A public university, a component unit of the state government, received a $2,000,000 endowment from a donor. The donor stipulated that the principal must be invested in perpetuity, and the income generated from the investment must be used to fund student scholarships. How should this endowment be classified in the university's Statement of Net Position (assuming it follows GASB standards)?
- ANonspendable Net Position
- BRestricted Net Position
- CUnrestricted Net Position
- DNet Investment in Capital Assets
Show answer & explanationAnswer & explanation
Correct answer: A. Nonspendable Net Position
Under GASB Statement No. 34, net position is classified into three components: Net Investment in Capital Assets, Restricted Net Position, and Unrestricted Net Position. Permanently restricted endowments where the principal must be maintained in perpetuity are classified as 'Nonspendable Net Position' within the 'Restricted Net Position' category, or more specifically, the 'Restricted - Nonexpendable' portion. However, the most appropriate single classification among the choices given that specifically addresses the perpetual nature of the principal is Nonspendable Net Position. GASB 63 and 65 refined this classification, but the core concept of 'nonspendable' for perpetual endowments remains.
Why the other options are wrong
- B. While the income is restricted, the principal itself is 'nonspendable' due to the perpetual restriction, making 'Nonspendable Net Position' a more precise classification for the principal.
- C. Unrestricted net position has no external restrictions.
- D. Net Investment in Capital Assets relates to capital assets, net of related debt.
Nonspendable Net Position (GASB)
A component of net position under GASB standards that represents amounts that cannot be spent because they are either not in spendable form (e.g., inventories, prepaid items) or are legally or contractually required to be maintained intact (e.g., permanent endowments).
- Part of government-wide Statement of Net Position.
- Includes permanent endowments.
- Principal cannot be spent.
Memory trick: Net Position is like a 'NICE' cake: 'N'onspendable, 'I'nvested in Capital Assets, 'C'apable (Restricted), 'E'verything Else (Unrestricted).