Promises to Give: Not-for-Profit Accounting Primer

Promises to give are a positive sign for nonprofit organizations—they reflect a donor’s intent to contribute funds, services, or property in the future. However, these pledges aren’t just symbolic; they come with important responsibilities. As such, it’s important for nonprofits to take specific action to properly account for and disclose these promises in their financial statements in accordance with applicable accounting standards.

Promises to Give vs. Intentions

Accounting for a promise to give is straightforward. The resulting revenue is recorded by making a debit to “contributions receivable” and a credit to “contribution revenue.” The challenge is in differentiating between promises to give and “intentions to give,” which are not recorded in an organization’s financial statement. Factors that indicate a promise to give include:

• The agreement uses words such as “promise,” “agree,” or “binding.”
• The promise contains a fixed payment schedule.
• The amount of the promise is determinable.
• The donor has the financial ability to fulfill the promise.

By contrast, an intention to give is generally demonstrated by the following:

• The donor refuses to put the promise in writing, or the written evidence is unclear.
• If there is written communication, then it uses words such as “intend,” “plan,” and “may.”
• The gift amount is not clear or readily computable.
• Payments were due, and no partial payments have been made.

Unconditional Promise to Give

Once it has been determined that a legitimate promise to give has been made, the next step is to determine if the gift is conditional or unconditional. An unconditional promise to give is just that—a promised gift in which the donor has placed no conditions. That said, a promised gift that contains certain conditions is still considered unconditional as long as receipt depends only on a) passage of time, or b) demand for performance.

Therefore, if a donor promises this year to donate $1,000 for an organization’s activities next year, then that gift encompasses a restriction relating to the passage of time (it can’t be used until next year). Likewise, if a donor promises a nonprofit $2,500 to purchase new computer equipment, then that gift encompasses a “performance demand” since the gift must be used to perform a specific intent (i.e., purchase computer equipment). In both examples, the donor is making an unconditional promise to give — and is placing restrictions only on the organization’s use of the gift.

Accounting: Record unconditional promises to give as revenue immediately, even if the donor has placed a time or performance restriction on the gift as described above and the restriction will not be met until some future reporting period. Note that if such restrictions are imposed, the revenue should generally be recorded as donor restricted revenue and net assets with donor restrictions until the related restrictions are met. As the restrictions expire or are fulfilled reclassification entries should be made to record a decrease in net assets with donor restrictions and an increase in net assets without donor restrictions in the statement of activities in the period when the restriction expires. Any portion of the promised gift that is not expected to be collected should not be recorded as contribution revenue. For example, if an organization raises pledges of $10,000 during its annual fund campaign but expects to collect only $8,400 of those pledges, then only $8,400 can be used as the estimate of fair value. All unconditional promises to give expected to be collected in more than one year should be recorded at fair value, which is measured as the present value of their future cash flows. The discount should be computed using risk-adjusted interest rates applicable to the year in which the promise is received. The discount should be amortized and recorded as revenue over the life of the pledge.

Conditional Promise to Give

A conditional promise to give makes the gift contingent on some future event occurring before the donor is bound to make the contribution. For a contribution to be conditional, the answer to both of the following questions must be yes:

1. Does the contributor retain either a right of return to the resources provided or a right of release of promisor from its obligation to transfer the resources?
2. Is there a barrier the organization must overcome to be entitled to the resources provided?

Some examples of barriers are:

1. Matching gifts – a donor may promise to make a $5,000 matching donation on the condition that $5,000 in other donations is first raised.
2. Specific service levels – a donor may require providing services to a certain number of people in a certain area.
3. Event or milestone – a donor may make the funds contingent on a specific event occurring, such as receiving governmental approval, meeting construction or other milestones, certain level of funding achieved, etc.

Accounting: Do not record a conditional promise until the conditions of the promise are substantially met. At the time that the conditions are considered to have been met, then the conditional promise becomes unconditional.

No Pinky Swear Required

Accounting for charitable gifts shouldn’t be a headache. Promises to give—whether funds, services, or property—are a good sign for nonprofit organizations, but they come with specific reporting requirements. If you’re ready to learn more, contact your CRI advisor today. Our not-for-profit advisors understand the nuances of contribution reporting—from restricted gifts to in-kind donations—and we’re here to help you get it right. We’ll walk you through the process and make sure everything is clear, compliant, and easy to manage.