Rule: Generally, losses on the investments of a donor-restricted endowment fund (permanently restricted net assets for external reporting purposes) serve to reduce temporarily restricted net assets to the extent that donor-imposed temporary restrictions on net appreciation (cumulative losses minus gains) of the fund have not been met before the loss occurs. Any remaining loss reduces unrestricted net assets. Choice "A" is correct. The change in temporarily restricted net assets is comprised of the increase in temporarily restricted net assets related to investment earnings and the amounts released from temporary restrictions. Investment losses in excess of satisfaction of donor-restricted stipulations are treated as unrestricted as follows. | Unrestricted
| Temporarily
Restricted
| Permanently
Restricted
| Total
|
|---|
Mental Health Program | | | | | Investment Income | | 30,000 | | 30,000 | Release restriction | 30,000 | (30,000) | | 0 | Expenses | (45,000) | 0 | | (45,000) | Subtotal | (15,000) | 0 | | (15,000) | Investments | | | | | Losses | (60,000) | 0 | 0 | (60,000) | Beginning of year | 0 | 0 | 500,000 | 500,000 | End of year | (75,000) | 0 | 500,000 | 425,000 |
The decline in fair value of the assets of the endowment fund (permanently restricted net assets for external reporting purposes) first reduce the temporarily restricted net assets to the extent that temporarily restricted resources are available to defray the loss. Any remaining loss then reduces unrestricted net assets.Choice "c" is incorrect. The unrealized loss on the investment and the net operating loss associated with unrestricted activities are not combined and reported as temporarily restricted.
Choice "b" is incorrect. The net loss in operations is not displayed as temporarily restricted.
Choice "d" is incorrect. The net value of permanent and temporarily restricted net assets and unrestricted net assets are not displayed as temporarily restricted.
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