What is ASC 958?
ASC 958 is the section of the Financial Accounting Standards Board's Accounting Standards Codification that governs not-for-profit entities. It sets the rules for how nonprofits recognize revenue, classify net assets, and present financial statements.
The most significant update to ASC 958 came in 2016 with ASU 2016-14, which simplified the net asset classification system and added new disclosure requirements around liquidity. Most nonprofits have been following the updated standard since 2018 or 2019.
Net asset classification
Under ASC 958, a nonprofit's equity is divided into two classes of net assets rather than the three classes used before the 2016 update.
- Without donor restrictions: Resources the organization can use for any purpose in support of its mission. This includes operating funds, board-designated reserves, and prior restricted funds that have been released.
- With donor restrictions: Resources restricted by donors for a specific purpose or time period. This includes gifts restricted by purpose or time (like a grant to be spent on a specific program within two years) and gifts restricted in perpetuity (like endowment principal). Before 2018 these were called temporarily and permanently restricted.
Understanding which of your resources are restricted and which are unrestricted is essential for financial planning. Having a large endowment but thin unrestricted reserves can create real cash flow challenges.
Revenue recognition
Nonprofit revenue recognition is nuanced. Different types of revenue are recognized differently.
- Contributions (donations): Recognized when received, or when promised if the promise is unconditional. Conditional promises are recognized once the conditions are met. If the gift comes with donor restrictions, it is initially recorded as restricted revenue and released when the restriction is met.
- Grants: Revenue recognition depends on whether the grant is a contribution or an exchange transaction. Since ASU 2018-08, most grants, including many government grants, are treated as contributions. If a grant has a barrier you must overcome and a right of return, it is conditional and recognized as you meet the conditions, for example as you incur allowable costs. Unconditional grants are recognized when awarded, with donor restrictions if applicable.
- Earned revenue: Program service revenue, membership dues, and similar income is recognized when the service is provided or when earned under the applicable revenue recognition standard.
Liquidity disclosures
The 2016 update added requirements to disclose information about your organization's liquidity and availability of resources. Your financial statements now need to show how much of your financial assets are available to meet general operating expenses within the next year.
This is more meaningful than it sounds. An organization might have millions in net assets but very little available cash. The liquidity disclosure helps readers understand that reality.
Functional expense allocation
ASC 958 requires every nonprofit to present an analysis of expenses by both function (program, management and general, fundraising) and nature (salaries, rent, supplies), in one place: on the statement of activities, in a separate statement, or in the notes. Allocating expenses accurately and consistently matters both for your 990 and for how funders evaluate your overhead ratios.
Why it matters
Your auditors, your CPA, and your more sophisticated funders and board members are reading your financial statements with this standard in mind. Understanding ASC 958 makes you a more informed steward of your organization's finances.
This guide shares general information, not tax, legal, or accounting advice for your specific situation. Rules change, so check current IRS and FASB guidance or ask me about your organization.