A community foundation closes the books on a $42 million balance sheet that lists "permanently restricted" net assets, a label ASU 2016-14 retired when it collapsed the three net asset classes into two. The auditor flags it as a presentation error, and the rebrand to "with donor restrictions" reshuffles the equity section and forces a fresh liquidity disclosure.
The three Representative Tasks under I.B1 stack from definition to preparation to error correction. The exam tests whether candidates can pull a not-for-profit trial balance into the right two-class equity section, reclassify releases correctly, and disclose liquidity the way ASU 2016-14 demands.
An NFP has no shareholders and pays no dividends, so the residual is net assets. The statement shows donors and regulators what resources are free to use, what is locked into a donor's purpose, and what must be held in perpetuity.
Assets = Liabilities + Net Assets
KEY: The section has only two lines: without donor restrictions and with donor restrictions. The old three-category model (unrestricted, temporarily restricted, permanently restricted) is gone.
Common mistakes
- Treating board-designated funds as donor-restricted. A board sets aside $200,000 as a facilities reserve. Trap: classify the $200,000 as "with donor restrictions." Correct: stays in "without donor restrictions" with a footnote.
- Recording a conditional pledge as a receivable. A $40,000 pledge contingent on a matching grant is recorded as pledges receivable. Trap: total assets overstated by $40,000. Correct: zero recognition until the condition is satisfied.
- Using the three-category equity section. "Temporarily restricted" and "permanently restricted" disappeared under ASU 2016-14. Trap: present three lines. Correct: two lines.
Bottom line
- The NFP statement of financial position reports assets, liabilities, and net assets (not stockholders' equity); the equation is Assets = Liabilities + Net Assets.
- Net assets split into two classes under ASU 2016-14: without donor restrictions (board-designated quasi-endowments live here) and with donor restrictions (purpose, time, or perpetual).
- Donor-restricted endowment principal stays in with donor restrictions forever; board-designated endowments sit in without donor restrictions because the board can reverse its own action.
- Conditional pledges are not recorded until the condition is met; unconditional purpose-restricted pledges are recorded, at present value if collection extends beyond one year.
Exam shortcut
When the trial balance shows a board action setting funds aside, they stay without donor restrictions. Only donor action moves them. If the equity section shows three categories, the question is testing whether the candidate knows ASU 2016-14 collapsed those into two. The release entry is always a wash on total net assets. It moves columns, not totals.
The full lesson (about 2,115 words, 14 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- I.B1
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