accounting Standards Update 2016-14, paragraph 958-205-05-6B).
Where a CPA Firm Meets the Number
Three artifacts carry it.
The statement of financial position reports total assets, total liabilities, total net assets, total net assets with donor restrictions and total net assets without donor restrictions (FASB, Accounting Standards Update 2016-14, paragraph 958-210-45-1).
The statement of activities reports the change in net assets for the period, plus the change in each of the two classes, and that change has to articulate to the net assets or equity reported in the statement of financial position (FASB, Accounting Standards Update 2016-14, paragraphs 958-225-45-1 and 958-225-45-2).
The return carries it three times. Form 990 Part I line 22 is net assets or fund balances, reached by subtracting total liabilities on line 21 from total assets on line 20 (IRS, Form 990).
Part X then splits it. An organization that follows FASB ASC 958 completes line 27 for net assets without donor restrictions and line 28 for net assets with donor restrictions, then line 32 for total net assets or fund balances and line 33 for total liabilities and net assets/fund balances. An organization that does not follow FASB ASC 958 checks the other box and completes lines 29 through 33 instead, where the two classes give way to capital stock or trust principal, paid-in or capital surplus, and retained earnings or other funds (IRS, Form 990).
Paragraph 958-210-45-1 lists total net assets with donor restrictions ahead of total net assets without (FASB, Accounting Standards Update 2016-14, paragraph 958-210-45-1), so the return’s line order is the reverse of the standard’s (IRS, Form 990).
Part XI is the reconciliation. Line 4 is net assets or fund balances at beginning of year and must equal Part X line 32 column (A), and line 10 is net assets or fund balances at end of year, combining lines 3 through 9, and must equal Part X line 32 column (B) (IRS, Form 990).
How a restriction moves through the ledger, and how the classification feeds the rest of the return, are fund accounting work in its own right.
A Worked Example
Say an organization closes the year with the totals below.
Total assets 4,200,000
Total liabilities 1,300,000
Total net assets 4,200,000 - 1,300,000 2,900,000
With donor restrictions 700,000
Without donor restrictions 2,900,000 - 700,000 2,200,000A restriction never changes the total. It only decides which of the two lines beneath it the money sits on, so the classes always add back, and that footing is the first thing to tie.
Net Assets and Equity Are the Same Residual
Equity and net assets are interchangeable terms, with equity the common usage for business entities and net assets the term used for not-for-profit entities, for which equity is less commonly used (FASB Concepts Statement No. 8, Chapter 4, footnote 12).
So the difference is not arithmetic, it is what the residual represents. In a business entity equity is the ownership interest, while in a not-for-profit entity the residual is not typically an ownership interest, and the distinguishing characteristics include operating purposes not centered on profit and significant receipts of contributions, many involving donor-imposed restrictions (FASB Concepts Statement No. 8, Chapter 4, paragraph E67).
Net Asset Value Is the Same Subtraction, Quoted Per Share
Net asset value, or NAV, of an investment company is that company’s total assets minus its total liabilities, and the company calculates the NAV of a single share by dividing its NAV by the number of shares that are outstanding (SEC, Investor.gov, Net Asset Value). The entity-level subtraction is the same one.
What differs is the unit. NAV is normally quoted per share, while net assets on a statement of financial position are reported as a total and split by donor restriction.
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