It’s welcome news for a nonprofit when a donor promises to make a contribution at a later date. But such pledges can come with complicated accounting issues, including the proper treatment of conditional pledges and the potential requirement to discount a pledge’s value.
When can you recognize a pledge?
Let’s say a donor makes a pledge in June 2017 to contribute $10,000 in January 2018. You generally will create a pledge receivable and recognize the revenue for the June 2017 financial period. When the payment is received in January 2018, you’ll apply it to the receivable. No new revenue will result in January because the revenue already was recorded.
Of course, you can’t recognize the revenue unless the donor has made a firm commitment and the pledge is unconditional — meaning the donor has committed to the pledge without reservations. Several factors might indicate an unconditional pledge, including when:
- The promise includes a fixed payment schedule,
- The promise includes words such as “promise,” “pledge,” “binding” and “agree” (as opposed to “plan,” “intend” and “hope”), and
- The amount of the promise can be determined.
What about conditional promises? They could include a requirement that the organization first complete a project before receiving the contribution or that the organization send a representative to an event to receive the check in person. Matching pledges are conditional until the matching requirement is satisfied, and bequests are conditional until after the donor’s death.
You generally shouldn’t recognize revenue on conditional promises until the conditions have been met. It could be acceptable to record a conditional pledge if the odds of a condition going unfulfilled are remote (for example, if the condition requires the nonprofit to exist in five years and the 20-year-old organization is in a solid financial position).
Your accounting department will require written documentation to support a pledge before recording it. The strongest evidence is a signed agreement with the donor that clearly details all of the terms of the pledge, including the amount and timing. If pledges are something that come up often, you might want to develop a standard pledge template to use with all pledge donors. Reluctance to sign such an agreement could be reason to question a donor’s level of commitment to making the contribution and you probably shouldn’t record the pledge.
Should you apply a discount?
A pledge must be recognized at its present value, as opposed to the amount you expect to receive in the future to reflect the time value of money. For a pledge that you’ll receive within a year, you can recognize the pledged amount as the present value.
If the pledge will be received further in the future, though, present value is calculated by applying a discount rate to the amount you expect to receive. The discount rate is usually the market interest rate, or the interest rate a bank would charge you to borrow the amount of the pledge. Additional entries will be required to remove the discount as time elapses.
A word of caution
Proper accounting for pledge receivables is critical. In particular, if you don’t record them in the proper financial period, you could run into audit issues that might, in turn, put your funding in jeopardy.