How do net assets with donor restrictions differ from net assets without donor restrictions?

Question

AcadiFi · Accepted Answer

Not-for-profit entities report two net asset classes: with donor restrictions and without donor restrictions. A donation goes into net assets with donor restrictions when the donor limits how or when the resource can be used. The restriction can be purpose-based, such as only for scholarships, or time-based, such as use in the next fiscal year. Once the restriction is satisfied, the amount is reclassified from with donor restrictions to without donor restrictions.

Example: Riverlight Arts Center receives a $500,000 gift. The donor specifies that $300,000 must be used to renovate the theater and $200,000 cannot be spent until next year. At receipt, the full $500,000 increases contribution revenue with donor restrictions. Later, when Riverlight spends $120,000 on qualifying theater renovations, it records net assets released from restriction for $120,000 and shifts that amount into net assets without donor restrictions.

```mermaid
flowchart LR
  A[Restricted gift] --> B[Net assets with donor restrictions]
  B --> C[Restriction satisfied]
  C --> D[Release from restriction]
  D --> E[Without donor restrictions]
```

The FAR trap is thinking restricted cash always means restricted net assets. The classification depends on the donor's stipulation, not just where cash is held. Focus on whether the donor limited timing or purpose, and then ask whether that limit has been satisfied by year-end. Practice more in our CPA FAR question bank.

How do net assets with donor restrictions differ from net assets without donor restrictions?

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