CPA Exam - FAR (Financial Accounting and Reporting)Not-for-Profit EntitiesMedium
A private not-for-profit college receives a substantial contribution from an alumna, specifying that the funds must be used to establish a scholarship fund for students pursuing degrees in STEM fields. The alumna further stipulates that the principal of the fund must remain intact in perpetuity, and only the investment income can be used for scholarships. How should this contribution be classified on the Statement of Financial Position?
- AAs net assets with donor restrictions, specifically as a permanently restricted endowment.
- BAs net assets without donor restrictions, because the college controls the investment strategy.
- CAs net assets with donor restrictions, specifically as a temporarily restricted endowment.
- DAs net assets designated by the board for scholarships.
Show answer & explanationAnswer & explanation
Correct answer: A. As net assets with donor restrictions, specifically as a permanently restricted endowment.
The donor's stipulation that the principal must remain intact 'in perpetuity' creates a permanent restriction. This type of restricted resource is classified as net assets with donor restrictions, specifically a permanently restricted endowment.
Why the other options are wrong
- B. Donor-imposed restrictions, especially in perpetuity, prevent classification as without donor restrictions.
- C. A 'temporarily restricted' endowment would imply a time limit on the principal restriction, which is not the case here ('in perpetuity').
- D. Board-designated funds are internal designations, not donor-imposed restrictions, and therefore would be part of net assets without donor restrictions.
Permanently Restricted Net Assets
Net assets whose use is limited by donor-imposed stipulations that do not expire over time and cannot be removed by the organization.
- Typically includes permanent endowments and land/art to be held in perpetuity.
- Must be reported separately from other net asset classes.
- Donor's intent dictates classification.
Memory trick: Donor's word is law: no restriction, temporary, or forever.