CPA Exam: FAR · Financial Reporting
CPA Exam: FAR: Not-for-Profit Entities Concepts
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Overview
This chapter covers private not-for-profit organizations such as charities, private colleges, and hospitals. Their statements are a statement of financial position, a statement of activities, a statement of cash flows, and an analysis of expenses by function and nature. Because there are no owners, the equity section is called net assets.
Net assets are split into two classes: with donor restrictions and without donor restrictions. When a donor's purpose or time restriction is met, the amount is released and moved from with donor restrictions to without donor restrictions. Unconditional promises to give are recorded as revenue when made, even before cash arrives, but conditional promises are not recorded until the conditions are met.
Expenses are always reported as decreases in net assets without donor restrictions. The organization must show expenses by function, such as program services, management and general, and fundraising, and by nature, such as salaries and rent, in one place. Contributed services are recorded only if they create or improve nonfinancial assets or need specialized skills the organization would otherwise buy.
Key concepts
Two classes of net assets
Net assets with donor restrictions carry a donor-imposed limit on use or timing, including permanent endowments. Net assets without donor restrictions are free for the board to use, even if the board itself sets them aside.
Memory tipA board designation does not create a donor restriction; it stays without donor restrictions.
Source: FASB ASC 958-210 · as of 2026
Unconditional promise to give
A donor's promise with no barrier to overcome. It is recognized as contribution revenue and a receivable when made, measured at fair value; long-term promises are usually measured at present value.
Memory tipA promise to pay in future years is treated as time-restricted unless the donor says otherwise.
Source: FASB ASC 958-605 · as of 2026
Conditional promise to give
A promise that has both a barrier the organization must overcome and a right of return or release for the donor. It is not recognized until the barrier is overcome.
Memory tipBoth pieces are needed: a barrier and a right of return or release.
Source: FASB ASC 958-605 · as of 2026
Release from restriction
When a donor's purpose is fulfilled or the time passes, net assets are reclassified from with donor restrictions to without donor restrictions in the statement of activities.
Memory tipThe expense is recorded in without donor restrictions; the release shows the matching amount moving over.
Source: FASB ASC 958-205 · as of 2026
Expenses by function and nature
All NFPs report expenses by function (program services and supporting activities such as management and general and fundraising) and by nature, in one location: the face of a statement, the notes, or a separate statement.
Memory tipExpenses are reported only in net assets without donor restrictions.
Source: FASB ASC 958-720 · as of 2026
Contributed services
Volunteer services are recorded as revenue only if they create or enhance nonfinancial assets, or require specialized skills, are provided by people with those skills, and would otherwise be purchased.
Memory tipGeneral volunteers stuffing envelopes are not recorded; a volunteer electrician doing needed work is.
Source: FASB ASC 958-605 · as of 2026
Often tested
- Only two net asset classes: with donor restrictions and without donor restrictions.
- Unconditional promises are revenue when made; conditional promises wait until the barrier is met.
- Expenses go only in net assets without donor restrictions.
- Function and nature analysis is required for all NFPs.
- Board-designated funds remain without donor restrictions.
Easy to confuse: Unconditional vs. conditional promise
| Item | Unconditional promise | Conditional promise |
|---|---|---|
| What it has | No barrier | A barrier plus a right of return or release |
| When recognized | When the promise is made | When the barrier is overcome |
| Cash received in advance | Contribution revenue | Refundable advance (liability) |
3 sample questions
Verified practice questions from this unit.
Question 1. Under current US GAAP for not-for-profit entities, the statement of financial position reports net assets in which classes?
- ① Unrestricted, temporarily restricted, and permanently restricted net assets
- ② Operating net assets and capital net assets
- ③ Current net assets and noncurrent net assets
- ④ Net assets without donor restrictions and net assets with donor restrictions
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Answer: ④ Net assets without donor restrictions and net assets with donor restrictions
Key point: NFP net assets: with vs. without donor restrictions
Not-for-profit entities report two classes of net assets: without donor restrictions and with donor restrictions. Board-designated amounts are still net assets without donor restrictions, because only donors can impose restrictions.
Wrong choices
- Unrestricted, temporarily restricted, and permanently restricted net assets: These three classes were replaced by two classes for NFPs.
- Operating net assets and capital net assets: These are not the required net asset classes.
- Current net assets and noncurrent net assets: Net assets are classified by donor restrictions, not by current or noncurrent.
Question 2. In Year 1, a donor makes an unconditional written promise to give a charity $10,000 cash in Year 2. The donor places no purpose restriction on the gift. How does the charity report this in Year 1?
- ① As contribution revenue that increases net assets without donor restrictions
- ② As contribution revenue that increases net assets with donor restrictions
- ③ No revenue until the cash is received in Year 2
- ④ Disclosure in the notes only, with no amount recognized
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Answer: ② As contribution revenue that increases net assets with donor restrictions
Key point: Future-year unconditional pledge = time-restricted revenue
An unconditional promise to give is recognized as a receivable and contribution revenue when the promise is received. Cash due in a future period is treated as time-restricted, so it increases net assets with donor restrictions until the time arrives.
Wrong choices
- As contribution revenue that increases net assets without donor restrictions: Because the cash is not due until a later year, the promise carries an implied time restriction.
- No revenue until the cash is received in Year 2: Unconditional promises to give are recognized when received, not when collected.
- Disclosure in the notes only, with no amount recognized: Only conditional promises are left unrecognized; this promise is unconditional.
Question 3. A donor promises a museum $50,000 only if the museum first raises $50,000 from other donors by year-end. If the museum fails, it receives nothing. At year-end the museum has raised $20,000 from others. How should the museum report the $50,000 promise?
- ① Recognize $50,000 contribution revenue with donor restrictions
- ② Recognize $20,000 contribution revenue in proportion to funds raised
- ③ Do not recognize it as revenue until the condition is met
- ④ Recognize $50,000 contribution revenue without donor restrictions
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Answer: ③ Do not recognize it as revenue until the condition is met
Key point: Conditional promise: no revenue until barrier met
A promise is conditional when it has a barrier that must be overcome and a right of return or release. The matching requirement is a barrier, and the donor is released if it is not met. The museum recognizes revenue only when it substantially meets the condition.
Wrong choices
- Recognize $50,000 contribution revenue with donor restrictions: A conditional promise (with a barrier and a right to walk away) is not revenue until the barrier is overcome.
- Recognize $20,000 contribution revenue in proportion to funds raised: The promise is all-or-nothing; partial progress does not create revenue.
- Recognize $50,000 contribution revenue without donor restrictions: The condition has not been met, so no revenue is recognized.