FAR · Financial reporting · 9 practice questions
NFP Donor Restrictions: Placed in Service vs. Holding Period
An NFP releases donor restrictions on long-lived asset gifts when the asset is placed in service, unless the donor explicitly requires a longer use or holding period. Follow an equipment gift across year-end, then practice the release rule.
Try one first
Hint
Separate initial recognition of the gift from the later reclassification out of net assets with donor restrictions, and focus on the trigger used for long-lived assets.
Answer B. Under current U.S. GAAP for nongovernmental NFPs, donor-restricted contributions to acquire long-lived assets are released from restriction when the asset is placed in service unless the donor specifies otherwise. Because the equipment was placed in service on January 5, Year 2, the net assets restricted for the acquisition are released in Year 2.
Why not A: Although an unconditional contribution is recognized when received, that records the gift as net assets with donor restrictions. The restriction is not satisfied until the placed-in-service condition for the long-lived asset is met.
Why not C: Spending the cash to acquire the asset does not by itself release the restriction for a long-lived asset under GAAP, the usual release trigger is placement in service unless the donor requires otherwise.
Why not D: While spreading the release over depreciation might seem like a matching approach, current guidance typically requires release upon placement in service rather than recognition over the asset's useful life unless the donor imposes a different condition.
The timeline
- December 15, Year 1The NFP receives an unconditional cash gift restricted to acquire imaging equipment.
Recognize support with donor restrictions. The donor requires no stated period of holding or use.
- December 28, Year 1The NFP buys the equipment, but it is not ready for its intended use.
No release yet. Spending the gift does not satisfy the placed-in-service trigger.
- December 31, Year 1The NFP reports its year-end net assets.
The entire gift remains in net assets with donor restrictions because the equipment is not yet placed in service.
- January 5, Year 2The equipment is placed in service for its intended use.
Release the full gift to net assets without donor restrictions in Year 2. No donor holding period extends the restriction.
Key points
- Remember: Purchased in December, placed in service in January means the gift is still donor-restricted at December 31.
- A donor's stated use period controls release, not the asset's useful life or depreciation.
- The same-period policy permits support without donor restrictions only when the gift's restrictions are satisfied in that reporting period.
- A board's internal release schedule cannot extend a donor restriction.
How the exam traps you
- Releasing the restriction when the NFP pays for the equipment or obtains title. Wait until the equipment is placed in service, meaning ready and available for its intended use.
- Releasing the entire gift at placement in service despite an explicit donor holding period. Follow the donor's stated period. Placement in service does not eliminate the remaining time restriction.
- Using the same-period policy because the equipment was purchased in the year the gift was received. The restriction must be satisfied in that reporting period. Purchase alone is not enough.
Question 2
| Fund / Item | Amount |
|---|---|
| Unrestricted operating gift | $240,000 |
| Gift restricted for scholarships; all scholarships were awarded in Year 1 | $100,000 |
| Gift restricted to acquire equipment; the equipment was purchased and placed in service in Year 1 | $90,000 |
| Gift restricted for a summer camp to be held in Year 2 | $70,000 |
| Unrestricted gift that the board designated at year-end for a future capital reserve | $60,000 |
| Gift required to be maintained in perpetuity as an endowment | $150,000 |
Hint
Distinguish donor-imposed restrictions from internal board designations, then determine which donor restrictions were actually satisfied by year-end under the entity’s stated policy.
Answer C. The scholarship ($100,000) and equipment ($90,000) restrictions were satisfied in Year 1 and, under the entity's disclosed election, may be reported as support without donor restrictions. Net assets without donor restrictions therefore include unrestricted gifts ($240,000 + $60,000) plus those two satisfied restricted gifts: $240,000 + $60,000 + $100,000 + $90,000 = $490,000. Net assets with donor restrictions remain the $70,000 summer-camp gift and the $150,000 permanent endowment, totaling $220,000.
Why not A: Tempts because a candidate could both treat the board-designated $60,000 as a donor restriction and fail to reclassify the equipment gift ($90,000) as without donor restrictions; that would yield with = $150,000 + $70,000 + $90,000 + $60,000 = $370,000 and without = $240,000 + $100,000 = $340,000. It is incorrect because board designations do not create donor-imposed restrictions and the equipment restriction was satisfied in Year 1 and may be presented as without donor restrictions under the policy.
Why not B: Tempts because it reflects treating the board-designated $60,000 as donor-restricted (with = $60,000 + $70,000 + $150,000 = $280,000; without = $240,000 + $100,000 + $90,000 = $430,000). It fails because internal board designations do not create donor-imposed restrictions; the $60,000 should remain part of net assets without donor restrictions.
Why not D: Tempts because a candidate might incorrectly treat the $70,000 summer-camp gift as satisfied in Year 1 and reclassify it to without donor restrictions (leaving only the $150,000 endowment with restrictions). It is wrong because the camp is scheduled for Year 2, so the $70,000 remains donor-restricted at Year 1-end and cannot be presented as support without donor restrictions in Year 1.
Question 3
Hint
Separate two issues: how the contribution is classified when received, and when the donor restriction is considered satisfied under the entity's stated policy.
Answer B. Because the donor restricted the gift to acquire a long-lived asset, the contribution is initially reported as support with donor restrictions. Under the placed-in-service approach, and because the donor did not require the truck to be held for a specified time, the restriction is satisfied when the truck is placed in service. Since Beacon does not use the same-period release policy election, the statement of activities should show the restricted contribution and a release from restriction in 20X5.
Why not A: This is tempting because the donor restriction was satisfied in the same year. However, the stem specifies Beacon did not elect the policy that permits reporting same-period restricted support directly as without donor restrictions. Without that election, the gift must be reported as with donor restrictions initially and then reclassified when the restriction is satisfied.
Why not C: This distractor appeals to candidates who think capital-purpose restrictions are released over the asset's useful life. Under the placed-in-service approach, the restriction is released when the asset is placed in service unless the donor explicitly requires a holding period; no such holding requirement exists here.
Why not D: Nongovernmental not-for-profits still recognize contribution revenue for unconditional gifts when received. A capital-purpose restriction affects the net asset classification and timing of release, not whether revenue is recognized on the statement of activities.
Question 4
Hint
Ask whether the donor required anything to occur after the asset was placed in service; donor terms, not internal policies or depreciation, govern external net asset classification.
Answer D. Under U.S. GAAP for nongovernmental NFPs (ASC 958), donor-restricted gifts to acquire long-lived assets are generally released from restriction when the asset is placed in service (the placed-in-service approach). A restriction remains only if the donor explicitly requires actions or conditions after placement (for example, a stipulation to maintain or use the building for a stated period or in perpetuity). Internal board policies, depreciation patterns, or management expectations do not create or extend donor-imposed restrictions for external financial reporting.
Why not A: Management's expectations about the asset's economic benefits do not, by themselves, establish or prolong a donor restriction; classification depends on the donor's explicit terms.
Why not B: This distractor appeals to a matching mindset, but GAAP does not generally tie release of a donor restriction to an asset's useful life or depreciation pattern. Release typically occurs when the asset is placed in service unless the donor explicitly imposed a post-placement time-related restriction.
Why not C: Board-designated or internal budgeting policies affect internal reporting and planning but do not create or lengthen donor-imposed restrictions for external net asset classification.
Question 5
Hint
Distinguish donor-imposed restrictions from internal board designations, and remember the placed-in-service approach for gifts restricted to acquiring long-lived assets.
Answer D. Gifts of cash restricted by a donor for acquisition of a long-lived asset are reported as net assets with donor restrictions until the asset is placed in service (the placed-in-service approach). A donor requirement to maintain principal in perpetuity constitutes a donor-imposed restriction on the principal and therefore is net assets with donor restrictions. Board designations are internal actions and do not create donor-imposed restrictions, so a board-designated quasi-endowment remains within net assets without donor restrictions. (See ASC 958, Not-for-Profit Entities, contributions guidance, e.g., ASC 958-605.)
Why not A: This is tempting because paying for an asset can look like satisfying the restriction, but current practice generally treats a donor restriction on acquiring a long-lived asset as released when the asset is placed in service, not merely when cash is disbursed. Also, board designations do not create donor-imposed restrictions, so treating a quasi-endowment as donor-restricted is incorrect.
Why not B: This may appear plausible because it correctly describes the board-designation treatment, but it is incorrect on the van. A restriction tied to acquiring a long-lived asset generally remains until the asset is placed in service; payment alone does not automatically release the donor restriction.
Why not C: This option lures candidates who recall an older approach of releasing restrictions over depreciation. Current presentation practice uses the placed-in-service approach rather than releasing the restriction over the asset's useful life. It also misclassifies perpetual endowment principal: a donor requirement to preserve principal is a restriction on the principal itself.
Question 6
Hint
Separate donor-imposed restrictions from board designations, and focus on the current GAAP trigger for releasing restrictions on gifts used to acquire long-lived assets.
Answer B. Gifts restricted for the acquisition of long-lived assets are released from donor restrictions when the asset is placed in service unless the donor specifies otherwise; because the MRI was not placed in service at Year 1-end, the restriction remains. Board designations (quasi-endowments) are internal actions and do not create donor restrictions, so the $400,000 remains in net assets without donor restrictions. Under current NFP GAAP (ASU 2016-14), an underwater donor-restricted endowment continues to be presented in net assets with donor restrictions (with the deficiency disclosed in the notes).
Why not A: Tempting because cash was paid, but for gifts to acquire long-lived assets the restriction is generally released when the asset is placed in service, not merely when payment is made; the other two points are correct.
Why not C: This mixes a correct MRI treatment with two errors: board designations do not create donor-imposed restrictions (they remain without donor restrictions), and under current GAAP the underwater donor-restricted endowment is not reclassified to net assets without donor restrictions.
Why not D: This reflects an outdated matching approach that would release the restriction over depreciation; current guidance releases the restriction when the asset is placed in service, and underwater deficiencies remain classified with donor restrictions.
Question 7
Hint
First separate donor-imposed restrictions from internal board designations; then determine whether any donor restriction was satisfied or released by year-end.
Answer C. Net assets with donor restrictions include amounts subject to donor-imposed restrictions. At December 31, Year 1, River has the $200,000 temporarily restricted for the Year 2 after-school program and the $400,000 of endowment principal that must be maintained in perpetuity, totaling $600,000. The $500,000 equipment gift restriction was released when River placed the asset in service under the placed-in-service approach; board designations are internal and reported as net assets without donor restrictions.
Why not A: This is tempting if a candidate counts only the $200,000 program restriction and overlooks the $400,000 endowment principal. The endowment principal is a donor-imposed perpetual restriction and remains classified as net assets with donor restrictions at year-end.
Why not B: This is tempting if a candidate treats the $500,000 equipment gift as still restricted and combines it with the $400,000 endowment principal (500 + 400 = 900). It is wrong because the equipment restriction was released when the asset was placed in service under the placed-in-service approach.
Why not D: This is tempting if a candidate includes all donor-imposed amounts, the $200,000 program restriction, the $500,000 equipment gift, and the $400,000 endowment principal (200 + 500 + 400 = 1,100). It is wrong because the $500,000 equipment restriction was released when the equipment was placed in service; only the $200,000 and $400,000 remain as donor-restricted net assets.
Question 8
Hint
Separate the statement of activities issue from the statement of cash flows issue. Then ask whether satisfying the donor's purpose in the same year changes the initial support classification under the facts given.
Answer B. Because the donor restricted the contribution to the acquisition of equipment, Pine initially reports the support as net assets with donor restrictions. When the qualifying equipment is purchased and placed in service, the purpose restriction is satisfied and the amount is reclassified as net assets released from restrictions. For cash flows, donor-restricted receipts for acquiring long-lived assets are reported as financing inflows for nongovernmental NFPs, and cash paid to acquire equipment is an investing outflow.
Why not A: This is tempting because candidates often treat same-period restrictions as effectively unrestricted and assume contributions are operating cash flows. It is incorrect here because the stem states Pine does not apply a same-period reclassification policy, so the contribution is initially with donor restrictions; equipment purchases are investing outflows, not operating outflows.
Why not C: This distractor correctly treats the contribution as donor-restricted and the equipment purchase as investing, but it misclassifies the cash receipt. For nongovernmental NFPs, donor-restricted receipts specifically for acquiring long-lived assets are reported as financing inflows, not operating inflows.
Why not D: This choice has the correct cash flow classifications but incorrectly reports the contribution as without donor restrictions. Under the stated facts (Pine does not use a same-period release policy), the gift must be reported initially as with donor restrictions and then released when the equipment is placed in service.
Question 9
Hint
First identify the event that satisfies a restriction to acquire a long‑lived asset (acquisition vs. placed in service). Then apply the museum's disclosed same‑period reporting policy.
Answer B. Under GAAP, a donor restriction for the acquisition of a long‑lived asset is generally satisfied when the asset is placed in service, absent a donor‑imposed time or maintenance requirement; the release is not dependent on depreciation. Because the museum both placed the system in service in 20X5 and has a disclosed policy to present same‑period releases as without donor restrictions, the contribution may be reported directly within net assets without donor restrictions in 20X5.
Why not A: This is tempting because it ties release to expense recognition, but GAAP generally treats the restriction as released when the asset is placed in service, not as depreciation is recognized, absent donor directions to the contrary.
Why not C: This correctly identifies placement in service as the release event, but it assumes the entity must first present the gift as with donor restrictions; given the museum's disclosed same‑period policy, direct presentation as without donor restrictions is permitted.
Why not D: This is a sequencing trap that treats acquisition as the release event. Acquisition alone does not generally satisfy a restriction to acquire and place an asset in service; GAAP release is typically at placement in service unless the donor specifies otherwise.
Common questions
When does an NFP release donor restrictions on long-lived asset gifts?
Under ASC 958, release occurs when the asset is ready and available for its intended use, unless explicit donor terms extend the restriction. Payment, signing a purchase agreement, or obtaining title alone does not trigger release.
Does an explicit donor holding period delay release?
Yes. A stated requirement to use or hold the asset after placement in service prevents full release on that date; release follows the donor's specified period rather than the asset's useful life.
Can an NFP report an equipment gift without donor restrictions in the year received?
Yes, if it elects the same-period policy and satisfies all donor restrictions in that reporting period. Buying equipment before year-end is not enough if it is not placed in service until the next year.
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