CPA Exam — REG (Regulation)Federal Taxation of EntitiesMedium
A client, a tax-exempt organization under IRC Section 501(c)(3), receives a $500,000 grant from a private foundation. The grant specifies that the funds must be used to establish an endowment for a specific research program, and only the income generated from the endowment can be spent. The principal must remain intact indefinitely. How should this grant be classified in the organization's financial statements?
- AWithout Donor Restrictions
- BWith Donor Restrictions (Temporarily Restricted)
- CWith Donor Restrictions (Permanently Restricted)
- DAs a liability until spent
Show answer & explanationAnswer & explanation
Correct answer: C. With Donor Restrictions (Permanently Restricted)
Since the donor stipulates that the principal must remain intact indefinitely, this creates a permanent restriction on the use of the assets, classifying it as 'With Donor Restrictions (Permanently Restricted)'.
Why the other options are wrong
- A. Incorrect; the grant has explicit donor restrictions.
- B. Incorrect; the restriction is permanent (principal must remain intact indefinitely), not temporary.
- D. Incorrect; this is a contribution, not a liability, as the organization is not obligated to repay it.
NFP Net Asset Classification (Permanently Restricted)
Net assets of not-for-profit organizations are classified as 'With Donor Restrictions (Permanently Restricted)' when donors impose stipulations that the assets be maintained in perpetuity.
- Commonly applies to endowments where only investment income can be spent.
- The principal amount cannot be expended.
- These restrictions are perpetual unless released by the donor or court order.
Memory trick: Donors Decide, Restrictions Define.