CPA Exam - FAR (Financial Accounting and Reporting)Not-for-Profit EntitiesMedium
A not-for-profit health clinic received a significant anonymous cash donation of $200,000. The donor did not specify any restrictions on the use of these funds. The clinic's board of directors subsequently decided to use $150,000 of this donation to establish an endowment fund, with the income generated to be used for general operations. How should the $150,000 designated by the board be reported in the financial statements?
- AAs board-designated net assets within net assets without donor restrictions.
- BAs an increase in permanently restricted net assets.
- CAs a reclassification from net assets without donor restrictions to net assets with donor restrictions.
- DAs an increase in net assets with donor restrictions.
Show answer & explanationAnswer & explanation
Correct answer: A. As board-designated net assets within net assets without donor restrictions.
Board-designated funds are internal designations, not donor-imposed restrictions. Therefore, they remain classified as net assets without donor restrictions, but are often separately disclosed or reported within that category to indicate the board's intent.
Why the other options are wrong
- B. This is incorrect; permanent restrictions are donor-imposed, not by the board.
- C. This is incorrect as there is no donor restriction to trigger a reclassification.
- D. This is incorrect because the restriction is board-imposed, not donor-imposed.
Board-Designated Funds
Funds that the governing board of a not-for-profit organization has internally designated for a specific purpose, rather than being subject to external donor restrictions.
- Internal restriction, not donor-imposed.
- Remains classified as net assets without donor restrictions.
- Can be rescinded by the board.
- Often disclosed separately within unrestricted net assets.
Memory trick: Board's choice, not donor's voice, stays unrestricted.