Accounting for pledges

A donor may promise a nonprofit to contribute money to it in the future. This promise is called a pledge. There are many types of pledges, such as ones that are to be fulfilled all at one time, in increments, and with or without restrictions. The accounting for a pledge depends upon the conditions attached to it. The variations are:

  • Unconditional pledge. When a donor commits to a pledge without reservation, the nonprofit receiving the funds records the pledge as revenue and an account receivable.
  • Conditional pledge. When a donor commits to a pledge, but only when a condition is met, the nonprofit does not record anything. Instead, it waits for the condition to be fulfilled and then records the pledge as revenue and an account receivable. If the probability that a condition will not be fulfilled is remote, the pledge can be treated as an unconditional pledge.

When in doubt, a nonprofit should not record a pledge in the accounting records. Instead, wait for the situation to resolve itself, so that it can tell with certainty the circumstances under which a donor will make a contribution. In many cases, a simple notification of a forthcoming payment is not sufficient proof that a pledge exists. Instead, there should be a well-documented pledge that itemizes the amount to be paid and any conditions that must be fulfilled prior to payment.

If a pledge commitment is unconditional and legally enforceable, the nonprofit is required to recognize the present value of the entire series of payments. Present value is the current worth of the cash to be received in the future with one or more payments, which has been discounted at a market rate of interest. The present value requirement is subject to the following variations:

  • If the funds are to be received within one year, it is permissible to recognize the entire amount of the pledge, rather than just its present value.
  • The estimated amount of cash flows can be used in the present value calculation, rather than the pledged amount. This allows management to be more conservative and recognize a lesser amount of revenue if it is uncertain about the total amount to be received or the timing of the receipt.

When a donor pledges that a contribution will be made in a certain amount and then fulfills the pledge with a stock donation, it is possible that the fair value of the stock will be less than the amount of the pledge. If so, contact the donor to determine how the remainder of the pledge will be fulfilled. Otherwise, the donor may assume that the obligation has been fulfilled, and will contribute no additional assets.