Nonprofit Accounting Basics

Pledges Receivable: Explaining the Basics to Your Development Department

Note: Articles published before January 1, 2017 may be out of date. We are in the process of updating this content.

Pledges receivable can be a point of conflict between the accounting department and the development or fundraising team. Accounting rules allow an organization to recognize revenue from a pledged receivable, also known as a promise to give, on the date of the commitment, if it is unconditional. Understandably the development team would like to have as many donor commitments as possible qualify as a promise to give.

Given this incentive, an effective accounting department must have controls in place to help guide the development department to ensure only firm commitments are recorded on the books. From the perspective of the development department, the accounting department’s guidance inevitably means the development team will get to count less than 100% of what they want as pledges receivable. Therefore, it is incumbent on the accounting department to explain in full their role as gatekeeper. Here are some key points worth communicating to the development team:

What is a Pledge from an Accounting Perspective?

A pledge, or promise to give, is an agreement between a donor and the organization where the donor promises to contribute, at a later date, cash or other assets to the organization. While that sounds simple enough, it is important for the development department to understand there are some basic criteria a pledge must meet in order for the accounting department to record the pledge as revenue. The two basic criteria are (1) ensuring that the donor has made a firm commitment and (2) that the pledge is unconditional. Examples of valid pledges are always a good way to demonstrate the key points involved. Here are a few helpful examples of unconditional pledges: 

  • A pledge that says, “I promise to donate $10,000 next month”, means that the accounting department will recognize $10,000 in the current month.
  • A pledge that says, “I pledge to give $5,000 a year for the next five years”, means the accounting department will recognize $25,000 in revenue on the date of the pledge.
  • Wording that says, “your grant award from the Foundation is $30,000, payable in two $15,000 installments six months apart”, means that the accounting department will recognize $30,000 on date of award (see note on “grants” below).

Why is the Accounting Department’s Role so Important Anyway?

The accounting department’s role is important because they make sure that any potential pledge meets all revenue recognition criteria and there is appropriate evidence to document the pledge and any donor restrictions. Once a pledge meets the criteria for recognition, it can be recorded at fair value. It is important to emphasize that the accounting department must evaluate substance over form. For example, it is a common misconception that a grant is a specific type of pledge and accounting rules are the same for all such agreements. However, the same facts apply to a grant agreement in that it must be evaluated based on the terms found in the agreement.

What are the Basics for Evaluating a Potential Pledge?

Since the substance of donor communication is so important, helping the development department understand how the accounting department evaluates a pledge is critical. This can also make the accounting department’s job easier since the development department may learn to filter out anything that does not meet the basic criteria.

Promise to Give vs. Intention to Give

To meet the criteria of a promise to give, look for firm language such as “promise”, “pledge”, or “agree”. If the donor uses firm language, and does not place any conditions on the contribution, the timing of revenue recognition is usually tied to the date of the commitment. If the language provides any wiggle room for the donor to escape their commitment—for instance if they use words like “plan”, “intend”, or “hope”—this is called an intention to give. Intentions to give are considered conditional and cannot be recorded as revenue.

Unconditional vs. Conditional

In order to recognize contribution revenue, a pledge must be unconditional. A conditional pledge occurs when a donor promises to contribute to an organization only if future and uncertain conditions are met. Because the donor is not bound by the pledge until the conditions are met, the organization should not recognize any revenue until the conditions are no longer in place. Again, examples are useful for explaining this somewhat complicated concept:

  • A requirement for the organization to complete a project before receiving funds is conditional until the project is completed.
  • A donor stipulation that a representative of the organization must attend an event to pick up a check in person is conditional until the representative attends the event.
  • A matching pledge is conditional until the matching requirement has been met.
  • A bequest is conditional until the amount can be reasonably estimated after the donor has passed away (e.g. once a probate court has declared the will valid and a valuation of the estate has been completed).

What Does the Accounting Department Need to Record a Pledge?

The accounting department needs evidence of the donor’s pledge from the development department to record the pledge. Explaining to the development department why evidence is required and showing them what forms are needed can help streamline the process for both departments.

Evidence Required

A pledge should not be recognized without evidence of the agreement with the donor. The best form of evidence for a pledge is a signed agreement by the donor laying out all the terms of the pledge clearly and concisely. Some organizations have a standard pledge agreement template that all donors are required to sign. If a donor refuses to sign an agreement, it may be unwise to record the pledge since they may be unlikely to sign an audit confirmation if they were to receive one.

Donor Restrictions

An organization must also make sure to document and track any donor imposed restrictions on the use of the contribution. Documenting these restrictions should be part of the same process for collecting evidence of the pledge. Failure to use a donation for the donor’s intended purpose is usually grounds for returning the funds to the donor.  Additionally, the States Attorney’s office can bring legal action against your organization. Note that restrictions are not the same as conditions, though they are often confused since both are donor-imposed constraints. Donor conditions must be met before any funds are recognized as revenue. Donor restrictions limit how the organization must use the funds after they have been received.

In conclusion, the development department and the accounting department have critical roles in the contributions process. The organization is better off if both departments are working together and speaking the same language. Taking the time to explain the accounting department’s role in evaluating and recording pledges to the development department will head off potential problems with revenue recognition in the end.