[Anonymous]

Please help me undertand this Becker question.

A not for profit voluntary health and welfare organization received a $500,000 permanent endowment. The donor stipulated that the income must be used for a mental health program. The endowment fund reported $60,000 net decrease in market value and $30,000 investment income. The organization spent $45,000 on the mental health program during the year. What amount of change in temporarily restricted net assets should the organization report?

Answer: $0.

Solution:

Unrestricted Temporarily Restricted Permanently Restricted TOTAL

Mental health Program

Investment Income $30,000. $30,000

Release restriction $30,000 (30,000) 0

Expenses (45,000) 0 (45,000)

Subtotal (15,000) 0 (15,000)

Investments

Losses (60,000) (60,000)

Beg. of year 0 $500,000 500,000

End of year (75,000) 0 $500,000 $425,000

I don’t understand how the net assets are classified in Permanent Restricted, Temporarily Restricted and Unrestricted.

How the decrease in market value, the investment income and the expenses are classified? What is the theory behind these classifications?

Thanks!

[Anonymous]

The donor restricted the income to be spent on mental health. That income is temporarily restricted until it is actually spent on mental health services.

You start with zero income (zero restricted), you make $30,000 in income (100% temporarily restricted), you spend $45,000 on mental health including the entire $30,000 you made, you end up with zero restricted. The change in temporarily restricted net assets is zero.

You have to ignore the $60,000 loss in the account, a permanent endowment is permanently restricted.

[Anonymous]

Tim94111, Good Explanation. Just to put the numbers in a table might help add to your explanation.

Beg Bal Inc Dec End Bal

Permanent Restricted 500,000 zero 75,000 425,000

(Market decrease-60,000 & Additional Spent 45,000-30,000)

Temporary Restricted zero 30,000 30,000 zero

Inv. Income spent

Unrestricted zero zero zero zero

All funds in this example are classified as either Permanent or Temporary Restricted based on the facts of the question. To turn the call of the question around, one could have asked the following questions:

1) What is the ending balance of the Permanent Restricted assets?

2) The Change in Permanent Restricted net assets?

3) The Unrestricted assets ending balance?

Just another way of looking at the same fact pattern and trying to understand the different way questions can be asked on the CPA exam. Good Luck.

[Jaywalk]

That's a good question, I had an issue with it as well.

The quick and dirty on the categories of accounts is this:

Unrestricted: Increase and decrease for anything not listed in the other accounts

Temporarily restricted: Increased for income that is specifically designated for certain programs by the donor. Decreased only when spent on those specified programs.

Permanently restricted: Increased for things the organization has a claim to, but can never touch due to the donor-imposed restrictions that last forever.

The special rule between Unrestricted and Temp restricted is that when Temp restricted gets spent (goes down) it must be reclassified as Unrestricted (correspondingly goes up) first before it flows out of the organization (immediately goes down again). The reclassification between Unrestricted and Temp is what the line-item on page F9-68 is showing, “Net assets released from restrictions”.

Temp restricted CANNOT be negative (see page F9-44 section D.2.a.) and we can't spend anything out of Perm restricted. Therefore, we know the first $60k loss must come from Unrestricted, which decreases Unrestricted by $60k. The $30k income made off the perm. endowment (which is Perm restricted) gets classified as Temp restricted until it is spent, so the $30k increases the Temp restricted account when recorded.

Then, we justifiably spend $45k for the program, but where did we get the funds?? We used the income that was Temp restricted for the program (the $30k), but since spending more than $30k would leave Temp restricted negative, we must pull the other $15k from Unrestricted, so Temp restricted decreases $30k and Unrestricted decreases $15k (the total together is where we get our $45k).

If we look at the changes in Temp restricted, the net effect is 0 (+$30k from income – $30k all that was available to spend in Temp restricted = $0). Take a look at the answer and hopefully it makes more sense now.

As a bonus, on page F9-47 section C.2.3., we could have technically classified the $30k income as Unrestricted if we met the donor-imposed restrictions in the same period it was received; which, again would mean the net change in Temp restricted was $0 because there literally was NO change in the account during the year.

BEC 78 - 11/27/2008 | AUD 84 - 08/10/2009
REG 82 - 11/23/2009 | FAR 84 - 01/19/2010
-| Passed all sections |-

[Author]

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