When a nongovernmental not-for-profit organization spends money for the purpose of which an external donor intended, the expense is reported as a:

• A. Decrease in net assets without donor restrictions.
• B. Increase in net assets with donor restrictions.
• C. Operating revenue.
• D. Net assets released from restrictions.

Answer: (A)

When donor-imposed restrictions exist, resources are reported as net assets with donor restrictions. When those restricted resources are spent for the donor’s intended purpose, the restriction is satisfied. The accounting treatment is to release the restricted amount from net assets with donor restrictions to net assets without donor restrictions. In the statement of activities this appears as a net assets released from restrictions line, reflecting that the funds have been used for their designated purpose and no longer remain restricted. The expense itself is part of normal operations, but the key presentation is the release of restrictions, not a change to unrestricted assets or to revenue.