CPA Exam - FAR (Financial Accounting and Reporting)Not-for-Profit EntitiesEasy
A not-for-profit university received a gift of marketable securities with a fair value of $500,000. The donor stipulated that the principal must be held in perpetuity, but the income generated from investing these securities can be used for scholarships. How should this contribution be classified in the Statement of Financial Position?
- AAs permanently restricted net assets.
- BAs net assets with donor restrictions.
- CAs net assets without donor restrictions.
- DAs a liability.
Show answer & explanationAnswer & explanation
Correct answer: A. As permanently restricted net assets.
When a donor stipulates that the principal of a contribution must be held in perpetuity, it creates a permanent restriction. This type of contribution is classified as permanently restricted net assets.
Why the other options are wrong
- B. Incorrect, as 'with donor restrictions' implies temporary restrictions that expire or are satisfied, not perpetual ones.
- C. Incorrect, as the donor imposed a perpetual restriction on the principal.
- D. Incorrect, as this is an unconditional contribution, not a liability.
Permanently Restricted Net Assets
Net assets whose use is limited by donor-imposed stipulations that neither expire by passage of time nor can be satisfied or removed by actions of the not-for-profit organization. The principal must be maintained indefinitely.
- Donor-imposed perpetual restrictions.
- Principal held indefinitely (e.g., endowment).
- Income may be restricted or unrestricted.
- Reported separately on the Statement of Financial Position.
Memory trick: Forever funds are permanently bound.