Not-for-profit
The Restriction Gate
Only a donor can restrict: two net asset classes, board designations stay without restrictions, and spending releases the restriction.
How the exam words it
- -The stem has a board voting to 'set aside' funds and asks how the amount 'is classified on the statement of financial position'.
- -A donor endows a fund and it asks how the principal or the income is classified.
- -Restricted money is spent and it asks how much is shown as 'Net Assets Released from Restrictions'.
- -It asks which net asset class absorbs expenses, or where an underwater endowment deficiency sits.
The playbook
- 1Two classes only: with donor restrictions and without. ASU 2016-14 eliminated the old three-class model.
- 2Board designations are internal, so board-designated funds remain without donor restrictions.
- 3Endowment principal stays with donor restrictions (including any underwater deficiency); income follows whatever the donor said about the income.
- 4Spending on the restricted purpose reclassifies net assets out of the restricted class, and all expenses are reported in the without class.
The trap
Classifying board-designated funds as donor restricted. Only an external donor can restrict; a board vote leaves the funds without donor restrictions.
How the exam varies it
The same pattern, re-skinned along these axes:
Donor restriction versus board designationPrincipal versus income, purpose versus time versus perpetualInitial classification versus release from restriction
Drill this pattern
8 questions of The Restriction Gate from across the AUD topics. Clear it by getting 5 right with a streak of 3.