A not-for-profit social service agency received a contribution of an office building valued at $2,000,000. The donor stipulated that the building must be used as the agency's headquarters for at least 20 years. After 20 years, the agency can sell the building and use the proceeds for any purpose. How should the initial receipt of this building be recorded?
- AAs an increase in net assets without donor restrictions of $2,000,000.
- BAs an increase in net assets with donor restrictions of $2,000,000.
- CAs an increase in net assets with a board-imposed time restriction of $2,000,000.
- DAs a deferred revenue liability of $2,000,000.
Show answer & explanationAnswer & explanation
Correct answer: B. As an increase in net assets with donor restrictions of $2,000,000.
The donor's stipulation that the building must be used as headquarters for 20 years constitutes a time restriction. Even though the restriction will expire, it is still a donor-imposed restriction, requiring the contribution to be recorded as an increase in net assets with donor restrictions. The NFP will then release a portion of this restriction to net assets without donor restrictions over the 20-year period, similar to depreciation.
Why the other options are wrong
- A. The 20-year usage stipulation is a donor-imposed time restriction, preventing classification as unrestricted.
- C. Board-imposed restrictions are internal and do not affect the initial classification of donor-restricted contributions.
- D. This is an unconditional contribution of an asset; it is recognized as revenue, not a liability, upon receipt.
Long-Term Asset Contribution (Time Restriction)
When a not-for-profit receives a long-term asset with a donor-imposed time restriction on its use, the asset is initially recorded as net assets with donor restrictions.
- The restriction is released over the asset's useful life or the specified period.
- Release typically mirrors depreciation, increasing unrestricted net assets.
- Initial recognition is at fair value.
Memory trick: Building's restricted, but restriction 'depreciates' over time.