A not-for-profit entity received a gift of marketable securities with a fair value of $250,000. The donor stipulated that the principal amount must be maintained in perpetuity, but the income generated from these securities could be used for general operating expenses. How should this contribution be classified on the Statement of Financial Position?
- AAs an increase in net assets with donor restrictions for $250,000.
- BAs an increase in net assets with donor restrictions for the income generated and net assets without donor restrictions for the principal.
- CAs an increase in net assets without donor restrictions for $250,000.
- DAs an increase in net assets without donor restrictions for the income generated and net assets with donor restrictions for the principal.
Show answer & explanationAnswer & explanation
Correct answer: A. As an increase in net assets with donor restrictions for $250,000.
The entire contribution of $250,000 has a donor-imposed restriction that the principal must be maintained in perpetuity. This type of restriction requires the amount to be classified as 'net assets with donor restrictions' on the Statement of Financial Position. The income generated, although usable for general operating expenses, is a separate transaction that occurs after the initial contribution of the principal.
Why the other options are wrong
- B. Incorrect. The principal is restricted, and the income is a separate subsequent event.
- C. Incorrect. The principal has a permanent donor restriction.
- D. Incorrect. The initial contribution of the principal is entirely restricted, not split.
Endowment Contribution Classification
An endowment contribution, where the principal must be maintained in perpetuity by donor stipulation, is classified as an increase in net assets with donor restrictions.
- Principal is permanently restricted by donor.
- Income may be unrestricted or restricted.
- Initial contribution is entirely 'with donor restrictions'.
Memory trick: Endowment's main 'gist' is that the principal is always 'restricted'.