Conditional promises to give are recognized only when the conditions are satisfied. Therefore, no revenue or receivable should be recognized at the time the promise is received. If any assets are received prior to the conditions being met, the assets should be accounted for as a refundable advance (liability). Once the condition is met, the liability is removed and revenue is recognized.

Additional disclosures must be made regarding promises to give. When disclosing conditional promises to give, you should disclose the following:

1. the total of the amounts promised; and
2. a description and amount for each group of promises having similar characteristics, such as promises conditioned on establishing new programs, completing a new building, or raising matching gifts by a specified date.

Summary of Unconditional vs. Conditional Promises to Give

 The following are examples of promises to give:

 Unconditional or Conditional?

Conditional Disclosure 1:

A trustee has agreed to match contributions to the Entity’s endowment funds on a one-for-two basis until the total reaches $5,000,000. In addition, a contributor has pledged to contribute $250,000, conditional upon proper matching with a grant.

Conditional Disclosure 2:

During 20X7, the Entity received restricted grants totaling $50,000 that contained donor conditions (primarily matching funds requirements). Since these grants represent conditional promises to give, they are not recorded as contribution revenue until donor conditions are met. Funds received from the donor in advance of the conditions being met totaled $20,000; are recorded as refundable advances; and will subsequently be recognized as contribution revenue when donor conditions are met.

For more information see “Unconditional Promises to Give” for general information regarding promises to give.

Promises to give can be unconditional or conditional. Unconditional promises to give are exactly that: unconditional (no strings attached). Once received, they can be used toward the ongoing operations or mission of the not-for-profit organization. 

The timing of recognition of contribution revenue or receivable depends upon the promise to give being unconditional or conditional. Unconditional promises to give are recognized when received, even if the donor restricts the promised contribution for use in a future period and even if the promise will not be paid until a future period. If the promise to give is restricted for use in a future period or won’t be paid until a future period, it should be reported as restricted support, either temporary or permanent. 

Contributions received should be measured at their fair values.  If the promise is expected to be collected in less than a year, it is measured at net realizable value, which in most cases would be the face value net of any estimated uncollectible amount. If the promise is expected to be collected after one year, the fair value should be based on future cash receipts, discounted at a rate “commensurate with the risks involved.”  Basically, the discount rate should be based on the same criteria that would be used for trade receivables.  The entity should consider the following factors:

1. when the receivable is expected to be collected;
2. the creditworthiness of the other parties;
3. the entity’s past collection experience;
4. the entity’s policies concerning the enforcement of promises to give;
5. expectations about possible variations in the amount or timing of the cash flows; and
6. other factors concerning the receivable’s collectibility.

Additional disclosures must be made regarding promises to give. When disclosing unconditional promises to give, you should disclose the following:

1. the amount of promises receivable in less than one year, in one to five years, and in more than five years; and
2. the amount of the allowance for uncollectible promises receivable.

 Examples

 Unconditional Disclosure 1:

Unconditional promises to give are recorded as receivables and revenue when received. The Entity distinguishes between contributions received for each net asset category in accordance with donor-imposed restrictions. Pledges are recorded after being discounted to the anticipated net present value of the future cash flows.

              Pledges are expected to be realized in the following periods:

                                                                                                  20X1                20X0     

                    In one year or less                                                 $  1,438,547     $   1,313,217
                    Between one year and five years                                 1,970,255          1,780,764
                                                                                                 3,408,802          3,093,981
                    Less:
                        Allowance for uncollectible pledges                            (969,036)          (717,538)
                        Discount, at 6%                                                     (387,800)          (324,867)
                                                                                             $  2,051,966     $   2,051,576

Unconditional Disclosure 2:

The pledges receivable consist of operating and capital project fund-raising campaigns. At June 30, 20X1, all pledges receivable are expected to be collected during the next year. Management has determined that the pledges receivable are fully collectible; therefore, no allowance for uncollectible accounts are considered necessary at June 30, 20X1.

For more information about conditional promises to give, watch for my next post.

To be classified as a current asset, cash and cash equivalents must be readily available to pay current obligations and free from any contractual restrictions. Cash that is restricted should be segregated from the general cash and cash equivalents category. Cash is considered to be restricted if it is designated (by donor or the Board of Directors) to be used for a specific purpose. For example, if you have entered into a capital campaign to raise money for a new building, any cash received for that purpose would be restricted. This means that this cash can only be spent on costs incurred for the new building and cannot be spent for any other purpose. 

The restricted cash is classified on the balance sheet either as a current asset or a noncurrent asset – depending on the relationship to the asset for which the funds are restricted. If the cash is restricted for property and equipment, the restricted portion is classified as a long-term asset.

Restrictions on cash must also be disclosed in the notes to the financial statements. You must disclose the amount of restricted cash and the purpose for which it is restricted. The following example shows the balance sheet presentation and the disclosure for cash restricted for current and noncurrent purposes.

At December 31, 2008, the Company has $1,500,000 of restricted cash of which $900,000 is classified as a noncurrent asset. The restricted cash serves as collateral for an irrevocable standby letter of credit that provides financial assurance that the Company will fulfill its obligations with respect to a litigation settlement discussed in Note [X]. The cash is held in custody by the issuing bank, is restricted as to withdrawal or use, and is currently invested in money market funds. Income from these investments is paid to the Company. The current portion of restricted cash of $600,000 represents the amount of current liability for amounts billed to the Company for certain repairs agreed to be made under the settlement agreement.

In order to facilitate the auditor’s ability to become comfortable with the fair market value of alternative investments, it is important that management understand their responsibility. It is management’s responsibility to:
• Understand the fund manager’s method for valuing the alternative investments
• Understand the nature of the underlying investments and the portfolio strategy used by the fund manager
• Obtain sufficient information to evaluate and challenge the fund’s valuation
• Determine the fair value measurements and disclosures to be included in the financial statements

For more information on alternative investments and how they may affect your audit contact us.

Authored by Ashley Parsons.

1. Unconditional promises to give are statements by a donor of their intent to make a contribution of some kind at a future period. (For example, the ABC Foundation informs you that they have voted at their last Board meeting to give your organization $10,000 in January.)
2. Conditional promises to give are pledges by a donor that are “conditioned” upon some other event (other than the passage of time) occurring. (Some examples are: 1). A donor states that he will give you $5,000 for your capital campaign if a contract with a builder has been signed. 2). A foundation will contribute $100,000 if a new program is implemented. 3). A corporation will donate $1,000 if other corporations in your community do the same.)

Remember: Conditional pledges require some other action to occur.

So what is the different accounting treatment?

1. Unconditional pledges are recorded as revenue (which is temporarily restricted – see blog on this topic) when the not-for-profit organization receives the pledge (written or verbal).
2. Conditional pledges are recorded as revenue when the condition has been met. Until that time, the conditional pledge would be disclosed in the notes to the financial statements (if significant), but not reflected in the accounting records. [For example, you learn on December 1, 2008 that a donor is going to contribute $1 million for your organization to begin an endowment if you are able to establish a location in another town by December 1, 2009. In the financial statements ending December 31, 2008, this information would be disclosed in the footnotes. On March 31, 2009 the location is opened, and at that time you would recognize the pledge and the associated revenue of $1 million even if payment has not actually occurred.]

Pledge information can be conveyed to you verbally or in writing. However, we suggest that all significant pledges be obtained from the donor in writing stipulating any restrictions, date payment is to be expected, any conditional information, etc. This practice helps to reduce any confusion or errors.

If the donor does not send this written information, then we suggest that you write the donor an acknowledgement of their pledge and outline the verbal specifications. Ask the donor to sign a copy of the letter and return it to you.

Sometimes it can be unclear when the condition of the pledge has been met and should be recorded in your accounting records. If you have questions regarding this recognition, give us a call.

When going throught this review, it is important to take the “person” out of the control and ask yourself, “If I had an unknown person performing this taks, would I be concerned?”  Because of the very nature of the types of services that most not-for-profits provide, they tend to hire caring, trustworthy individuals to perform various tasks.  While trust is certainly a needed attribute to have in an employee, it cannot serve as your only internal control.  If you also believe that an employee would never do anything wrong, you may be under a false sense of security.  We usually suggest to our clients that the internal controls be designed in such a way that it eliminates the opportunity for an employee to commit fraud.  This design not only can protect you, but the employee as well.

A key component of a well-designed internal control system is segregation of duties.  Proper segregation also helps to eliminate the opportunity to make errors or commit fraud.  To create proper segregation, the following tasks should be performed by different personnel:

• Authority (approving purchases, writing off bad debt, authorizing salary increases, approving new vendors)
• Custody (ability to write checks, make bank deposits, process cash receipts, manage inventory, make electronic withdrawals from bank and investment accounts )
• Recordkeeping (posting transactions to the general ledger, recording receivables and payables)

Need help in segregating functions or duties. Contact me.

When the endowments are earning interest and capital gains during the year, this is relatively easy. The corpus stays intact as permanently restricted and the earnings are recognized as increases to unrestricted net assets. However, during adverse economic times, such as now, it’s very possible that investments lose value during a fiscal year. In this case the original amount of the endowment, or corpus, must remain intact. Any losses must be recognized as unrestricted net asset changes and the permanently restricted corpus should remain whole on the financial statements.

Unfortunately, this is a grim reality in the current economic conditions and widespread investment losses. The amount of the donor’s original endowment must remain whole and any changes in value, good or bad, will affect unrestricted net assets.

Is your organization experiencing difficulties in allocating investment losses between unrestricted and restricted net assets? Post a comment.

]]> http://www.missionaccountable.com/2009/01/07/endowment-investments-losing-value-how-to-classify-based-on-restrictions/feed/ 0 http://www.missionaccountable.com/2008/12/12/safeguarding-your-cash/ http://www.missionaccountable.com/2008/12/12/safeguarding-your-cash/#comments Fri, 12 Dec 2008 22:42:29 +0000 Susan White http://www.missionaccountable.com/?p=83 Nonprofits typically use their cash. Large amounts may be kept in checking and savings accounts instead of being invested because it is not meant to hang around a long time. It is meant to be used for the mission of the nonprofit.  If your nonprofit keeps large amounts of cash in the bank, be wise about protecting it. Keep your money in an FDIC insured bank. To find out if your bank is FDIC insured, you can call this number obtained from the FDIC’s website:  1-877-275-3342. You may also use “bank find” at www.fdic.gov/deposit .

The rules have changed recently so it might be a good time to recheck them. FDIC insurance covers checking, NOW, savings, and money market accounts as well as CD’s. Currently the amount insured is $250,000 per depositor per bank. This means that it might be a wise decision to have a maximum limit of $250, 000 in total per bank your nonprofit uses. The FDIC will sum all the insured accounts per bank, so just opening new accounts in the same bank or in a different branch of the same bank isn’t a safeguard.

For more information see: www.fdic.gov/deposit/Deposits/insured/faq.html

However, earlier this year, liquidity issues in the global credit markets resulted in the failure of ARS auctions.

This loss of liquidity does not mean that the investment is worthless; however, the investor may be forced to wait until the security matures, which could be 20 to 30 years, before the investments can be liquidated. Therefore, these investments are no longer considered cash equivalents and will be reclassified as long-term investments for financial statement purposes. More importantly, investors need to realize that funds that they once thought were easily convertible to cash may be unavailable for the long-term. 

All may not be lost!

Recent developments with these securities are showing that some brokerage firms are offering to redeem the ARS. We suggest that you contact your investment advisor to determine if your portfolio contains any of these securities and to determine the course of action, if any, you should consider.

These limits will be in effect until December 31, 2009. On January 1, 2010, the coverage limits will return to $100,000 for all accounts except IRAs and Certain Other Retirement Accounts. These accounts will continue to be covered at $250,000.

To calculate your FDIC insurance coverage, go to www.fdic.gov/edie.

For other information, go to www.fdic.gov or contact us at www.rcosolutions.com.