July 27, 2016

“Promises are like crying babies in a theater, they should be carried out at once.”
 – Norman Vincent Peale

Ah, if it was only so easy. In the world of nonprofit fundraising, much-needed support often comes in the form of a promise: for example, a signed pledge card, an e-mail acknowledgement or a letter of intent.

And while your nonprofit certainly shouldn’t look a gift horse in the mouth, such pledges do require action on your part. Specifically, you need to properly account for and disclose promised gifts in your financials. Here’s how:

1.  Treat promises to give as an asset. In general, promises to give are treated as an asset and shown on the books when the promise is made. To record the revenue, simply make a debit to “contributions receivable” and a credit to “contribution revenue.”

2.  Make the distinction between a promise and an intention. There is a big difference between someone making a pledge and someone simply indicating their intention to give. A mere statement of an intention to give should not be recorded as revenue. Factors that distinguish between promises and intentions include:

Promise: Words such as “promise,” “agree” or “binding” are used in the agreement.
Intention: The donor does not put the promise in writing. If there is a written communication, it uses words such as “intend,” “plan” or “may.”

Promise: The amount of the promise is determinable.
Intention: The gift amount is not clear or readily computable.

Promise: The promise contains a fixed payment schedule.
Intention: No formal method or schedule of payment is proposed.

Promise: The donor has the financial ability to fulfill the promise.
Intention: Payments were due, but no payments have been made.

Another example of an intention to give is when a donor says that the organization has been included in his or her will. Because of the ability to modify a will at any time prior to death, conditional promises to give are not recorded as revenue in the organization’s financial statements, but are sometimes disclosed in the footnotes to the financial statements. Gift annuities, gifts of life insurance, bequests, charitable remainder trusts, pooled income funds, and many other planned gift options also exist.

An attorney can assist with drafting pledge documents that will clarify the difference between a promise and an intention to give.

3.  Determine the conditions. It is important to understand that “conditions” take place before the funds are received, while “restrictions” govern the use of the contribution after it is received.

An unconditional promise to give is a promised gift on which the donor has placed no conditions — or has made the gift conditional only on the passage of time or a demand for performance. For example, a passage-of-time condition is created when a donor makes a pledge to support your organization next year (i.e., promise is made now, but the gift can’t be used until next year).

Similarly, a performance demand would be created when a donor promises your nonprofit a specific amount of money to purchase new computers. Here, the gift must be used to perform a specific action, like purchase computer equipment. In both examples, the donor is making an unconditional promise to give and is placing restrictions only on your organization’s use of the gift.

From an accounting standpoint, record unconditional promises to give as revenue immediately, even if the donor has placed a time or performance restriction on the gift and the restriction will not be met until some future time.

By contrast, a conditional promise to give makes the gift contingent on some future event occurring before the donor is bound to make the contribution. For example, a donor may promise to make a $10,000 matching donation on the condition that $10,000 in other donations are raised first.

From an accounting standpoint, do not record a conditional promise until the conditions of the promise are substantially met and the conditional promise becomes unconditional. Note that in some cases, the donor’s conditions may be met in stages. As your organization receives qualifying contributions in a dollar-for-dollar match, for example, a corresponding equal amount should also be recognized from the matching gift. Here, the donor’s condition on the matching gift is being met as qualifying contributions come in.


4.  Record it properly.
Intentions are disclosed in notes to the financial statements, while promises are recorded as receivables and revenue.

5.  Plan for it. Consider establishing a formal written policy for both gift acceptance and revenue recognition regarding promises to give. This includes what documentation must be obtained or maintained in order to substantiate the amount and timing of revenue recognition.

A promise to give is a good thing. It means someone has promised to deliver funds, services or property to your organization sometime in the future. Take the next step by ensuring you are properly accounting for promised gifts.


Contact us if you would like more information on proper revenue recognition procedures.

About the Authors

Katie A. Allender
CPA
Manager, Assurance and Advisory
Keith J. Libman
CPA
Partner, Assurance and Advisory

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