A client, a tax-exempt organization, received a grant of $1,000,000 from a donor. The donor specified that the funds must be used to build a new research facility and that the facility must be completed within five years. If the facility is not completed, the funds must be returned. How should this grant be classified in the organization's net assets?
- AWithout Donor Restrictions, because the organization has control over how to use the funds within the stipulated purpose.
- BWith Donor Restrictions, permanently restricted, because the funds are for a specific capital asset.
- CWith Donor Restrictions, temporarily restricted, because the restriction is time-based and purpose-based.
- DWithout Donor Restrictions, because the return clause makes it a refundable advance, not a grant.
Show answer & explanationAnswer & explanation
Correct answer: C. With Donor Restrictions, temporarily restricted, because the restriction is time-based and purpose-based.
This grant has both a purpose restriction (build a research facility) and a time restriction (within five years). The return clause is a condition, not a permanent restriction. Therefore, it is classified as 'With Donor Restrictions' and is considered 'temporarily restricted' because the restrictions will eventually expire (when the facility is built and the time limit passes).
Why the other options are wrong
- A. Incorrect. The donor's specified use and time limit constitute donor restrictions.
- B. Incorrect. Permanently restricted funds typically involve endowments where the principal must be maintained in perpetuity. The restriction here is temporary as it will be satisfied upon completion of the facility.
- D. Incorrect. While it has a return clause (condition), it is still a grant once the conditions are deemed probable to be met, and it carries donor restrictions, making it not 'Without Donor Restrictions'.
NFP Net Asset Classification (Conditional Grant)
Conditional grants to Not-for-Profit (NFP) organizations are recognized as revenue (and classified as With Donor Restrictions) only when the conditions are substantially met or explicitly waived. Restrictions can be temporary (purpose or time) or permanent.
- Conditional grants are not recognized as revenue until conditions are met.
- Purpose restrictions make assets 'With Donor Restrictions'.
- Time restrictions (implied or explicit) also make assets 'With Donor Restrictions'.
- Permanently restricted assets typically involve endowments where principal is maintained indefinitely.
Memory trick: No Strings, Temporary Strings, Forever Strings.