Accounting for Promises to Give

Accounting for Promises to Give Under GAAP, the term “promises to give” is used to describe donor agreements to contribute cash or other assets. These promises can be written or oral; however, organizations must have verifiable documentation before recognizing a promise as a receivable. Such documentation should include the donor’s name and contact details, the amount pledged, the due date, the date of the promise, and the name of the staff or representative involved. 

Types of Promises: Unconditional and Conditional 

Unconditional promises: 

These are legally binding commitments that can be recognized as revenue when they are initially made or received, provided they meet the standards of measurement and verifiability. 

Conditional promises: 

These depend on the occurrence of specific future events or conditions—such as achieving performance goals or matching donations. Recognition of these promises occurs only when the conditions are substantially met, making the promise unconditional. For example, a corporate matching pledge that becomes unconditional upon the receipt of employee donations. 

Measurement and Recognition of Unconditional Promises Initial Measurement: 

• Within one year: Promises expected to be received within one year are measured at fair value or net realizable value at the time of initial recognition. 
• Beyond one year: For longer-term promises, present value techniques are used, applying a risk-adjusted discount rate. An organization may also elect the fair value option for recording long-term promises to give cash or financial instruments. 

Subsequent measurement: 

• Subsequent measurements for items for which the fair value option is elected should include adjustments for changes in fair value, which are reported as changes in net assets as they occur. 

Unconditional Promises with Future Payment Due Dates 

Implied Time Restrictions: 

When a promise has a future due date, it is generally reported as assets with donor restrictions, unless the donor explicitly directs otherwise. These restrictions are based on the scheduled payment date supporting activities in that period. 

Lapse of Restrictions:

Restrictions lapse when the promise’s due date arrives, not when the pledge is collected. When due dates are unclear, organizations should assess the circumstances to determine when restrictions end. 

Purpose Restrictions: 

Some restrictions are based on the purpose of the gift rather than the payment date. For example, a pledge restricted for a specific event in year 2 should be treated accordingly, regardless of payment timing.

Disclosures Organizations should disclose: 

• Total promises to give
• Amounts due within one year and beyond
• Discount rates used to determine fair value
• Allowances

Conclusion 

GAAP guides nonprofits in properly recognizing, measuring, and disclosing promises to give. Adhering to these standards ensures accurate financial reporting, reflects the true assets of the organization, and promotes transparency with donors and stakeholders.