CPA Exam - FAR (Financial Accounting and Reporting)Not-for-Profit EntitiesMedium
A not-for-profit (NFP) organization received a donation of marketable securities with a fair value of $75,000. The donor stipulated that the principal of the securities must be invested indefinitely, but the income generated from the investments can be used for any general operating purposes of the NFP. How should this contribution be classified?
- AAs unrestricted net assets.
- BAs temporarily restricted net assets.
- CAs permanently restricted net assets.
- DAs an exchange transaction revenue.
Show answer & explanationAnswer & explanation
Correct answer: C. As permanently restricted net assets.
When a donor stipulates that the principal of a contribution must be maintained indefinitely, it creates a permanent restriction. The income generated, if unrestricted by the donor, would be classified as unrestricted net assets when earned.
Why the other options are wrong
- A. This is incorrect because the principal itself has a permanent donor restriction.
- B. Temporarily restricted net assets would apply if the restriction eventually expires or is satisfied by spending for a specific purpose.
- D. Donations are contributions, not exchange transactions.
Permanently Restricted Net Assets (Endowment)
Net assets resulting from contributions whose principal must be maintained in perpetuity, with the income often available for use.
- Donor-imposed restriction never expires.
- Typically involves endowments where the corpus must remain intact.
- Income generated from the principal may be unrestricted or temporarily restricted, depending on donor intent.
Memory trick: Forever funds find permanent places.