A not-for-profit (NFP) organization received a $100,000 cash contribution. The donor specified that the funds must be used to purchase a new accessible van for transporting beneficiaries. The NFP purchased the van for $100,000 in the same fiscal year. How should this contribution affect the NFP's net assets classification in the Statement of Financial Position at year-end?
- ANo change in total Net Assets, only a reclassification within Net Assets With Donor Restrictions.
- BIncrease in Net Assets With Donor Restrictions of $100,000, then reclassified to Without Donor Restrictions upon expenditure.
- CIncrease in Net Assets Without Donor Restrictions of $100,000.
- DIncrease in Net Assets With Donor Restrictions of $100,000 for the entire life of the van.
Show answer & explanationAnswer & explanation
Correct answer: B. Increase in Net Assets With Donor Restrictions of $100,000, then reclassified to Without Donor Restrictions upon expenditure.
Contributions with donor-imposed stipulations are initially recorded as Net Assets With Donor Restrictions. Once the restriction is met (e.g., by purchasing the specified asset), the amount is reclassified from Net Assets With Donor Restrictions to Net Assets Without Donor Restrictions.
Why the other options are wrong
- A. There is a change in total net assets upon receipt of the contribution, and a reclassification occurs after the restriction is met.
- C. This is incorrect. The initial receipt is restricted, not without restrictions.
- D. The restriction on the use of the funds is satisfied once the asset is purchased, not over its useful life.
Restricted Contributions (NFP - Asset Acquisition)
When an NFP receives a contribution restricted for the acquisition of a long-lived asset, the contribution is initially recorded as Net Assets With Donor Restrictions and then reclassified to Net Assets Without Donor Restrictions when the asset is placed in service.
- Initially increases Net Assets With Donor Restrictions.
- Restriction is met when the asset is acquired/placed in service.
- Reclassification to Net Assets Without Donor Restrictions occurs upon restriction satisfaction.
Memory trick: Restricted gifts are locked until their purpose is fulfilled.