Statement of Activities (SOFA): How to Read and Prepare It

When a nonprofit's board reviews financial statements, the Statement of Activities is usually the one that generates the most conversation. Revenue came in. Expenses went out. Did we end the year with more or less than we started with? But reading the SOFA correctly requires understanding several concepts that have no equivalent in for-profit accounting.

The Statement of Activities — often called the SOFA — is the nonprofit equivalent of an income statement, showing revenues, expenses, and the resulting change in net assets for a reporting period, broken out by those with and without donor restrictions.

This article explains the structure of the SOFA, walks through a sample statement, and addresses the concepts that most commonly confuse new readers.

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How the SOFA Differs From a Commercial Income Statement

A for-profit income statement has one column: revenue minus expenses equals net income. A nonprofit Statement of Activities has at minimum two columns: changes in net assets without donor restrictions, and changes in net assets with donor restrictions. The total column shows the overall change.

This columnar structure exists because of donor restrictions. A major restricted grant counts as revenue in the "with donor restrictions" column when it is received. It does not count as revenue available for operations until it is spent on its designated purpose — at which point it releases from the restricted column and appears as a positive item in the "without donor restrictions" column. This movement is called a release from restriction.

Understanding this mechanism is essential for reading the SOFA correctly. An organization can show a large positive change in net assets with donor restrictions while simultaneously showing a deficit in net assets without donor restrictions — meaning operations are running in the red even though the restricted balance is growing.

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The Structure of the SOFA

Revenue

Revenue is presented by source, within the net asset category where it is initially recognized.

Typical revenue lines:

• Contributions (individual donors, unrestricted)
• Contributions (individual donors, restricted)
• Grants (foundations, unrestricted)
• Grants (foundations, restricted)
• Government contracts and grants
• Special event revenue, net of direct costs
• Program service fees
• Investment income
• In-kind contributions

Under ASC 958, unconditional contributions are recognized as revenue when they are promised (pledge) or received (cash), in the appropriate net asset category. A $100,000 restricted pledge is revenue in the "with donor restrictions" column in the year the pledge is made, even if the cash does not arrive until next year.

Releases From Restriction

Releases from restriction is one of the most distinctive and frequently misunderstood items on the SOFA. When a purpose restriction is satisfied — when restricted funds are spent on their designated program — the following happens:

• The amount appears as a negative in the "with donor restrictions" column (funds are leaving that category)
• The same amount appears as a positive in the "without donor restrictions" column (funds are becoming available for operations)
• The two entries net to zero at the total level — no new revenue is created, just a reclassification

This is why an organization can receive a $500,000 restricted grant, spend it entirely on program services during the year, and show $500,000 in program expense against a zero change in the restricted net asset category. The grant came in as restricted revenue; it left as a release from restriction; the expense shows up in the operating column.

Expenses

Expenses appear only in the "without donor restrictions" column. Even if a restricted grant funds program expenses, the expense itself is unrestricted — it is the release from restriction that moves the corresponding revenue.

Expenses are typically presented by natural classification on the face of the SOFA:

• Salaries and benefits
• Rent and occupancy
• Professional fees
• Supplies and materials
• Travel
• Depreciation
• Other

The functional classification (program services, management and general, fundraising) is either presented in a separate Statement of Functional Expenses or in the notes to the financial statements.

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Sample Statement of Activities

Item	Without Restrictions	With Restrictions	Total
REVENUE
Individual contributions	$620,000	$180,000	$800,000
Foundation grants	$50,000	$275,000	$325,000
Government contracts	$0	$400,000	$400,000
Program service fees	$95,000	$0	$95,000
Investment income	$42,000	$0	$42,000
Net assets released from restriction	$735,000	($735,000)	$0
Total Revenue	$1,542,000	$120,000	$1,662,000
EXPENSES
Program services	$1,010,000	$0	$1,010,000
Management and general	$215,000	$0	$215,000
Fundraising	$90,000	$0	$90,000
Total Expenses	$1,315,000	$0	$1,315,000
Change in Net Assets	$227,000	$120,000	$347,000
Net assets, beginning of year	$594,100	$1,230,000	$1,824,100
Net Assets, End of Year	$821,100	$1,350,000	$2,171,100

Notice several things in this example:

• $735,000 in releases from restriction offset between the two columns — this represents restricted grants spent on program during the year
• The restricted column shows a net increase of $120,000 — new restricted gifts exceeded spending releases by this amount
• The unrestricted column shows $227,000 — a healthy operating surplus
• The ending net asset balances match the Statement of Financial Position

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Common Misreadings of the SOFA

Mistaking a large restricted balance for operational health

An organization with a $500,000 surplus in the restricted column and a $50,000 deficit in the unrestricted column is running operational losses. The restricted funds cannot cover operating expenses — they are designated for specific programs. Total net assets may look positive, but the operating picture is concerning.

Confusing releases from restriction with new revenue

Releases from restriction do not represent new money coming in. They represent restricted money that has been spent on its intended purpose, moving from the restricted column to the unrestricted column. An organization that received a $1 million restricted grant last year and spent it this year will show $1 million in releases from restriction — this looks like revenue, but it is not new funding.

Not comparing to the prior year

The SOFA is far more useful with a prior year comparative column. Single-year results can be distorted by timing — a large restricted grant received in December inflates the restricted revenue line but has no impact on operations. Multi-year comparisons reveal trends that one-year snapshots hide.

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The Efficiency Gap: Building the Columnar Format in Spreadsheets

A commercial income statement has one column. The SOFA has three. Producing the columnar format from accounting software that does not track net asset classification natively requires exporting single-column results, manually separating revenue into restricted and unrestricted categories, calculating the releases from restriction line, and assembling the three columns in a spreadsheet.

This process is repeated every month for management reporting and every year for the audit. Each iteration is a manual assembly exercise with material error risk.

sherbertOSOS tracks net asset classification on every revenue transaction at the point of entry. The Statement of Activities is a live, multi-column report that pulls directly from the general ledger. Releases from restriction are calculated automatically as restricted grants are expensed. The assembled statement is not a product of manual work — it is a view of what the accounting system already knows.

For the full FASB framework this statement fits into, see FASB ASC 958: What Every Nonprofit Controller Needs to Know. For how the restricted column connects to donor-restricted fund balances, see Restricted vs. Unrestricted Funds: A Complete Guide.

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Frequently Asked Questions

What is the difference between a SOFA and a commercial income statement?

A SOFA reports changes in net assets by restriction category, not profit or loss. It also includes releases from restriction — a movement between net asset categories that has no equivalent in for-profit accounting. The columnar format (with restrictions, without restrictions, total) reflects the nonprofit's accountability obligations to restricted donors and grantors.

What are releases from restriction?

When a time or purpose restriction is satisfied — for example, when a restricted grant is spent on its designated program — the funds release from net assets with donor restrictions to net assets without donor restrictions. On the SOFA, this appears as a negative in the restricted column and a positive in the unrestricted column, netting to zero.

Should the SOFA show functional expenses or natural expenses?

The SOFA typically shows expenses by natural classification (salaries, rent, supplies). Functional expense detail — the distribution across program services, management and general, and fundraising — is presented in a separate Statement of Functional Expenses or in the notes to the financial statements.

How do I explain the SOFA to a board member who is used to for-profit financial statements?

Start with the total column: this is the equivalent of a single income statement showing total revenue, total expenses, and the change in net assets. Then explain the restricted column: this shows money that came in with donor-imposed conditions on how it can be spent. Then explain that the releases line is not new money — it is the accounting entry that transfers restricted funds to the operating column when they are spent on their intended purpose.

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The Bottom Line

The Statement of Activities is the financial statement that tells the story of the year. Read correctly — with attention to the restricted versus unrestricted breakdown and the releases from restriction line — it reveals not just whether the organization ran a surplus or deficit, but whether that surplus came from operations, restricted grants, or a favorable investment year. Each of those sources has different implications for financial health.

→ Start your free trial and see the SOFA auto-generated in columnar format from the sherbertOSOS general ledger.