Reporting of Pledges

5 Step Process on When and How to Report Pledges

By: Susan R. Legaspi, CPA, CFE, CGMA, ACFE
ISFFA National Board
Zuehls, Legaspi & Company

Pledges are great, but do you record them as income?

Your organization just received a major pledge - great news. Some period of time will now likely pass before you actually receive the money. Meanwhile, how does your organization account for the pledge it received in its financial statements? Can you count it as revenue now or later? You must ask several specific questions to arrive at the correct answer.

The authoritative guidance governing this area is FASB ASC 958-605-50, formerly Statement of Financial Accounting Standards No. 116, “Accounting for Contributions Received and Contributions Made.”

There are many different forms and types of contributions. They can be in virtually any form - cash, securities, real estate or dozens of other assets. A contribution can also be in the form of a mere promise to give in lieu of an immediate contribution.

Step 1. In the case of a promise to give, often referred to as a pledge, the initial question to be asked is whether the donor was expressing an intention to give or a promise to give. This goes to the very essence of a contribution. A simple intention to give is not allowed to be recorded unless it is enforceable by law. Distinguishing between an intent to give and a promise to give is very important but is sometimes very subjective.

Step 2. If your organization concludes that a promise has been made, the next question that needs to be asked is whether there is proof in the form of verifiable documentation. ASC 958- 605-50 specifically mandates that “…to be recognized in financial statements there must be sufficient evidence in the form of verifiable documentation that a promise was made and received.”

Even though a promise may be oral, there must still be the requisite “verifiable documentation.” What is clear is that a written pledge letter, a pledge form, or grant award letter is verifiable evidence of a promise to give.

Step 3. Once you have determined that a promise to give has been made, and that you have verifiable documentation, you now must ask whether the promise contains any donor imposed condition(s). If there are any donor imposed conditions, the organization should not record any revenue upon receipt of the contribution.

In the event cash or other assets are actually received with a donor condition, the organization would not record any revenue, but only a corresponding liability.

It is sometimes difficult to tell whether or not the organization has received a conditional promise to give or it has received a grant award. Sometimes something that sounds like a condition is really not a condition at all. ASC 958-605-50 provides the following guidance:

“A conditional promise to give is considered unconditional if the possibility that the condition will not be met is remote. For example, a stipulation that an annual report must be provided by the donee to receive subsequent annual payments on a multiyear promise is not a condition if the possibility of not meeting that administrative requirement is remote.”

Step 4. If there are no conditions attached to a promise, grant, or other contribution, the next question must be: should the revenue be recognized in its entirety at the time of the contribution or promise to give, or recognized ratably as the funds are actually received? The general rule is that the revenue must be recognized all up front at the time the contribution is made.

Step 5. The final question to be asked is whether the contribution is restricted by the donor? If the answer is yes, then the restricted portion of the contribution must be classified as “restricted revenue.”

There are only two types of restrictions: permanent restrictions and temporary restrictions. Permanently restricted gifts are those in which the principal amount must typically be left unspent but where the income thereon may be used for donor determined purposes.

Temporary restrictions fall into two categories: (1) time restricted - where funds need to be spent within a particular time period, and (2) purpose restricted - where the funds must be spent for particular purposes - sometimes both occur with the same contribution.

This 5 step process should allow you to answer most questions about when and how you are to record your grants, pledges and other contributions in your financial statements.