Revenue Recognition for Pledges

by Casey R. Good, CPA, Audit Manager

Posted on October 3, 2017

Pledges can be the lifeblood of a non-profit, and while your development department may be eager to record every promise they receive, there are several items the accounting department must consider.

To be eligible for revenue recognition, the pledge needs to be evaluated to whether it is a promise to give, or an intention to give. A promise is a firm commitment between a donor and your organization in which the donor promises to give at some point in the future assets or cash to the non-profit. In contrast, an intention to give is considered conditional (the donor can rescind) and cannot be recorded as revenue.

In addition, it is important to determine the conditions of the pledge. An unconditional pledge is a pledge that a donor firmly agrees to without any reservation. The non-profit can record the funds at the time the commitment is made with unconditional promises to give. A conditional pledge occurs when a donor promises to contribute to your non-profit only if future and uncertain conditions are met.Because the donor is not bound by the pledge until the conditions are met, the non-profit shouldn’t recognize any revenue until the conditions are lifted.

When it comes time to record the pledge in the financial statements, you must consider how long it will take to collect the promise to give. If the pledge will be received within one year, you may record the entire pledge. However, if a pledge is received over 5 years, future cash flows must be discounted to their net present value at the time the transaction is recorded.

Working together with the development department will help your organization avoid any issues with revenue recognition related to pledges.