October 10, 2024 •HoganTaylor
Understanding the difference between financial pledges and donations is essential for nonprofit organizations. In simple terms, pledges are promises to donate in the future, while donations provide immediate financial support. However, the accounting for pledges is often more complex. A promise to donate does not guarantee that you will receive the funds as expected—or at all.
Unconditional Pledges: A Green Light
Let’s illustrate this with an example. Suppose a donor pledges $10,000 in September 2024, with the intention of contributing in January 2025. In this case, you would typically create a pledge receivable and recognize the revenue in your September 2024 financial statements. When the donation is received in January 2025, you’ll simply apply it to the receivable—no new revenue is recorded in January since the revenue was already recognized.
However, you can only recognize this revenue if the donor has made a firm and unconditional commitment. An unconditional pledge means the donor has committed to the pledge without any reservations. Indicators of an unconditional pledge include:
- A fixed payment schedule
- A clear, determinable amount
Words that signal an unconditional promise include “promise,” “pledge,” “binding,” and “agree,” in contrast to terms like “plan,” “intend,” and “hope.”
Conditional Pledges: Proceed with Caution
What about conditional promises? These may require your organization to fulfill certain obligations before receiving the contribution. For instance, a donor might stipulate that you must complete a specific project or attend an event to collect the check. Matching pledges are considered conditional until the matching criteria are met, and bequests remain conditional until after the donor's death.
You generally should not recognize revenue on conditional promises until all conditions have been met. However, if the likelihood of a condition going unfulfilled is minimal, you may record the pledge. For example, if a donor pledges support contingent upon your nonprofit’s existence in five years, and your organization has been financially stable for the last decade, you may feel confident in satisfying that condition.
Supporting and Recognizing Pledges
Regardless of whether a pledge is conditional or unconditional, it’s crucial for your accounting department to have written documentation to support it before recording it. The strongest form of evidence is a signed agreement detailing the pledge’s terms, including the amount and timing. If pledges are common for your organization, consider developing a standard pledge template for consistency.
Be cautious: if a donor is reluctant to sign an agreement, this might indicate a lack of commitment, prompting you to reconsider recording the pledge.
To account for the time value of money, pledges must be recorded at their present value, rather than the amounts you expect to receive in the future. For pledges expected within a year, you can recognize the pledged amount at its present value. For those further out, calculate the present value by applying a discount rate, usually based on the market interest rate—essentially the rate at which a bank would lend you the amount of the pledge. Keep in mind that additional entries will be necessary to adjust the discount as time progresses.
Enhancing Your Fundraising Strategy
While it’s understandable that your organization might prefer outright donations over pledges, it’s important to recognize the unique advantages pledges can offer. They often involve larger amounts and foster longer-term relationships with donors.
For expert advice on how to properly account for charitable pledges and integrate them into your fundraising strategy, contact us today.
How HoganTaylor Can Help
The HoganTaylor Nonprofit team of business advisors and CPAs is comprised of former CFOs, controllers, and industry experts with extensive experience providing the guidance organizations need to lean forward again in their leadership. If you have any questions about this content, or if you would like more information about HoganTaylor’s Nonprofit practice, please contact Jack Murray, CPA, Nonprofit Practice Lead.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
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