FASB Compliant Accounting: What Nonprofits Need to Know

FASB compliance for nonprofits means following the accounting rules in ASC 958, which requires classifying net assets as "with donor restrictions" or "without donor restrictions," presenting a Statement of Functional Expenses (expenses by program vs. admin vs. fundraising), and disclosing liquidity information. Purpose-built nonprofit accounting software like Alignmint generates all FASB-required statements automatically — generic tools like QuickBooks don't support these requirements natively.

FASB compliance isn't optional. It's the baseline standard that auditors, grantors, and sophisticated donors expect. Here's what you actually need to know, without the accounting jargon.

What FASB Is and Why You Can't Ignore It

The Financial Accounting Standards Board (FASB) sets the accounting rules for nonprofits in the United States. The key standard is ASC 958, which governs how nonprofits classify net assets, report expenses, disclose liquidity, and present financial statements.

If your nonprofit has an audit, your auditor is checking your statements against FASB standards. If you apply for grants, many grantors require FASB-compliant financials as part of the application. If your board is making decisions based on your financial reports, those reports need to follow FASB standards to be meaningful.

The good news: FASB compliance isn't complicated once you understand the requirements. The bad news: generic accounting software like QuickBooks doesn't support most of them natively, which means someone on your team is probably doing manual workarounds — and those workarounds are where errors creep in.

The Five Requirements That Actually Matter

FASB has a lot of standards, but for most nonprofits, five requirements drive the majority of compliance work. Let's walk through each one in plain English.

Net Asset Classification: The Foundation of Everything

FASB requires nonprofits to classify every dollar of net assets into two categories:

• With donor restrictions — money that donors have restricted for a specific purpose (like a building fund) or time period (like a pledge payable next year)
• Without donor restrictions — money your organization can use for any purpose

This replaced the old three-category system (unrestricted, temporarily restricted, permanently restricted) back in 2018. If your financial statements still use the old categories, they're not compliant — and your auditor will flag it.

Here's where this gets practical: every transaction in your accounting system needs to be tagged with the correct net asset classification. When a donor gives $10,000 restricted for scholarships, that gift must be recorded as "with donor restrictions." When you spend $3,000 of that money on scholarships, the restriction is "released" — and your Statement of Activities needs to show that release as a line item.

If your software doesn't handle this automatically based on fund assignments, someone is doing it manually. And manual net asset classification is one of the most common sources of audit findings we've seen.

Statement of Financial Position (Your Balance Sheet)

Your balance sheet must show assets, liabilities, and net assets — with net assets broken down by restriction category. This means two columns (or two line items) for net assets: with donor restrictions and without donor restrictions.

Most nonprofits get this right at year-end because their auditor helps them. But your interim financial statements — the ones your board sees quarterly — should also show this breakdown. If your board is looking at a balance sheet that lumps all net assets together, they can't tell how much of your cash is actually available for operations vs. locked up in restricted funds. That's a governance gap.

Statement of Activities (Your Income Statement, But Different)

Your income statement needs to show revenues and expenses with changes in net assets by category. This means showing how much revenue was restricted vs. unrestricted, how much was released from restrictions, and the net change in each category.

This is the report that tells the real story of your financial health. A nonprofit can show a positive change in net assets overall while actually losing money on operations — because most of the revenue was restricted and can't be used for general expenses. If your Statement of Activities doesn't break this out, your board is making decisions based on incomplete information.

Statement of Functional Expenses: The One That Trips Everyone Up

This is the report that causes the most pain. FASB requires nonprofits to show expenses broken down by both function (program services, management and general, fundraising) and nature (salaries, rent, supplies, travel, depreciation, etc.). The result is a matrix — functions across the top, natural categories down the side.

Why does this matter? Because donors, grantors, and watchdog organizations use your functional expense ratios to evaluate your efficiency. "What percentage of spending goes to programs vs. overhead?" is one of the most common questions nonprofits face. The Statement of Functional Expenses is where that answer comes from.

Here's the problem: producing this report requires you to allocate every expense to a function at the time of entry — or to have a reliable methodology for allocating shared costs (like rent and utilities) across functions after the fact. QuickBooks has no concept of functional allocation. If you're producing your Statement of Functional Expenses in a spreadsheet, you're spending 4-8 hours per quarter on a report that purpose-built nonprofit accounting software generates in seconds.

Liquidity Disclosures: The Newest Requirement

Added in 2018, this requirement asks nonprofits to disclose both quantitative and qualitative information about how they manage liquidity. Specifically: what financial assets are available for general use within one year?

This sounds straightforward, but it requires you to know — at any point — how much of your cash and receivables are actually available vs. restricted. If you have $500,000 in the bank but $350,000 of it is restricted, your available liquidity is $150,000. Your board needs to know this number. Your auditor will ask for it. And if calculating it requires a spreadsheet exercise, your liquidity disclosures are probably stale by the time they're published.

The QuickBooks Compliance Gap

We keep coming back to QuickBooks because it's what most small nonprofits use — and it's where most FASB compliance problems originate. To be clear: QuickBooks is excellent accounting software for small businesses. It was not designed for nonprofit accounting standards.

Here's what QuickBooks can't do natively:

FASB Requirement	QuickBooks	Purpose-Built Nonprofit Software
Net asset classification	Manual (using classes or workarounds)	Automatic based on fund assignment
Statement of Functional Expenses	Not supported — requires spreadsheet	Generated automatically
Restriction releases	Manual journal entries	Automatic when restricted funds are spent
Liquidity disclosures	Manual calculation	Real-time available balance reporting
Fund-specific financial statements	Limited (class-based reports)	Native fund-level statements

If you're using QuickBooks and producing FASB-compliant statements, someone on your team is doing significant manual work to bridge the gap. That work is time-consuming, error-prone, and invisible until something goes wrong.

What Compliance Actually Looks Like Day-to-Day

FASB compliance isn't a year-end exercise. It's a daily practice built into how you record transactions. Here's what that looks like:

Every transaction gets a fund assignment. When you record a gift, expense, or journal entry, it's tagged to a specific fund — which determines its net asset classification automatically. No manual classification needed.

Functional allocation happens at entry, not at year-end. When you record a salary expense, you allocate it across functions (60% program, 25% management, 15% fundraising) at the time of entry. When you record rent, you apply your allocation methodology. This means your Statement of Functional Expenses is always current — not a year-end reconstruction project.

Restriction releases are tracked automatically. When you spend money from a restricted fund on its intended purpose, the software records the restriction release. Your Statement of Activities reflects it immediately. No manual journal entries at year-end.

Financial statements are always audit-ready. Because every transaction is properly classified and allocated from the start, your financial statements are FASB-compliant at any point in the year — not just after your auditor adjusts them.

Your FASB Compliance Checklist

Before your next audit (or your next board meeting), verify:

• Net assets are classified as "with donor restrictions" or "without donor restrictions" (not the old three-category system)
• Statement of Financial Position shows net asset breakdown by restriction
• Statement of Activities shows changes in net assets by category, including restriction releases
• Statement of Functional Expenses presents the function × nature matrix
• Liquidity disclosures show financial assets available for general use within one year
• Accounting policies and allocation methodologies are documented

If any of these require manual spreadsheet work to produce, that's a sign your accounting software isn't built for nonprofit compliance — and it's worth evaluating a purpose-built alternative.

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Related:

• Nonprofit Financial Reporting — Reports your board and auditors expect
• Restricted Funds Tracking — Ensure compliance with donor restrictions
• Nonprofit Tax Compliance Tools — Stay audit-ready year-round
• Fund Accounting Software — What fund accounting is and why it matters
• Fund Accounting — See how Alignmint handles FASB compliance