A community art center, a not-for-profit organization, received a donation of historical artifacts valued at $75,000. These artifacts are to be preserved and displayed for public exhibition, and the NFP has a policy to preserve such items. The NFP does not capitalize collections if they are held for public exhibition, protected, cared for, and subject to a policy that requires proceeds from their sale to be reinvested in other collection items. How should this donation be recognized?
- AAs an increase in 'net assets with donor restrictions' for $75,000.
- BAs an increase in 'net assets with donor restrictions' for $75,000, and a corresponding expense.
- CAs an increase in 'net assets without donor restrictions' for $75,000.
- DAs a memo entry only, with no recognition on the Statement of Financial Position.
Show answer & explanationAnswer & explanation
Correct answer: D. As a memo entry only, with no recognition on the Statement of Financial Position.
GAAP allows NFPs to not capitalize collections if they meet specific criteria: held for public exhibition, education, or research; protected and preserved; and subject to a policy that requires proceeds from sales to be reinvested in other collection items. If these criteria are met, the NFP may choose not to recognize the collection as an asset, and thus, no contribution revenue is recognized.
Why the other options are wrong
- A. Incorrect. If the NFP chooses not to capitalize the collection, it is not recognized as an asset or contribution revenue.
- B. Incorrect. No expense is recognized for a donated collection that is not capitalized.
- C. Incorrect. This would imply capitalization and no restriction, neither of which applies if the NFP follows the non-capitalization policy.
Non-Capitalized Collections (NFP)
Not-for-profit organizations may elect not to capitalize collections if they meet specific criteria related to public exhibition, preservation, and reinvestment policy for sale proceeds.
- Optional non-capitalization if criteria met.
- Items held for public exhibition, education, or research.
- Protected, cared for, and preserved.
- Sale proceeds reinvested in collections.
Memory trick: Collections are 'special' assets, sometimes just a 'note' in the book.