CPA Exam — REG (Regulation)Federal Taxation of EntitiesMedium
A client, a tax-exempt organization, received a substantial gift from a donor. The donor specified that the gift must be used to fund a new research facility and cannot be used for general operating expenses. Which type of fund is this gift most likely to be classified as for financial reporting purposes?
- ATemporarily Restricted Net Assets
- BEndowment Fund
- CPermanently Restricted Net Assets
- DUnrestricted Net Assets
Show answer & explanationAnswer & explanation
Correct answer: C. Permanently Restricted Net Assets
A gift that must be used to fund a new research facility implies a long-term, specific purpose for the use of the asset itself, rather than the income from it. This restriction is permanent, as the asset (the facility) itself is restricted. Therefore, it is classified as permanently restricted net assets. Temporarily restricted assets would have a time or purpose restriction that eventually expires.
Why the other options are wrong
- A. Temporarily restricted net assets have time or purpose restrictions that will eventually be met or expire.
- B. An endowment fund is a type of restricted fund, but a gift for a specific facility is more precisely classified by its restriction type (permanently restricted).
- D. Unrestricted net assets have no donor-imposed restrictions.
Net Asset Classifications (NFP)
Not-for-profit organizations classify their net assets based on the existence and nature of donor-imposed restrictions.
- Unrestricted: No donor restrictions.
- Temporarily Restricted: Time or purpose restrictions that expire.
- Permanently Restricted: Restrictions that never expire (e.g., endowments, specific assets).
Memory trick: Un-Temp-Perm: Unrestricted, Temporary, Permanent, that's the NFP asset journey!