How to account for Pledges and Gifts

How to account for contribution revenue

Nonprofit organizations are unique in the way that they receive pledges (promises to give) and gifts from donors. In this article we will dive into some of the important definitions of pledges and the unique accounting for promises to give that is required for not-for-profit organizations.

A definition of promise to give – a promise to give is a written or oral agreement to contribute cash or other assets to an organization and carries rights and obligations. So, the promise can be made in written form (by sending a pledge card for example) or in oral form (verbally, over the phone etc.). The key to a promise to give is the rights and obligations that it carries with it, the recipient of the promise has the right to expect that the promised assets are going to come in. As a result, this will not only be a moral or social obligation it will also become a legal obligation and the nonprofit (recipient of the promise) has the legal grounds to sure, even though most nonprofits probably would not go that route.

Pledges can be unconditional or conditional. Typically, unconditional pledges are promises that a donor gives to a not-for-profit organization indicating that he will provide an amount at a certain point in time. A conditional promise to give is subject to donor conditions, so there is typically a barrier that must be overcome before the pledge can be recognized. In addition to that, a conditional pledge would also have a right of return or right of release which also contributes to the fact that until that barrier is met, the pledge cannot be recognized.

Unconditional pledge is recognized when the pledge is received by debiting pledge receivable and crediting contribution revenue. There must be sufficient evidence (or documentation) on file that a pledge has been made. An acceptable form of documentation would be a pledge card filled out by the donor, or in a case of an oral pledge a thank you note to the donor documenting and confirming the promise to give (the amount the name of the organization or person).A good practice it to send out thank you note or confirmation letter to the donor after verbal promise to give as soon as promise has been made. The journal entry to recognize an unconditional pledge would be:

Dr.	Pledge Receivable	$XX,XXX
Cr.	Contribution Revenue	$XX,XXX

Unconditional pledges that are received in less than a year can be reported at the net realizable value (adjusted for uncollectable amounts). For unconditional pledges that span over multiple years fair value needs to be used for recording (using present value techniques). The difference between the pledge amount and the fair value amount is recorded as discount on pledge is amortized as the please is received. The funds that are to be received in the future are considered to be restricted funds, unless there is explicit donor stipulations that make it clear that the donor intended the funds to be used for support of NFP activities in the current period. For example, a large corporation made a 5-year pledge to a not-for-profit organization for a total of $1,000,000. The agreement is that the corporation will be paying $200,000 a year over the next 5 years.

How to record a multi-year pledge?

In order to record a multi-year pledge there are several present value considerations that need to be thought about.

1. Expected collection date
2. Donor creditworthiness
3. Nonprofit past collection experience
4. Policies for enforcement of pledges
5. Inherent risk of cash flows
6. Nonprofit specific factors as it relates to collectability

After considering the factors above a discount rate can be established. Typically, not-for-profit organizations have pretty low discount rate, very often a short-term treasury rate is used. Whatever rate is used it needs to be very well documented within Pledge receivable schedule or organization policies. The effective interest rate method is used when calculating present value of pledge receivable discount and use that interest rate to amortize the discount over the term of the pledge. The journal entry to record pledge receivable and discount would be:

Dr.	Pledge Receivable	$X,XXX,XXX
Cr.	Contribution Revenue	$XXX,XXX
Cr.	Discount of Pledge Receivable	$X,XXX

Conditional Pledges

A conditional pledge on the other hand is only recognized when the condition (or barrier) has been met before recording the pledge. For example, if a pledge was made for $1,000,000 conditional upon the not-for-profit organization raising $500,000 on its own, then only when the $500,000 has been raised can a pledge receivable in the amount of $1,000,000 be recorded. Once the condition is met, the journal entry to record pledge receivable would be similar to the one above.

Intentions to give

Intentions to give are different from promises to give with the main difference being legal enforceability. Intention to give are not legally enforceable event. And since it is not legally enforceable, it does not get recorded within the financial statements. A good example of an intention to give would be the inclusion of a not-for-profit organizations into donor’s will. Being included into someone will does not constitute an unconditional promise to give because the donor retains the ability to change or modify his or her will.

In conclusion, accounting for pledges and gifts can get very complex and some deep analysis is required. If you need help with accounting for pledges and gifts or with setting up proper processes and procedures for your organization, feel free to schedule a free consultation with me and I will walk you through the process and with providing guidance and necessary tools for your organization.