As discussed in “Unconditional Promises to Give” post, promises to give can be unconditional or conditional. Conditional promises to give come with donor-imposed conditions. If the condition is not met, the donor is not obligated to fulfill the promise to give. If the donor has already fulfilled the promise but the condition is never met, the donor has a right to have the assets returned to them.

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. Read the rest of this entry »

A promise to give is a written or oral agreement to contribute cash or other assets to another entity. To be recognized in GAAP financial statements, you must have sufficient evidence that a promise to give was made and received. Sufficient evidence must be in the form of verifiable documentation such as a pledge card or written agreement. Oral promises to give may be substantiated by tape recordings, written registers or other means that permit verification.        

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.

As a former employee of a not-for-profit organization, we always got excited when we learned of a pledge (also known as a promise to give) from a generous donor. What can be difficult to understand is what you do with that information. There are two kinds of pledges and the treatment of each is different.

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?

Read the rest of this entry »