Not-for-Profit Accounting on FAR: Two Classes of Net Assets, Conditional Promises and Contributed Services

A charity signs a grant agreement for 500,000, banks the cash before year end, and reports no revenue at all. A second is promised 500,000 that may be spent only on the literacy programme, spends none of it, and reports the whole 500,000 as revenue in the year of the promise. Both are correct.

The difference is one word. The first agreement is conditional, the second restricted, and US GAAP treats those as different kinds of transaction rather than two strengths of the same one. A conditional contribution is not revenue and not deferred revenue: it is a refundable advance, or nothing at all. A restricted contribution is revenue on day one, in a class of net assets that says so.

Most candidates outside the United States meet this for the first time in a study guide, because nothing in their working life points at it. The Preface to IFRS Accounting Standards says the standards are designed for the financial statements of profit-oriented entities, and are not designed to apply to not-for-profit activities in the private sector, public sector or government, though entities with such activities may find them appropriate. There is no IFRS counterpart of ASC 958. Where a country needed one it wrote its own: SOCPA maintains separate standards for not-for-profit entities, amended in 2023 and effective for periods beginning on or after 1 January 2025. FAR tests the FASB Codification and nothing else.

Where not-for-profit sits in the FAR blueprint

The Blueprint puts it in two places.

Area	Group	What the tasks ask
I. Financial Reporting (30 to 40%)	B. Nongovernmental Not-for-Profit Entities	Prepare the statements of financial position, activities and cash flows from a trial balance, adjust each for errors, report expenses by nature and function
III. Select Transactions (25 to 35%)	C. Revenue recognition	Conditional and unconditional promises to give, agent and intermediary transfers that are not contributions, contributed services, and contributions of financial and nonfinancial assets

Area II, Select Balance Sheet Accounts, carries no not-for-profit task at all, because the Blueprint writes one only where the treatment differs: a receivable or a building is accounted for in a charity exactly as in a company. Read the word nongovernmental in that heading as a fence too. A public university or a city hospital reports under GASB and belongs to the governmental system, which has funds, modified accrual and no donor restrictions.

No weight is published below the Area, so any figure for the not-for-profit share of FAR is an estimate. The level is not: recall, prepare, adjust and calculate are Remembering and Understanding and Application, and the heaviest concentration of Analysis tasks is in Area II, the one area with no not-for-profit content.

Three statements, and what each one is called

Statement	Counterpart	What is different
Statement of financial position	Balance sheet	Assets less liabilities is net assets, not equity, in two classes plus the total
Statement of activities	Income statement	The bottom line is the change in net assets. No net income, no earnings per share, no required operating subtotal
Statement of cash flows	The same statement	The same three categories, either method allowed, and the direct method carries no indirect reconciliation. The Blueprint names the indirect method

The missing operating measure surprises anyone expecting a charity's accounts to say whether it broke even. US GAAP does not define operations for a not-for-profit: the question went to a second phase of the FASB project behind ASU 2016-14 and has not been answered since.

One requirement has no commercial parallel: an analysis of expenses by both natural classification (salaries, occupancy, depreciation) and functional classification (each programme, management and general, fundraising), in one location, which may be the statement of activities, a separate statement of functional expenses or a note. The allocation methods are disclosed too. Stop at a single expense total and you have omitted the part the Blueprint names. The cash flow mechanics themselves are the ordinary ones.

Two classes of net assets, not three

Until ASU 2016-14 a not-for-profit reported three classes: unrestricted, temporarily restricted and permanently restricted. That Update, effective for fiscal years beginning after 15 December 2017, replaced them on the face of the statements with two, net assets with donor restrictions and net assets without donor restrictions, plus the total. The permanent and temporary split moved to the notes, which disclose the composition of the restricted class.

Item	Where it goes	Why
Funds the board set aside for a building	Without donor restrictions, and disclosed	Only a donor creates a donor restriction. A board designation can be undone by the same board, so it is disclosed, not reclassified
An endowment now worth less than the original gift	With donor restrictions	The deficiency sits inside that class, with the appropriation policy, fair value, original gift amounts and shortfall disclosed
Cash given to construct a building	Released when the asset is placed in service	Absent explicit donor stipulations the placed-in-service approach is mandatory; releasing over the useful life is no longer allowed
Investment return	Reported net	Net of external and direct internal investment expenses, no longer disclosed separately

One further rule earns marks quietly: ASU 2016-14 added a liquidity disclosure in two halves, qualitative on how the entity manages its liquid resources and quantitative on what its financial assets can actually meet within one year.

Restricted is not conditional

Four questions, in this order: is it a contribution, is it yours, is it conditional, is it restricted. The third has the next section to itself. Asking them out of order is how the marks go.

Is it a contribution or an exchange?

ASU 2018-08 settled a long argument about grants, government grants above all. The test is whether the resource provider itself receives commensurate value, and the Update says two things plainly: a benefit received by the general public is not commensurate value to the provider, and neither is executing the provider's own mission or the sentiment of acting as a donor. Most grants are therefore contributions under Subtopic 958-605, not revenue from contracts with customers under the five step model. The exception is a third-party payer settling an existing exchange with an identified customer.

Is the money yours at all?

An entity that accepts assets and agrees to pass them, or their investment return, to a specified beneficiary is not a donee. It recognises a liability to that beneficiary as it recognises the cash, and no contribution revenue ever appears. Two things break the pattern: the donor explicitly granting variance power, the unilateral right to redirect the gift, and recipient and beneficiary being financially interrelated entities.

Is it restricted?

Only once a contribution is unconditional does the purpose or timing matter, and then it decides the class, not the year. An unconditional promise is recognised when made, at fair value, given verifiable documentation; one collectible beyond a year is normally measured at present value, and the unwinding of that discount is contribution revenue, not interest income. A restriction expires when the time elapses or the purpose is fulfilled, and an expense either class could have funded fulfils it to that extent.

The barrier, and the right of return beside it

A contribution is conditional only if the agreement contains both a barrier the entity must overcome and either a right of return of the assets or a right of release of the promisor from its obligation. One without the other is not a condition, and the right of return or release must be determinable from the agreement or a document it refers to.

ASU 2018-08 gives three indicators of a barrier, none decisive alone: a measurable barrier, such as a level of service, units of output, a specific outcome or a matching requirement; a stipulation limiting the recipient's discretion, such as allowable expenses or a protocol to follow; and whether the stipulation relates to the purpose of the agreement, which excludes administrative and trivial requirements. The standard's own non-barrier is the annual report a donee files to keep the instalments coming.

Cash received before the barrier is overcome is a refundable advance, a liability, until the conditions are substantially met or explicitly waived. Not deferred revenue, not a restricted net asset.

Conditions can be met in pieces. A promise conditioned on a series of milestones, or on the recipient incurring qualifying expenses, becomes unconditional in increments, and revenue follows as each is reached or incurred. That is where the cost-reimbursement grant lands, the one an NGO or a university department in the Gulf is likeliest to hold.

The old remote shortcut is gone. Earlier guidance treated a conditional promise as unconditional if the possibility of the condition not being met was remote. ASU 2018-08 removed that deliberately, so revenue could not be accelerated by judging a condition likely to be met. A presumption runs the other way instead: where the facts and a conversation with the donor cannot settle whether a stipulation is a condition or a restriction, presume it is a condition.

Contributed services and contributed nonfinancial assets

Volunteer time is the most reliably mis-answered item here, because the instinct is to value it and the rule is usually not to. Services are recognised only if they create or enhance a nonfinancial asset, or meet three tests together: they require specialised skills, they are provided by individuals possessing those skills, and they would typically need to be purchased if not donated. The standard names the professions it means, among them accountants, architects, carpenters, doctors, lawyers, nurses and teachers. An accountant who keeps the books for nothing is recognised; the same accountant serving meals on Saturday is not. The notes describe the services either way.

Next to that sits a category that looks like services and is not. The use of property, utilities or advertising time is a contributed asset, recognised at fair value as both revenue and expense in the period received and used. Donated goods, materials, intangibles and fixed assets are nonfinancial assets, and since ASU 2020-07 they get their own line in the statement of activities, apart from cash, and a disaggregation in the notes by category saying whether each was monetised or utilised, any donor restrictions, and the valuation technique used.

Collections are the exception to all of it. Contributed works of art, historical treasures and similar items need not be recognised if they join a collection held for public exhibition, education or research rather than gain, protected and preserved, and subject to a policy requiring sale proceeds to be spent on other collection items or, since ASU 2019-03, on the direct care of existing collections, which the entity must then define.

How FAR asks it

Which class does it land in. A list of receipts with stipulations attached, and a question asking for the closing balance of net assets with donor restrictions. The traps are the board designation, the underwater endowment and the building gift released on the day the building opens.

Which year does the revenue land in. A grant agreement in one paragraph, and a question asking how much revenue this year. Hunt for a barrier and a right of return in the same agreement. Both there, recognise as the barrier is overcome and hold the cash as a refundable advance; either missing, it is revenue now.

Recognise the non-cash item, or not. Volunteer hours, a donated van, free use of an office, donated advertising, a painting for the collection: each has its own rule above, and the question mixes three and asks for one total.

Prepare or repair a statement. A trial balance, a few adjustments, a statement to complete. Presenting the two classes and showing releases from restriction as a reclassification between them is most of the mark.

Where to practise this

Not-for-profit reporting is finite, rules driven and asked in a few recognisable shapes, among the cheaper marks in FAR for anyone who learns the vocabulary once. Prepito's FAR course covers it with practice questions, timed simulations, full explanations and mistake review, in English.

CPA questions and written explanations are in English. Prepito’s interface is available in English and Arabic, and the AI tutor can respond in either language.

The other rules-driven block in the same Area is governmental accounting, best studied beside this one so the two stop blurring. For where both sit, see the FAR study guide, or start with the CPA programme.

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Sources: AICPA Uniform CPA Examination Blueprints, effective 1 January 2026, FASB ASU 2016-14, ASU 2018-08, ASU 2019-03, ASU 2020-07 and FASB Statement No. 116 on contributed services, the Preface to IFRS Accounting Standards, and SOCPA's standards for not-for-profit entities. Blueprint weightings are ranges revised periodically and the FASB amends Topic 958; confirm both.