Change in Net Assets

Change in net assets is the bottom-line result reported on a nonprofit organization's statement of activities, serving the same basic function that net income serves on a for-profit company's income statement. It is calculated from the organization's revenues, expenses, gains, losses, and any release of restrictions on previously restricted assets during the period.

Nonprofit organizations have no owners and do not report profit in the way a for-profit business does, so their core financial statement replaces owner's or stockholders' equity with net assets, and replaces net income with change in net assets. The underlying accounting logic, revenues and gains minus expenses and losses equals the period's result, is essentially the same; only the labels, and the absence of any owner claim on the result, differ.

Because nonprofits must track restrictions donors place on their contributions, change in net assets is calculated and reported separately for each classification of net assets a nonprofit maintains, generally net assets with donor restrictions and net assets without donor restrictions since the 2018 accounting standards update replaced the older three-tier classification system. A nonprofit might show a positive change in net assets without donor restrictions while simultaneously showing a different result in the restricted category, depending on how its various revenue sources are classified.

Because nonprofits exist to advance a mission rather than generate owner profit, a positive change in net assets simply means the organization's total resources grew during the period, often because it is building reserves, funding future programs, or has simply received a timing-driven influx of contributions; it carries none of the same connotation that a for-profit company's net income does about returns to owners, since nonprofits have no owners to return anything to in the first place.

Donors, grantmakers, and nonprofit boards all watch change in net assets closely as a basic indicator of financial sustainability: a nonprofit reporting a sustained negative change in net assets year after year is drawing down its reserves and faces a genuine viability problem, in much the same way a for-profit business reporting sustained net losses would be viewed as financially troubled, even though the accounting labels used to describe the result differ between the two types of organization.

A nonprofit with $3.2 million in total revenue, including contributions and program fees, and $3.0 million in total expenses for the year would report a $200,000 increase in net assets, split between whatever portion is attributable to net assets with donor restrictions versus net assets without donor restrictions, depending on how the underlying contributions were classified when received.

Nonprofit organizations do not have owners or shareholders in the way a for-profit corporation does, so reporting a bottom-line profit figure the way a business would makes little conceptual sense — there is no equity holder entitled to that surplus. Change in net assets instead measures whether the organization's total resources, and specifically the resources attached to each class of donor restriction, grew or shrank during the period, which is the more relevant question for donors, grantmakers, and the organization's own board when assessing financial sustainability. A nonprofit reporting a positive change in net assets year after year, particularly in its unrestricted category, is generally building the reserves it needs to weather a future downturn in donations or grant funding.