NFP Net Assets With Donor Restrictions vs. Board Designations

Answer D. Net assets with donor restrictions at December 31, Year 1 include the $260,000 restricted for the Year 2 youth program and the $120,000 gift whose principal must be maintained in perpetuity, totaling $380,000. The $140,000 equipment gift was released from restriction when the equipment was acquired and placed in service in Year 1 under the placed-in-service approach. The board designation is not a donor-imposed restriction, and the $70,000 conditional promise is not recognized until the matching condition is met.

Why not A: This answer ignores the $120,000 perpetual restriction. A donor requirement to maintain principal in perpetuity is a donor-imposed restriction and remains in net assets with donor restrictions at year-end.

Why not B: This choice treats the $140,000 equipment gift as still restricted at year-end. Because the equipment was purchased and placed in service in Year 1, the donor restriction for acquiring the equipment was released under the placed-in-service approach.

Why not C: This amount likely adds the $70,000 conditional promise incorrectly. Conditional promises are not recognized (and therefore not included in net assets with donor restrictions) until the condition is substantially met.

Answer D. ASU 2016-14 (current U.S. GAAP) requires nongovernmental not-for-profit entities to present two net asset classes, net assets with donor restrictions and net assets without donor restrictions, rather than the older three-class model. GAAP also requires information about expenses by both natural and functional classification to be presented in one location (face of a statement, a separate statement, or the notes). The indirect method for the statement of cash flows is permitted.

Why not A: This is tempting if a candidate misremembers cash flow presentation rules; however, the indirect method is allowed under U.S. GAAP. The real problems are the outdated three-class net asset presentation and the failure to show expenses by both function and nature.

Why not B: This distractor plays on the older unrestricted/temporarily restricted/permanently restricted terminology. Under current GAAP, that three-class presentation is no longer the required format for primary financial statements; notes cannot preserve the old three-class model as acceptable primary classification.

Why not C: This choice correctly flags the net asset change but incorrectly assumes that natural-only expense disclosure suffices. U.S. GAAP requires expenses to be shown by both natural and functional classification in a single location.

Answer C. The donor-imposed scholarship restriction determines net asset classification, so the $500,000 remains in net assets with donor restrictions until the donor's purpose is satisfied. A board designation is an internal action and does not create donor restrictions, so the $200,000 remains within net assets without donor restrictions. Current U.S. GAAP requires nongovernmental not-for-profit entities to present an analysis of expenses by both natural and functional classification in one location (either a statement or the notes).

Why not A: This distractor appeals to focusing on how the funds will be used (program services) rather than the donor's stated restriction. Donor-imposed purpose restrictions control classification until satisfied. Also, board-designated amounts remain within net assets without donor restrictions, not as a separate category outside net assets.

Why not B: Tempting if a candidate conflates any restriction with donor-imposed restrictions, but board designations are internal and do not create donor restrictions. It is also incorrect because GAAP requires both natural and functional expense classifications in one location, not functional only.

Why not D: This gets the two net asset classifications right, which makes it attractive, but it is wrong about expense presentation. Nongovernmental not-for-profits must provide an analysis of expenses by both natural and functional classification in one location; presenting natural classification alone is not sufficient.

Answer A. Board designations are not donor-imposed restrictions, so a board-designated (quasi-)endowment remains within net assets without donor restrictions (the designation should be disclosed). Under current U.S. GAAP (ASU 2016-14), an underwater donor-restricted endowment remains classified within net assets with donor restrictions rather than being shown as an unrestricted deficit. ASU 2016-14 also requires nongovernmental NFPs to present an analysis of expenses by both nature and function in one location, either on the face of the statements or in a note.

Why not B: This option reflects older practice that treated underwater endowment deficits as a reduction of unrestricted net assets, but ASU 2016-14 requires such donor-restricted endowments to remain within net assets with donor restrictions. It is also wrong on expense presentation because ASU 2016-14 standardized the requirement for a nature-and-function analysis in one location for nongovernmental NFPs.

Why not C: This is tempting because of the board's long-term intent, but internal board intent does not create donor-imposed restrictions; board-designated quasi-endowments are presented as without donor restrictions. It is also incorrect about expense reporting, since ASU 2016-14 requires an analysis by both nature and function for nongovernmental NFPs.

Why not D: This choice combines two common errors: treating internal board limitations as donor-imposed restrictions (which they are not) and splitting a donor-restricted endowment between net asset classes based on market deficits. Current GAAP does not reclassify part of a donor-restricted endowment as unrestricted solely because fair value is below original gift amount.

Answer D. Net asset classification for contributions depends on donor-imposed restrictions, not on the organization's internal decisions. Because the donor specified only general support and did not impose a time or purpose restriction, the gift is reported as net assets without donor restrictions when received. A board designation (earmark) does not create a donor restriction under U.S. GAAP.

Why not A: This is tempting because candidates often confuse board designations with donor restrictions. However, internal board decisions (designations or earmarks) do not change GAAP classification; only donor-imposed restrictions determine classification as with or without donor restrictions.

Why not B: Materiality may affect disclosure judgments but does not determine net asset classification. Classification depends on whether the donor placed restrictions on the gift.

Why not C: Timing matters only if the donor imposes a time restriction. The organization's expectation about when it will spend the funds does not, by itself, create a donor restriction.

Answer A. The $600,000 donor gift is subject to a donor-imposed purpose restriction (purchase of equipment) and therefore is contribution revenue classified as net assets with donor restrictions until the restriction is satisfied. A board designation is an internal action and does not create a donor restriction, so those funds remain in net assets without donor restrictions (though the designation may be disclosed). The $200,000 foundation pledge is conditional on a matching barrier and contains a release provision, so it is not recognized as revenue or a receivable until the condition is substantially met.

Why not B: This option incorrectly treats the board designation as a donor-imposed restriction. Board designations are internal and leave the funds in net assets without donor restrictions, so only the donor-imposed $600,000 is reported as net assets with donor restrictions.

Why not C: This distractor mistakes timing of use for the classification of the restriction. The contribution is recognized when received, and because the donor specified the purpose (equipment acquisition) the amount is classified as net assets with donor restrictions until the purpose is met.

Why not D: This option improperly recognizes the $200,000 pledge despite the explicit matching condition and release clause. Because the pledge is conditional on the clinic raising matching contributions and the foundation can be released if the match is not raised, the pledge is not recognized until the condition is met.

Answer B. The donor imposed no purpose or time restriction, so the contribution is unrestricted and should be classified as net assets without donor restrictions. A board designation is an internal decision and does not create donor-imposed restrictions that would require classification as net assets with donor restrictions. The board-designated amount may be disclosed in notes, but the net asset classification does not change.

Why not A: This is tempting because building projects are commonly funded by purpose-restricted gifts, but the stem explicitly states the donor imposed no restriction. Internal intent or board action cannot convert an unrestricted gift into donor-restricted net assets.

Why not C: A candidate might confuse an unspent gift with unearned revenue, but an unconditional contribution is recognized when received (or promised) and is not deferred simply because it has not yet been spent. Deferred revenue applies to exchange transactions or conditional promises.

Why not D: This choice treats a board designation like an external restriction, but only donor-imposed restrictions determine classification. A board may designate or remove designations internally, yet the gift remains unrestricted for reporting purposes unless the donor imposes a restriction.

Answer D. Board designations do not create donor restrictions. Because the resources were originally without donor restrictions and no donor-imposed restriction applies, they remain in net assets without donor restrictions. The board's action may warrant disclosure, often as a board-designated amount such as a quasi-endowment, but it does not change the net asset class.

Why not A: This is tempting because candidates often equate any internal limitation with a restriction. However, net assets with donor restrictions arise from donor-imposed restrictions, not from management or board intent. A board-designated quasi-endowment stays in net assets without donor restrictions.

Why not B: This is tempting if a candidate thinks any internal commitment creates an obligation. A board designation is generally self-imposed and can usually be changed by the board, so it does not create a present obligation to an external party. Therefore, liability classification is not appropriate.

Why not C: This distractor appeals to the idea that formal investment action is needed before reporting changes. But the accounting issue here is classification of existing net assets, not whether a separate investment account has been opened. The resources are already recognized and remain in net assets without donor restrictions, with disclosure of the designation if appropriate.