Accounting is usually boring and undramatic, except when accountants are faced with releases from restrictions when it comes to non-profit organizations. This is when you see accounting types, like CPAs and auditors, especially those without a non-profit background, giggling too nervously. Blame it all on FASB 117!
“Net Assets Freed from Restrictions” (NARFR) isn’t just one account. You have these accounts in all net assets or funds. Basically, these accounts are part of a FASB 117 mechanism to temporarily decrease restricted net assets, since most, if not all, expenses are reported in the unrestricted fund.
For example, you received a $5,000 donation to use for a program to be held the following year.
Debit Cash-Temp Restricted 5,000
Credit Income- Temporarily Restricted- 5,000
Come next year and now you can use that money for expenses. Money held in a separate account can be transferred. Three journal entries can be created:
Cash-Unrestricted Debit 5,000
Cash-Temporary Restricted Credit 5,000
Debit Expenses – No Restrictions 5,000
Cash Credit – Unrestricted 5,000
NARFR Debit- Temporarily Restricted- 5,000
NARFR Credit – unrestricted – 5,000
When the organization does not follow this setup and at the end of the year needs to convert to FASB 117, things can get confusing. Generally, accountants summarize all expenses listed as restricted and use that number for NARFR.
Year-end reports may be prepared in a different style than regular books. Many nonprofits do this because it’s easier to understand the expenses as part of each temporary fund, rather than showing NARFR receipts. You can compile a year-end report and leave the books as they are. That way, NARFRs are displayed at the report level only.
*** NARFR accounts are ALWAYS zeroed and have zero impact on the organization’s financial statements viewed on a consolidated basis. It ALWAYS increases one net asset and decreases another by the same amount.