Question

lifeworks is a nongovernmental not-for-profit organization that recently received a large gift from a donor in the amount of $5,000,000 in cash. the donor wishes to leave a legacy and therefore specified that lifeworks cannot spend the $5,000,000 but can invest the $5,000,000 and use any earnings from the investments to support the organization. in the first year, $400,000 was earned and designated by the board to be spent for general operations, but has not yet been spent. how would the $5,000,000 gift and the $400,000 in earnings impact the net assets of lifeworks?

Answer 1

The $5,000,000 donation increases Lifeworks's net assets with donor restrictions, while the $400,000 in earnings increases net assets without donor restrictions, impacting the overall net assets of the organization.

The organization Lifeworks, a nongovernmental not-for-profit entity, received a donation meant as an endowment of $5,000,000 which they are not allowed to spend but can invest.

The earnings from this investment, $400,000 in the first year, are considered without restrictions and can be used for general operations.

This distinction affects the way these amounts are reported in Lifeworks's financial statements.

The $5,000,000 donation increases the net assets with donor restrictions, while the $400,000 earned and designated for general operations would increase the net assets without donor restrictions once the funds are actually used.

Until the earnings are expended, they would be reported as part of the organization's net assets, but as a commitment to use in the future.