CPA Exam — REG (Regulation)Federal Taxation of EntitiesEasy
A client, a tax-exempt organization under IRC Section 501(c)(3), received a restricted grant of $200,000 from a donor. The donor specified that the funds must be used exclusively to build a new wing for the organization's community center. The new wing is expected to be completed in three years. How should this grant be classified in the organization's financial statements?
- AWith donor restrictions, permanently restricted.
- BWith donor restrictions, temporarily restricted.
- CAs revenue from exchange transactions.
- DWithout donor restrictions.
Show answer & explanationAnswer & explanation
Correct answer: B. With donor restrictions, temporarily restricted.
Funds restricted for a specific purpose or for use in a future period are classified as 'with donor restrictions, temporarily restricted' until the restriction is met or expires.
Why the other options are wrong
- A. Permanent restrictions typically involve endowments where the principal must be maintained in perpetuity, which is not the case here.
- C. Grants are typically contributions, not exchange transactions where the organization provides goods or services of equal value.
- D. This is incorrect as the donor explicitly specified the use of the funds, creating a restriction.
NFP Net Asset Classification (Temporarily Restricted)
Net assets with donor restrictions are classified as 'temporarily restricted' when the donor imposes restrictions that expire with the passage of time or when a specified purpose has been fulfilled.
- Restrictions can be for specific programs, time periods, or capital projects.
- When the restriction is met, the net assets are reclassified as 'without donor restrictions'.
- This classification is based on FASB ASC 958.
Memory trick: NFP Assets: Free, For Now, Forever.