CPA Exam - FAR (Financial Accounting and Reporting)Not-for-Profit EntitiesMedium
A not-for-profit museum received a contribution of artwork valued at $500,000. The donor stipulated that the artwork must be displayed for public viewing for at least 10 years. The museum's policy is to capitalize all donated artwork. How should this contribution be recognized in the Statement of Activities?
- AAs an increase in net assets without donor restrictions for $500,000.
- BAs a memo entry only, with no recognition on the Statement of Activities.
- CAs an increase in net assets with donor restrictions for $500,000.
- DAs an increase in net assets without donor restrictions and a corresponding expense for the display.
Show answer & explanationAnswer & explanation
Correct answer: C. As an increase in net assets with donor restrictions for $500,000.
The donor's stipulation that the artwork must be displayed for at least 10 years constitutes a time restriction. Contributions with time restrictions are classified as 'net assets with donor restrictions' until the time restriction expires or is met. The museum's policy to capitalize the artwork means it will be recognized as an asset and contribution revenue.
Why the other options are wrong
- A. Incorrect. The 10-year display requirement is a donor-imposed time restriction.
- B. Incorrect. The museum's policy is to capitalize, so it must be recognized on the financial statements.
- D. Incorrect. An expense is not recognized upon initial receipt of a donated asset with a time restriction.
Time-Restricted Contribution (NFP)
A contribution with a donor-imposed time restriction must be recognized as an increase in net assets with donor restrictions until the specified time period has elapsed or the purpose is fulfilled.
- Donor specifies a period for use or display.
- Classified as 'net assets with donor restrictions'.
- Released to 'net assets without donor restrictions' over time or when purpose met.
Memory trick: Time restrictions mean the asset is 'locked' in restricted assets until time 'runs out'.